Risky business: why failing to exploit intellectual property is the real danger

“A ship in harbor is safe, but that is not what ships are built for” – John A Shedd

We live in a world of rapid technology innovation, where corporations compete fiercely for market share and fortunes rise and fall in the blink of an eye. Billion-dollar decisions at the International Trade Commission and US district courts have made patent litigation the new sport of kings (see Table 1). On the global stage, intellectual property threads through the world’s economies, underpins contentious trade deals and serves as the great differentiator for industry leaders across the globe. Surely, then, given the high stakes of today’s corporate environment and the emphasis on winning, boards must be pushing their executive teams to implement IP strategies that make the most of their assets?

Unfortunately, this is not yet the case. Instead boardroom conversations about intellectual property are increasingly focusing on risk management and defensive strategies. By now, board members are all too familiar with horror stories of companies with insufficient IP protection moving into a market only to be ousted by a fast follower or handcuffed by an early innovator. They read headlines about injunctions, import bans and large damages awards, and they want to avoid being similarly exposed. As a result, they are quick to sign up to non-aggression pacts, add to the coffers of defensive aggregators and acquire patent litigation insurance as additional layers of protection. In many ways, intellectual property has become synonymous with playing defence, reducing risk and arming oneself in the hopes of discouraging others from attacking – a form of mutually assured destruction.

And who is to blame boards for thinking like that? The notion that patents are a defensive tool has become so ingrained in our psyche that it even manifests itself in pop culture. How many times has Mark Cuban on the US TV show Shark Tank asked a company that was pitching: “Do you have patent protection?” Board members have been trained to ask the question and management teams have been trained to check the box. But it is a question that lacks nuance and drastically undersells the strategic opportunity afforded by a forward-looking and dynamic IP strategy. What board members should really be asking is: “How are you expecting to use intellectual property to gain competitive advantage in the marketplace, deliver on corporate objectives and ultimately maximise value for shareholders?”

This article explores how IP function leaders can get the board to ask the right questions and enable them to make the most of their portfolio.

Table 1. Largest initial adjudicated damages awards, 1998-2017

Source: 2018 Patent Litigation Study, PwC, May 2018

Altering the mindset of the boardroom

Before we talk about how to steer a boardroom on IP issues, let us first remind ourselves what boards care about. It boils down to two things: improving profitability and demonstrating growth. These are the levers that will ultimately help to increase a company’s share price. If you want boards to start taking IP strategy into account and maximising the value of a portfolio, you have to help them connect the dots. It is not always an easy task, but if you succeed, you may be able to unlock your operational handcuffs.

Below, we set out a three-part action plan to help alter boardroom thinking, regardless of whether your board members are IP neophytes or IP wizards. By the end, you should be well positioned to establish the importance of intellectual property across the business, to ensure that stakeholders are asking the right questions and to cultivate an IP-friendly board that is making the most of its assets.

Step 1: Know what is in your portfolio and develop a plan for it

Too few companies have a good understanding of what makes up their portfolio, not only with respect to the assets that they have acquired but also with respect to those filed organically. Often, they rack up significant prosecution costs and maintenance fees each year developing and maintaining a portfolio that has, at best, some defensive worth and, at worst, little to no value at all.

We have seen companies that are industry leaders, with tens of thousands of patents, shell out millions of dollars in maintenance fees annually for assets with zero market value that are unrelated to any of their products, services or operating units (see Table 2). They are not claim charting patents against their competitors; in fact, they are not claim charting patents at all. Portfolios are constructed with a file first, ask questions later (or never) mindset, which often makes them bloated and under-utilised.

Table 2. Leading US portfolios by PatentStrength distribution

Source: Internal analysis using data from Innography

Why does this happen? In part, it is because patents are well understood to have inherent defensive value. However, the difficulty of expressing this value has served as a catalyst for merely increasing the size of a portfolio. R&D and IP teams are rewarded (often directly) for filings, so quantity begins to far exceed quality and filing areas become overbroad and directionless. Carrying costs for the portfolio grow continually over the years, while institutional inertia and diffusion of responsibility make inaction the easy choice. It is the curse of a box-checking mindset and leads to corporate excess, significant busy work by a company’s IP function and portfolios that lack any strategic purpose or vision.

It is crucial for an IP function to have its house in order. Instead of haphazardly growing the size of a portfolio, we encourage IP function leaders to answer the following questions:

• What are the key elements of the technology stack driving consumer demand for products and services in your market, and how can you own those chokepoints?
• What geographies are core to your operations (eg, use, manufacture or sale)? Which of these are also key IP jurisdictions (eg, Germany or China)? Do you have assets in the necessary countries to protect your products and assert your IP rights?
• What do your competitors’ filings tell you about their product roadmap or corporate strategy, and how can you hem in their activities? Are companies outside of your competitive set filing intellectual property that could be used against you?
• Is your intellectual property battle ready (ie, will it be able to withstand extensive prior art searches and other concerns that may arise in inter partes reviews or opposition proceedings)?
• What do you think the future will look like, and do you have the team and tools to innovate in those areas? If not, who should you partner with or what assets should you acquire to ensure long-term IP success?
• How can you amend your specifications and claim language so that your patents are useful in markets in which you do not already participate, setting up the opportunity for new revenue streams down the road?

