INTRODUCTION
Intellectual property refers to creations largely of the mind or intellect, such as inventions, literary works, artistic works, and industrial designs, as well as symbols, logos, and names used in commerce for source identification of products. Virtually every company has some form of intellectual property, whether it is a brand name, a unique and innovative product design, functionality, or composition, or literary/artistic works that are used by the company or to support its endeavors. As many, but not all, companies know, intellectual property rights (“IPR”) are valuable and competitively important.
More specifically, IPR are important at all stages of a business entity’s life cycle:
- At the early stages to support capital investment;
- At the established stage to protect branding and market share related to creative and/or innovative products, and to fuel further innovation; and,
- At the mature stage to impart value to the business entity above and beyond what one would typically think of as “profits.”
IPR are also important on a more macroeconomic level in terms of stimulating innovation, creating jobs, and elevating wages. One commentator stated that:
Without adequate IP protection, innovators are unable to attract investments, business creation is slowed and jobs lost. Evidence suggests that this same story plays out, albeit with differing dynamics, across all sorts of firms and all nations. Economic prosperity relies on job growth, and it is clear that strong, effective IP rights have a role to play in creating both.
The purpose of this article is to highlight the importance of investing in, and protecting, IPR to individuals, companies, and institutions. Part II of this article provides a discussion of the origin and importance of IPR in the U.S. and abroad, as well as a brief overview of the various types of intellectual property. Part III of this article explains why it is important for businesses to invest in intellectual property. Part IV of this article concludes by reaffirming the importance of intellectual property, and exhorting individuals, companies, and institutions to invest in intellectual property for their own benefit, and the benefit of the United States economy.
BACKGROUND
Origin and Importance of IPR in the U.S. and Abroad
There should be no doubt regarding the value and importance of IPR to the U.S. economy, and its continued growth. In fact, there should be no doubt regarding the value and importance of IPR to individual companies and other entities (e.g., universities) that constantly seek to break new ground at the frontiers of science, medicine, engineering, etc. Our founding fathers recognized it. Our current government recognizes it. Foreign governments recognize it. Those who are at the forefront of innovation in today’s day and age should also recognize it.
Our founding fathers understood the importance of IPR to the development of the Union and its economy by including the following clause in Article I, Section 8 of the Constitution:
The Congress shall have power … To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries;
In his first State of the Union message to Congress as President, George Washington stated that:
The advancement of agriculture, commerce, and manufactures by all proper means will not, I trust, need recommendation; but I can not forbear intimating to you the expediency of giving effectual encouragement as well to the introduction of new and useful inventions from abroad as to the exertions of skill and genius in producing them at home …
George Washington “[could] not forbear [from] intimating” the importance of a robust IPR system to fostering innovation. Notably, Washington himself signed the first patent issued by the United States.
An oft-cited quote from Abraham Lincoln nearly 70 years later reaffirms the position of our founding fathers and Washington:
Next came the Patent laws. These began in England in 1624; and, in this country, with the adoption of our constitution. Before them, any man might instantly use what another had invented; so that the inventor had no special advantage from his own invention. The patent system changed this; secured to the inventor, for a limited time, the exclusive use of his invention; and thereby added the fuel of interest to the fire of genius, in the discovery and production of new and useful things.
In a lesser known quote from Lincoln in 1860, he said:
[I]n the world’s history, certain inventions and discoveries occurred, of peculiar value, on account of their great efficiency in facilitating all other inventions and discoveries. Of these were the arts of writing and of printing, the discovery of America, and the introduction of Patent laws.
Certainly, Lincoln had a high view of the patent system as he equated it with the discovery of the printing press and the discovery of America.
Bringing these concepts forward to the present time, in March of 2012, the Economics and Statistics Administration in conjunction with the U.S. Patent and Trademark Office (“USPTO”) promulgated a report entitled, “Intellectual Property and the U.S. Economy: Industries in Focus,” which focused on the prevalence of IPR in specific U.S. industries and the economic impact of such industries on employment, wages, and GDP.9 In the report, a number of broad findings were offered:
- “Innovation … is a primary driver of U.S. economic growth and national competitiveness.”
