Many companies are increasingly looking to the federal government during COVID-19 for liquidity or other financial assistance. Colleague Drew Schulte recently spoke with host Joel Simon on Pillsbury’s Industry Insights podcast and highlighted a variety of strategies available to companies with intellectual property assets (and particularly patents or patentable assets) to reduce costs and to generate revenue by monetizing their IP assets.
- Patents come with costs.
As active research and development teams create numerous products, each requiring a patent, budgeting becomes a significant element of patent portfolio management. Each patent application incurs costs related to drafting it, prosecuting it before the patent office, and maintaining it once it has issued. Furthermore, each country has its own patent office and requires a separate patent application. Thus, pursuing a portfolio with numerous patents in numerous jurisdictions can quickly escalate costs.
- Cultivate your IP portfolio in a cost-effective way.
Despite high costs, and ever-shrinking IP budgets, most companies fail to cultivate an IP portfolio in a cost-effective way. Specifically, IP owners can tailor their portfolios to their business goals by considering the company’s business operations, each jurisdiction’s legal climate surrounding IP protection, and the realities of a rapidly changing economy.
To be efficient, a company must first know what it wants out of its patent portfolio. For example, patent protection might not be needed in every corner of the globe, depending on the patent’s intended use and the company’s business. Most companies likely want to obtain patent protection in geographically large jurisdictions, such as the European Union and the United States, and it is usually a good idea to obtain patents there. However, patent prosecution might not be advisable where the company does not plan to operate or, significantly, where patent enforcement is difficult.
Companies should weigh the costs and benefits of holding IP, taking into account a variety of factors. Is the strength of having intellectual property rights in a particular jurisdiction known, or is it uncertain? How durable is the technology or product for which the company would seek a patent? Does the company have the infrastructure to investigate a potential breach or pursue an enforcement claim? How substantial would a damages award be if the company successfully enforces its IP rights? These questions should inform whether, when and where a company pursues IP rights.
- Immediately monetize your IP portfolio through license agreements, financing and use of “un-ripened” assets.
Even when its market share is difficult to maintain, companies can generate immediate revenue through IP licensing programs. A company should review its IP portfolio and determine which of its assets are worth litigating over in the event licensing goes awry. It should also research which other entities use its IP, might want to use its IP, or might need an IP license. Then reach out.
IP can also be used to raise capital. When companies operate in jurisdictions with strong legal protections, IP can serve as valuable collateral in a debt financing.
In addition, the underlying IP assets can be profitable before the related IP rights become concrete. So-called “un-ripened assets,” which may have patent applications pending, or be without patent protection altogether (e.g., research and development), can be sold to competitors, donated as a charitable contribution, or proposed to be the basis or part of the basis of a joint venture. These transactions can be complex, but allow companies to derive immediate value from assets they might otherwise abandon. This strategy might be most useful to cash-strapped companies that are struggling to raise revenue in the current economic climate.
- Generate revenue by using and holding IP in a tax-efficient way.
IP can also be used to reduce income tax liability. Taxpayers who itemize deductions can reduce their gross income by the fair market value of property donated to or for use by qualified organizations under 26 U.S.C. § 170. (For specific guidance and limitations on charitable contributions, please refer to the Internal Revenue Code and Treasury Regulations.)
IP holding companies can be utilized to defer income tax liability. In the U.S., domestic corporations are taxed on worldwide income and foreign corporations are taxed on income that is effectively connected with a U.S. trade or business, subject to the terms of a bilateral treaty (26 U.S.C. §§11, 882). U.S. corporations can establish IP holding companies to hold their IP assets in jurisdictions with favorable tax rates. Royalties or other income derived from the IP will flow to the non-U.S. corporation, and might not be subject to U.S. taxation until brought back into the U.S. Each company should seek specific guidance regarding the intricacies of international tax strategies and the related laws, rules and regulations.
An additional strategy that can employed by companies is to create tax-favored IP by developing products in jurisdictions with preferable treatment for “home-grown” inventions. For example, the U.K. Patent Box program provides for a reduction of corporate taxes on profits related to inventions that are patented in the UK, and that were created or developed in the UK.
In conclusion, while patents, and other forms of IP, are notoriously illiquid assets, taking steps to cultivate your IP in a cost-effective way and use it to accomplish business goals, can result in immediate cost reductions and revenue generation.