Point of Vie                          January 23, 2011

 Why every company needs an IP Strategy

When I was at Microsoft, I had the opportunity to be involved in several M&A transactions where my role was to oversee the intellectual property and legal due diligence of the target companies. I was always amazed to how little attention had been paid to these matters by their business owners (and their investors) given that these companies were all technology ones. In many cases, IP related issues uncovered during due diligence ended up affecting the ultimate valuation of some companies, delaying the earn out and, in some cases, killing the deal. All these companies had one thing in common: great team, great product, but no sound IP strategy.

Let me ask you this: would you build your house or invest your money in a real estate project without knowing whether you actually own the land on which it will sit, or that you are in full compliance with the zoning regulations and won’t be asked to demolish the building the minute it is erected? Of course you wouldn’t! That’s just plain common sense.

Yet, when it comes to most technology based ventures, business owners and investors seem to overlook some basic principles related to the intangible nature of their company. They also often underestimate how IP matters can dictate the viability and valuation of their business over time.  In other words, while most small and medium size companies have a business plan, very few have an IP strategy and they often end up pay a high price for this shortcoming if a dispute arise or when it is time to exit.

Consider this: 85%+ of the value of most businesses nowadays is in the form of intangibles. For small technology companies, this percentage runs close to 100%. If you own a business, just ask yourself how much you’d generate if you were to sell all the assets on the books (equipment, inventory, etc. ) Now compare this to how much you think your company is worth. 1M, 5M, 10M? The difference in value is essentially in the intangibles, i.e. the bundle of intellectual property rights the company has developed or acquired over time (copyrights, patents, trade secrets, trademarks, licenses, etc.).  When accountants value a company based on its trailing revenues or other sales figures, they are simply translating into a formula the expectation that people will continue to pay for the IP (e.g. superior or unique technology, well liked brand, exclusive franchise, etc.) embodied in your products or services and that no one can offer the exact same thing without infringing those rights.  Simply put: no enforceable IP = much lower value. That is why a legit copy of Windows costs around $100 and a pirated one can go for as low as $1. $99 goes to the IP.

What is an IP Strategy? Does it simply mean you should go gangbuster and file a patent every time you think you came up with something smart? Of course not!  Just consider that it costs on average $15K to $20K to file and prosecute a utility patent in the US only (the price goes up exponentially if you file overseas as well). Yet, it takes close to 5 years for a US patent to issue and research shows that fewer than 10% of issued patents are actually practiced by their owner. Are you, like most people, filing the wrong patents? Could you even detect if someone else was infringing your patent(s)? If not, what exactly did you pay for? Is filing patents (which means teaching your competitors how you’ve built a better mouse trap) even the right approach for you, as opposed to relying on trade secrets protection?

Conversely, what do you know about other patent owners in your industry segment? The Licensing Executive Society recently published a study showing that the average costs of a patent litigation in the US is 3 million dollars for a trial on the merits (and 5M if one party appeals). And that’s just for defending the case! Yet, patent litigation keeps increasing. To make matters worse, patent trolls (aka NPEs) have amassed thousands of patents in the past decade and their business model is predicated essentially on licensing revenues on a large scale. This is called “retail licensing” and it doesn’t bode well for SMEs who had been largely immune so far from law suits by NPEs. So do you know whether you infringe or will soon be infringing someone else’ patents? Would you survive such a claim, especially if you can’t use your own patents as a counter lever?

Branding is also extremely important and some famous trademarks can be worth in the billions of dollars. Yet, just like patents, trademark rights are on a country by country basis. Can you imagine Coke having to use tens of different names around the world? It hasn’t happened because Coca-Cola was aggressive and proactive in securing trademarks before it even entered those countries. As a business owner, don’t you want to know beforehand whether you will need to change the name of your flagship product every time you enter a new market? And what about your domain names? Heard of domain hoarding?

If your product or service relies on software, do you know for sure you own the code outright? Was the development outsourced? Do you have the proper agreements to confirm ownership (remember that software is NOT one of the listed categories or works under the Copyrights Act where a mere “work for hire” provision in a contract will transfer title)? What if your developers lifted the code from a third party? Do you have the proper contractual safeguards and will they protect you enough to cover your own exposure? Also, have you considered the possible long term impact of using open source components? Have you gone through the cost/benefit analysis of short term savings vs. long term dependencies under some copyleft type of licenses? Have you considered the fact that potential acquirers might balk at the presence of open source in your product given their business model or internal development policies and that it may be a lot more expensive (or just impossible) to untangle and rewrite some of those components a few years from now?

 How would you fare tomorrow if someone wanted to acquire (or invest in) your company and subject it to a thorough IP and legal due diligence? Would you pass muster? Would valuation go down as a result of some IP dependencies or weaknesses? In other words, why would someone want to buy you or pay the full amount you think your company is worth if they can replicate what you did without infringing any proprietary rights? Or if they are required to secure rights after the fact because you didn’t do it when it would have been a lot cheaper to do so? Or if they have to redesign part of the product to avoid a third party IP (generally patent) claim once your technology is no longer flying under everyone’s radar screen?

Those are just a few examples to show how important a sound IP strategy is for any company. Having a business plan that doesn’t include a well-articulated IP component leaves a huge percentage of the execution and future success of your company to improvisation and sheer luck. It can -and will likely- affect the competitive advantage, profitability, legal exposure and, ultimately, valuation of a business, if not its very existence. Napster died because of IP issues, RIM almost did and the venture cemetery is littered with companies that never made it because they didn’t have the right IP foundation to protect and/or exploit their products or services in the long run. That’s not the kind of company you want!

