Generally, but especially in times of economic downturn, companies need to fully understand the scope and value of their assets, and the extent to which such assets could serve as the basis for possible revenue generation. A company may possess a portfolio of intellectual property (‘IP”) assets - which could include a trademark, or a patented or copyrighted software tool, product or business process - that is significant for the company, yet receives insufficient attention and, therefore, tends to be underutilized. Only by better understanding the nature of its IP portfolio can a company be sure that it is optimally exploiting these assets.

The importance of understanding one’s IP portfolio was well illustrated in the report by PricewaterhouseCoopers, 2008 Report on Emerging Canadian Software Companies: The CEO Perspective, (the “PwC Report”) which examined a survey of CEO’s in the Canadian software industry to help identify the business and strategic issues facing that industry. Mark Penner and John Beardwood contributed the portion of the survey and the subsequent report which addressed IP issues.

While the IP survey data should be of particular interest to those in the software industry, many of the lessons found in the PwC Report have equal application to any business with an IP portfolio. A summary of the more relevant lessons are set out below to assist managers in protecting and maximizing the value of their IP assets, an important consideration in an economic downturn.  

Summary of IP Lessons Learned

The PwC Report explored several IP related issues, including the importance of understanding the role of IP in a company’s business, understanding the assets in that company’s IP portfolio, and assessing the extent to which the company has uncontested and complete ownership rights in its IP assets.  

At a high level, the PwC Report showed the following:  

  1. The majority of CEOs of emerging software companies have (a) an understanding that IP is a key or a top priority, and (b) a clear, and remarkably uniform, view of the role that IP plays within their organization 2. When considering IP issues in greater detail, however, the results suggest that there may be a disconnect between each CEO’s understanding of (a) the importance of and role of the IP assets, and (b) the extent to which their company actually possesses those assets, in the IP portfolio of their company.
  2. There appeared to be a significant lack of understanding as to the importance of conducting IP due diligence prior to developing and using and/or marketing an IP asset for their business. Perhaps to a certain extent as a result, almost 1 in 5 of the CEOs polled indicated they had been involved in a legal dispute involving IP.  
  3. Less than half of companies surveyed reported that IP played a significant role in generating revenue for their company (e.g. through licensing). Only 29% of the respondents have “licensed out” their IP to third parties. This would seem to suggest that there are opportunities to generate revenue from IP licensing which are being missed.  

Detailed Overview

1. Understanding the Role of Your Intellectual Property  

The PwC Report showed that the CEO’s of the surveyed software companies knew that IP was important to their business. Almost 65% considered IP to be a key or top priority; in contrast, the most surprising result, in light of the nature of their products, is that 5% considered IP to be a low priority. IP protection in other countries was also clearly important for the Canadian companies surveyed, as 90% of the respondents reported that they licensed or otherwise distributed their products outside Canada. The majority (55%) of the CEOs indicated they had sought to protect their IP rights outside of Canada, with the United States and Europe being the most important jurisdictions.  

Emerging companies also had a clear, and remarkably uniform, view of the role that IP plays within their organizations. The majority of respondents indicated that IP “distinguishes” their company in the marketplace (approximately 75%), “increases the company’s valuation” (approximately 74%) and/or “creates barriers for competitors” (approximately 71%).  

The large percentage of responses that IP increases a company’s valuation and creates barriers for competitors suggested the perceived importance of IP was as a means for companies to protect those products developed for establishing market dominance. Patenting a product, for example, can play an important role in doing just that – recall that a patent provides the right to exclude others from making, using, selling, offering for sale, or importing the patented invention for the term of the patent - yet only 56% of respondents indicated that patents were important. Further, only 34% of respondents actually indicated that they own patents.  

The value of IP protection, however, goes beyond just acting as a sword to enforce the rights of the IP owner. Of possibly greater importance in these times is revenue generation through IP licensing agreements. However, in order to take advantage of such revenue generation opportunities, a company needs (a) to be aware of and understand what IP assets it actually owns, and (b) to take steps to properly obtain and protect its IP.  

2. Understanding the Assets in Your Intellectual Property Portfolio

The high degree of support for IP as a way to distinguish a company in the marketplace may have been an acknowledgement of the role of trade-marks in formally identifying the company in such marketplace. This appeared to be borne out by the significant majority response of the surveyed CEOs that trade-marks were of particular importance to emerging businesses (73%), and that their respective businesses owned trade-marks (72%). However, what is surprising is that approximately 28% of the respondents indicated they did not own any trademarks. This may reflect a misunderstanding that trade-marks can arise through simply using any word, symbol, logo, slogan, etc. or combination thereof that identifies the wares and/or services of one company from those of another – that is, trademarks do not arise only through registration. As a result, one would expect that every company has at least one trade-mark, whether or not it has registered that mark.

This disconnect between the expressed importance to the business, and the actual ownership of, each IP asset, continued with copyright. While approximately 67% of the CEOs indicated that copyright was important to their company, only approximately 57% indicated that their company owned any copyright. This is a significant result, given that copyright remains an important means by which software is protected. As was the case with the trade-mark responses, the copyright responses appeared to significantly underestimate the extent to which each company possessed copyright assets, and may have reflected a misunderstanding of the fact that that copyright arises from the act of creation, and would therefore apply to a wide variety of material (e.g. developed software, user documentation, websites, etc.) without the need to register. Registration does provide some significant advantages, however, which include establishing both a public record of the copyright claim, and prima facie evidence of the validity of the copyright.

