CHAPTER TWO: INTRODUCTION TO IP STRATEGY

In today’s global environment, the organizations that experience the greatest success are those that have developed an IP strategy that not only supports their business goals, but that is also realistic and attainable given their financial and other constraints. In fact, there are a number of risks in not making considered and informed decisions about whether to protect your IP and what your IP strategy should look like. At the very least, being cognizant of the surrounding IP environment is a necessary first step for any business. This chapter will explore some of the basic ways in which an IP strategy can be good for your bottom line.

An IP strategy is typically defined as a plan that enables a business to leverage the value of the IP that it owns in relation to and sometimes independently of the core business. There is a lot of research that shows that having a solid IP portfolio and knowing how to deploy it strategically is good for business. For example, studies conducted in the European Union demonstrate that small and medium-sized enterprises (SMEs) are more likely to become high-growth companies if they have protected at least one form of IP. Similar research in Canada has shown that IP-intensive SMEs are 60% more likely to be high-growth ventures. In the United States, it is claimed that IP-intensive businesses account for over one third of the country’s gross domestic product.

It’s not hard to find examples of major global companies that have successfully leveraged their IP. Apple and Coca-Cola come easily to mind. Forbes Magazine’s list of most valuable brands for 2019 puts Apple’s brand first with a value of $205.5 billion and Coca-Cola sixth at $59.2 billion. The top five companies on this list are all IP-intensive technology companies: Apple, Google, Microsoft, Amazon, and Facebook. These high-value companies combine various forms of IP—especially trademarks, patents, industrial designs, confidential information / trade secrets, and copyright to maximize the value of their businesses. They all know how to use their entire IP portfolio for competitive advantage and to generate revenue streams, and we will return to them as examples throughout this book.

But IP strategy is not just for big companies. Every business will necessarily have some form of IP, regardless of its size or its stage of maturity. While not every business will be built around a patented invention, most will have, at the very least, a trademark to identify their products or services and copyright in promotional material and websites. If they do business online, they will inevitably have a domain name to protect.

The question is typically, then, not whether your business will have some form of IP, but how you choose to leverage that IP. There are two key objectives in strategically leveraging IP: (1) increasing your company’s profitability; and (2) averting threats from competitors. In this chapter, we will introduce them both.

INCREASING PROFITABILITY

In terms of enhancing your profitability, IP can be leveraged to allow you to charge higher prices, increase your market share, generate new revenue streams, attract investment, and/or maintain lower costs. Each of these aspects will be explored below and discussed in greater detail in subsequent chapters.

COMMANDING HIGHER PRICES

Because IP rights give you the ability to exclude competitors, your products and services can command higher prices. For example, when a pharmaceutical drug is protected by a patent, a competitor can’t enter the market for the same drug. During this monopoly period, a patented drug can command a substantially higher price than the chemically equivalent drug that can only be sold once the patent has expired. Similarly, where a consumer product has a key patented feature, it can also often command a higher price over comparable products. For example, a smartphone that has a patented battery function that allows the device to be fully charged in one minute would likely command a higher price than a phone that requires a much longer period of time to fully charge, but that is otherwise comparable.

BRAND RECOGNITION

Products that have a strong trademark associated with them can often be sold at a premium because of the value of the trademark. Some well-known examples of this include Coca-Cola (which is more expensive than other colas, including its chief rival Pepsi, which itself has considerable consumer recognition) and S’well water bottles (which are more expensive than other insulated water bottles with comparable or, in some cases, better features).

INCREASING MARKET SHARE

Because IP rights typically confer monopoly rights, they enable you to capture virtually all the market share during the life of your IP. In cases of patents, which offer the strongest monopoly rights, you can usually exclude competition over the specific patented invention in that jurisdiction for the duration of the patent. The ability to rely on a strong trademark can also increase your market share since a product that has strong consumer identification and reputation through its trademark is more likely to be selected by a consumer than a product that has little or no consumer recognition or a product whose reputation has been damaged in some way.

A more proactive way in which IP can increase your market share is by creating an ecosystem of third-party products and services that are complementary to, and thus support, your products and services. The availability of various products and services within an ecosystem can make your product or service more desirable to consumers, therefore enabling you to capture a greater share of the market. For instance, it is widely believed that while the Apple iPhone has appealing hardware and browsing features, its success is largely attributable to the wide variety of applications (apps) that work on Apple’s software platform. These apps have been created by third parties—individuals who are not associated with or employed by Apple, but who are given access to Apple’s copyright-protected software platform. There are millions of apps in the App Store, most of which have been developed by third parties. The availability of these third-party apps serves to enhance the desirability of Apple’s platform and its products. The revenues Apple generates from the sales of its products are enhanced by the commission Apple levies on the downloads of paid apps and in-app purchases. Finally, the popularity of third-party apps locks customers into Apple’s platform. End-users are typically reluctant to switch platforms because doing so likely means that they lose the ability to use these apps and other content that they may have acquired from the App Store.

