The Musings of Metis

Is your database your most valuable asset?

By Michelle Korman on behalf of Metis Partners Limited

We’ve all heard the buzz around “Big Data,” large swathes of personal consumer information which can be used to maximise business intelligence while personalising and optimising consumer needs. But despite its entrance into the collective commercial consciousness, companies often fail to acknowledge the significant amount of data which exist within their own business models. For example, when trying to eke out any potentially hidden intellectual property assets within clients’ businesses, we often ask them to list those assets which they believe underpin their company’s competitive advantage. While we often receive varied responses, running the gamut from the quality of a company’s proprietary product to the know-how of a key individual within the business, customer databases is an answer we rarely hear - which is a shame given that databases are, for all intents and purposes, one of the most valuable and overlooked assets a company can have.

Databases seem to be gaining greater traction it seems, as we’ve recently been approached by a number of insolvency practitioners and company directors who have questioned whether their databases have any value and, to that end, we thought we’d briefly talk about database value and protection.

Before delving headfirst into the topic, it is first important to clarify exactly what we mean by “database right,” as this is a wholly separate concept from copyright in a database. As defined by London law firm Birketts, copyright protects originality in the structure of a database rather than its contents. Database rights, however, protect the “investment in the actual creation of a database, i.e. obtaining, verifying or presenting the database.” Critically, it protects what copyright does not – the actual data contained within the database – and acknowledges the significant level of investment, both in terms of money and time, which goes into building it.

Not all databases are created equal, however, and there are a few criteria essential to maximising a database’s value – or claiming it has any value at all. The quality of a database is a critical factor in determining its value, particularly when it comes to prospective purchasers wishing to get their hands on potential new sources of revenue. Databases that are regularly cleansed and kept up-to-date, for example, have significantly more worth than those which contain outdated and irrelevant contact details and information. Equally, databases which are specific to niche business areas might be more valuable than generic databases containing a large quantity of information that doesn’t help a company target a particular type of customer.

Anecdotally, we’ve seen a database consisting of millions of entries sold for a low five-figure sum, whereas a database with 3,000 contacts was sold for a high six-figure sum – the difference, of course, was in the information they contained. The former had a large quantity of business contacts, but it contained only basic information such as a phone number and address. The value proposition was in the effort it took to assemble the list and the time saved for companies who wish to use the contacts but do not have to collect the contact information themselves. The latter, however, had a detailed account of the customer’s order history and accompanying notes that would allow a business to tailor its marketing and services. What increased the database’s value, despite its smaller size, was the fact that the information it contained was not easily ascertainable by other means or competitors.

Depending on the nature of the information, customer databases can even be the subject of a trade secrets policy, given that a detailed list of what some consider to be a company’s most valuable asset is not something you would wish to fall into a competitor’s hands. This is particularly true if the database fulfils the following criteria:

• The information is not easily ascertainable by other means, i.e. via trade directories or a simple online search
• It includes much more valuable data other than names and addresses, such as pricing and special needs
• It takes effort, i.e. time and money, to assemble the list
• It is personal, long-standing or exclusive, as it is special to the particular business and has been collected and in use for a significant period of time

Effectively, the database must provide a company with some level of competitive advantage, and has to be more than merely inconvenient for a third party to retrieve or replicate the information contained therein.

If you think this may apply to your company’s database – take heed! As we’ve stressed innumerable times before, the first step to protecting a critical IP asset is identifying it as such (you can read more about that in our Trade Secrets blog posts). Without creating a culture around IP protection, employees may not realise that they are (mis)handling key company assets. But even with this knowledge in hand, it is crucial that employee access to the database is limited, and those that do have access must go through user authentication systems.

Peter Drucker, the unwitting usher of the knowledge economy, once said “there is only one valid definition of business purpose: to create a customer.” It can only follow, then, that the manifestation of your business’ purpose is a valuable asset indeed.

IP STRATEGY FOR START-UPS

By Josef Geoola on behalf of Metis Partners Ltd.

I recently came across a 2012 blog posting on New Morning IP (find it here) which was tweeted for re-consumption by all of us who dream of IP when we sleep. The blog caught my attention because firstly, the author’s point on the value of patenting within a start-up really resonated with my own thoughts on that specific topic.In the post, the author urges that start-ups evaluate the cost/benefit of patenting within the context of their business model. If benefits brought on by patents outweigh the costs involved (with some certainty) in filing, prosecution, maintenance and enforcement of that patent, then patent away. Whilst my thoughts on this are not as formulaic as the blog’s author, I do agree that start-ups and investors alike should think hard as to whether patenting is crucial in order to allow the business to prosper. Patenting is an expensive process – one which can burden start-ups already limited in funds, and one which allegedly only leads to revenues in excess of the patent costs 5% of the time.There are, however, alternatives to patenting which can be as equally effective when done in accordance with a sound IP management strategy. Surprisingly, the blog fails to mention these additional options, which brings me to my next point.

