The huge potential value of intellectual property (IP) continues to drive up the number of patent applications filed. For example, the number of patent applications filed annually has more than tripled, from 108,000 in 1980 to approximately 350,000 today.ⁱ In terms of value, revenues from patent licensing have increased more than 30-fold from $4 billion in 1980 to $130 billion in 2000.ⁱⁱ

While licensing revenues have increased, so too has IP litigation and subsequent settlement amounts. In 2003 alone, 2,716 patent infringement suits were filed in the United States, and the number of patent infringement suits filed is growing more than three times faster than the number of non-patent civil suits.ⁱⁱⁱ



According to the 2003 American Intellectual Property Lawyers Association Economic Survey, it will cost a defendant in a patent action filed in Texas with between $1 million and $25 million at stake roughly $1.5 million just to get through discovery. Even worse, for that same amount at stake, the defendant is looking at spending more than $2.5 million if it has to go through trial.
Texas Lawyer, 9/20/04

Recent legislation and regulations have also placed a greater emphasis on the value of IP. The Sarbanes-Oxley Act of 2002 requires companies to conduct regular audits of their intangible assets and to report material changes likely to affect the company's operations or financial strength. Furthermore, rules set by the Financial Accounting Standards Board require companies to categorize and measure intangible assets.

These trends demonstrate how in a developing knowledge economy, intellectual assets are perceived as more valuable than traditional assets like buildings and machinery. They also demonstrate the need for companies to understand and closely manage their intellectual assets before they literally go walking out the door, are appropriated by partners or vendors with whom they are working globally, or are faced with a lawsuit over the rights to IP.

Though most companies now better appreciate the value of IP, they have not yet extended their company-wide IP management to IP risk management. Consequently, companies do not fully comprehend the full range of IP exposures they face in a world hungry for the next best idea, whether for a product, a process or a service.

Executives concerned with IP risk should be asking themselves the following questions:

• Do I know what my IP exposures are? Have I quantified them? Have I prepared for them?
• In my company is the responsibility for IP capture and development centralized in a single person, committee, or department?
• Does my company regularly conduct formal invention-disclosure brainstorming sessions with inventors, product development, and counsel?
• Are invention-disclosure policies and procedures formalized, documented, and followed?
• Are trade-secret protection policies and procedures formalized, documented, and explained to employees and consultants?
• Are my employees and consultants required to sign confidentiality agreements, as well as assign rights to inventions and creative works to the company?
• Are nondisclosure agreements systematically used prior to the disclosure of trade secrets, and are such agreements reviewed by counsel and archived?
• Are IP ownership rights clearly delineated in joint development agreements and other types of partnering arrangements?
• When acquiring IP assets or companies owning IP assets, does my company use uniform and consistent IP due-diligence policies and procedures to verify IP ownership rights?
• Has my company integrated its patenting processes and product clearance processes?
• Has my company formalized and implemented IP infringement diligence policies and procedures?

To fully understand how IP risk exposure can reverberate throughout an organization, companies must create a common framework that takes into account all facets of this strategic business risk: legal, financial, and traditional risk management. IP counsel, the CEO, and the CFO must work together to translate how IP legal issues affect both IP value and the enterprise as a whole. This should entail building an IP profile according to the five key IP perils: enforcement expenses; loss of position or value; cost of defense; damages or injunction; and title—specifically, the costs to secure or defend it.

One critical factor in decreasing IP risks is maintaining a strong IP portfolio that protects a company's products in the marketplace and provides bargaining chips if a competitor alleges infringement. Therefore, a company's IP capture and development policies and procedures must be thorough, documented, and followed.

A rigorous process to ensure that a company has established ownership of a piece of IP will lessen the chances of ownership challenges and value impairment. In order to ensure appropriate title, an organization should establish and implement policies and procedures for ensuring that employees, consultants, faculty, and researchers execute invention assignments; understand the inventive process and who should be identified as the inventor on a patent application; and understand and comply with confidentiality requirements.

"We take it very seriously when we believe someone or some company is using our intellectual property… We owe that to our shareholders and employees especially."
Dan Follis, Associate General Counsel for Compuware, Crain's Detroit Business, 10/25/04

Companies also should document and implement infringement due diligence policies and procedures. Searches and preventive measures cost much less than treble damages for willful infringement, lost R&D and product development and marketing costs, and lost revenue.

Mergers and other situations where companies are acting jointly toward a common goal can increase the likelihood of IP disputes. Therefore, effective and thorough IP due diligence policies and procedures for merger and acquisition, investment activities, licensing negotiations, and joint development agreements are needed. Licensing and joint development contracts should be clear as to which entity owns which IP going into the relationship, and how IP ownership will be defined throughout the relationship.

Marsh's experts in valuation, claims, litigation support, and crisis management can assist organizations to identify, prioritize, and manage the wide variety of risks they face in relation to IP. Working together, we can help you stay ahead of your risk issues and manage recovery efforts.

If you have any questions or would like additional information, please contact us.

ⁱFerrell, John S., Protecting Your Techknowledgy: The Entrepreneur's Guide to Patents, Trademarks, Copyrights, and Trade Secrets (2003) at 21.

ⁱⁱRivette, Kevin & Kline, David, REMBRANDTS IN THE ATTIC: UNLOCKING THE HIDDEN VALUE OF Patents 4-6 (Harvard Business School Press 2000); Berman, Bruce, FROM IDEAS TO ASSETS - INVESTING WISELY IN INTELLECTUAL PROPERTY, "The Economics of Patent Litigation" by Samson Vermont, Ch.16 at 331.

ⁱⁱⁱKerr, William O., & Prakash-Canjels, Gauri, "Some Evidence of the Influence of Patent Law on Innovation and Technology at 3 (Penta Advisory Services 2000).