INTELLECTUAL PROPERTY & TECHNOLOGY NEWSFLASH The New Currency Intellectual property (“IP”) is the new currency in today’s knowledge economy. Your company’s IP is more valuable than ever, making the strategic use of such assets a competitive differentiator in the global marketplace. Many companies have developed large IP portfolios, but use only a small portion thereof in their core products and services; such companies have failed to recognize their IP as a key asset of their business.

The remaining IP assets sit on the shelf even though some of them could provide enormous

economic benefits. Companies leading the way in leveraging their IP have found ways to boost revenues, drive capital formation, and reduce risk. IBM, for example, generates in excess of $1 billion annually from IP licensing revenues, all without making a single product. Other companies that have effectively leveraged their IP and substantially increased their revenue include BellSouth, Cisco, Dell, Southwire, Texas Instruments and UPS. Effectively leveraging and safeguarding IP assets can generate significant new revenue streams, increase shareholder value and reduce risks. Overlook these assets and you run the risk of being shut out of developing markets, losing precious market share and undermining your research-and-development (“R&D) efforts, while your competitors strategically build IP barriers around key technologies and innovative business methods. Furthermore, IP management is increasingly considered an element of a company’s fiduciary responsibility; thus, officers and directors may be exposed to potential liability if they ignore or mismanage the company’s IP assets. This article discusses some of the various tools and methods available to effectively manage and generate economic returns from your IP assets. Commercialization Traditionally, a company’s strategy for economic growth has centered on its tangible assets, ignoring the enormous value of its IP. As the marketplace has evolved, companies need to develop new approaches to measure, value and leverage their IP in order to gain a competitive edge. A company’s R&D department typically manages the company’s IP. However, such management tends to underutilize the IP assets, focusing primarily on development, rather than protection and commercialization.

Paying

attention to and planning the proper use of your IP is somewhat speculative but ultimately a lucrative endeavor. To effectively realize the inherent value therein, many entities have formed IP holding companies to aggressively protect, manage and exploit their IP. IP Holding Companies IP holding companies (i.e., transferring the company’s IP to a subsidiary that licenses the IP back to the operating companies) have a proven track record of increasing revenue, decreasing costs, reducing taxes, mitigating risks and creating new business opportunities. For example, several years ago BellSouth had two staff attorneys managing all aspects of the company’s IP. Recognizing both the need to better manage IP assets and the unrealized opportunities in its IP, BellSouth formed an IP subsidiary and increased its IP staff to over 30 employees, while significantly increasing its IP related profits. Other companies that have successfully formed IP management companies include Ford, Dow Chemical Company and Lucent Technology. In addition to streamlining the management process, the formation of an IP management company could result in tax savings, which are achieved by transferring the company’s IP to a subsidiary that is located in a tax favored state (one that results in little or none of the IP-related income being taxed). Recent case law1, however, has minimized such savings and as a result some companies are forming its IP holding company in foreign countries in an effort to drive down its taxes. For example, Google, Microsoft and Oracle have established IP subsidiaries in Ireland. Another advantage realized by the formation of an IP management company is mitigating IP related risks by insulating the parent company from involvement in the prosecution of lawsuits involving the IP assets; the IP holding company can maintain lawsuits and administrative proceedings solely in its own name, and thereby shield the parent company and its officers and directors from participation in discovery and other aspects of such proceedings, a potentially large efficiency of time and money if the holding company is, or is likely to be, litigious.

1

See A&F Trademark Inc. v. Tolson, No. COA03-1203 (N.C. Ct. App. Dec. 7 2004); but see Kmart Corp. v. Taxation and Revenue Department, No. 27,269 (N.M. Sup. Ct. Dec. 29, 2005).

Effective Management Even if you do not form an IP holding company, in order to realize significant value from your IP portfolio, a comprehensive, company-wide IP management program is imperative. Managing IP is very much like managing any other business, you need to allocate sufficient staff and resources to meet your organization's current business needs and to position it for future success. You must be proactive, not just reactive. There are several areas that you should address to create a successful IP program: development, prosecution, protection, liability avoidance, revenue generation and enforcement. The level of investment you make in each area will shape the direction and future of your portfolio. There are a variety of tools and tactics that can help your company build an IP fortress. One such tool is an internal patent program system that encourages engineers and developers to apply for patents and helps the company track its development efforts. For example, Cisco’s Patents On-Line system has become a cornerstone of continued innovation at the company, and has increased its number of annual patent application filings from 6 in 1994 to 1,000. This type of system can also help streamline the internal R&D process and reduce company expenditures in connection therewith. Patent mapping, which identifies characteristics and relationships among patents in a particular technology space, is another management tool. It can help evaluate opportunities to leverage patents and research across seemingly unrelated industries through in-licensing and other partnering arrangements. Patent mapping is similar to building an IP database, and the results are grouped on maps by claimed subject matter. Different maps are created as management tools to evaluate the strength of your portfolio, or a competitor’s portfolio, and provide direction for making informed decisions about potential growth areas, or to maximize commercial value. White Space To maintain a competitive advantage, you should not only focus on your current products and services, but access untapped areas in your industry which are ripe for competitive advantage (i.e., “white space”). White space protection can have a dramatic effect on the marketplace.