The second reason the blog captured my attention was because it seems to draw an exclusive relationship, whether unintentionally or otherwise, between patenting and an IP strategy. That is, if patenting is not on the cards, then an IP strategy is not really needed. This fundamentally erroneous supposition can be misleading to a reader who is not all that familiar with IP. Regardless of whether formally registered, IP assets which underpin competitive advantage exist within virtually every company. Such IP assets include brand and goodwill, trade-secrets, know-how, and software (just to name a few) and require diligent management in order to ensure that they are secured and leveraged in a manner which maximises value and continues to support a start-up’s competitive advantage. Disregarding IP because patenting is not a business focus is an effective form of self-sabotage committed by that start-up - or any established company for that matter.

A week ago, I met an investor from a local investment firm with focus on industrial - manufacturing companies. As we started discussing IP, he echoed the false notion I highlighted above – his portfolio of companies focused on the tangible nature of industrial manufacturing, and therefore patenting was neither a focus nor an option, in his opinion. As a result, the companies failed to recognise the significant IP assets which existed within their respective businesses, necessitating the creation of a robust IP strategy. It took a bit of probing before we reached a moment of epiphany and recognised that, although his companies did not rely on any patents, they relied on a vast amount of manufacturing know-how and data which underpinned their competitive advantage. If any of this know-how was to leave the company building and make its way through the doors of a competitor, a sizeable competitive advantage could be lost.

Whether or not patenting is an option or a focus, nearly every business within the knowledge-economy - be it a specialist tea supplier or a pharmaceuticals R&D firm - holds a vast amount of IP in various forms, including brand, trade secrets, know -how and specialist data. These assets are most likely to underpin a start-up’s competitive advantage, and will significantly contribute to the revenues generated through sales of services and/or products. Additionally, these IP assets can be monetised in the short term via out-licensing agreements (for example to a company operating in a different market or technology space) so that the start-up can generate immediate revenue whilst further developing its own products or services. An IP strategy combined with proactive IP management are required to ensure that these IP assets are recognised, protected and leveraged, and that risk is properly mitigated so as not to affect future valuations or investment opportunities.

Metis Partners’ Metisology™ is a proven appraisal model which helps businesses identify and assess all IP assets that are, or could be, owned by a company beyond formally registrable IP such as patents and trademarks. Furthermore, we offer a unique “virtual Chief IP Officer” service which allows IP conscious start-ups and SMEs to subscribe and rely on proactive and ongoing IP strategy and management support backed by the IP expertise of Metis Partner’s multi-disciplinary team. By identifying and protecting the wealth of intangible assets which exist within start-ups, SMEs or established businesses, companies can truly approach IP in the strategic, accessible and cost-effective manner the blog post seeks to encourage.

We are bound by the secrets we share

In our second blog on trade secrets, we highlighted the importance of maintaining and enforcing an internal trade secret policy in order to prevent IP leakage via employee carelessness. But equally as important is the necessity for an external trade secret policy, particularly when embarking on partnerships and joint ventures (“JV”) – or even attending conferences and exhibitions, as we found out whilst attending the Offshore Europe conference this fall. Walking around the mammoth venue, we couldn’t help but overhear eager attendees and vendors sharing potentially valuable information with one another with little regard to how it might affect their company’s bottom line. Start-ups and SMEs are particularly prone to this type of behaviour, simply because they are developing and licensing technology to multiple parties and/or looking for third party collaboration, during which they might divulge some key aspects of their technology or innovation.

But a joint venture can be a great vehicle for business expansion, development of new products or moving into a foreign market, all while sharing the costs, operating risks and profits. Your business might have strong potential for growth and key intellectual property assets ripe for commercialisation, and joint ventures or partnerships could provide you with increased resources, greater capacity, increased technical expertise or access to established markets and distribution channels.

Nonetheless, joint ventures pose a tremendous challenge in relation to trade secret protection. Parties frequently enter into a joint venture because they have complementary technologies and operate in different market sectors, leading parties to (sometimes incorrectly) assume that information disclosed within the contours of the joint venture will not be used in direct competition. In practice, however, the majority of “strategic” partners present a particularly high risk factor to the loss of trade secret information. While your company may have a strong internal trade secret policy that is continuously assessed and enforced amongst its employees, entering into a partnership means that you are now reliant on the other company’s knowledge and protection of IP – both theirs and your own.

In practice, it may be your partner that unknowingly leaks a key trade secret at a conference as they enthusiastically narrate details of a developing project to a large corporate or investor – which, it should be noted, could undermine any future patent applications your company may plan to make. Or perhaps they will utilise that key know-how which underpins your company’s competitive advantage in subsequent research and development partnerships with other third parties. Whatever the particular situation may be, it is crucial that your trade secret policy extends to external concerns and goes further than just the legal stipulations contained in your confidentiality agreement.

The first step in maximising efforts to prevent loss of trade secrets is much the same as we wrote about in our previous blog, but it bears repeating. Identifying trade secret information is crucial, and less obvious than you might assume. It is a methodical process which involves mapping all of your company’s IP and classifying which of those recognised IP assets would qualify as a trade secret – we’ve learned from personal experience that companies often fail to realise that they have more IP than they think they do, and that some of the information they freely share, both internally and externally, are critical trade secrets which underpin their competitive advantage.