GENERATING NEW REVENUE STREAMS

IP can be used to generate revenue streams through licensing: the granting of permission to a third party to use your IP. You can supplement the revenue from your core business by enabling others to use your IP for their own products and/ or services and claiming payment for licensing such use. Payments for licensing your IP are usually referred to as royalties. IP royalties tend to be high margin as there are, typically, no incremental costs (other than transactional costs) associated with generating this type of revenue stream.

Many companies generate a significant percentage of their overall revenue simply by allowing other people to use their IP. In fact, you can elect to do nothing at all with your IP except to extract revenue from licensing as a nonpracticing entity (NPE). NPEs will be discussed further in later chapters.

ATTRACTING INVESTMENT

IP can be leveraged as a business asset to attract investment and financing. Increasingly, investors and venture capitalists are looking to invest in start-ups that own IP, and base their decisions about whether to invest in a particular company on whether it has an IP strategy for growth. Similarly, governments are increasingly introducing grant programs that are contingent on grantees owning IP and having an IP strategy.

Further, you can use your IP as collateral to secure financing. In fact, using IP in this way is becoming more common. Companies of all sizes are leveraging their IP to secure loans.

Finally, IP attracts investment by making your business more attractive to prospective purchasers. In other words, having a strong IP portfolio makes your business desirable for acquisition. One notable example, which we will discuss in later chapters, is Google’s acquisition of Motorola for $12.5 billion. The price paid by Google reflected a significant premium over Motorola’s trading share price because of Motorola’s vast and valuable trove of patents.

MAINTAINING LOWER COSTS

Owning IP can help you to lower your operating costs in two principal ways. First of all, it may allow you to use your IP protected technologies (which your competitors can’t use) to make your production or service delivery more efficient and/or less costly. For example, having a patented or a secret technology that increases manufacturing yield will result in lower costs, which in turn increases profitability.

Secondly, you may be able to use your IP as leverage to offset costs associated with infringing third-party IP by cross-licensing your IP. In a cross-licensing arrangement, you license your IP to third parties in exchange for them licensing theirs to you. The benefit is that you can eliminate or negotiate better royalty rates from that third party because you have something to bargain with.

Let’s say that your product infringes patents owned by a competitor. That competitor could charge you a licensing fee to enable you to continue to manufacture and sell your products. However, if you, yourself, have patents that are being infringed by that same competitor, you could come to a mutually beneficial arrangement to reduce or eliminate the licensing fee that you would have to pay. In addition, if your IP portfolio is sufficiently strong, you may even be able to force your competitor to also pay you a licensing fee for your patents.

AVERTING THREATS FROM YOUR COMPETITORS

There are two potential avenues to avert threats from your competitors: (1) using your IP offensively; and (2) using your IP defensively.

USING YOUR IP OFFENSIVELY

Using your IP offensively entails using your IP proactively in two major ways: (1) using your IP to protect your market by preventing others from entering the market and by going after copycats; and (2) increasing your competitors’ costs by charging them fees or preventing them from benefitting from your IP.

Protecting your market. IP provides you with certain exclusive rights that you can enforce through the courts. In fact, this is the core of what IP rights are. For example: If you own a patent you can stop others from manufacturing, selling, or using your patented invention. If you have a copyright in a work, you can exclude anyone else from performing, reproducing, or publishing your work. If you have a trademark over a product, no one else can use a logo or wordmark that is the same or confusingly similar to yours on a product that is the same or similar to your product.

To exercise or assert your IP rights, however, you will have to enforce them. Generally speaking, your primary recourse will be to initiate a lawsuit against the possible infringer. We will discuss this and other avenues of IP enforcement in chapter 10.

Increasing your competitors’ costs. IP can help to increase your competitors’ costs in two distinct ways. The first is by decreasing your costs, thereby increasing your competitors’ costs relative to you. Certain forms of IP can allow you to exploit something—a methodology, for example—that enables you to save costs while blocking your competitor from using the same cost-saving measures. For instance, if you have a patented or secret technology that increases manufacturing yield, as in our example above, then, all things being equal, your costs will be lower than those of your competitors.

Moreover, if your competitors want to replicate your manufacturing yield, they will have to either invest in the creation of their own new methodology or process, or obtain a license to your IP. The first way of increasing your competitors’ costs can, thus, lead to the second: forcing your competitors to spend money on research and development or on licensing your IP. This latter cost is, of course, also a benefit for you: not only does it increase your competitors’ expenses, but those expenses are paid to you in the form of royalties.