Following this process leads to the creation of a deliberate portfolio that has strategic value for the business. Once the assets have granted and matured, we encourage IP function leaders to classify them. By that, we do not just mean by technology areas and market relevancy (although this is good practice); instead, we have something more strategic in mind – the so-called ‘compete, monetise and abandon’ framework.

This is a way to determine what value, if any, each asset in the portfolio is bringing to the table. Once completed, IP function leaders should be able to use the framework to quickly identify what any particular patent is doing for the company. Below is a breakdown of the three categories, their defining characteristics and the value that they drive.

Compete

These are assets that companies should keep in order to assert against their competitors, differentiate and protect their products and services, indemnify customers and generate new business.

Monetise

These are assets that can create value through licensing, litigation and/or sale.

Abandon

These are assets that are not in use in the market with no promise for future value and are effectively creating a drag on the company’s bottom line.

It is good housekeeping for IP functions to classify their portfolios in this way. It is also an undertaking that takes time and commitment, and it may initially benefit from an outside and unbiased lens. Once the initial pass is completed and stakeholders have bought into the mindset of building their portfolios in a tactical way, IP heads are then well positioned to develop an actionable strategy for their intellectual property, adopt the schema into ongoing operations and cultivate a streamlined, purpose-driven IP function. Most importantly, this process provides the foundation for making well-reasoned, defensible cases to the board when it comes to maximising the value of the company’s portfolio.

Step 2: Develop a vision for the IP portfolio

Once you have a portfolio primed to meet business challenges, you will need to build a compelling vision for the IP function that is rooted in profitability and growth in order to get buy-in from the board. Spell out how the portfolio can be leveraged to empower broader corporate objectives (eg, establish entirely new revenue streams, enable better supplier agreements, initiate new strategic partnerships and provide better terms on capital raises and financing efforts). Paint a compelling picture of IP monetisation, including licensing and asset sales. Sketch out a roadmap with clear-cut milestones and consider creating a scorecard that you can use to chart your progress so that the board will know whether your strategy has succeeded or hit a roadblock (see Table 3).

Table 3. Using scorecards to track your IP function

Source: 2018 Patent Litigation Study, PwC, May 2018

We are the first to admit that getting buy-in on a forward-looking IP strategy is not always easy, especially if intellectual property has historically played a background role at your company. Often, the IP strategy will affect supply chains, customer relationships or the competitive dynamics of your industry.

If you make competitors pay to use the technology that your company has developed, if you build an effective IP moat around your products or if you carve out a position in a new market with a strategic portfolio acquisition, management and board members might end up fielding angry phone calls, dealing with accusations of “not playing nice” or reading critical articles in The Wall Street Journal. The board might be tempted to blink first – or it might be so afraid of the reception of an aggressive IP strategy that it stops you from making a move in the first place.

In this situation, we find it helpful to remind boards that inaction and indecision have a cost as well. There are games in which the only winning move is not to play, but intellectual property is not one of them. By refusing to be assertive or to use the portfolio that you have paid to develop and maintain, you are likely leaving money on the table. The rest of the industry will gladly take the competitive advantage that you cede to them – competitors will be happy to shut you out of markets or undercut you on price by letting you conduct R&D on their behalf. So, as you introduce your board to your vision and describe the upside that your strategy can bring to the business, remember to emphasise the costs of business as usual and the downside of sitting on your hands. Boards have a fiduciary responsibility to act in the interest of shareholders – sometimes they need an IP strategy framed in those terms.

Which companies have convinced their boards of a compelling IP vision and then executed this efficiently? As IP strategy becomes more prominent, the number of case studies has grown. Let us look at a few examples of IP-savvy corporations with a decisive vision, which leveraged their portfolios to meet corporate objectives, as well as one company that found itself on the back foot but managed to right the ship.

Attract investment and solidify a business case

Early and growth-stage start-ups face many challenges. Engineers and technical staff work long hours to get to a minimum viable and then consumer-ready product. Chief financial officers stay up all night worrying about cash burn and how much runway they have. CEOs are often forced to spend as much time raising funds as they do focusing on make-or-break strategic decisions.

Then we come to the issue of intellectual property. With staff utilisation pushed to the max, it can be difficult to block off engineering time to write invention disclosures or claims. In a lean organisation, capital to file and maintain a well-designed portfolio can be hard to come by, while companies with distracted management (and often no standalone IP function) can find it challenging to devise and execute on meaningful IP strategies.