Marking this confidential information, and making sure that this process is repeatedly enforced, is also a critical step. Not only do identification and marking help you identify who may have access to that critical information and how it is shared, but it can also help prevent your collaborator from claiming that they discovered your trade secret independently or contributed to the conception of your trade secret. Stressing the importance of marking confidential information to your partner – and insisting that neither one of you veer away from these requirements as the project continues –as well as including a provision for the protection of trade secret information even where it is not properly marked will help instill that same culture of trade secret awareness and protection in both companies.

While there are inevitably steps you can take to make sure your partner understands the importance of maintaining trade secret confidentiality, you would nonetheless be wise to operate on the assumption that your joint venture partner will eventually discover the gaps in your security measures. No matter how long the relationship continues, treat your strategic partner like any other third party who may be seeking to discover your trade secret information – limit and record access to your trade secrets and provide information only on a “need to know” basis, amongst other things. And much like you would do with a departing employee, be prepared to take the same measures with a former joint venture partner upon the termination of relationship. This can include asking the relevant party to sign a certification stating that confidential information and property received in the course of the project has been returned and/or the their acknowledgement of their ongoing confidentiality and non-disclosure obligations. As we stated in our previous blog, it is not enough to merely have a policy – emphasising the importance of the policy, until it becomes a natural part of your company’s culture, is the most effective means of protecting your trade secrets.

Remember, “three may keep a secret… if two of them are dead.”

Disclosing the truth about non-disclosure agreements

According to everyone’s favourite web-based encyclopaedia, Venture Capital (“VC”) is defined as financial capital provided to early-stage, high-potential, high-risk, start-up companies on the back of a novel technology or business model – so is it really any wonder so much emphasis is placed on maintaining the confidentiality of information related to an entrepreneur’s innovation, novel technology or business model, particularly when disclosing aspects of it to potential third party investors? While we here at Metis Partners fully encourage the creation and maintenance of a robust trade secret policy, as well as the use of non-disclosure agreements (“NDAs”) when the situation calls for it, start-ups often jump to the latter without considering whether an NDA is appropriately crafted or, more likely, whether it’s even appropriate at all.

Historically, venture capitalists have been loath to sign NDAs, a position which has evolved for a variety of reasons, including:-

(1) Though NDAs are often viewed as commonplace, start-ups must remember that they are, at heart, a legally binding document. The fact is, most VCs are unwilling to accept the risk of litigation if they hear about a similar concept from another start-up; and since VCs – CVCs included – are often looking at a number of similar deals at any given time, it’s no stretch to imagine that the “paranoid entrepreneur” might view an investor’s choice to fund a similar company as breaching the NDA and stealing their idea.

(2) If an NDA is too general in nature, as they all too often are, it might even prohibit VCs from investing in a particular industry as publically available information might now fall within the ambit of the NDA. This is particularly problematic for CVCs, as they support new projects which are likely to be linked to the industry in which they operate.

(3) As with any other legally binding document, VCs will likely require an attorney to review the terms and conditions of an NDA prior to signing it. VCs often lack the internal resources necessary to adequately review each NDA from every company that approaches them, and subsequently monitor compliance, and the costs of implementing such a policy would be onerous. As one start-up lawyer once wrote, “only two groups would benefit: lawyers and paper companies.”

(4) There is a big difference between a conceptualised idea and an implemented idea. VCs look for people who can implement an idea, not merely come up with them; ideas are easy, it’s the implementation that’s difficult. NDAs should only be used in situations where it’s the “how,” not the “what,” that is being disclosed, that is, the unique process or innovation which will give the start-up its competitive advantage. It’s an all too common fallacy, particularly in relation to CVCs, that it will hear about an idea, recognise its brilliance and steal it or produce it itself – after all, ideas are a dime a dozen, and it’s the execution which has real value.

With that being said, there has been a marked shift from the earlier reluctance by VCs to sign NDAs, predominantly due to the ever-increasing number of VC firms and rise of CVCs, as well as a growing trend of investing in later-stage portfolio companies which may have already developed a trade secret policy that should be bound by an NDA. As a result, many new VCs – who have yet to build up the level of trust of more established VCs – have broken rank and accepted NDAs as a necessary part of discussions with start-up companies. Nonetheless, young entrepreneurs should be discerning in their use of NDAs, and must remember to tailor and narrow the scope of an NDA, but only where there’s a need to use one. Remember:-

• There should be no need for NDAs prior to an initial meeting, as it is unlikely anything truly confidential will be discussed. Remember, it is the implementation rather than the idea that holds true value

• “Confidential information” should be narrowly defined. Before drafting an NDA, identify the type of information that will be shared and require that it be shared in writing. An NDA should not capture broad descriptions of technology or publicly available information that may be accessible from other sources

• NDAs should not include the restrictive “purpose” covenant, which restricts a fund from using the confidential information for “any purpose other than evaluating a possible transaction with the company”

Though it might seem a risk to speak with a VC without an NDA in place, an internal trade secret policy might go a great way to alleviate some of that concern; after all, knowing the difference between the information that widely constitutes your idea versus the “bits and bytes” underpinning your competitive advantage means you’ll be well placed to know what to disclose and what to keep secret.

As published in August 2013 GCV Magazine.

