Patents, trademarks, copyrights and trade secrets, or intellectual property (IP), have become an increasingly important asset for today’s businesses. In particular, IP provides strategic and financial advantages against competitors in the form of improved business and/or manufacturing processes and new product technology or designs.
The U.S. Patent and Trademark Office (USPTO) indicated the number of patents granted in 2011 (247,713) was the largest since 1963, and as of 2011, there were 1.75 million active trademark registrations. Further, the U.S. Copyright Office indicated that between 1790 and 2009, approximately 33.65 million copyrights were registered.
“While we have seen the number of patent grants and the volume of trademark and copyright registrations increase, in my experience, companies are not appropriately identifying and managing their IP,” says Andrea Gonzalez, CPA, a senior manager at Cendrowski Corporate Advisors. “As a result, companies are missing valuable strategic and economic opportunities.”
Smart Business spoke with Gonzalez about the necessity for companies to identify and manage their IP.
Why it is important for a company to identify its IP?
It is important for a variety of reasons; in particular, it allows a company to fully understand its IP portfolio. Once a company identifies its IP portfolio, it is able to determine the development stage of in-process IP; determine the ongoing cost of its IP development, including whether the company should continue to fund development; assess and critically review the IP’s continuing value to the company; identify potential licensing in/out opportunities; identify potential IP purchasing needs or sales of nonperforming IP; comply with financial reporting requirements; and monitor for potential misappropriation or infringement of its IP.
How can a company identify and manage its IP?
A company can start by implementing a formal process of identifying and managing all IP assets within the company on an annual basis. The first step is to establish a standardized method for identifying specific IP by department or functional area, by the type of IP (e.g., patents, copyrights) and by the type of product it relates to or the process for which it applies. The categories of identification can vary by company depending on the depth and variety of IP assets.
The second step is to implement the formal IP identification process. The implementation begins by interviewing various employees. Employee interviews enable a company to identify all of its in-process and established IP and appropriately categorize by department, type and product/process.
Once all IP is identified and categorized, the company can easily manage its IP portfolio. Specifically, it can perform annual audits of its IP portfolio either internally or via outside IP consultants and implement computerized or automated audits. The audits enable a company to monitor the current status of in-process IP; estimate the useful life and use of its IP; determine its value for purposes of financial reporting, insurance or collateral; and identify potential business opportunities (e.g., licensing in/out, sales, purchases), among other items.
Don’t a company’s financial statement auditors perform this function?
Not necessarily. If IP is self-created, the costs of creating the property are expensed rather than capitalized. As such, there may not be an asset included in the balance sheet for the IP.
Is it also important for a company to safeguard its IP?
Safeguarding a company’s IP is important to maintaining the economic and business benefits previously discussed. It has also become increasingly important because the accessibility of information has never been easier than it is today.
Further, there is an increasing availability of tools capable of obtaining information maintained in electronic environments. Therefore, it is crucial for a company to identify its various forms of IP and work to not only implement appropriate internal security measures but to also work with their legal counsel to ensure the appropriate IP protection afforded under U.S. laws are in place to protect the company’s IP assets. Enterprise risk management extends to IP, as well as ‘hard’ assets.
What if a company suspects its IP rights have been infringed or stolen?
The first step is to contact legal counsel. If legal counsel determines there is an alleged infringement or misappropriation, financial and accounting professionals can be retained to determine the economic damages that may have resulted from the alleged unlawful acts prior to or after a formal complaint is filed with the court.
How are damages quantified if a company believes its IP has been infringed or misappropriated?
There are a number of different methods forensic accountants and valuation analysts use to quantify IP damages. Bearing in mind damage remedies available under the law vary based on the type of IP allegedly infringed or misappropriated, damages may be quantified by estimating a reasonable royalty rate, quantifying the profits the IP inventor would have earned but for the alleged infringement, or by quantifying the unjust enrichment the infringer earned as a result of their alleged misappropriation or infringement.
Andrea Gonzalez, CPA, is a senior manager at Cendrowski Corporate Advisors. Reach her at firstname.lastname@example.org.