Fortunately, very much like with financial planning, a solid IP strategy –especially if done early- is very affordable (much less than the cost of filing just one US patent)* and will go a long way toward minimizing some of the most common risks and maximizing long term value for your company.  As an owner or investor, you need to make sure that the house you are building rests on the right IP foundation.


*We have conducted several IP Audits and IP Strategies for our clients. Estimates and sample reports are available upon request. 

Disclaimer: Please note that this newsletter is for educative purposes only and does not constitute legal advice. It should not be relied on to make business or legal decisions, since each state has different laws, each situation is fact specific, and it is impossible to evaluate a legal problem without a comprehensive consultation and review of all the facts and/or documents at issue.    

 Related: The Intellectual Property Century   IP has become the critical rudder for the 21st century economy. Alongside our focus on the specific innovations that we will see in the coming decade, we need to more transparently and aggressively understand, expand, address and deploy IP models and methods. Xonomy 


 Counterfeit Websites Top 50 Billion Online Visits Annually  Latest research has revealed that almost 75 percent of the websites that operate as a platform for counterfeit goods, are based in Western Europe and North America, according to market research firm MarkMonitor.  The Epoch Time.
Report: Android code identical to Java  Did Google take code from Java when it built Android? Oracle sure thinks so, and now an expert on software patents seems to agree.  Florian Mueller, who writes the blog FOSS Patents, posted a lengthy examination of 37 files within the Android 2.2 source code. Those files match files found in Oracle's Java technology, and were even marked PROPRIETARY/CONFIDENTIAL" by Sun Microsystems, the inventor of Java which Oracle acquired last year.  CNET News
Project Copyright! Bill Giving IP Protection to Fashion Moves Forward  The current bill, which could go to before the full Senate before the December recess, creates a “substantially identical” standard for infringement, largely borrowed from trademark law. It would create a 3-year term of protection, for designs that have both originality and novelty. For a good overview of the bill’s specifics, click here. The Wall Street Journal 
Ascentive Faces Class Suit Over Alleged Sham Software Ascentive LLC has been slapped with a proposed breach of contract class action for allegedly swindling consumers into buying software that fixes fictitious or overstated computer problems.  Contract Law 360
Pfizer Sued Over Termination Of Wyeth Patent Pact  Pharmaceutical company Pfizer Inc. has been accused of unlawfully terminating a patent licensing agreement for imaging technology between AntiCancer Inc. and Wyeth following the merger of the two drug giants. Contract Law 360
Twitter Faces Suit Over Celebrity Networking Patent  A Virginia patent-holding company has sued Twitter Inc. claiming the real-time information Internet sensation infringed a patent for a way to create an interactive community of famous people. Technology Law 360
HP Derivative Case Stayed For Probe Of Ex-CEO's Exit  Hewlett-Packard Co. has asked for a stay in derivative litigation over ex-CEO Mark Hurd's allegedly excessive severance award while a committee of independent directors looks into Hurd's departure and the approval of his separation agreement. Technology Law 360
How Ballmer courted U.S. deal, and how Google won injunctionMicrosoft CEO Steve Ballmer met personally with U.S. Department of Interior officials -- and apparently made quite an impression -- before the agency decided to exclude Google and other rivals by only accepting bids involving Microsoft technologies to upgrade the email system for the department's 88,000 employees. Tech Flash


 Top Trends to Watch in 2011 From Experts in Infotech, Biotech, Cleantech   Innovators have to be very optimistic to believe they can create new technologies that will shake up a market. So it shouldn’t be any surprise that the high tech business leaders Xconomy writes about are looking forward to big things to come in 2011.  Xonomy
Six Keys to Changing Almost Anything Change is hard. New Year's resolutions almost always fail. But some have developed a way of making changes that has proved remarkably powerful and enduring. Harvard Business Review
What It Takes to Be a Great Employer One of the primary definitions of the word "engagement" is "a hostile encounter; a battle." Another is "a specific, often limited period of employment."  In the corporate world, however, engagement has come to signify just the opposite: some blend of an employee's commitment, passion, focus, motivation, morale and job satisfaction. It's what every company wants, but few get.  Harvard Business Review
What the departures of Apple, Google CEOs mean for Microsoft  It has been a week of major executive departures in the tech industry, with news of Apple CEO Steve Jobs' leave of absence followed by Google CEO Eric Schmidt's announcement a few days ago that he's handing over the reins to co-founder Larry Page.  TechFlash 

(c) 2011. The Point Law Group, PLLC. All rights reserved.  


Louis Carbonneau
Founder & Principal
The Point Law Group

THE POINT LAW is a boutique law firm specializing in business and intellectual property counseling as well as various technology transactions and overall IP Strategies & Audits. We cater primarily to technology and e-commerce companies. We offer a full range of legal and business solutions to start-ups, small and medium-sized businesses and large multinational corporations.

You can contact Louis directly at:
(425) 868-9280 (o)
(425) 213-7252 (m)


In the next few weeks, Louis will be giving a series of keynotes on topics related to Business, IP and Innovation

February 2: CEIM Meeting, Montreal, Quebec

February 2: Innocentre Meeting, Montreal, Quebec

February 3: 4th International Forum of Intellectual Property, Montreal, Quebec

February 4: Tuck School of Business, 6th Annual Private Equity and Growth Ventures Conference, Hanover, NH. 

February 4: North Country Angels Meeting, Hanover, NH


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January 10 Issue