- “IP is used everywhere in the economy, and IP rights support innovation and creativity in virtually every U.S. industry.”
- “The granting and protection of intellectual property rights is vital to promoting innovation and creativity and is an essential element of our free-enterprise, market-based system.”
- “Patents, trademarks, and copyrights are the principal means used to establish ownership of inventions and creative ideas in their various forms, providing a legal foundation to generate tangible benefits from innovation for companies, workers, and consumers. Without this framework, the creators of intellectual property would tend to lose the economic fruits of their own work, thereby undermining the incentives to undertake the investments necessary to develop the IP in the first place. Moreover, without IP protection, the inventor who had invested time and money in developing the new product or service (sunk costs) would always be at a disadvantage to the new firm that could just copy and market the product without having to recoup any sunk costs or pay the higher salaries required by those with the creative talents and skills. As a result, the benefits associated with American ingenuity would tend to more easily flow outside of the United States”
“IP-intensive industries accounted for about … 34.8% of U.S. gross domestic product (GDP) in 2010.”
In June of 2013, the then U.S. Intellectual Property Enforcement Coordinator Victoria A. Espinel discussed the Administration’s 2013 Joint Strategic Plan on Intellectual Property Enforcement. Along with emphasizing innovation and creativity as the foundation of the United States economy, she stated that:
Intellectual property is a key driver of our economy. … Ours is a Nation of entrepreneurs, inventors, and artists. The ideas that American citizens generate [and] catalyze cutting edge research, ensure longer and healthier lives, and power the globe’s most productive economy.
The highest levels of U.S. government, as well as the USPTO itself, acknowledge and emphasize that IPR is very important for economic growth in the U.S.
Furthermore, the importance of IPR is not lost on other countries. For example, the leaders of China recognize the paramount importance of IPR, and as well as the relationship between strong IPR and economic development and competitiveness. In its 2008 Outline of the National Intellectual Property Strategy, the Chinese government stated that:
In the world today, with the development of the knowledge-based economy and economic globalization, intellectual property is becoming increasingly a strategic resource in national development and a core element in international competitiveness, an important supporting force in building an innovative country and the key to hold the initiative in development.
Building on its 2008 strategy, in its 2010 National Patent Development Strategy, China’s State Intellectual Property Office stated:
The patent system is an important component part of [the] intellectual property system. As a fundamental system to encourage and protect innovation, the patent system is playing an increasingly important role in economic, technological and social developments of a country. In the 21st century, with rapid development of [a] knowledge economy and acceleration of the globalization process, … patented technolog[ies have] become strategic resources for the core competitiveness of a country, and the patent system has become an important instrument for international industrial distribution, which is concerned by a growing number of countries.
Former Premier of China, Wen Jiabao stated in a 2009 speech that “[s]cience and technology is a powerful engine of economic growth.” In the same speech, Premier Jinbao also said that, “IPR protection is vital to driving innovation and development.”
Since then, the Chinese government has continued to show support for the growth and innovation through patent rights both domestically and abroad. In the Chinese government’s National Patent Development Strategy (“the Strategy”) for 2011-2020, patented technology is emphasized as a source “strategic resources for the core competitiveness of a country, and the patent system has become an important instrument for international industrial distribution.” The Strategy was developed as “an inexorable requirement to deal with fierce international competition and accelerate transformation of economic development mode; it is a strong support for making China an innovative country and attaining the goal of building a moderately prosperous society in all respects.”
In other words, the governments of the two largest economies in the world believe that innovation and strong IPR are critical for sustaining economic growth both on a macro- and a micro- level.
General Primer on the Different Types of IPR
As noted in the Introduction, “intellectual property” refers to intellectual creations such as technological inventions, industrial designs, literary and artistic works, as well as symbols, logos, and names used in commerce for branding. Today, most countries provide means for the creator or inventor of such matters to obtain protection for his or her creation or invention so that he or she can have, for ostensibly a limited time, the exclusive right to use, or allow others to use, his or her creation or invention. Such rights are called “intellectual property rights” (IPR).
