For any technology-based organization—and increasingly for all entities—a significant amount of company value resides in nontangible assets, in particular intellectual property, commonly known as IP. An increased awareness of this has influenced the way transactions—such as mergers and acquisitions—are handled. When it comes time for these business transactions, knowing where all the IP pieces are and having this information at your fingertips will trigger the due diligence process by enabling you to quickly address the questions of potential investors, partners and insurance underwriters.
An organization needs to be able to describe its technology and the IP rights that give it exclusivity in that technology, as well as any potential liabilities. It should know the status of any threatened or ongoing litigation concerning infringement or theft of its own IP, or its potential or actual infringement of third party IP. A company should also consider whether its inventions are patentable. Potential investors and partners will want to know how business will develop in the future and whether any planned products or services will require licenses from third parties.
What Are Intellectual Property Rights?
To be able to assess and inventory company IP, you must know where to look. Intellectual property generally consists of patents, trademarks, copyrights and trade secrets. Each of these forms distinct categories of intangible assets and each has unique mechanisms for securing rights.
An inventory should include more than just a list of patent numbers. A company needs to determine whether it does in fact have rights to its IP. Those rights can be owned or licensed, and it is important to know exactly what rights exist, who actually owns the rights, and what rights are owned by the company itself.
Patents. In the United States, a patent for an invention is the grant of a property right to the inventor, issued by the U.S. Patent and Trademark Office (USPTO). Patents are granted on ideas that are new, useful and not obvious. The right conferred by the patent grant is, in the language of the statute, “the right to exclude others from making, using, offering for sale, or selling” the invention in the United States or “importing” the invention into the United States.
In order to obtain patent rights, the invention must be fully disclosed and will be made available to the public, either when the patent application is published or when the patent is issued. In the United States, patent applications are published 18 months after filing, unless the applicant specifically requests nonpublication, and the term of the patent grant is 20 years from the date of filing. Patent rights vary from country to country and are limited to the country in which the patent is issued.
In the process of assessing your company’s patent rights, you should first compile a list of all issued U.S. patents and pending applications to which your company has rights. Determine which of those are solely owned by or assigned to the company, which are exclusively licensed by the company and which are nonexclusively licensed or jointly owned by the company.
Then, list all foreign patents and patent applications and determine the ownership rights as described above. Grouping this information with the related U.S. patents or patent applications in patent “families” speeds up the review process during a business transaction.
For all patent applications and issued patents, the company should record the applicable assignments with the USPTO. Properly recording assignments puts third parties on notice of the company’s ownership.
The key patents, i.e., those that are most important for the business of the company, should be identified. If these patents are not exclusively licensed or owned by the company, be prepared to explain why it is not a concern or, if necessary, what the company will do to remedy the situation.
Trademarks. A trademark is a word, name, symbol or device that is used in trade with goods to distinguish them and indicate their source. A “service mark” identifies and distinguishes the source of a service rather than a product. “Trade dress,” the way a product or service is packaged or presented, may also qualify for trademark protection. ‚
Trademark rights may be used to prevent others from using a confusingly similar mark, but not to prevent others from making the same or similar goods or from selling the same goods or services under a clearly different mark. Trademarks that are used in interstate or foreign commerce may be registered with the USPTO. Trademark rights may also be applied for outside of the United States, and exist for as long as the trademark is in use.
Even if a trademark is not registered with the USPTO, a company still has certain trademark rights in locations where the mark has been used for a sufficient amount of time, such that customers can identify it as a trademark. These rights generally fall under the rubric of common law rights.
As with patent rights, a company should maintain a list of all trademarks registered or pending with the USPTO as well as international trademark rights. Even if no trademark applications have been filed with the USPTO, any marks a company uses should be listed to determine if any common law rights exist, and if there is any possible infringement of third party marks.
Copyrights. Copyright is a form of protection provided to the creators of “original works of authorship,” including literary, dramatic, musical, artistic and certain other intellectual works, both published and unpublished, such as computer software, instruction manuals, advertising layouts, diagrams, photographs and recordings. Copyrights are registered by the Copyright Office of the Library of Congress. Protection is also available in foreign countries.
