Intangible assets, which include intellectual property as a primary component, comprise anywhere from 50%-85% of your organisation’s capital value. The following questions for management will assist directors to show compliance with directors’ duties and help ensure sound IP governance practices are in place.
As with physical assets, such as land, plant and equipment, management should be delegated the operational responsibility for managing intellectual property (“IP”) and reporting to the Board, but it is up to directors to ensure the proper governance is in place to manage such assets. The following questions will assist directors in that process.
Question 1: Has an IP audit been done to locate, identify and understand the company’s main IP assets?
In order to properly manage IP assets, they first need to be identified and prioritised in order of strategic importance and value. It is not sufficient to only know that the company has say 5 patent families and 2 trade mark families. Understanding details around status, scope and strength, and also current and planned use of any such protected IP assets should be key outcomes of a sound IP audit.
Other key know-how and trade secret based IP assets should also be sought to be identified and where necessary suitably captured as part of any IP audit process.
Question 2: Is an updated IP plan and procedure in place and being followed?
A formal IP plan is one of the most effective tools directors can have to ensure that management takes IP seriously and recognises the value and opportunities that can be realised from IP assets. The plan should be considered and approved by the Board and should include:
- Company IP policy and procedure manual;
- IP business plan or strategy document; and
- A list of senior management responsible for implementing the IP strategy, together with clear KPI’s.
Question 3: Has an IP revenue assessment been performed and implemented?
IP assets can be leveraged to increase return on investment in the same way as physical assets.
Companies with best practice IP governance processes in place schedule regular reviews to identify latent or under-leveraged IP to deploy for further revenue or benefits for the company.
For example, in 1990 CSL limited owned no patented intellectual property. A decade later it owned 174 patents and its portfolio continued to grow. The growth of CSL’s patent portfolio was accompanied by a growth in its market valuation and sales.
Question 4: How does the company compare with its peers in ownership of registered intellectual property rights?
In most industries, there are accepted benchmarks for the levels of IP (including patents and trade marks) a company should hold in its IP portfolio.
Where management cannot demonstrate any patents or trade marks covering key products and services, this is an indication the portfolio needs to be benchmarked. A starting point for any such benchmarking is an assessment of the relevant “IP Landscape” as it pertains to your company’s business activities.
Question 5: Is the company exposed to infringement actions from competing intellectual property rights?
As the company invests in developing new products and services it needs to have processes in place to ensure it does not infringe the intellectual property rights of others. For example, prior to entering into a clinical trial for a new drug, a company should undertake a freedom to operate search and/or an infringement analysis to prevent the new drug from being blocked by patents.
The R&D department should be able to demonstrate an understanding of competing rights of competitors to minimise litigation risks when new products are released. The aforementioned IP Landscape review can also provide valuable insight into 3rd party IP rights that may be ‘in play’ in respect of planned commercial activities.
Worst-case scenarios for mismanagement include intellectual property infringement litigation and class actions for mismanagement of IP assets.
Question 6: Are there any current corporate issues that expose directors to regulatory sanction, shareholder actions or class actions?
Class actions have already occurred in the US which contain allegations against directors relating to IP mismanagement. They include failure to disclose adverse facts regarding patent enforcement efforts, failure to disclose inadvertent lapse of key patent maintenance fees, false claims regarding licensing agreements, false claims regarding exclusivity of company licences, promotion of known invalid patents, false press releases regarding licences to use famous brands and wasting corporate resources in patent litigation without merit.
An Australian example is Chemeq Limited. In 2006, Chemeq was fined $500,000 by the Federal Court of Australia for breaches of continuous disclosure provisions in part relating to an announcement about a patent grant, which was later found to be false. The presiding judge was Justice French, now the Chief Judge of the High Court of Australia. This was then the highest penalty awarded in Australia for breaches of continuous disclosure rules.
Question 7: Is there an IP review built into joint venture engagements or other third party project involvement?
When the company works with other companies to develop IP, management should have processes in place to clearly address the capture and management of any IP that is developed, and most importantly, ownership of jointly developed IP and legal agreements that clearly deal with those issues.
In the absence of any terms to the contrary, it should be considered that IP ownership around new IP developed as part of joint program of work typically resides with the creator. Such an outcome may result in significant problems for companies who may rely on some of all of the ‘project developed IP’ for subsequent projects with other customers.
Question 8: Is IP due diligence built into corporate transactions?
Often senior executives get caught up in “getting the deal done”. It is up to directors to ensure that both the physical and non-physical (IP) assets underlying the deal are captured and properly valued, from a qualitative and quantitative perspective.
The strategic drivers behind an acquisition should be supported by properly managed IP within the target company.
Question 9: Is the senior executive responsible for IP management sufficiently integrated into the company’s strategic planning and sufficiently resourced?
If the company is going to fully exploit its IP return on investment, and align IP strategy with the broader business strategy of the company, the Board needs to ensure the executive responsible for managing IP is sufficiently senior and has the resources to get the job done.
IP protection and management activities should underpin broader commercial objectives and so IP managers need to be abreast of ongoing developments and future plans, and vice versa.
Question 10: Does the Board require IP awareness training or should it seek to appoint a director with IP experience?
Given that IP is the most valuable asset class of many of today’s company, it is imperative that directors have a basic understanding of IP issues in order to comply with their duties. For companies with high dependencies on their IP assets, directors should consider appointing to the Board a colleague with commercial IP experience.
Read more from other Wrays thought leaders in volume 2 of The GATHERER.
