Empirical evidence suggests that intellectual property (IP) drives a significant portion of the market value of companies today. In Michael Pellegrino’s “Guide to Intellectual Property Valuation,” he presents a set of evergreen due diligence procedures and considerations that practical IP valuation analysts can use today to create credible and defensible IP valuations.
One of the most important topics he covers, while fairly basic, is the four types of IP and their advantages and disadvantages. After all, what good is accounting for the value of IP if you cannot establish that the IP rights exist in the first place?
So, what are the four generally accepted types of IP?
- Trademarks; and
- Trade secrets.
The first three IP types come with formal and explicit government protections. The fourth, trade secrets, is not subject to traditional government protection. With or without government protections, all IP forms may have economic value and knowing the differences is key.
What are patents?
At the most basic level, patents are nothing more than a set of exclusive rights granted by a government to an inventor or the inventor’s assignee for a fixed period in exchange for the disclosure of an invention. Patents represent the legal right to exclude others from the market and generally cover the discovery of a new and useful process. Keep in mind, patents are not guarantees to make money. In fact, in some situations, patents may indeed be liabilities instead of assets.
What are the advantages of patents?
First, patents protect a design of something functional or utilized. The government provides patent owners with monopoly protection for up to the statutory life of the patent. The monopolistic nature creates an artificial market limitation or shortage in the market for technology that embodies the claims of the patent. Artificial limitations to the market allow the patent owner to raise prices higher than the market clearing price, providing the patent owner with abnormal profits.
In addition, patents offer superior rights when willful infringement does occur. Under 35 U.S.C. §284, the patent owner may receive damages for infringement that a competent authority determines as willful. Of course, the economics of such a proposition are obvious. If the court finds a competitor has willfully infringed and that infringement created damages, then the patent owner would be entitled to damages from the competitor.
What are the disadvantages of patents?
First, patents are expensive to acquire, oftentimes costing tens of thousands of dollars to prosecute. Costs involve direct costs for legal services as well as soft costs (i.e., an inventor’s time) to describe the technology to the patent attorney and patent offices. These costs increase dramatically if the application includes foreign jurisdictions.
Second, patents provide for only a relatively short economic life compared with other IP types. The statutory life for a patent is 20 years from the earliest effective filing date of the patent application. Since the earliest effective filing date is the trigger point for starting the statutory clock, patents are unique among IP types in that the award process consumes a significant portion of the patent’s economic life. This has administrative and value impacts.
Lastly, in exchange for the monopoly protection, the government requires that the inventor disclose the exact nature of the inventions described in patents, including how the inventions work, what problems the inventions address, and how the designs differ in a novel way from prior art. Of course, the downside to this disclosure requirement is that competitors have exact and specific knowledge of how inventions described within the patents work, which makes it easy for those competitors to use the designs without fear of legal repercussions in jurisdictions that do not have patent protection.
What are copyrights?
Copyrights are like patents in that copyrights represent nothing more than a set of exclusive rights granted by a government for a creation. Unlike patents, which focus on an invention or something of function or utility, copyrights apply to works of authorship. With copyrights, the author gains the exclusive rights to creations for a fixed period.
What are the advantages of copyrights?
Copyrights have several advantages over other IP types, including a significantly longer statutory life—the life of the author plus 70 years! Many copyrights will not generate economic activity for anywhere near the statutory life of the author or beyond.
Another advantage of copyrights is that the owner is entitled to actual damages and any additional profits enjoyed by the infringer, or statutory damages. The calculation of damages can be easier for a copyright litigation as opposed to a patent litigation.
Lastly, copyrights are relatively inexpensive and simple to register. Authors gain protection and ownership for copyrightable works at the point authors fix the work in a tangible medium. Thus, the copyright owner receives protection immediately after that point without any explicit action with a government agency.
What are the disadvantages of copyrights?
The primary disadvantage for copyrights is that copyrights protect the expression of an idea, not the idea itself. Patents and trade secrets typically protect ideas. The difference may be subtle, but it is an important distinction. For example, an inventor publishes an article describing a new technology. Copyright law protects the way the author expressed the invention in the article; however, the actual invention described in the article does not receive copyright protection.