U.S. laws generally give the owner of the copyright the exclusive right to: reproduce the copyrighted work, prepare derivative works, distribute copies or phonorecords of the copyrighted work, perform the copyrighted work publicly, or display the copyrighted work publicly over the lifetime of the copyright owner, plus 70 years.
Copyright protects the form of expression, not the subject matter. For example, a description of a machine could be copyrighted, but this would only prevent others from copying that description; it would not prevent others from writing a description of their own or from making and using the machine. Other forms of IP protection (such as patents) could be required.
All original work, produced in a tangible form, is protected by copyright. The registration of copyright in a work made in the United States is a public record of that right, and provides certain benefits against infringement. In addition, before an infringement suit is filed in court, registration is necessary for works of U.S. origin.
A company should keep a list of all registered copyrights and pending registrations. It should also review its employees’ work to determine if any of it warrants protection under federal copyright laws. Works prepared by an employee within the scope of his or her employment qualify as “works made for hire” and endure 95 years from the date of first publication, or a term of 120 years from the year of creation, whichever expires first.
Trade Secrets. Although there is some protection under federal criminal laws, trade secret rights generally do not come from federal law but from individual state law. (Many states have adopted the Uniform Trade Secrets Act.) Trade secret laws protect against theft of ideas that are important to the company and that the company takes reasonable steps to keep secret. In most states, a trade secret can be any formula, pattern, physical device, idea, process, compilation of information or other element that provides the owner with a competitive advantage in the marketplace. Trade secrets lose their value once they are disclosed. Thus, a company cannot obtain a patent on an idea at the same time it maintains that idea as a trade secret.
Assignments and License Agreements
A company should keep copies of all assignments and license agreements that grant it rights to intellectual property, as well as those that grant its intellectual property rights to others. This is particularly important if the company does not own its intellectual property and relies on licenses from third parties.
Grants and collaborative research agreements should also be compiled. These agreements usually contain terms that either grant a company additional intellectual property rights or may restrict them. In particular, all executed confidentiality and nondisclosure agreements, material transfer agreements, security interest agreements, and any other agreement where rights in existing or future intellectual property are granted or retained, should be maintained. Any letters from third parties regarding possible infringement issues should also be kept on file.
Protecting Your Rights
If the company has any trade secrets, measures should be undertaken to protect them. Because it is not always known prior to an engagement whether a trade secret may be developed or discussed, care must be taken at all times to protect ideas that may provide the company with a competitive advantage. Ideally, a company should limit the number of people who know the trade secret. In addition, confidentiality agreements should always be signed with every employee, contractor, agent or collaborator. Even preliminary discussions with potential business partners must be preceded by confidentiality agreements. Copies of the signed agreements should be maintained to demonstrate that the company has taken reasonable steps to protect its secrets.
Specifically regarding patent- and copyright-protected property, all employees should regularly prepare and submit ideas for inventions and employers should have a current list and copies of all invention disclosures from its employees. (This is also useful in describing potential patents to investors and helps the company evaluate where it wants its technology to go.) All employees and officers should sign employment agreements that: (1) assign to the employer their rights to all inventions created and made while employed by the company, using its resources; (2) include nondisclosure agreements prior to any disclosure of confidential information, in order to protect the patentability of any inventions as well as any trade secrets of the company; and (3) assign copyright. (If a copyright is not explicitly assigned or designated as a work-for-hire, it will remain with the author.) This also applies to contractors, collaborators, consultants and all company agents.
Putting It All Together
Whether you are an executive in business development or a risk manager, you should be aware of all IP assets. It will help you to develop and maintain a plan for the future of the company, whether that future includes M&As, partnering, financing or obtaining insurance. Even in a down economy, there are still many companies looking for funding and partners and venture capitalists looking to invest. Knowing a company’s IP assets and how it is protected offers risk management an important role in business transactions, particularly M&As. The guidelines set forth here should help your company get organized, have a better understanding of its value and become better prepared to take advantage of business opportunities.