At the same time, intellectual property often requires a robust approach. The markets being entered generally have capable incumbents with stable ties to suppliers and deep manufacturing chops. Cash-poor start-ups rarely have the capital on-hand to initiate (or, more importantly, defend against) IP litigation.

One successful client took a particularly proactive approach to addressing these concerns. As a jumping-off point, it completed a comprehensive analysis of its internal knowledge base, delineating the scope of its proprietary know-how. Building from this, it designated which of its intellectual assets it would protect with patents (but thus publicise) and which it would retain as trade secrets. With a clear roadmap for future portfolio development, it assessed the available option space of business models enabled by a comprehensive portfolio (eg, razor-and-blades and design build) and constructed conservative economic models for each.

The output of this exercise provided two clear benefits. First, it was able to ramp up fundraising by offering a clearer and more robust financial picture for investors, demonstrating monetisable off-ramps and emphasising the risk reduction offered by its portfolio.

Second, it opened up new strategic possibilities for itself and allowed for enhanced business flexibility in the future. While it continues to focus on serving one core market, it can now adapt and respond to changing market conditions.

Protect market share from low-cost entrants

Diapers and wind turbines are seldom mentioned in the same breath. However, these two different product categories – one consumer-facing, the other industrial – share a similar underlying storyline here. A blue-chip US corporation faced the threat of downward price pressure and market share loss from a lower-cost entrant. In the 1990s, it was Kimberly-Clark and Procter & Gamble (P&G), which faced a challenge from private-label diaper manufacturer Paragon Trade Brands. In the 2000s, it was General Electric (GE) protecting its position in the domestic wind turbine market from Mitsubishi Heavy Industries (MHI).

In both cases, the patent-rich industry stalwarts went on the offensive, using multi-year infringement lawsuits to ensure retention of market share and operational flexibility. For GE, the challenge – and its resolution – proved especially meaningful. As Dan Shreve in Green Tech Media notes: “The IP infringement undermined MHI’s US wind business by introducing IP infringement risk to [purchasers] during a time when new orders were most critical, following the passage of the American Recovery and Reinvestment Act in 2009.” For Kimberly-Clark and P&G, the victory was even more decisive: Paragon filed for bankruptcy in 1998.

Even as we applaud these companies for their willingness to actively use their portfolios to achieve corporate objectives, it is worth drawing attention to the postscript of the GE case study for a brief admonition. While GE was quick to act in 2009 to defend against MHI, it was significantly more reticent several years later as Vestas, a Danish wind-turbine manufacturer, sought to bounce back from the brink of bankruptcy in 2013.

The jury is still out on the exact reasoning behind GE’s hesitancy; by some accounts, it was distracted by its acquisitions of Alstom and LM Wind Power, while others point to GE’s desire to recover before becoming embroiled in another potentially lengthy lawsuit. Whatever the reason, GE flinched and waited until the third quarter of 2017 to bring a lawsuit against Vestas. By then, Vestas had grown its share of new US wind power capacity from 12% in 2014 to 43% in 2016 – surpassing GE.

GE and Vestas settled their patent dispute in June 2019. Through the second quarter of 2019, Vestas turbines accounted for 49% of new capacity, while GE represented 42%. Waiting had proven costly.

Use intellectual property to drive efficient innovation

One of the biggest fears in any boardroom is the unforeseen arrival of a nimble competitor with a disruptive technology or product. This disruption can happen rapidly – often too fast for a company set in its ways to react. Usually, this is not something that a company can avoid by optimising its product team or even through product-focused R&D. By the time the CEO demands that the new technology is built into the next product line (or, more likely, asks why it is not in the current product line), the damage is done.

This is where the IP function comes in. An IP team well versed in technology landscaping and literature searches can make the difference between disruption and continued growth. The most successful companies that we work with use their IP function as an early warning system for unexpected technologies, a barometer of the R&D landscape, a roadmap to allocate innovation resources and a lever to drive meaningful strategic partnerships with universities and start-ups.

In practice, this often involves a systematic process of determining pain points and using the resources of the IP function to identify novel solutions. A major food manufacturer, for example, might be concerned about price and supply volatility in the sugar market. A technology and IP landscape would highlight the trend towards high-intensity sweeteners and taste modifiers early, while identifying potential new suppliers.

How to act when you find yourself behind the eight ball

To many readers, the idea of building a portfolio with strategic intent will seem obvious. That said, many companies are out of position – often because they are in an early stage or an industry that has been patent-light and non-litigious. As the Greek philosopher Heraclitus observed: “There is nothing permanent except change.”

Not only do such companies lack the assets to adequately defend themselves, they are meaningfully limiting their future ability to adapt, grow and pivot when change finds them.

