In many industries a large portion of a company’s value can reside in its intangible assets, especially its intellectual property (IP) which can include patents, copyrights, trademarks, and trade secrets. These IP assets have become a much more powerful asset class, surpassing traditional capital assets such as real estate, plant and equipment. More specifically, one often hears statistics that attribute approximately 80 percent of a company’s current value to intangible assets, compared to 20 percent just a few decades ago.

As companies navigate the economic climate, either revisiting or initiating IP management implementation strategies can be a source of new revenues and cost savings. CFOs of IP-rich companies should ask how much more value their companies can unlock from their IP assets and if they are effectively managing and monetizing their IP by:

• Collecting the maximum licensing revenues per the licensing contract
• Managing the costs of acquiring and maintaining IP assets efficiently
• Growing the return on IP
• Adequately protecting their IP from infringement and misappropriation by others

Many large companies potentially leave tens of millions of dollars on the table from not effectively addressing these questions.

Collecting the Money You are Owed for Your Licensed IP
In recent years, companies, universities, and individual inventors have realized the value of licensing their IP to generate revenues. Business development professionals, internal IP groups, and university technology transfer offices have sought out licensees and executed favorable licensing agreements. But when it comes to collecting the monies due under the license, licensee-reported royalty payments were found to be incorrect in approximately 80 percent of inspections. Often licensees do not pay the right amounts because they do not systematically assess and account for the use of the licensed IP within their company, or the IP could have migrated to products or services other than those for which the original license was granted. Additionally, unless license agreements are monitored on an ongoing basis, line managers, technical and business development personnel or accounting departments, typically do not know the terms of the license agreements and therefore royalties may inadvertently be underreported.

Contract clauses usually address penalties and interest; for example, if there is a substantial underreporting, the licensee has to pay the service providers fees, make up the under-reported amount, and also pay a penalty and interest. In today’s economic environment, there is a renewed interest among licensors to improve contract compliance and returns on their IP. Companies with a large portfolio of licensing agreements can potentially recover tens of millions of dollars by conducting a royalty inspection. Licensing contracts characteristically have an audit clause stating that if the variance exceeds a certain percentage of what was paid versus what was due, the licensee pays penalties, which may include costs for the third party services used for the inspection.

How can CFOs tap into this cash stream? Start by launching a contract compliance program around the most important licensed assets. Simply letting licensees know that your organization has launched a formal contract compliance program, and that they will be contacted by a third-party, often motivates licensees to start their own internal compliance program. Licensees want to ensure they are compliant and paying the correct amount in order to avoid having their licensing agreement cancelled, paying penalties and potentially preventing them from offering certain products and/or services. IP owners and licensors have a fiduciary responsibility to collect what is due under the contract. Not only have they done the legwork to establish a contract with a partner, but they need to make sure the relationship is monetarily beneficial to both parties. Additionally, a formal compliance program often strengthens the relationship between the licensor and licensee, allowing the licensor to be more proactive rather than reactive, and keeping the internal focus on core competencies.

Managing the Costs of Your IP Portfolio
The development and protection of IP can be a costly investment. Patents, for example, can be expensive to draft and file. Apart from the initial cost of filing the patent, granted patents can also be expensive to maintain. In the United States, payments to maintain a single patent with the U.S. Patent and Trademark Office through its expiration can add up to approximately $1,000 at 3.5 years, an additional payment of approximately $2,500 at 7.5 years, and a final payment of approximately $4,500 at 11.5 years. For large companies with significant patent portfolios, costs related to maintenance could be millions of dollars per year, and even higher when associated legal fees worldwide are taken into account. Indeed many smaller companies and individual inventors do not have the funds to pay maintenance fees. Oftentimes innovations and potential future revenues will be lost simply because maintenance fees were too expensive for the IP owner to pay.

How can CFOs bring maintenance costs under control? First, it is important to know what should be maintained. Today it is more important to know what the ROI is on your core IP than it is to claim a large patent portfolio. IP owners need to sort out the IP that is critical to the future of the company and likely to generate the highest return. It is also important to identify which pieces of IP no longer serve the company’s strategy or business focus, or could potentially be obsolete and have no value in the marketplace. For larger organizations with thousands of patents and large maintenance budgets, allowing certain patents to expire can be an effective cost-savings approach. Alternatively, if these assets are potentially valuable to other companies, consider IP monetization strategies (i.e., sale, licensing, etc.). By reviewing and culling non-core or unused IP from the overall portfolio, companies can substantially reduce the costs associated with their IP.

