Why patent outsourcing is critical to the financial services industry

It is common knowledge that risk is a huge part of investing, but to a lesser-known degree, is the role that patents play in a company’s risk mitigation strategy. The seven-year IP battle between Apple and Samsung, which resulted in Samsung paying Apple $539 million on account of the infringement of the ‘bounce back’ patent, is a costly reminder of this. However, it is important to understand that these legal battles do not occur between industry giants only; they can happen to an organisation of any size. In a recent study by the American Intellectual Property Law Association, even if there is no payout, the cost of defending an infringement case for a value at risk under $1 million is a minimum of $700,000 – a sum that would be devastating to any young company.

In the financial services industry, it is the analyst’s job to review the risk profile of all potential investments, which should include a due diligence test on this company’s patent portfolio. This is especially important in the telecoms and pharmaceutical industries, which rely heavily on innovation and protection. If a company has not invested in protecting its products in regions in which it wants to commercialise, this should register as a red flag to investors. A financial analyst is recognised as the brains behind the numbers; however, with the growing importance placed on IP expertise, should they also be looked to as an expert in patents and intellectual property? This is where outsourcing to IP experts becomes critical to making sound investment decisions. Trusting in industry expertise will help financial analysts to assess whether the protection surrounding a company’s intellectual property is adequate.

Outsourced IP services such as a competitive intelligence report, patent portfolio audit or an FTO analysis are important for understanding not only the infringement risk, but whether the company’s commercial strategy is viable. Intellectual property can help to determine whether the company is following innovative industry trends or if it has the  opportunity to license its intellectual property for financial returns. This must be considered when making any future investment decisions. A forward-thinking company that has been strategic in its IP filing and understands that intellectual property is a commercial asset, is less likely to run into IP litigation issues in the future. For this reason, investing in outsourced IP searches and reports from an IP expert is a no-brainer when it comes to return on investment (ROI). The earlier this analysis is conducted, the more beneficial it is to the investment decision. Future implications would have far more of a negative impact on the return.

The financial sector extends beyond investment decisions, and so does the need to outsource IP analysis. As an example, a company goes long on (ie, purchases an asset and owns it with the expectation that the price is going to rise) a new robotics company, which has recently developed an automated robotic arm. The yield becomes more positive as the need for robotics in wider industries grows. Outwardly, this seems like a smart move. However, once the arm is proven to be effective, a large multinational gets wind of the news and investigates the space. Realising that the company does not have IP protection around this idea in multiple jurisdictions, it makes the same robotic arm without risk of infringement and quickly reaps the rewards of its innovation, as it has the resources to commercialise the invention worldwide. This may seem like an unlikely scenario, but acknowledging its potential during an initial IP analysis can prevent multinationals from bullying their way onto the global stage.  

Further, IP analysis and understanding IP risk are important in the world of M&A. High-value deals are at the forefront of the investment banking world, but they also allow industries to pursue important collaboration and resource share. Analysing the risk profile of each company is an important part of any deal, and it would be naïve to think that IP analysis does not play a role in this. Similarly, the protection of the companies’ patent portfolios must be analysed to ascertain whether their products are protected in the jurisdictions in which they wish to operate.

Another scenario that comes to mind is when a company acquires another, and whether their intellectual property is also transferred through that acquisition. This can reap great financial reward, whether that be through IP protection or licensing deals. However, if the risk is not analysed properly before the acquisition is signed, a future case could be brought against the acquired company and parent company, resulting in devastating costs. In contrast, examining intellectual property prior to a merger or acquisition sheds light on the makeup of the new, larger portfolio. The merger or acquisition could result in different, but complementary, strategies, which may provide worldwide coverage, innovative product protection and multiple licensing deals that bring in revenue for both companies.

In summary, a comprehensive understanding of a company’s intellectual property is vital for decision making in the financial services industry. As an industry that is based on risk analysis and forecasting, it is vital that analysts rely on outsourced IP analysis services in order to do their jobs effectively. A smart, strategic approach to assessing investment risk involves acknowledging analysts’ shortcomings in the area of IP knowledge, and turning to trusted experts in the field to ensure the highest ROI on new investments.

This is an Insight article, written by a selected partner as part of IAM's co-published content. Read more on Insight

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