Let us briefly examine the social media space for a case study on how to build a portfolio and how to respond when the IP environment changes rapidly.

Between 2011 and 2012, three developments highlighted Facebook’s lack of preparedness around intellectual property. First, litigation between industry leaders across technology sectors underscored the risks of IP exposure and demonstrated the value of a large portfolio. Second, the increasingly IP-savvy Google released its own social media network, Google+, in June 2011 and gained 90 million users by the end of the year. Third, two months before Facebook’s initial public offering (IPO) in May 2012, Yahoo! sued the social media giant for patent infringement.

Facebook responded swiftly on two fronts. To address immediate concerns, it embarked on an aggressive buying programme from Microsoft, IBM and others that grew its portfolio from approximately 160 assets before the Yahoo! suit to approximately 1,400 shortly after (only a handful of these were organic). To prepare for the longer term and to make up for its dearth of organic assets, Facebook also ramped up its filing significantly, growing from around 50 US filings in 2009 to about 800 in 2012. Two years later, Twitter would follow a similar pattern; an infringement suit brought by IBM before Twitter’s IPO in 2013 led to a major patent acquisition and an increase in organic filing from single digits in 2012 to around 50 in 2014.

Both companies now have thousands of assets, are forward thinking in their acquisitions and continue to use intellectual property to create value. Over the past three years, Facebook has seen its market cap grow by approximately 67%, while Twitter has grown by roughly 80%. IP-light Pinterest has seen its market cap fall by roughly 21% since its IPO in 2019. Snapchat, which is slightly more advanced with regard to its IP function, has fallen by about 26% since March 2017, having struggled to adequately protect some of its most differentiating features and technologies.

Step 3: Ensure that intellectual property infiltrates every business decision

Many IP heads have built strong and productive relationships with their boards. They engage with board members on at least a quarterly basis and many get their own speaking slots at board meetings. This kind of facetime is invaluable. That said, we find that more often than not, intellectual property is segregated from other strategic discussions and the IP team is cloistered from other business groups. This arrangement falls short of the ideal for two reasons.

First, developing a strong IP function and executing on a broad IP strategy that will drive results necessitates contributions from across corporate functions. Product engineers and the R&D team must provide a stream of invention disclosures and technical expertise for claim charts, product teardowns and technology landscaping. HR must help to build out the proper R&D, engineering and IP talent base. The general counsel must authorise and support a litigation strategy, if necessary. These contributions are enhanced and streamlined with frequent contact and collaboration between intellectual property and other business units.

Second, the most effective way to use intellectual property to maximise corporate objectives is to integrate it into almost all of the conversations that dominate high-level boardrooms. Just as intellectual property benefits from contributions from other functions, other functions can (and should) utilise IP strategies to meet their own goals. This can be thought of in terms of the key business decisions that a board must make, across every stage of a business’s life cycle (see Table 4).

Table 4. Responding to key business concerns with intellectual property

Despite the crucial role that intellectual property can and should play in key business decisions, IP function leaders can find themselves struggling to escape the shadows of their own general counsel or broader management teams. Communication pathways to the boardroom can be constricted or completely blocked. The reason? Management teams know that controlling communication to the board is a source of power. They can steer the narrative of the business, be perceived as thought leaders and manage or stifle dissenting opinions. So, as an IP function leader, what should you do?

One useful technique for combating this situation is to stay above the fray. Make the case that the board has a responsibility to discuss and evaluate IP strategies because these ultimately affect the bottom line. This need not be a confrontational process.

For example, frame the concept of IP licensing, which is considered taboo by some management teams and boards, as a question of maximising return on capital. Should the business invest money to continue developing a product line that is experiencing market share loss and declining margins or should it cut bait and transition to a high-margin IP licensing model? What measures can be taken to ensure that the company is not perceived as a patent troll?

When management teams and boards realise that they can often have their cake and eat it too (ie, generate new high-value licensing streams while maintaining a white-hat reputation in the market), they will wish they had listened sooner.

Remember, intellectual property is one of the most valuable assets that a company holds. Used properly, it can enhance almost every function of an organisation. Do not be afraid to step up and demonstrate to your board the myriad ways that the IP function can help to improve profitability, drive growth and win market share.

Moving to the fore

All too often, when we see board presentations, IP topics rarely sit centre stage. Instead, they are relegated to footnotes or the appendix, unless there is a make-or-break IP litigation in progress. Shifting discussions about intellectual property in the boardroom from risk mitigation to value creation is not always an easy task, but it is the responsibility of every IP function leader.

Do not allow your company to operate with a passive IP strategy. Build a strategic portfolio, showcase your vision for extracting value from it and execute on the plan. In other words, do not let your ships waste away in the harbour. Use them for what they were built for and you may be surprised to see how it benefits your company and your career.