There are four main categories of IPR: (1) patents; (2) trademarks; (3) copyrights; and, (4) trade secrets. There are also subcategories under several of the main categories (e.g., utility patents and design patents; trademarks and trade dress). The extent of protection of the various types of IPR varies from country to country, and in the U.S., trade secrets are presently a protected by state laws. The purpose of this section of the article is not to expound on which set of rights is better or more ideal for a particular situation, but simply to identify the rights and provide a brief description of what each right generally covers.
Patents
In the U.S., a patent is a grant from the federal government, based on a provision in Article I, Section 8 of the Constitution that gives an inventor the right to exclude others from making, using, importing, offering to sell, or selling a patented invention. There are two main types of patents – utility patents and design patents. Utility patents protect the functionality of a machine or process, as well as compositions and their uses, among other things. Design patents, on the other hand, protect the ornamental features of an article of manufacture, but can also include graphical user interfaces for computer programs, for example. If the invention does not qualify as a utility patent because there is no functional uniqueness in the underlying invention, then a design patent may be the only option available. If the invention is both functionally and visually unique, then it can qualify for both a utility and a design patent.
Because patents are essentially a limited monopoly, the terms are restricted. A utility patent is limited to approximately 20 years from the filing date of the patent application (subject to possible adjustment), and a design patent has a term of 15 years. The inventor is required to disclose all aspects of the invention (or design) in exchange for the limited monopoly, and is required to file for patent protection within one (1) year of first sale or disclosure of the invention at the latest. Once a patent issues, it is a public document; and, in the vast majority of cases, the patent application papers describing the invention become public eighteen (18) months after the patent application filing date. Once a patent expires, the public is free to practice the invention described in the patent.
Typically, if there is an infringement, a patent will allow the patent holder institute a lawsuit to recover damages for the infringement, and the ability to seek an injunction to stop the infringement. For both utility and design patents, damages may include the patent holder’s lost profits or a reasonable royalty on sales of the infringing product. In both cases, these types of damages typically require disclosure of the patent holder’s financials as an element of the proof of damages. Design patents, however, have a unique remedy in which the design patent holder can obtain recovery of the infringer’s profits, which should eliminate the design patent holder’s need to disclose its financials.
Design patents are relatively inexpensive to obtain, whereas utility patents, because of their highly technical nature and more involved application process, have a significant cost associated with securing such rights. Patents, however, are the sine qua non of IPR.
Trademarks/Trade Dress
Trademarks are everywhere. A trademark may be any word, name, symbol, or device, or any combination thereof, used by a person or business entity to identify and distinguish his/her/its goods or services from those manufactured or sold by others, and to indicate the source of the goods, even if that source is unknown. Colors, smells, and sounds may also serve as trademarks.34 In other words, virtually any distinctive word, name, logo, symbol, etc. that enables consumers to associate a particular product or service with a single source can serve as a trademark. Trademarks do not have a specified term, but instead expire with non-use.
One subcategory of trademarks is called trade dress. Trade dress comes in two main types: (1) product packaging trade dress, and (2) product design, or product configuration, trade dress. Product packaging trade dress pertains to product packaging, as the title indicates. A classic example of product packaging trade dress is the Coca-Cola bottle.
Product design trade dress pertains to the configuration of a product, and such rights are not easy to obtain. The product configuration for which trade dress protection is sought must be source-identifying (i.e., possess “secondary meaning”) and must be “non-functional.”36 An example of product design trade dress is the iPhone. A detailed discussion of secondary meaning and non-functionality are beyond the scope of this article. Nonetheless, trade dress rights, if established, can be quite powerful because they, like trademarks themselves, do not have an expiration date, and only expire with non-use of the trade dress.