USING IP DEFENSIVELY

Using your IP defensively entails using your exclusive rights as deterrents to protect yourself against your competitors and to protect your market share. The mere fact of owning IP may allow you to guard your market without ever having to assert or enforce your IP rights. For instance, your competitors may hesitate to enter into your space for fear of their potential liability.

In addition, your IP could be used as a shield to deter others from suing you—and even if they do sue you, you can deploy your IP to counter-sue and force a quick settlement or a settlement for a reduced amount, including the possibility of cross licensing. Acquiring IP for defensive purposes is fairly common, especially in the patenting world where companies often build robust patent portfolios to serve exclusively as protection against litigation.

Google is an example of a company that has adopted a defensive IP strategy. Recognizing that its own patent portfolio was weak, Google acquired a number of companies, in large part because of their impressive patent portfolios. These acquisitions include the $12 billion acquisition of Motorola and the $3.2 billion acquisition of Nest (with its 40 granted patents and 200 pending patent applications). Google has also embarked on other proactive patent acquisition schemes, which has included acquiring over 1000 patents from IBM as well as hundreds of patents from other companies. One of Google’s tactics in its acquisition schemes was its novel Patent Purchase Promotion, which it launched in 2015. Through the Patent Purchase Promotion, patent holders were invited to make offers to sell their patents to Google.

In sum, having an IP strategy can help you increase your profitability, as well as navigate some of the uncertainties of coming up against your competitors’ IP.

ASSESSING THE VALUE OF YOUR IP

Since IP is increasingly accounting for a significant percentage of a company’s value, having some methods of assessing that value will necessarily be part of your IP strategy. You will need to consider the value of your IP portfolio in order to license your IP, to secure financing, or to attract investors. Knowing the value of your IP is also important if you want to sell that IP, sell your business, or potentially use your IP as leverage in litigation.

There are some standardized methods of IP valuation. These include cost-based, market-based, and income-based valuations. A cost-based valuation is premised on how much it cost, historically, to develop the IP in question, and how much it would cost if that asset needed to be recreated. A market-based valuation is premised on comparable market transactions, such as the purchase or sale of similar IP. An income-based valuation is premised on the historical and anticipated future earning power of the IP.

These different methods are sometimes applied concurrently to arrive at a final valuation. However, the approach to valuation may vary depending on the types of IP in question, so you may have to engage different independent valuation experts in order to obtain a comprehensive valuation of your entire IP portfolio.

However, an accurate valuation of the IP depends first of all on the careful identification and proper management of the IP. The following are best practices that you should consider implementing in this regard:

1. Clearly identify all of the IP with as much detail as possible.

2. Ensure that you have unambiguous title to the IP—that is, that you are the clear owner of the IP and that you can prove that title.

3. Regularly quantify the earning capacity as well as the profitability of your various forms of IP.

4. Understand the competitive landscape and barriers to entry for the products and services to which the IP relates.

5. Determine the life cycle for the products and services to which the IP relates, and recognize that the value will shift as the IP right gets closer to expiry.

6. Identify the historical and prospective growth for the products and services to which the IP relates.

RECOGNIZING THE RISKS ASSOCIATED WITH IP

The benefits of having IP must also be weighed against the risks. There are risks associated with asserting your IP, there are risks associated with failing to assert your IP, and there are risks associated with infringing third-party IP. Understanding and mitigating the risks are elements that must be factored into your IP strategy.

ASSERTING YOUR IP

Asserting IP is an essential part of many IP strategies. However, before you assert your IP, you should be aware of the potential adverse consequences that may follow, including, but not limited to those discussed in this section.

Monetary costs. Asserting your IP against a third party can be very costly, especially if you end up having to go to court. You will have to pay your own costs and, if you are unsuccessful in court, you may be responsible for a portion of the other side’s costs, as well.

Reputational risks. Companies that are overly aggressive in asserting their IP may be viewed unfavorably by current and potential customers, and the public generally. For example, Research In Motion (now BlackBerry) got the nickname “Litigation in Motion” because it was once viewed as overzealous and too litigious.

Distractions. Litigation can be a distraction for your business. Executives and key personnel will have to spend time with counsel and locate and review documents to respond to discovery requests. They will also have to be prepared to attend examinations for discovery, and to be witnesses in court proceedings. These efforts, as well as the mere burden of litigation, detract from the time that these individuals can spend on the business.

Opening the door to preemptive lawsuits from competitors. If you threaten to sue a third party on your IP, that party may be in a position to sue you first and attack the validity of your IP (e.g., through what is called a declaratory judgment, which is available in some jurisdictions) or may assert its own IP against you in an attempt to take the upper hand in the litigation.

Losing your IP. Once you sue a third party for infringing your IP, that party may turn around and challenge the very validity of your IP rights in a counter-suit. If the counter-suit is successful, it will invalidate your IP and you will be left with no protection at all.