Insolvency and the hidden brand benefit

Though this has been a year of soaring corporate profits for some, the number of companies which have entered insolvency proceedings was up 6% from this time last year. These businesses ran the gamut from celebrity-endorsed clothing brand Gio-Goi, to once-dominant movie rental provider Blockbuster, to music retail giant HMV. Headlines blamed the recession, or simply proclaimed that customers had lost faith in these brands which had been usurped by bigger, better brands. But what these headlines have conveniently overlooked is that many other big brands have also nearly collapsed – behemoth brands such as Marks & Spencer, Laura Ashley and Harley Davidson, for example. But in each case, it wasn’t the brand that was the major problem; rather, it was operational and management inefficiencies which caused these businesses to suffer, and once these were corrected, it was in fact the brand itself which brought about each company’s return to prosperity.

The fact of the matter is that there is often a significant disconnect between company value and brand value. While the companies themselves may have suffered, the value of the brands often remains proportionally unaffected during the time in which the business was reorganised or on hiatus. Strikingly, brand value may bear no resemblance to a company’s share price, turnover or overall profitability, and a company’s revenue may not be the most suitable to reference the brand against, particularly if the company is insolvent or operating inefficiently. Blockbuster, as an example, is operating under a now obsolete business model – but if it was operationally overhauled, would its long history and brand embeddedness be able to create the type of brand value that a company like Netflix currently possesses?

The amount of goodwill associated with a trademark can either prove to be the foundation for a commercial comeback – rumours of HMV’s rebirth as a pure-play, online-retail platform prior to its restructuring are a testament to this – or, conversely, it may be just what a competitor is after. The common factor companies in this position share is that they all have the benefit of accrued goodwill in the brand, something which may be difficult for a new company or start-up to amass on their own. This is particularly true of a trademark owned by a distressed company which may be inactive, and which is therefore not generating any value for that company – however, it may be exactly what a competitor is after. Though HMV is back up and running, competitors such as Sony Music Entertainment and Warner Music Group, or even companies like Amazon or iTunes, might have benefited from the notoriety and goodwill associated with the dog and gramophone symbol if HMV had decided to sell it after all.

We’ve seen this type of scenario before, both in and outwith the work Metis Partners has carried out. In a post about the importance of valuing intangibles in a downturn, Stuart Whitwell of Intangible Business mentions the historic case of the Plymouth Gin brand, which was sold for a “pittance” to investors in 1996 – only to become one of the UK’s best-selling premium gin brands, ultimately being sold in 2005 for millions of pounds. Had the original owners realised the inherent value that resided in the brand, they might have been able to significantly maximise the value in the IP sale. Conversely, in January 2009, Woolworths Group plc, a company which owned the British high-street retail chain Woolworths as well as other brands such as children’s clothing label LadyBird, went into administration, resulting in the closure of all 807 Woolworths stores. But by February 2009 the Woolworths and Ladybird trademarks and domain names were purchased by Shop Direct Group, where the brands are now sold on both shopdirect.com as well as on the previous Woolworths Group retail website, Woolworths.co.uk.

Metis Partners also has first-hand experience with the lasting reputational benefits a well-known – and well-protected – brand can have, having marketed the MFI furniture brand following MFI Group Limited’s administration in 2008. Walker Capital, the private equity owners of online bathroom retailer Victoria Plumb, purchased the brand and relaunched MFI as an online-only retailer, selling furniture, beds and bathroom suites. Likewise, we have just recently sold the iconic British fashion brand Horrockses following a significant amount of interest in the brand and its associated trademarks and goodwill. Though the garments they had been famous for were only manufactured up until the mid-20th century, the notoriety it had accrued during its 50 year run remains palpable today, through avid vintage clothing collectors, blogging about their latest Horrockses fashion find, and fashion exhibits in noted museums. Horrockses dresses can still be found on eBay, where they are sold for over £250 per dress, such is the lasting impression they have made.

As these cases illustrate, companies which invest significant time and resources into building the goodwill & reputation of a brand – be it online or off line via marketing, advertising, networking or other means – may not see that value recorded on the balance sheet, but it is precisely this accrued goodwill which can prove to be a business’s most valuable asset, both in an economic upturn and an economic downturn.

Metis Summer Summary...So Far

We here at Metis Partners have been busy throughout the summer season, but no one more so than Director Stephen Robertson, who’s been racking up the air miles attending and presenting at a number of IP-related conferences over the past couple of months.

IP Business Congress

Stephen’s first trip of the summer took him to Boston, Massachusetts, home of the Boston Red Sox, New England “Chowda” and everyone’s favourite Hollywood upstarts Ben Affleck and Matt Damon – not to mention the 2013 IP Business Congress! A sell-out crowd of over 600 major players from the IP, finance and legal sectors attended the three-day event, taking part in a range of sessions before unwinding at the IP Hall of Fame Gala Dinner, where Stephen’s kilt went down a treat!

The main takeaway from the event was the noticeable shift in the agenda, particularly as it relates to patents – patents were no longer seen as merely an assertive tool for suing competitors or infringers, but as a piece of valuable IP collateral. Discussions also progressed onto the idea of using patents to change cost structures and supply chains, particularly where outsourcing manufacturing under a patent-backed licence would improve company profit margins. Significant emphasis was also placed on IP finance and evolving monetisation models, something Metis is quite familiar with having won a tender from Scottish Enterprise to look into the current state of IP-led financing.

