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How to Monetize Intellectual Property
Often, intangible assets are developed as a part of a company's overall productivity and growth. For example, as a company grows and increases its presence in the market, it gains a reputation with consumers. This reputation is most often tied to a brand name which serves to identify its products to consumers – in fewer words, a trademark. While some intangible assets contribute to the main economic benefit of the company, as is the case when a trademark keeps customers coming back to the same product sold by a specific business, additional means of revenue may be generated through supplementary monetization means.
For example, ancillary intangible assets often become by-products of the main business. Rather than being pushed to the sideline, these ancillary intangible assets may nevertheless be leveraged to generate revenue. In other instances, main intangible assets may be monetized to generate multiple streams of revenue rather than the traditional single stream revenue.
Accordingly, the task of managing and introducing intangible or intellectual property assets into revenue streams requires an overarching strategy, specifically tailored to the business practices of each sector.
Planning and Strategy
Understanding the tools and relative strengths of different forms of intellectual property protection is important when planning an overarching monetization strategy.
Intellectual property or intangible assets include:
- Trademarks (i.e., brand logos, words, slogans, jingles and even modes of packaging goods)
- Patents (i.e., technical inventions)
- Copyrighted materials (i.e. written materials, drawings, computer code)
- Designs (i.e., industrial designs for products)
- Domain names (i.e., website addresses)
- Trade secrets (i.e., methods of doing something only known to select individuals)
- Other (i.e., the goodwill associated with a brand)
The length and scope of protection of each type of intellectual property or intangible asset is varied. This may be determined by common law and statutory legislation, contractual confidentiality or non-disclosure agreements with employees and third parties, and physical barriers that limit the physical access of confidential information.
Furthermore, different types of intellectual property rights can subsist in a single product or service to provide more comprehensive legal protection. For example, a software application may be protected by filing a patent in addition to registering copyright in the underlying computer code and registering industrial designs for its user interface and icons.
Unlike tangible assets (i.e., houses and cars), intangible assets do not depreciate with use and can usually be used by several parties simultaneously. As such, conducting due diligence and evaluating intellectual property asset strengths are crucial when executing co-development, licensing, collateralization, securitization, sale-leaseback, spin-out and other forms of monetization strategies (see Figure 1).
Figure 1. Means of monetizing intellectual property or intangible assets
In some instances, companies publish patent scorecards and associated rankings of companies by intellectual property strengths, providing further methods of gauging the value of intangible assets. This type of information may be useful, as it may provide an indication of current and future competitive advantages or opportunities.
Co-development
Traditionally, companies have generally invested their own time and resources into the creation of intellectual property or intangible assets. However, additional advantageous strategies include the formation of co-development partnerships, as this type of strategy drives towards a common goal, while distributing risk and combining resources.
Furthermore, the scope of the co-development partnership, the success criteria, the sublicensing and subcontracting rights, any indemnity and liability issues, and the consequences of dropped targets should be outlined in detail under the co-development agreement. Incentives, such as increased royalty rates or milestone payments, may further enhance the effectiveness of the activities under the agreement. These items should be investigated proactively to canvas prospective partners and should be negotiated to reduce exposure to legal risk.
More particularly, it is important to specify the ownership of intellectual property assets generated during the partnership in order to avoid later disputes, since the costs associated with dispute resolution generally outweigh the costs associated with investigating and negotiating intellectual property ownership rights. To start, each party should identify what intellectual property will be developed under the agreement, who will be materially contributing to the development of the intellectual property during the co-development partnership, and to what degree each party will retain ownership or use rights. If a party materially contributes to the development of intellectual property but does not retain proportional ownership rights thereto, it is then important to ensure that the party assigning away their intellectual property rights is fairly remunerated under the agreement. Furthermore, decisions regarding the development, protection, and/or licence of additional intangible assets often depend on the industry and surrounding business climate. Thus, drafting a robust co-development agreement involves measuring the value of securing a business opportunity against the exposure to legal risk.
Overall, co-development agreements may be an excellent tool to distribute risk, while combining resources to achieve a common goal among multiple parties.
Licensing
Due to the increasingly global nature of businesses, the licensing of intellectual property assets in competing and non-competing industries is becoming an increasingly lucrative and effective method of establishing and retaining market advantage.
As such, increased convergence and crossover of industries fuel the emergence of licensing agreements. For instance, companies assert aggressive methods of identifying licensing opportunities for non-core intellectual property assets to spread the costs of upfront investments on research and development.
Furthermore, licensing agreements between competitors who infringe another party's intellectual property portfolio may provide for mutually beneficial outcomes. While the intellectual property owner retains control, the licensor may have the ability to use the intellectual property while paying a predetermined royalty.
Licensing agreements offer substantial flexibility in determining the scope of permitted use. While generally very industry-specific, the scope of licensing agreements should be carefully tailored to match the expectations or needs of the parties by not offering either too much or too little access to a licensor’s intellectual property. For example, a licensor may inadvertently authorize a licensee to make use of the licensor’s intellectual property in a way that goes beyond the scope of uses contemplated by the licensor when pricing the license. Thus, reasonable limitations must be imposed on licensees to ensure off-target uses of intellectual property are not permitted or are otherwise factored into the license price. Conversely, if a licensee does not adequately identify what uses they want or need from a licensing agreement, the licensee may not be able to legally perform certain work that requires the licensed intellectual property. Thus, licensees should clearly identify their intended uses before entering negotiations and ensure those uses are unequivocally authorized under the licensing agreement.
Depending on each party's bargaining positions and strength of the intellectual property asset, tremendous revenue may be generated from licensing operations. For example, it is well known that IBM generates over $1 billion in annual licensing revenues from its intellectual property assets. On the other hand, licensees with exclusive access to especially strong or desirable intellectual property gain a market advantage by being able to offer higher quality products and services that incorporate this intellectual property.