FAILING TO ASSERT YOUR IP

It is not uncommon for IP owners to delay acting when their IP is infringed because of the costs and the potential adverse consequences of litigation. This is understandable; however, generally speaking, the law does not look favorably on those who delay once they discover that an infringement has occurred. If the delay is unreasonable, you may be barred from taking legal action at all.

INFRINGING THIRD-PART IP

It is often the case that, in developing your product or service line, you may improperly use someone else’s IP. For example, if you are developing your website, you may cut and paste text from other online sources in the mistaken belief that you can lawfully copy from a publicly available website. It is therefore important to always consider the IP rights of third parties before starting up a business or launching a new product or service. If you don’t have the requisite rights, you can be sued by the third party, which could result in a shut-down of your business, steep monetary damages, or a forced license.

DEVELOPING A STRONG IP STRATEGY

You should develop a strategic approach to IP that involves an assessment of your business’s particular needs as well as the various risks associated with third-party IP. Your strategy should take into consideration all the different forms of IP and how they can support you. It should also be sensitive to changes in IP law and the market, and be flexible enough to change in response.

AN IP STRATEGY SHOULD BE CUSTOMIZED FOR YOUR SPECIFIC BUSINESS

Developing an effective IP strategy requires an assessment of your desired business outcomes since it is these outcomes that should drive the strategy. For example, if your business goals are to market and sell a product solely within the Canadian and American markets, it may make sense to have an IP strategy that limits IP acquisition and ownership to those countries, even if there is a potential market in Europe. It is important to be very clear about current business goals and objectives and to anticipate future goals, especially those involving how many markets you are prepared to enter. How an IP portfolio is managed across borders will be a fundamental consideration in an overall business strategy.

AN IP STRATEGY SHOULD CONSIDER ALL FORMS OF IP

A strong IP strategy also requires a sophisticated understanding of the ways in which the different types of IP can be used in combination and can enhance each other. In other words, an effective IP strategy is one that implements IP “bundling” or “layering,” an idea discussed further in chapter 11.

AN IP STRATEGY MUST ALWAYS INCORPORATE LEGAL CONSIDERATIONS

An IP strategy must factor in practical legal issues such as the costs of IP protection, the freedom to operate, the risks of litigation (both of suing and of being sued), and the company’s financial ability to initiate or defend a lawsuit. It must also be responsive to any changes in the legal landscape and to the consequences these changes have in all the markets in which you do or may conduct business.

AN IP STRATEGY IS NOT A STATIC DOCUMENT

Your IP strategy, like your overall business strategy, should be revisited regularly. Specifically, it is important to diligently assess the alignment between the business strategy and the IP strategy. The IP strategy should be updated to reflect any changes in the business or in your IP portfolio. Because most IP rights expire after a certain period of time, the value of your IP will necessarily diminish as their particular expiry dates draw closer. You may want to implement a strategy that extracts as much value as possible at the start of IP protection, and that relies on more diverse uses, including licensing, as the IP matures.

AN IP STRATEGY MUST ALWAYS BE RESPONSIVE TO CHANGES IN MARKET CONDITIONS

An IP strategy must be responsive to how market dynamics shift over time. For example, during the earlier stages of a business, the plan may be to focus on building up a patent portfolio for defensive purposes. However, this may change if sales volumes decline or if there is a shift in how the products are distributed in the marketplace.

BlackBerry is an example of a company that shifted its IP strategy in response to changing market conditions. Since its inception, BlackBerry has built an extensive patent portfolio. Given how profitable it was, BlackBerry was initially not as concerned about creating licensing revenue from its IP portfolio. In fact, its patent portfolio was originally intended to be asserted only when a competitor had engaged in some egregious behavior (like unlawful copying of the company’s products). It was otherwise used for cross-licensing or in counter-suits as part of a defensive strategy.

As sales of its smartphones began to drop and revenues began to decline, however, it appears that the company had to find ways to augment its revenue stream by licensing its patents. BlackBerry’s recent business decision to stop manufacturing hardware and to focus instead on becoming a software company may have helped the company in that regard. This is because BlackBerry’s move away from hardware appears to have given the company more freedom to generate revenue by licensing its hardware patents to other smartphone manufacturers since it is no longer competing directly with them. In an effort to maximize on its licensing revenues, the company has also entered into an agreement with a patent licensing company to sublicense its patents to global smartphone vendors. This arrangement is in addition to BlackBerry’s other licensing programs, which appear to extend some of its technology patents to other fields, such as cybersecurity and the “Internet of Things.”

In addition to seeking to license its patents, BlackBerry has recently exhibited greater willingness to enforce its IP through the courts. For example, in 2018, the company sued Facebook, WhatsApp, and Instagram, alleging that they each infringed on BlackBerry’s messaging patents. As can be seen from the BlackBerry example, the best IP strategies are those that are flexible enough to react to changing market conditions.