Trade secrets were a particularly hot topic – it was actually the impetus for creating our series of Trade Secrets blogs, as Stephen had been approached by a number of conference attendees hoping to understand what trade secrets were and how they could be protected and/or monetised.

Apart from all the robust IP discussions and debates, Stephen also saw the famed Red Sox beat the Philadelphia Flyers 10-4, and had a chance to practice his moves like Jagger at the Rolling Stones concert at the Boston TD Garden Arena. You know what they say about “all work and no play…”

WIPO Summer School

At the start of July, Stephen made a quick stop at the WIPO Summer School on Intellectual Property in Geneva, a two-week course for IP enthusiasts and young professionals alike. Stephen lectured on IP Asset Mapping, IP Finance and IP Monetisation to the mixed group of graduates and corporate interns. It may come as no surprise that the topic generating the most interest at the seminar was that of IP Valuation, with much discussion and debate centring on whether the income or market approach was the best valuation model. Students were also keen on the concept of using IP as security, with talk turning specifically to the value of mobile “apps” – quite apt, given Google’s recent acquisition of the crowd-sourced traffic app developer Waze for nearly $1 billion.
To learn more about Waze and the importance of a robust IP strategy, check out our article in the July 2013 edition of Global Corporate Venturing Magazine.

If you attended these or other IP-related events, leave a comment below and let us know about your personal experiences and thoughts!

Are all your secrets exposed?

Patents, Trademarks, Copyright. These are the famous faces of intellectual property, terms which most people have engaged with at some point in their lives. But as important as these may be to a company’s competitive advantage, there is one particular unsung hero of intellectual property (“IP”) which may be equally, if not more, valuable: Trade Secrets. From the widely known (and now debunked) anecdote that only two directors know half of the secret formula for Coca Cola at any given time, to proprietary know-how which forms the basis of an SME’s product offering, trade secrets are incredibly pervasive in the real world. Yet trade secret awareness – from what trade secrets actually entail to what steps should be taken to protect them – remains surprisingly low.

More often than not trade secret misappropriation is a result of carelessness or negligence, not malice. There are stories of purposeful trade secret theft, such as the case of a disgruntled DuPont employee who, after having been demoted, downloaded circa 22,000 abstracts and 16,700 documents – 10% of the total information stored on confidential servers – worth an estimated $400 million.

But the majority of trade secret theft, according to a survey carried out by Symantec, is the result of a lack of appropriate training and awareness of the importance of trade secrets. Attitudes that emerged from the survey suggested that employees are not generally aware that they are putting themselves and their employers at risk. Misappropriation of trade secrets via technological means – by way of employees emailing documents to their personal accounts, downloading them onto personal tablets and smart phones or storing them in cloud-based storage apps such as Google Docs or Dropbox – makes confidential information even more vulnerable as it leaves corporate-owned devices. Add that to the fact that over half of those surveyed did not believe that using competitive data taken from a previous employer is a crime, and you’re left with a particularly worrying IP culture. This mentality not only puts the company whose trade secrets were stolen at a disadvantage, but it also puts the new employer at risk as they may unknowingly be using confidential information.

Some of you may be thinking to yourselves at this point that this doesn’t apply to you, that your employee contracts include a standard non-disclosure clause alerting employees to the consequences of divulging confidential information. But policy itself is not enough, as anecdotal evidence suggests that nearly half of insider theft cases involved an NDA or IP agreement in some form. Illustrative of the fallibility of policy without training is the common misconception held amongst employees that ownership of IP is attributed to the person who created it. When given the scenario of a software developer who re-uses source code that they created for a former employer, 42% saw no problem with it, based on the fact that a person should have an ownership stake in their work and inventions. Without the proper training, an NDA or contract clause is moot; employees need to know that certain actions or understandings – such as who has ownership over innovations created in the course of employment – are wrong before they can correct that behaviour.

Creating a robust trade secret policy is certainly a (big) step in the right direction, but making certain that employees understand what is required of them is the only way to minimise trade secret leakage. Follow these few simple steps, and you might just find secrets stay, well, secret:

1. Define trade secrets – the flexible scope of trade secrets, based on its broad definition as any information that is secret, derives economic value from that secrecy and is the subject of reasonable measures to maintain its secrecy, is continually expanding. This undoubtedly leads to confusion, and it is important to delineate what falls into the “general know-how” category and what constitutes the “critical know-how” that underpins revenue generation. Explicitly legending highly confidential documents will further clarify this difference. Employees who unambiguously understand which information falls within the ambit of a company trade secret may be more careful about how they treat that information.
2. Tailor trade secret policies – IP culture plays a significant role in deciding which type of IP policy would best suit your company. If your IP culture revolves around patents, a robust invention disclosure process is a must, as this information has to stay secret until such time as the patent is published. If patents are not an integral part of your company, you may still have particular know-how which qualifies as a trade secret, therefore necessitating a separate and appropriate trade secret policy.
3. Enforce internal NDAs – it is not merely enough to have a policy; that policy must be enforced. According to the Symantec survey, 64% of employees said that their managers do not view data protection as a business priority and 68% of employees stated that their organisation does not take steps to ensure that employees are not using confidential competitive information from third parties. Employers must stress the importance of NDAs, and make sure that information classified as a trade secret is not being leaked by moving IP outside the company or casually discussing it in JV discussions, presentations at conferences, etc. The same goes for exit interviews, in which employer’s should stress an employee’s continued responsibility to protect confidential information and return all company information wherever it may be stored.
4. Monitoring access – as the importance of critical IP continues to increase, so too do the tools which can be used to monitor inappropriate access and use of IP. If trade secrets do need to be digitised – and often they do – making sure that only those who absolutely need access to the information may help limit unauthorised downloading of critical IP.