What are trademarks?
Trademarks provide explicit protections for brands, slogans, logos, and other similar items. Generally speaking, trademarks represent the most valuable types of IP in the market. Icons such as Coca-Cola or Nike’s swoosh both represent brands that command a market premium, despite seemingly nonexistent or minimal functional differences among nonbranded products.
What are the advantages of trademarks?
The biggest advantage to a trademark is that there are no statutory limitations for the life of trademarks. Trademarks have a statutory life as long as the trademark owner maintains registration of the trademark, keeps the trademark in continued use, and enforces the trademark owner’s rights.
Second, registration of a trademark at a trademark office is relatively inexpensive and easy. The trademark owner has to fill out a form and send in a relatively small registration fee. Thus, while the cost to register the trademark is more than the cost to register a copyright, it is still relatively inexpensive compared to patent prosecution costs.
Lastly, trademarks are unique in that one can use them to brand and create demand for otherwise uninteresting or commodity products, inducing a buyer to pay a premium for something that could otherwise be purchased at less cost.
What are the disadvantages of trademarks?
Trademarks represent some of the largest brands in the world. However, like boxers and wrestlers, the bigger they are, the harder they fall. Trademarks can possess a remarkable amount of volatility in the market. Markets and perceptions change on a whim, and such changes can impair value in dramatic ways.
Popular trademarks are also at risk for genericide, which occurs when the public begins to associate a brand with common products of the same utility. For example, Xerox and Kleenex never began as common words. They began as branded products that ultimately the public associated with more general products. These brands lost value because of genericide.
What are trade secrets?
Trade secrets are explicit protections that accrue to inventors or creators of some intangible asset. Common examples of trade secrets include customer lists, chemical formulas, manufacturing processes, business plans, inventions, and so on. A key tenet of trade secrets is that there is no public disclosure of the asset. The primary means with which one protects trade secrets is with contracts (typically nondisclosure agreements).
What are the advantages of trade secrets?
First, trade secrets can cover any type of design, information, or other knowledge that may also otherwise be protectable with other intellectual property forms. In fact, it is quite common that companies protect other intellectual property types, such as patents and trademarks, with trade secrets before they receive formal protections from the government.
Second, unlike copyrights, trade secrets can cover functional items or items of utility, such as a chemical formula or a method to solve a problem with a computer and software. Unlike patents, trade secrets can cover the expression or concatenation of data, such as a customer data list or a process for compiling competitive market intelligence.
Third, trade secrets can present a competitive advantage that may be difficult to reverse engineer or reproduce. Patents require full disclosure in exchange for the limited monopoly protection that they afford. However, there is no disclosure requirement for trade secrets.
And lastly, trade secrets are generally easy and inexpensive to create. Trade secrets require no formal registration or approval process with a regulatory entity, which is common for copyrights, trademarks, and patents.
What are the disadvantages of trade secrets?
Trade secrets maintain several disadvantages that are unique to their intellectual property type. First, nothing prevents one from independently deriving the same or similar design for an invention protected with a trade secret. The fact that others can independently develop the same or similar design allows a competitor the possibility to design a competing product that is the same or substantially similar, patent it, and then block the original inventor from selling embodiments of the trade secret in the open market.
A second disadvantage is that trade secrets require diligent attention to the administration and enforcement of noncompetition and nondisclosure agreements, the marking of documents, limiting information access, and consistent enforcement. Administratively, tending to agreement administration can be cumbersome and expensive to enforce.
Finally, trade secrets receive no formal federal protections like a patent, copyright, or trademark does. Thus, the jurisdiction for a trade secret lawsuit will generally vary by the state where a company transacts its business and any governing law clauses in trade secret owner agreements.
Where does that leave IP practitioners?
Want to learn more about due diligence for an IP valuation analysis? Check out Pellegrino’s complete “Guide to Valuing Intellectual Property” and download an excerpt. It is a comprehensive resource for practitioners working in the trenches of IP valuation and serves as a real-world walk-through of an IP valuation analysis from start to finish for each of the primary IP types.