For example, with

respect to patents, the starting point is generally a search of patent databases to assess the patent landscape in a particular industry to determine whether there is any room left for novel designs. Such analysis will foster the creation of new IP within your company and can also protect you against patent trolling.

Market Share and Patent Trolling IP protection and innovation work hand in hand in leveraging your IP.

Innovation can occur

without IP protection but those with IP protection can prevent competitor innovation from dominating a market space. The use of IP protection, particularly with respect to patents, is increasingly used to maintain market share, even where that market share has been obtained by anticompetitive means. For example, recently there has been a barrage of “patent tolling,” which involves inventing and procuring or acquiring (usually at bankruptcy sales) patents not intended for use or commercialization, then suing infringers of those patents. Patent trolls include both individuals and corporations. Most patent trolls have no plans to practice the patent—they make all their money from licensing, often under threat of litigation.

A troll remains

dormant, waiting for the industry to grow up around the patent so it can coerce licensing fees from unsuspecting infringers. Under the current law, patent trolls are not prohibited from obtaining licensing fees from businesses who are actually commercializing the patented but troll-owned inventions. Because costly litigation is not a sufficient deterrent for patent trolls, and because what trolls are doing is usually not unlawful, corporations and businesses are evaluating low-cost alternatives to defeating trolls. One of the most cost efficient ways to protect against patent trolls is to know your white space as discussed above, monitor your competitors and plan ahead, do not be afraid to patent technology you are not yet using. By effectively managing your IP portfolio and the competition you can concentrate more on generating revenue rather than defending your business in litigation. Licensing Royalty revenues from licensing of patent rights have increased from $15 billion in 1990 to more than $110 billion today. With the licensing market still in its infancy, experts say revenue could top a halftrillion dollars annually by 2009. A rigorous analysis of your IP portfolio can reveal a subset of IP that is ripe for licensing.

BellSouth, Procter & Gamble and Texas Instruments have had success aggressively

mining their portfolios for licensing opportunities. In addition to the traditional downstream license of a company’s IP products to its customers, there are several other licensing paradigms that can enable a company to maximize its IP currency.

Even if “old” IP becomes less valuable to you as your business strategy evolves or if your company does not commercialize certain technologies, such IP could be of value to others.

As a result, many

companies will seek to license its non-core IP assets to other companies. For example, IBM derives a very high profit margin from licensing its non-core patent portfolio. Another strategy that many companies have successfully utilized is cross-licensing. Cross-licensing occurs when two parties mutually license, on a royalty free basis, their IP assets to the other, most often with respect to innovations or patents. Cross-licensing removes legal barriers, reducing the potential for disputes between the companies, smoothing the way for the development of new products, and speeding the delivery of products or services to the market. In a cross-licensing agreement with IBM, Dell was able to lower the cost of components it was purchasing from IBM, making Dell more price-competitive, while ensuring access to critical PC components. Samsung and Sony have also entered into a successful crosslicensing agreement, which covers a wide range of patents for digital products. Deriving Additional Revenue In addition to licensing, another option for monetizing technology-related IP is a spin-off or business sale, in which IP and associated key people become the basis for creating a new and separate entity. This may be an option when your business has inventions that do not fit with the strategic direction of your business. One of the many important factors in a successful spin-off is the correlation between the patents and business. You should be able to carve out pieces of your IP portfolio without disrupting other patents and business. A related monetization option is a joint venture or other partnering opportunity that is based on the leverage potential of the inventions, copyrights and brands. IP securitizations and collateralizations (i.e., financing backed by a security interest or pledge of the borrower's patents, copyrights, trade marks, know-how or other intellectual property) have also provided many companies with opportunities to leverage its IP assets and raise capital. For example, Coca-Colas market capitalization has been largely based on the value of its well-known trademarks. Patent auctions are a great conduit for marketing, selling and/or acquiring IP, as well as monitoring the white space and/or competition. The event brings together a large number of buyers and sellers, and serves as a unique setting to meet, network and learn which patents are available in today's market.

Cost reduction is another form of IP monetization. A thorough analysis of an IP portfolio will often reveal patents that are basically worthless because of advances in technology. IBM does a tremendous job of eliminating unnecessary patents from its portfolio, thus reducing the maintenance fees and costs associated therewith, even as it continues to be a leader in generating new patents. Similarly, you can donate IP to universities and research institutions as a cost reduction strategy. This provides a tax deduction equivalent to the fair market value of your IP and can enhance your business’s reputation.

However

changes in tax laws and audits have made IP tax donations not as lucrative as they were in the more recent past. Conclusion With IP assets increasingly dominating market capitalization, IP management cannot be ignored by a company seeking to maintain a competitive advantage. As more companies analyze their IP and options for monetization, they will discover the value inherent in utilizing their IP as the new form of currency in today’s global technology-driven market.

For more information, please contact Doug McDonald at 813.223.7000 or [email protected] or visit www.carltonfields.com.

This publication is not intended as, and does not represent legal advice and should not be relied upon to take the place of such advice. Since factual situations will vary, please feel free to contact a member of the firm for specific interpretation and advice, if you have a question regarding the impact of the information contained herein. The hiring of a lawyer is an important decision that should not be based solely upon advertisements. Before you decide, ask us to send you free written information about our qualifications and experience.