In our last blog on the topic, we talked about the increasing prevalence of trade secrets in the news, highlighting articles predominantly based around high-profile, malevolent and expensive cyber-attacks and trade secret theft. But the fact is that trade secret theft is becoming startlingly commonplace, often without any malicious intent behind it, resulting in employees exposing former and current employers to risk without realising it. The changing landscape of both our social and work lives, embodied primarily in the shift from a physical to an internet-based society, has brought with it new requirements for managing relationships and information. Yet it seems many businesses have failed to adapt to these new requirements, essentially leading them to create a culture of insecurity.

As author Ann Aguirre wrote, “once exposed, a secret loses all its power.” So keep your power, and keep your trade secret exactly that – a secret.

IP Insurance

In November 2012, the Licensing Executives Society (LES) Scotland held the aptly-titled event “IP Insurance – too complicated and too expensive – why bother?” which, unsurprisingly, covered the oft-overlooked topic of insurance for intangible assets. But in a market which is increasingly reliant upon intangible assets to boost value and add a competitive advantage, why does IP insurance have such a dearth of coverage in the mainstream commercial world?

In a staggeringly illustrative statistic, only 17% of value in S&P 500 companies was attributed to intangible assets in 1975; by 2010, this figure rose to a whopping 80%. Traditional insurance does not cover intellectual property rights (IPR), and cannot provide for a company’s IP risk management policy. However, the insurance industry has not managed to adapt at a parallel pace, and as a whole has been slow to adjust to the changing needs of its clientele. Even the UKIPO website, which claims to be able to “help you get the right type of protection for your creation or invention,” provides minimal information on what IP insurance is and where you can find it – and that’s if you even manage to locate the blurb on the site.

It’s a strange, if not altogether inexplicable, phenomenon. In 1975, insurers were vital to a business; it was easy to insure tangibles and ensure that companies could stay afloat following any unforeseen physical accident. However, insurance companies are now becoming more irrelevant to modern, IP-rich companies whose worth is tied up in assets that are much more difficult to value. Take Coca-Cola for example – it has consistently earned first place in Interbrand’s annual list of top 100 brands, and its formula is one of the most valuable trade secrets in the industry. And while Coca-Cola could easily pursue or defend any claims, what would happen to a smaller company if they were accused of infringing either of these major assets?

The traditional school of thought regarding IP protection used to be summed up in the following phrase: “the best insurance is a well-drafted patent.” The problem with this is twofold. The first and most obvious problem is that not all IP falls squarely within the category of registered IP assets, much less within the limited area of patents. The contemporary understanding of IP acknowledges a much broader range of assets; Metis Partners’ Metisology™ accounts for a number of these, know-how, organisational knowledge and trade secrets included. The second – and biggest – problem is that patents don’t pay for claims. And what is the value of a “policy” that doesn’t pay claims? Most would answer that with NIL.

Anecdotally, following a growing frustration at the increasing levels of IP infringement, inventor Michael Wilcox burned his patent in protest in March of 2012. He claimed that large companies were no longer concerned with seeking out licensing deals since they didn’t fear the consequences of appropriating these innovative products and processes for free. This, of course, is because SMEs are traditionally in a much weaker position to pursue or defend any infringement claim, and companies freely use this knowledge to their advantage in eliminating competitors from the market. But these SMEs can also become the unwitting perpetrators of IP infringement; as soon as a product is put into the market, there is an inherent risk that it may be infringing upon an already registered patent.

According to Erik Alsegard , the Senior IP Underwriter at Munich Re, if a company is not in a position to defend or pursue IP infringement, then the intangible value on their balance sheet is not even worth talking about. This inherent frustration with the system has been made clear in the ever-diminishing number of patents being filed in the UK, along with the steady incline in patent infringement claims; in the past year alone, filed patents have decreased from circa 21,000 to 15,000, whereas there have been over 2000 unique claims of patent infringement.

Aggravating the situation even further is the exorbitant price of IP litigation; we highlighted in a previous blog that, for the first time, more money had been spent on court fees than on innovation thanks to companies engaged in the headline-grabbing patent wars. But the mammoth costs of litigation aren’t limited to giant corporations like Apple and Samsung – the average cost to an SME defending an infringement claim can exceed the £1million mark, and in fact it is SMEs who are normally engaged in IP litigation.

