Companies don’t spend millions of dollars filing intangible assets such as patents, trademarks and plant variety rights to stuff them in the bottom drawer.
Today, more than 87% of a company’s value and earnings growth is derived from intangible assets and it follows that companies will aggressively defend these assets – including through litigation, if necessary.
Among the top-five intangible asset risks companies face every day (especially those doing business in international markets) – is threatened or actual intellectual property litigation. There has been a massive growth in IP litigation in the United States and Europe over the last 10 years and it now presents a significant risk to many companies, especially those that haven’t identified or mitigated their intangible asset risks.
A recent example (and a warning to Directors that these threats need to be taken seriously) comes from Cochlear (ASX:COH), which has just had AU$377M in intangible asset damages (including for willful infringement) awarded against it for patent infringement in the US. Particularly concerning was the fact the damages award was more than 17 times the amount Cochlear had set aside for the liability based on an "independent damages expert assessment". Companies need to be very careful to utilize expert advice when assessing potential liabilities – to be this far out is extremely concerning. At the time the announcement was made, Cochlear shares fell 3.8% or A$380M – about the same amount as the damages award and creating a double blow for the company and its shareholders.
While Cochlear is appealing the judgment, it may not receive a ruling on this for two-years or more. In the interim, the company will need to lodge a A$464 million insurance bond with the court within 14 days to secure the judgment amount, and any interest and costs – a costly exercise both from a financial perspective, but also from a management perspective given it can be expected that a great deal of management team resources will be going into managing and fighting this case.
But it is not only this case that has been in the news recently. This month Zespri, one of New Zealand’s biggest exporters, has brought a $30 million High Court action against two individuals and a company which it claims provided gold kiwifruit plants (or grafts), to a Chinese grower who cultivated more than 167 hectares of these plants and has the potential to sell the plants across China.
The G3 and G9 strains of gold kiwifruit are a New Zealand invention, which were developed to be resistant to the PSA disease. The growth and distribution of these plants throughout China without remuneration to Zespri has the potential to significantly cut into the company’s sales opportunities and profit margins in this market. With Zespri’s exports to China valued at more than NZ$504 million in 2017, protecting its intangible assets is something that the company takes extremely seriously.
And in a third-example, recently the Munich Regional Court ruled a patent held by ResMed was infringed by two of F&P Healthcare's masks. This ruling is the latest development in a long-running series of litigations spanning the US, UK, Europe, New Zealand and Australia, where ResMed continues to strongly defend its patents covering its sleep mask technology. The immediate impact of this latest development was that F&P Healthcare shares fell 3.8 percent to NZD$13.50, the lowest since June.
These cases serve as a stark reminder – and warning – to Boards and Senior Management Teams – that when 87% of all value is in intangible assets people will defend them and they can be hugely rewarded for doing so.
While some companies understand that this problem exists, many Boards and Management Teams – especially those doing business in international markets – are still not taking the time to understand their risk exposure and instead find themselves in the threshing machine of litigation. As evidenced above, if you get caught-up in threatened or actual IP litigation, it can be an extremely costly mistake, both from a financial perspective and also in terms of the attention that fighting these cases will require from the management team and Board – time which could be much better spent focusing on growing revenues and profits.
So what is the solution to this problem?
When it comes to risk mitigation around IP litigation, the best approach is to be proactive rather than reactive from an early stage. Many companies develop their products and services and launch them into the market without, or with little regard, for whether or not they are actually infringing upon third-party patents, trademarks or other intangible assets.
The issue here is that if you think you are doing something valuable, there is a reasonable chance that somebody else thinks it's valuable too – and they may in fact have filed intellectual property rights in advance of you. The more valuable whatever it is you're developing, the better the odds that somebody else has already protected it.
Therefore, rather than spending millions on R&D before launching your product into the market and running the risk of getting sued, a better approach is that before you even start to develop a product, check to see what level of risk exposure you're running. Do your due diligence early on by investigating what kind of patents and trademarks have already been filed into the markets you're intending to launch into, and understand how these read across your products.
Once you understand the level of risk exposure you are facing, you can take actions to correct or modify your product, and avoid that level of risk exposure. By undertaking this process early on, you can avoid making mistakes that have the potential to cost hundreds of millions of dollars – not to mention sucking-up the valuable time and efforts of your Board and management team.