Thus, the scope of ownership of the licensed product, the exclusivity, the field of use, the territorial limitations, the transfer or sublicensing rights, and other limitations are essential aspects that must be outlined meticulously in each licensing agreement. Similar to co-development agreements, these considerations are particularly important to avoid costly and time consuming disputes in court that greatly exceed the costs of prudent drafting.
Securitization, Collateralization, Sale-Leaseback and Purchase or Sale
Intangible assets may be used to generate financing. Copyright, trademark and patent securitization agreements have garnered increased attention from investors due to the relatively stable risk/return characteristics associated with a particular intellectual property asset.
In each case, the volatility of the anticipated revenue streams is determined based on due diligence and an asset credit quality analysis. Therefrom, investments are usually based on the expected volatility of the anticipated return streams.
Moreover, like any other forms of property, intellectual property assets may be collateralized to raise capital. In other words, third-party lenders may provide loans while holding intellectual property assets as collateral. Intermediate guarantors may provide further assurance to the third-party lenders of certain rights in the event of a default.
Additionally, the sale-leaseback of intangible assets may be a useful financial arrangement. Intellectual property rights may be combined and resold as a pool. Under this arrangement, a share of the proceeds may be returned to each contributor over time, diversifying risk.
Lastly, selling IP or purchasing IP from another party is another way for businesses to monetize IP. The following are some considerations when buying and selling IP asset(s):
- Identify the owner(s) of the asset(s) to determine if the employees and contractors have assigned their IP to the seller company. Otherwise, there is a risk that employees and contractors may later claim ownership of the IP;
- Determine the existence of any third-party obligations associated with the IP. For example, whether there are royalty or licensing arrangements;
- Determine if the IP is infringing on the rights of another or being infringed upon;
- Decide if a grant-back provision is necessary. A grant back provision gives the seller of the IP the right to use the transferred IP for a fee;
- Buyers of patents who wish to protect their patents purchase may consider restricting grant-back provisions or transfer rights of the seller. Further, buyers may want to confirm the patents are valid, for example, by ensuring the requisite maintenance fees are paid;
- Businesses purchasing trademarks will want to ensure that the use of the trademark has not evolved beyond registration; and
- Buyers of copyright may want to see the copyright registered as evidence of ownership, even though registration is not required for copyright to subsist in the work. Additionally, they may want to ensure that a waiver of the moral rights associated with the copyright.
Spin-out
Typically, spin-out opportunities consist of moving a portion of the intellectual property assets from an existing company to a new company. In doing so, marginally used intellectual property assets may be exploited more effectively under the umbrella of a new operation, which presents fewer competing priorities. Forming a new company may also attract new investment and new talent.
Tax Considerations
Depending on the jurisdiction, the activities associated with the development and monetization of intellectual property may relate to important tax planning issues.
In Quebec, the patent box has been introduced as a tax incentive for innovators. The patent box allows for the deduction of income derived from patents after March 17, 2016 for qualifying innovative manufacturing corporations in Quebec.
Specifically, income from innovation will be taxed at 4 per cent rather than the original 11.8 per cent for businesses that have more than $15 million in paid-up capital. This type of tax incentive may spread to other provinces and perhaps the federal government.
Alternatively, the Scientific Research and Experimental Development Tax Incentive Program (SRED) provides tax credits to entities conducting scientific research or development in Canada. As such, companies may plan accordingly to manage the tax implications of the development and monetization of intellectual property assets.
Due Diligence
An essential element prior to the negotiation and drafting of a commercial agreement or transaction regarding intangible assets is the performance of due diligence. In this context, due diligence provides detailed insight into the current and future strengths, weaknesses and opportunities when it comes to the exploitation of intellectual property assets.
More importantly, it provides the business, its investors or purchasers the opportunity to assess and manage any risks and to formulate an overarching strategy. Such a strategy may include identifying any and all intellectual property a business owns, what legal protections and enforcement strategies are most effective against competitors or infringers, and what legal risks ought to be accepted in maximizing intellectual property-derived revenue.
Additionally, intellectual property issues may be cheaply and easily corrected earlier in the lifecycle of a venture, but may generally become much more expensive to fix later on. Therefore, rather than merely performing a cursory exercise of due diligence, a detailed analysis may add tremendous value and provide insight into facts and issues that are frequently overlooked.
Cross-Border Issues
Currently, there is no worldwide system that governs intellectual property rights. As such, the extent and scope of protection conferred by each country may vary. Before entering into an agreement pertaining to intellectual property assets, the country's policies should be checked carefully. The agreement, and any related transactions, must comply with the country's regulations and formalities. Many intellectual property experts are part of a professional network that helps facilitate intellectual property protection and commercialization in legally unfamiliar jurisdictions. As such, it is prudent to consult legal counsel about how to proactively address the risk associated with entering a new and unfamiliar market.
Parties to a cross-border agreement have the option of including a clause that opts into international arbitration. One major advantage is that under the New York Convention (1958), foreign arbitration awards are enforceable in each of the 156 signatory countries.
As such, courts in each country generally may not challenge the arbitral decision unless there are instances of fraud or serious irregularities. Further, the location of the arbitration may also be subject to negotiation and agreement between the parties.
Conclusion
On the whole, leveraging intellectual property assets to generate alternative sources of revenue may strengthen a company's overall profits and diversify risk. With an eye on the overarching strategy and a solid understanding of the current environment, the monetization of intellectual property assets may help an entity's overall productivity and growth.
If you would like to discuss options for monetizing or registering your intellectual property, please contact us for a complimentary and confidential telephone appointment with a member of our team.