So what happens when these cash-strapped SMEs are taken to court over potentially arbitrary infringement issues? Oftentimes, these start-ups will be forced to use venture capital and innovation investment funds in order to defend rather than innovate, which may not sit well with investors and dissuade them from providing the company with capital in the future. Also potentially damaging for a company’s reputation, in the case of a licencing contract for example, is the inability to pay for an indemnity clause – something which nearly 80% of businesses provide for in their contracts.

IP insurance – or rather, IP infringement insurance – is an appropriate safeguard against these potential pitfalls. It gives businesses the freedom to operate, especially in markets that have a high patent turnover rate or contain ‘hidden’ patents which are particularly difficult to find. It also gives businesses the option of deciding whether to take the risk of continuing to sell the possibly infringing products, or whether to recall them; the policy would provide for the losses (to a limit) in either case.

There is, of course, the potential for abuse of such a policy; a company may opt to sue for infringement or file an appeal, not on the basis of any hard evidence, but because they are in an economic position to do so. Nevertheless, a well-drafted IP insurance policy should ensure that any such claims are well-founded, and would ultimately ensure that crucial IP assets which underpin a company’s competitive advantage are well-protected. And that is why we should all bother.

IP led Financing

Small and medium-sized enterprises (SMEs) account for a staggering 99.9% of all enterprises within the UK, providing for 59.1% of private sector jobs and employing upwards of 13.7 million people. But despite their obvious importance to both economic growth and stability, many SMEs are hindered by their inability to raise capital as a result of their disadvantaged position when it comes to attracting external financing. Consequently, only about 65% of small businesses are still operating after three years, and after five years, fewer than 45% of SMEs will have survived.

Innovative young SMEs often have one major asset which is both their boon and their hindrance: intellectual property (IP). It has been argued that certain IP, and the rights vested therein, are less valuable until they can be shown to underpin revenues. However, proper identification and valuation of the IP assets which underpins the actual commercial value and competitive advantage of an SME can be used to attract external finance and become an important business asset to raise money against. If an innovative new product or service is protected by a patent, trademark, copyright or formally-protected trade secrets, it may help to convince prospective lenders of the market opportunities for the commercialisation of those products and services. After all, intellectual property rights (IPRs) can create barriers to entry in the relevant market, guaranteeing a certain level of exclusivity and thereby a higher market share if the product proves to be successful.

The recent proliferation of Intellectual Property Exchanges, including IPXI – the world's first financial exchange which facilitates the licensing and trading of IPRs – founded by Metis Partner’s JV partner Ocean Tomo, signals an increase in IP asset recognition. Essentially, it allows companies to buy, sell and hedge patent rights just like any other asset, and makes it easier for companies to make a profit off of the IP backing their novel ideas. Additionally, though IPR-backed finance was traditionally used by large corporates, the introduction of patent brokers such as ICAP – with whom Metis has recently worked – has opened up different funding mechanisms which can be used by SMEs.

Governments are also starting to take note of the increasing importance of IP rights, particularly in international governments such as those in China and Malaysia; Malaysia Debt Ventures (MDV), for example, was created as a response to companies which had difficulty in accessing financing from financial institutions or fulfilling their credit criteria. MDV targets companies which are still in their growth and expansion stage, specifically within the Information and Communications Technology (ICT) sectors, and helps them to procure the necessary financing for project inputs, capital expenditure and working capital. MDV differs from traditional banking institutions in that they assess companies based on their management and technical capabilities, key assets for technical companies, rather than on their current cash flow. The Malaysian government has gone even further, announcing that a deduction equal to the amount of investment made by an angel investor in a venture company can be offset against his income; this means that the Government is now the one taking the risk when individuals make angel investments, because if those investments fail, the individual will be able to offset the losses they made against future taxes. The greater incentivisation is, according to the CEO of Multimedia Development Corporation, the national ICT custodian and lead agency, “…a boon to innovators in the country."

The UK is also starting to – slowly – follow suit. Clydesdale Bank is the latest player to enter the venture debt game, having recently backed a dozen or more IP-rich companies across the UK, including Aircraft Medical, a Scottish medical device maker, and Polatis, a Cambridge-based optical switching technology company, to the tune of £2.2 million and £2.5 million respectively. According to a managing partner at Clydesdale’s Financial Solutions Centre in Cambridge, “the Bank made a commitment to lend £10 billion of new lending to business customers… and this is just another example of how we’re working with local companies to help them invest in the future growth of their business.”

A newer, though lesser-known, option for IP-backed financing is also beginning to emerge. Pension-led funding works by utilising pensions held by business owners, directors and senior executives as a means of providing cash injection into a business, usually via the business’ own IP. This can happen either through the purchase of a business’s IP assets, and subsequent licencing-back from the pension fund to the company, or by way of securing a loan against the IP assets themselves. Anecdotally, after being turned down by a number of investors, including the popular BBC programme Dragon’s Den, Bristol-based heated glove manufacturer Tony Curtis released £27,000 of his total pension by way of a self-invested loan, secured through a general debenture, and facilitated by an independent valuation of the company’s pending UK patent to supplement the business’s balance sheet. The Company’s turnover is expected to hit £200,000 in its first year of trading, and it has already been awarded the 2012 Guardian “Startup Company of the Year” award. Apart from providing the funding a company needs, pension-led funding means that business charges and personal guarantees can be removed from the equation; that is, the security of a director’s non-pension personal assets will no longer rely on the success of the business.

