By Pearson, Judith; Nickson, Stephen; Marvel, Sean
Risk Management , Vol. 48, No. 2
We have arrived at the intersection of a changing legal and business environment. Intellectual property (IP) exposure is at the center of the crossroads; litigation over IP rights has catastrophic potential.
Intellectual property-defined as any intangible asset that consists of human knowledge and ideas-has become a valuable and costly enterprise. The average cost to litigate a patent case today is $2.5 million, and each year that increases 10 percent to 15 percent. In light of the amounts at stake, law firms and plaintiffs treat IP litigation as a growth industry.
Why the change now? Dramatic technological developments have created new wealth for shareholders. More than ever before, sophisticated investors are placing value on intellectual property and corporate management strategies. Moreover, corporations are changing the way they manage their intellectual property portfolios. Intellectual property is now viewed as a way to strengthen earnings, shore up the value of assets and provide growth in varying economic climates. While companies cannot afford to lose their intellectual property in court, aggressive firms are poised to succeed in forcing just that.
Company leaders sit back in their chairs and ask: "We do not have patents, so how big can our risk be?" The answer: enormous.
While patents drive 60 percent of the current intellectual property litigation, trademarks and copyrights represent another 34 percent. More worrisome is trade secret litigation. While it currently represents just 5 percent of the cases filed, trade secret litigation will ultimately mirror both the frequency and severity of patent litigation as the importance and exposure of trade secrets expand.
Another common misconception is that the rise of intellectual property litigation is focused on hi-tech or Internet-based companies. While it is true that a significant number of cases involve these areas, much of the litigation is also challenging court positions on the patentability of software and business processes. Although litigation against companies in software, hardware, semiconductor and Internet businesses represent 39 percent of the litigation, traditional manufacturing companies are involved in more than 35 percent of the activity. Consider also the effect of globalization for any company. Intellectual property issues are a focal point in many trade negotiations. And in 1999, only 58 percent of all U.S. patents were issued to domestic companies; the remaining were registered to foreign entities-with companies in Japan, Germany and France leading the way. Corresponding statistics from other clearinghouses, such as the World Intellectual Property Organization, provide similar views of the intellectual property landscape. Industry mores are changing-and no sector is secure.
The size of a company is also not necessarily a good indicator of exposure. According to Aon, approximately 13 percent of the thirtythree court cases it tracked were filed against companies with assets of less than $100 million, while 32 percent were against companies with assets in excess of $1 billion. (Total estimated losses in these cases is estimated to be in excess of $100 million.) It does not matter if your company is large or small, public or private-all companies are exposed.
Because of the evolving risks to corporations, qualifying and quantifying corporate exposure are key components to risk management techniques. The evolution of intellectual property risk factors is analogous to the changes directors and officers faced in the early 1980s. Prior to the merger mania of that decade, shareholders rarely challenged the behavior of the board of directors. The extensive litigation beginning in the late 1970s and early 1980s clarified the relationship of the shareholder to the board of directors and established the foundation of best practices.
Today, through the rise in litigation, standards in intellectual property management are being forged. …