In the U.S., trademarks may develop common law rights separate from registration through use of the trademark in commerce. For product design trade dress, more than simple use must be shown to establish enforceable rights, as referenced above. Trademarks may be registered in individual states, as well as on the federal level. State trademark registration can be done more quickly and costs less than federal registration, however federal trademark registration provides additional rights and protections that make it an important means of protecting and enforcing one’s trademarks. Federal trademark registration creates a legal presumption of mark ownership and right to use, is superior to state registration, gives the owner a right to file infringement suits in federal court, and the ability to register a mark which has not been used in commerce yet, but will be used, amongst other benefits.
Copyrights
A copyright protects any original work of authorship fixed in a tangible medium.39 Works of authorship include writings, drawings, paintings, photographs, sculptures, music, motion pictures, architectural works, and more.40 The author of such a work may acquire enforceable copyright protection through a federal registration process that grants the author a right to exclude others from copying, selling, performing, displaying or making derivative versions of the copyrighted work. The term of a copyright is typically for the life of the author plus seventy (70) years. In cases where the copyright author is an entity (typically based on a work for hire agreement), the term will be 95 years from the year of its first publication, or 120 years from the year of its creation, whichever expires first.
Trade Secrets
A trade secret can exist for any product or process that derives economic value because it is not known to the public, but is used by the owner of the trade secret in his or her business. Classic examples of a trade secret include the formula for Coca-Cola and Google’s algorithms for its search engine.
A trade secret has no duration and does not have a registration process. A person or business who seeks to enforce trade secret rights must be able to specifically identify the trade secret and demonstrate that he/she/it have/has taken sufficient steps to maintain the secrecy of the invention or process, such as employment agreements with confidentiality provisions, secure facilities and computer networks, and more.
At the present time, with software processes becoming more difficult to patent in light of recent case law,44 innovators in the software area, in particular, should also consider implementing trade secret protection, in addition to, or rather than, filing for patent protection on a software program in order to have the widest protection.
In light of the proposition that strong IPR drives economic growth on a “macro” (e.g., national or international) level, and with a basic description of the main types of intellectual property, it is important to “get down to brass tacks” and consider why it is important for a business owner to invest in and protect the intellectual property of the business, or for a board of directors to authorize such investment.
BUSINESSES SHOULD MAKE WISE, TARGETED, BUT AGGRESSIVE INVESTMENT IN IPR
IPR are important throughout the life cycle of a company. Early-stage companies often require IPR to secure capital for further development of the technology and the company itself. Established companies require IPR to protect, defend, and/or monetize their branding, content, and products, often through enforcement and/or licensing efforts. For established companies looking to sell, or that are under consideration for purchase, IPR often constitutes a significant portion of the value of such companies. Thus, it is important for companies to invest in developing IPR during all stages of their life cycles. Some of the reasons that support this proposition follow below.
First, IPR help companies protect what they have worked hard, and expended substantial time and money, to develop, whether it be branding/marketing, art, know-how, or technology.
Second, IPR help companies to carve out for themselves a space in the market that allows them to exclude others from entering the particular market (assuming no “design arounds”) for approximately 17 years with patents, and potentially for much longer periods of time with trademarks (rights persist provided the trademark is in use), copyrights (rights typically last for the life of the author plus 70 years), and trade secrets (provided the information that creates the economic value remains protected as a trade secret). This exclusivity amounts to a limited monopoly, which provides a competitive edge, and may (or should) increase revenues and market share, and provide funds for reinvestment into the company for further research and development.
It is always possible that one’s competitors achieve new innovation that allows them to bypass the IPR owner, but that is simply the nature of competition. The Apple v. Samsung litigation is illustrative: Samsung redesigned its products presumably to avoid Apple’s IPR, but the overall situation also shows that while Samsung’s market share may have increased relative to Apple’s, Apple did recover a significant sum of damages to compensate it for Samsung’s infringement..
Third, robust present IPR may provide for the future ability to exclude others from the market in a more de facto exclusion. For example, a company may pursue aggressive branding strategies even when a product goes off-patent because the trademark rights for the product still exist and the goodwill associated with the company and the formerly patented product remain.