Despite the increasing awareness of IP assets as a critical company asset, IP-backed funding still presents a challenge to SMEs looking for fresh capital. There remains a sense of unease over exit routes and the realisation of IP value for lenders, particularly in pre-revenue companies. However, there is a greater chance of IP assets being accepted as collateral if it can be shown that a company’s IP can be valued separately from the business in the event of default or insolvency. An SME must show the durability and marketability of their IP, as it provides a “competitive advantage” for that company, making it critical to identify all the IP assets within a company and to obtain an objective and independent valuation of the identified assets from a competent valuation firm. With our longstanding experience in the field of IP audits and valuations, Metis Partners have helped a number of IP-rich start-ups do just that, to their enduring success.

IP Budgets

Patent wars are, surprisingly, nothing new; a TIME Magazine article from 1929 covered the eruption of a patent war for radio patents against twenty independent radio makers. Nearly a century on, large companies’ penchant for engaging in patent wars is the same as ever, but the sheer scale and antagonism with which they pursue and defend their intellectual property (IP) has grown exponentially. But what’s even more startling – and problematic – is the amount of money these companies have sunk into buying, protecting and defending these IP assets, as opposed to utilising that budget for innovation and new product development.

The New York Times recently published a lengthy article about the now infamous Apple/Google patent debacle, and buried within it, almost as an aside, was the following fact:

Last year, for the first time, spending by Apple and Google on patent lawsuits and unusually big-dollar patent purchases exceeded spending on research and development of new products, according to public filings.

According to a Stanford University analysis, nearly $20 billion was spent on patent litigation and patent purchases in the last two years. Compare this to the relatively low $3.4 billion Apple spent on its research & development (R&D) for the 2012 fiscal year. They spent nearly the same amount, $2.6 billion, towards the acquisition of Nortel’s patent portfolio, but that didn’t even come close to matching the $12.5 billion Google spent buying Motorola Mobility ($5.5 billion of which went towards the patents).

But apart from headline fatigue, why should anyone care what these companies spend their cash on? The concern is two-fold, and it affects innovation on all levels. The first is that, when established players stop innovating, they run the risk of losing their competitive edge and being overtaken. It’s what Apple did to Research in Motion when the iPhone trumped the once indomitable BlackBerry. It’s what Samsung did to Sony when it toppled Sony’s flat screen TV reign, what Microsoft did when it entered the video-game console market with the Xbox, and what Google did to virtually every popular search engine that predated it. This doesn’t mean that companies should forfeit protecting their IP, of course; on the contrary, we here at Metis Partners believe that protecting IP assets is crucial for maximising a company’s value. However, changing a company’s offensive strategy from innovation to litigation may be harmful in the long term.

Take Apple for (an obvious) example. Since Apple forged ahead with its patent war, the company’s R&D spending has slowly diminished. At the peak of Apple’s period of innovation, circa 2001-2003, it was spending 8% of its annual revenue on R&D, whereas its current R&D budget has faded to a mere2.2% of revenue. This figure is even paltrier given the fact that Apple’s revenue has sharply increased since that innovation heyday. In terms of pure innovation, Apple’s last new product was 2010’s iPad, and even that had its roots in a prototype that existed prior to the iPhone. Instead of focusing on new product development, Apple has primarily fallen into the habit of releasing incremental upgrades to existing products, and taking companies to court over such “innovations” as rounded corners.

Though this may seem like an incentive for new innovators to enter the market, the truth of the matter is that many small inventors find the increasing cost of litigation a deterrent. These litigation-happy companies don’t just attack one another – they are equally happy to go after smaller firms who they feel are infringing on their IP rights. Anecdotal evidence of this comes courtesy of Mr. Phillips who, in 2006, co-founded a voice recognition company named Vlingo. The firm received partnership proposals from Apple and Google, and its technology was even integrated into early versions of Siri. In 2008, however, Vlingo was contacted by a much larger voice recognition firm called Nuance, and were issued an ultimatum: sell Vlingo, or be sued for patent infringement. Suddenly, Apple and Google stopped calling, and the company behind Siri switched its partnership from Vlingo to Nuance. Worst of all, the millions of dollars Mr. Phillips had set aside for research and development purposes now had to be used to pay off lawyers and court fees. Though the court ultimately found that Mr. Phillips had not in fact infringed any patents, the damage was already down; the suit had cost $3 million and Mr. Phillips was forced to sell his company to Nuance after all.

Do companies need to protect their intellectual property? Absolutely. But when the courtroom becomes more important than the lab, and more money is spent on offensive tactics to derail competitors and potential market entrants than on innovation, product development suffers as a whole. Companies need to refocus, rebalance their spending and establish an effective IP budget. Consulting third-party counsel to value IP assets and determine what necessitates greater protection as opposed to what is irrelevant to the company’s business, and can therefore be eliminated, may help avoid wasteful maintenance costs. But more than that, what has become patently clear is that companies need to continue to go on the offensive by way of research, innovation and invention rather than through costly litigious scare tactics.