Growing the Return on IP
Companies often own patents that are no longer useful to them, perhaps because they have changed their focus or business strategy, migrated away from a business segment, invented alternative technologies, or decided to terminate specific products or services. In these situations, patent mapping and patent landscape exercises can assist in identifying potential partners who might be interested in licensing or acquiring those non-core IP assets. Potential partners could be established industry participants or perhaps start-ups in the process of filing for their own patents, where the existing IP assets could be valuable in helping them bring proprietary products or services to the marketplace much faster. Licensing or selling these IP assets to partners can generate a high-margin revenue event or possibly generate recurring royalties for future years.

The growth of IP as an asset class has spawned a fragmented market of IP service providers. One specific area of interest is IP brokers and IP aggregators. IP brokers typically represent IP owners to help facilitate transactions quickly for a so-called success fee or commission. Many of these transactions are in the high tech, telecommunications, wireless, internet and digital media industries, and the buyers are generally known as IP aggregators. IP aggregators purchase large numbers of patents with the potential goal of instituting licensing programs and/or employing various arbitrage strategies.

Selling or licensing IP without the development of a concise strategy and implementation plan will likely impact the ability to extract maximum value for those IP assets. Things to consider are:

• Defining the IP owners’ expectations
• Assembling a cross-functional team that represents industry and/or technology expertise
• Evaluating the IP portfolio (i.e., detailed analysis of the patents, patent families, file histories, discussions with internal/external patent counsel and inventors, etc.)
• Identifying targets that might potentially be interested in acquiring or licensing the IP; this identification could be via traditional research, access to proprietary IP databases, knowledge of IP buyers and industry participants
• Stratifying and confidentially contacting potentially interested parties
• Evaluating potential acceptable financial terms and conditions, transaction structures (e.g.., outright sale, license, royalty rates, annual minimums, etc.), timing, and tax strategy considerations, if applicable

The evaluation of an IP portfolio in M&A transactions is also a very important step that does not always get the attention it deserves. While IP assets are generally recognized as a driving component of the overall value of the company being acquired, oftentimes IP is not properly valued. In many instances, IP determined to be non-core to the acquiring party can be sold or licensed to help recoup partial deal cost. Often there are hidden gems in the IP portfolio that can prove to very valuable. In some instances, future royalty income can be sold to a third party, via a structured finance transaction. This type of transaction offers the IP owner a convenient source of capital at an attractive cost while also potentially mitigating some of the business risks associated with the stability of the royalty income.

To maximize the value of IP, senior leadership needs to believe in the value of their intangible assets either for defensive purposes to protect market share or to drive licensing revenues. The CFO, the Chief Technical Officer, the General Counsel, and the licensing and marketing teams all have to buy into and actively take ownership during the development, implementation and management of IP strategies to effectively extract maximum value for their organization’s IP assets. Companies need to establish internal patent incentive programs that are aligned with the overall IP goals and strategy of the company.

Adequately Protecting Your IP from Infringement and Misappropriation
Protecting IP from misappropriation takes on many potential forms. One approach is to launch an enforcement licensing program geared toward the identification of potential infringers, whereby IP assets are licensed and a running royalty is collected on the licensed products and/or services being sold. After conferring with legal IP counsel on a potential infringing party, an IP owner might have to decide whether or not to initiate litigation. Litigation is a business decision and often has positive attributes to an IP owner; attributes that can include credibility of the IP owner. Litigated IP is potentially stronger IP since it has been tested in the courtroom. An IP owner who is willing to litigate can be viewed as a stronger IP owner and may be less likely to be targeted by other IP owners. If bringing an infringement action is a potential strategy, it is critical to bring together a seasoned IP team that includes internal technical personnel/inventors, outside technical personnel, outside financial experts, and both outside patent prosecution and outside litigation counsel. The IP litigation process can be lengthy and costly — a case can often take more than two years to get to trial and the cost associated with a patent litigation case can easily reach millions of dollars. An alternative strategy can be the divesture of assets that are potentially being infringed. Divesting avoids potential internal distractions from litigation and costly enforcement activities, and the potential acquirer might be in a better position to extract value from those assets through litigation, cross licensing, joint venture or other applicable strategies.

Conclusion
As companies seek new avenues to recover and generate cash, tapping into the unrealized value of IP may be a strategy worth considering. It can yield results with very little upfront additional investments. CFOs should ask if their organizations are doing all they can to meet their fiduciary responsibilities in extracting maximum value for their IP assets via sale, license, cost savings, royalty recovery, IP protection, enforcement and applicable tax strategies.

 _{Deloitte’s CFO Program harnesses the breadth of our capabilities to deliver forward thinking perspectives and fresh insights to help CFOs manage the complexities of their role, drive more value in their organization, and adapt to the changing strategic shifts in the market.}  

_{As used in this document, “Deloitte” means Deloitte & Touche LLP, Deloitte Tax LLP, Deloitte Consulting LLP, and Deloitte Financial Advisory Services LLP, which are separate subsidiaries of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.} 

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