Fourth, IPR often enhances the value of the overall company during the term of the IPR. For utility patents, the term may be relatively short (about17 years), but the value derived from the exclusionary rights that patents provide can be substantial. For trademarks, the term lasts as long as the trademark is used in commerce, and trademarks may provide a major aspect of the value, branding, and goodwill associated with a company. For copyrights, depending on the nature of the work, and the demand for it, increased company value can also be supported.
In addition, in some cases, retailers and/or consumers may be impressed by IPR markings on, or associated with, a product, and the perceived exclusivity of product, which can increase revenues from the product and/or increase company value.
Fifth, IPR can be licensed to other companies, whether the company that owns the IPR uses the technology or not. Licensing IPR can be analogized to a landlord who rents a house or apartment he or she owns. The owner of the IPR is the “landlord” so to speak. Licensing can generate substantial revenues for a company, as renting a house/apartment can do for a landlord. Licensing is beneficial, particularly in connection with IPR that the company owns, but is not using. Just ask IBM.
Sixth, and very important, IPR enhances the ability of companies to obtain investment and financing. In particular for early-stage companies and startups, patent applications, and especially issued patents, can have a significant impact on the ability to attract outside investment. As discussed in the 2016 study “The Brighter Side of Patents,” “patents act as a catalyst that sets startups on a growth path by facilitating their access to capital.” Startups that hold patents ultimately are twice as likely to eventually be listed on a stock exchange. IPR typically decrease the risk for investors and present the possibility of solid return on investment, which are two key components of any investment decision. Furthermore, patents allow entrepreneurs to disclose information in a more efficient manner and without worry that the information will be stolen by competitors.50 One commentator highlights that:
to incentivize innovation, intellectual property rights are essential. … In today’s economy, innovation is expensive and requires hard-sought investment and deliberate planning. These investments of time, talent and financial resources only take place when incentivized by the potential returns that IP protection [may provide].”
In addition, strong IPR, particularly patent rights, determined through due diligence and combined with careful analysis of the market(s) for the product(s) described by the patent, have been shown to support a strong valuation of the patent(s), as well as support equity funding negotiations and capital raises.52 For more established companies, IPR can be used as collateral for loans, lines of credit, or the other such means of raising capital.
On the flip side, without IPR, it is very difficult for companies to secure investments and capital. The reason is quite simple. There are many investment opportunities out there, and a new venture is well served to be able to protect the subject matter of the venture from encroachment by others as an incentive to lure investors. Intellectual property rights, particularly patent rights, are often the only collateral a startup company has to secure investments in the company. If the potential to be knocked off, copied, or the like cannot be adequately accounted for, investors will often see the deal as too risky in terms of return on investment to move forward with an injection of capital.
“Angel” investors provide seed funding so that a company can be built up to the point where venture capitalists and banks will provide larger investments. In discussing the life cycle of a startup company including early stage, one writer said that:
“[W]ithout strong patent rights even the best early stage company can look unacceptably risky, which means it has become difficult to attract Angels, which in turn makes it even more difficult to attract venture capital. When early investors steer clear this creates a funding gap between seed-stage companies seen as too high risk, and early-stage companies with products, customer and a team with manageable risk.”
In other words, having patent rights is an important method for bringing capital into a startup company.
Seventh, IPR can fuel a cycle that further drives a company’s development. Economic benefits derived from existing IPR can be reinvested in the company’s research and development, and lead to procurement of additional IPR, which can secure more investment money, and so on and so forth.
Eighth, patents can be used defensively in several ways. If a company is frequently innovating and procuring patents, but not necessarily using the patented technology, the company can essentially carve out peripheral space related to the space in which it does operate. By doing this, the company knows, with greater certainty, that it will not be sued for patent infringement in that peripheral space, as well as its core space.
A second way patents can be used as a defense mechanism is in a cross-licensing situation. If a company operates in a crowded field where a lot of innovation is taking place, patenting incremental advances in the technology, even if that technology is not actively used by the company, may create a situation where a competitor that sues the company for patent infringement may face several patents in that same crowded area coming back at it in a counterclaim. This sets up the possibility of a cross-licensing resolution in which the companies settle the case and agree to cross-license each other’s patents.