Finally, this misunderstanding of the nature of various forms of IP continued to be well illustrated by the responses regarding company ownership of trade secrets and industrial designs. While over 76% of the respondents indicated that trade secrets were important to their business, only 45% of respondents stated that they owned a trade secret. Given that trade secrets are effectively a form of confidential information that, because it is confidential, grants some form of economic benefit to its holder, it is very likely that respondents under-reported trade secret ownership.

In contrast, more than 20% of emerging software companies highlighted industrial design as key to their company’s software business. Given that Canadian industrial designs are directed to the features of “…shape, configuration, pattern or ornament and any combination of those features that, in a finished article, appeal to and are judged solely by the eye,” it is unlikely that so many CEO’s would have highlighted this IP right as key to their company’s software business if the nature of the right were better understood. Industrial designs are also known as “design patents” in the United States, and this may have added to possible confusion regarding, and thus the overreporting of the ranked importance of industrial designs.

3. Assessing the extent of full ownership rights in your IP Assets

Once a company understands the role and nature of its IP assets, it should investigate the extent to which the company has full and uncontested ownership rights in those assets. Such a review may also assist in identifying cross-licensing opportunities. Before launching a new business, product or service, 64% of the survey respondents indicated they would conduct a market analysis of existing businesses, products or services. However, only 18% indicated they would search IP databases. With respect to general monitoring of the marketplace for potential IP issues, more than 55% of the respondents indicated that they did not conduct any such monitoring, and of the 45% that did monitor the market, 34% did so through reading industryfocused publications (e.g. Wired), and 25% did so through reading national newspapers (e.g. Globe and Mail, National Post). Only 15% indicated they engaged IP counsel.

The degree to which conducting IP searches can assist a company to mitigate third-party claims will vary based on many factors, including the number of competitors in the market, the nature of the product and the applicable jurisdiction. However, companies should be cautious about substituting the reading of media sources for such searches: not only will such media reports likely fail to provide proper definition to any such IP issues that could form a significant concern, but by the time such issues are referenced in the media it is likely too late to mitigate the risk.  

Perhaps more importantly, before going to market with an IP asset a company should at least confirm the existence and comprehensiveness of its own internal records regarding the ownership of such IP asset. If there are key employees or independent contractors that are involved in the development of significant software, the company should confirm ownership of the software internally to avoid personnel contesting ownership (in particular where such personnel are then hired by a competitor), including obtaining assignments of copyright and waivers of moral rights from such personnel (moral rights are a creation of the Canadian Copyright Act which grant authors the right to the integrity of the work as well as the right to be associated (or not) with the work). However, only 13% of the respondents indicated that they currently take this step.

With respect to foreign IP due diligence, while the vast majority of companies surveyed (more than 90%) indicated they sell products or make services available outside of Canada, only 29% had taken steps to identify third-party IP rights in applicable foreign jurisdictions.

In brief, why is it so important to conduct the appropriate level of IP due diligence? More than 45% of companies indicated that IP-generated revenue for the company occurs via licensing or sale of ownership. A licensee or purchaser will require representations and warranties regarding ownership and non-infringement. To the extent that the polled companies agreed to such representations and warranties, 89% of the respondent CEOs indicated they were either very or somewhat comfortable with these representations and warranties. It is difficult to reconcile this high level of comfort with the above evidence of misunderstandings as to the nature of various forms of IP, and expressed failures to conduct appropriate IP due diligence, as well as with the fact that almost 40% of the respondents indicated that they had not implemented any formal IP policies.

In summary, and not surprisingly in light of the above responses, nearly 60% of the respondents agreed that their company’s “IP strategy requires improvement.” In addition, a number of those companies which had at least implemented IP policies still acknowledged the need to adopt additional measures to assess and protect their IP portfolio. While 55% of CEOs indicated that if they had more funds they would take actions to improve their IP policies, many of the CEOs also acknowledged that a significant external event would be required for them to do so. Surprisingly, almost 50% indicated it would take an IP dispute involving the company, and 38% indicated that it would take knowledge of a dispute involving one of their competitors. As we note below, the occurrence of such a dispute is not unlikely; further, by the time the disputes occurs, it is likely too late.  

4. IP disputes for 1 in 5 respondents

The adoption of an IP strategy that includes the implementation of an IP policy, the registration of IP and the conduct of IP searches prior to going to market is, of course, intended to forestall the emergence of IP disputes. What is the risk of such a dispute? Almost 20% of the CEOs polled indicated they had been involved in a legal dispute involving IP. In light of the fact that this survey covered emerging software companies - that is, companies which are early in their lifecycle - this is a very significant percentage. Note that defending and settling such disputes can impose material, and sometimes company-killing, costs on a company. Conclusion In summary, while the survey was targeted at software companies, any company with IP assets can learn the following lessons from the responses of the respondents.  

  1. Understand what role IP plays in your business and the possibility for revenue generation.  
  2. Improve your understanding of the nature of each IP right in order that you may better understand the scope of the assets in your IP portfolio.  
  3. Complete sufficient levels of IP due diligence to ensure that you have sufficient assurance that your company does in fact own those assets.  
  4. Develop, implement and maintain an IP strategy to institutionalize those activities above and to protect, maintain, grow and exploit that IP portfolio once identified.