Blog of Intellectual Capital

By:  Andrew J. Sherman, Jones Day & Member of Gerbsman Partners Board of Intellectual Capital

CEO’s and business leaders of growing companies inside and outside the Beltway are guilty of committing a very serious strategic sin:  the failure to properly protect, mine and harvest the company’s intellectual property.

From 1997 to 2001, billions of dollars went into the venture capital and private equity markets and the primary use of these proceeds by entrepreneurs was the creation of intellectual property and other intangible assets.  In many cases, five years later, however, emerging growth and middle market companies have failed to leverage this intellectual capital into new revenue streams, profit centers and market opportunities because of a singular focus on the company’s core business or a lack of strategic vision or expertise to uncover or identify other applications or distribution channels.  Investors and tech executives may also lack the proper tools to understand and analyze the value of the company’s intellectual assets.  In a recent study by Professor Baruch Lev at NYU, only 15 % of the “true value” of the S&P 500 was found to be captured in their financial statements.  This gap in capturing and reflecting points out the critical need for a legal and strategic analysis of on emerging company’s intellectual property portfolio.

To begin uncovering hidden value, entrepreneurs and senior executives of growing companies should go through the process of an intellectual property audit.  The intellectual property audit will examine the company’s intellectual asset management (IAM) system (if any), ensure that the intangible assets of the company have been properly protected and most importantly, will serve as the starting point for the strategic planning exercise which will be focused on identifying ancillary applications and markets for the company’s intangible assets, which could create new income streams and profit centers for the company via licensing, joint ventures, strategic alliances and even business format franchising.  The intellectual property audit and strategic planning process based upon the audit results will increase shareholder value by ensuring that the highest and best uses of the company’s intangible assets are pursued – which could also be part of the turnaround or restructuring plan of a troubled portfolio company or which could serve at the core of the value proposition in positioning a growing company for sale.

Understanding The Various Types of Intellectual Property

Intellectual Capital consists of human capital, intellectual property and relationship capital and are the key assets for driving business growth in all types of economic conditions.  As an entry point into the strategy of leveraging IP assets, an appreciation of the different types of assets and their licensing characteristics is useful.  The corporate intangible asset inventory may include trade secrets and know-how, trademarks and trade names, patents and patent applications, and copyrights.

Trade Secrets and Know-How

While trade secrets, considered collectively, often comprise the primary intangible asset a company owns, the protection regime for trade secrets, unlike patents, trademarks or copyrights, trade secret protection is not based on a federal statute.  Trade secrets are unpatented bodies of information that lay outside the public domain.  Formulations, such as the concentrate for Coca-Cola, may be immensely valuable trade secrets. The processes used by an enterprise to make products or to manage itself may qualify as trade secrets. For example, material sources, marketing plans, distribution techniques, customer information, product specification/tolerances, best methods and practices, franchise management protocols, all qualify as trade secrets.  Tweaks and modifications to improve equipment, even off-the-shelf equipment purchased on the open market, may qualify; as do the fruits of the R&D operations: blue prints, test results (even unsuccessful test results are protectable), designs, data bases. etc.  Know-how is a first cousin of trade secrets but far more difficult to inventory as a discrete intangible asset; it is an accumulation of information, knowledge and experience (some of which may qualify as trade secrets, some not) that enables its possessor to achieve practical results which can not be obtained by one not possessing it. Know-how is the essence of what make a company’s most valuable employees valuable.

Patents

A patent grants an inventor the right to exclude third parties from making, using or selling the subject matter of his or her invention throughout the United States for a defined period of time. Utility patents, which are the most common type of patents granted by the U.S. Patent and Trademark Office (USPTO), protect new, useful and non-obvious processes, machines, compositions of matter and articles of manufacture for a period of 17 years. Design patents, which stay in effect for 14 years, cover new, original, ornamental and non-obvious designs for articles of manufacture. And plant patents, which USPTO issues for certain new varieties of plants that have been asexually reproduced, are in effect for 17 years.

Trademarks, Servicemarks, and Tradenames

The Lanham Act of 1946 defines a trademark as any word, name, symbol, or device adopted and used by a manufacturer or merchant to identify and distinguish its goods from those manufactured or sold by others and to indicate the source of the goods. A servicemark serves similar purposes, but it protects the advertising and marketing of services rather than products. A tradename is the name a business or other organization selects to identify itself as a distinct entity. While it’s true that some companies do use their tradenames as trademarks or servicemarks, it’s important to treat the two varieties of intellectual property differently. A company cannot assume that its name has automatically acquired trademark or servicemark rights simply because it has been offering its goods or services under its particular company name. Tradename protection, which lasts 10 years, is granted by the USPTO.

Copyrights
Copyright protection is available to authors of original literary, dramatic, musical, artistic and certain other intellectual works that are fixed in any tangible medium of expression. In most cases, the owner of a copyright from the USPTO has the exclusive right to or authorize others to reproduce and/or prepare derivative works, distribute copies, perform or display the copyrighted work, during the author’s lifetime, plus 50 years.

ABOUT THE AUTHOR
Andrew J. Sherman is a Partner in the Washington, D.C. office of Jones Day, with over 2,500 attorneys worldwide.  Mr. Sherman is a recognized international authority on the legal and strategic issues affecting small and growing companies.  Mr. Sherman is an Adjunct Professor in the Masters of Business Administration (MBA) program at the University of Maryland and Georgetown University where he has taught courses on business growth, capital formation and entrepreneurship for over twenty-three (23) years.  Mr. Sherman is the author of nineteen (19) books on the legal and strategic aspects of business growth and capital formation.  His eighteenth (18th) book, Road Rules Be the Truck.  Not the Squirrel. (http://www.bethetruck.com) is an inspirational book which was published in the Fall of 2008.  Mr. Sherman can be reached at  202-879-3686 or e-mail ajsherman@jonesday.com.

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