Ninth, at the end of a company’s life cycle when a company (or even a division within a company) is approached for purchase, or looking to be sold, IPR can be extremely beneficial LAteto the exit strategy. Potential buyers will look carefully at the IPR of a company in assessing whether or not purchase is worthwhile, and valuation(s) of the company will take into consideration the IPR. According to Davis Blaine, CEO of The Mentor Group, a company in Westlake Village, California that provides, among other things, intellectual property valuations and sales of companies, “When a company with significant intellectual property rights is sold, the intellectual property often supports anywhere from 20-50% of the purchase price. However, that percentage can be higher in some instances. We find that unique IP often drives a higher sale price of a company.”
One global financial advisory firm said:
It is well established that intellectual property (“IP”) assets – including patents, trademarks, trade secrets, and copyrights, among others – generate what economists would refer to as “excess profits” to their owners, causing relatively high levels of returns compared to other asset classes. Similarly, it appears that today, more than ever, IP assets are contributing more value to corporations than other assets… We believe that much of this value represents legally protected IP assets, including patents, trademarks, copyright, and trade secrets, among others.
In 1975, only 17 percent of the market value of the S&P 500 companies was represented by intangible assets. In contrast, in 2010, intangible assets represented 80 percent of the market value of the S&P 500.58 Take Yahoo, for instance. Yahoo’s Excalibur patent portfolio consists of about 4,000 patents that were not sold, but licensed to Verizon when they acquired Yahoo, and are not part of Yahoo’s core business. 59The portfolio was valued at $740 million as of December 31, 2016.60 Google’s parent company, Alphabet, and Microsoft are reportedly interested in purchasing the portfolio. Yahoo’s Excalibur portfolio is the perfect example of how important IP assets are at all stages of a business.
Being short-sighted on IPR during the earlier stages of a company’s development (if a company is looking for an early acquisition) or even during the more established period of a company’s life cycle (if a sale inquiry is made by a potential purchaser or if the owners of the established company are looking to sell), can be very costly.
The upshot of the foregoing is that IPR are critical for many purposes at all stages of a company’s existence, and it is arguably foolish for a company not to aggressively seek, procure, exploit, and enforce IPR.
CONCLUSION
At the macro- level, the importance of IPR as a basis for fueling and sustaining economic growth is readily apparent. At the micro- level, there are many ways in which IPR are very important to companies at all stages of their life cycles. For early-stage companies, IPR protect inventions, brands, and creative works, and can help to attract seed money and subsequent capital investments. For established companies, IPR serve to protect the brands, products, and markets that are the drivers of the companies’ revenues. For established or mature companies that are subject to purchase or are looking to sell, IPR can increase the value of such companies beyond the accounts receivable, inventory, and such other traditional means of valuation. Thus, IPR are vital to both macroeconomic success at the national level and microeconomic success at the company level.
At the macro- level, it is important that the U.S. and other industrialized countries maintain strong systems for procurement and protection of IPR. At the micro- level, it is important that companies make wise, but aggressive decisions about protecting the innovations, the creativity, and the branding that emanates from them.
Focusing on the micro- level, company owners/executives should ask themselves or their boards the following types of questions:
- What IPR do we own?
- When, if ever, will the IPR expire?
- Should we have an IP audit performed by IP counsel to inventory and assess the IPR we have?
- Should we have IP counsel help us consider further IPR procurement to pursue?
- Can or should we expand the reach of our IPR (e.g., trademarks) into new markets?
- Do we have an internal program to monitor and record the development or need for IPR?
- Are we maintaining any IPR that we do not need or that we no longer use, and what should we do with any such IPR (e.g., sell, license, abandon)?
Given the importance of IPR throughout the life cycle of a company, as set forth herein, and the expense in developing, procuring, and maintaining the IPR, these types of questions, and others, should be a regular discussion topic among company owners and executives.