The patent files.
In a world where a single employee can walk out of a corporation's front gate with assets worth millions in his pocket - or in his head - what's the definition of corporate security? It's tough to keep an idea under lock and key. All the physical protection you can build or hire - gates, guards, and security codes - just won't cut it. And yet, as the U.S. has moved from an industrial economy into the Information Age, a company's intellectual property (IP) often proves its most valuable asset. Increasingly, both the courts and corporate leaders are recognizing the issue of protecting intangible assets - and making headlines in the process. When General Electric and Hitachi began using magnetic resonance imaging (MRI) medical equipment technology invented by Raymond V. Damadian, the founder of Fonar, Inc. fought back against his powerhouse competitors with a patent infringement lawsuit. Hitachi settled, but GE decided to take its chances in court. The gamble cost them $103.4 million, which Fonar, then a $15 million company, put toward funding research and development and expanding the company.
Roger Beach, chairman of Unocal Corp., also has an eye for revenues in Unocal's intellectual property. "If it happens, it'll be fantastic," said Beach of the possibility that Unocal would win a patent infringement suit against six of the biggest oil companies in the U.S. The jury subsequently awarded Unocal 5.75 cents per gallon for infringement of its patent on clean-burning gasoline formulations. Royalties for past infringement alone could top $200 million.
And patents aren't the only kind of intellectual property that IP-aware companies deem worthy of protecting. When the recent launch of Viagra, the new impotence drug from Pfizer, was followed by the introduction of two similarly named products, the company quickly defended its investment in the Viagra name by filing suit for trademark infringement.
Unfortunately, too many CEOs still fail to view IP assets - patents, trademarks, copyrights, and trade secrets - as corporate resources that confer competitive advantage and revenues. In fact, many companies, especially non-high-tech firms, leave IP assets inadequately protected, risking harm to revenue and shareholder value.
Perhaps one of the biggest mistakes that CEOs make is to vest responsibility for intellectual property issues in others and then assume they are being managed. Without a CEO who understands IP issues and can focus and motivate vigorous defense of intellectual property, management of an IP portfolio can easily falter. That direct involvement by CEOs and other high ranking corporate officers pays off is evidenced by the case of Honeywell Inc. taking on the world camera industry in the early 1990s. The CEO's delegate, then-CFO Christopher Steffen, was a present and constant force in the case, which provided a total return of nearly $500 million in damages and licensing fees from other companies in the camera industry.
But the best security starts with prevention, not prosecution. Unless enforcement of intellectual property rights is made a strategic consideration and is tied in with business goals, IP portfolio management can sink to defensive monitoring and prosecution, rather than creative initiatives to boost return on investment. This is most common at companies with semiautonomous divisions where IP assets are not visible above the division level and the company as a whole does not know how to identify or properly value its intellectual property. As a result, these firms - often middle-tech companies with few patents, but still enough to assemble a portfolio - miss out on opportunities to use intellectual property to enhance revenues and earnings.
Protection begins with identifying the corporation's valuable intangible assets and developing an integrated IP strategy that dovetails with business goals. Is the company protecting its assets through patenting, copyrighting, and trademarking? Are there confidentiality agreements with employees? Are there adequate security measures in place so that if an employee leaves with a company secret the company will be able to win a lawsuit? The strategy should include a business plan for obtaining a return on IP assets, whether or not the company commercializes them. Tapping third-party firms that purchase, market, and license patents that otherwise would decay in a company's possession can realize revenues that would otherwise be lost at a minimal expense. Such firms will then find uses for the technology or institute suits against infringers. An international technology transfer company that buys patents recently instituted such a suit against IBM, US Robotics, and seven modem makers for infringement of four patents that the company purchased covering modern connectors used in laptop computer PMCCIA cards. While this suit has yet to be resolved, the original owner of the patents now has a revenue opportunity that was not previously available to it.
Identifying a company-wide patent portfolio can also provide a key defense in IP litigation. An IP portfolio can act as a barrier, especially in patent infringement litigation. Many large companies are adept at this. The strategy is similar to the U.S. government's "mutually assured destruction" posture during the Cold War. If another firm sues for a patent infringement, the defending company searches its patent portfolio to find a basis for countersuing for infringement in another area. Acer the computer manufacturer, responded to a Lucent Technologies lawsuit with such a countersuit, alleging that Lucent violated several Acer patents. Acer sought a cross-licensing agreement with Lucent to resolve the costly litigation.
The widely reported Digital Equipment (DEC) lawsuit against Intel also involved allegations of infringement by both companies. It ended in an unusual settlement in which Intel and DEC entered into a 10-year patent cross-license agreement and Intel purchased DEC's semiconductor operations. For small companies and individual inventors, protection of IP assets can be critically important because the patent or trade secret may represent a primary asset. Expropriation of the invention or idea could destroy the company or ruin an inventor's life work. The Brown v. Shimano case, for example, involved the Japanese bicycle components manufacturer Shimano using gear-shifting technology without a license from the technology's inventor after he attempted to license it to Shimano. The inventor's financial assets and health were affected, until he vindicated his invention through lengthy litigation.
Non-compete agreements represent another area where CEOs need to protect their companies adequately. Laws governing these agreements vary by state and by country, with some allowing greater enforcement than others, so that a single non-compete contract is insufficient to keep IP secure from employee pilfering. Companies must assess non-compete agreements by jurisdiction and adjust them accordingly. General Motors provided a notable example of enforcing a non-compete agreement when it successfully prosecuted its former chief, Jose Ignacio Lopez de Arriortua, after he left GM with seven of his executives to join Volkswagen - carting boxloads of GM's purchasing secrets with him. In jurisdictions where non-compete agreements are difficult to enforce, a CEO should decide whether and how employee access to intellectual property should be restricted.
Consideration of restricting access is particularly important today, in a time when domestic and international companies can expropriate IP assets more easily than ever. Ironically, a company's employees can unintentionally give away proprietary data even when they are aware of the need for security. A researcher's comment in Internet newsgroup discussions, for example, might inadvertently hint at a product under development. Employees may unwittingly use non-secure media, such as cell phones, for intimate discussions of company data or trust other employees to a fault, giving them access to data they have no right to have.
CEOs often show surprise when they find out how easy it is for a worker - or even a temporary employee - to walk off with secrets, manufacturing instructions, proprietary development schedules, and other intimate business details. Yet employees commit most intellectual property thefts. After researching a company through existing news sources, searches of Internet newsgroups, Web sites, and even a company's own brochures in order to draw a map of what is inside the premises, infiltrators can sometimes gain entrance as temporary workers or on-site vendors, then pose as insiders to breach a firm's network and its sensitive documents. Security firms sometimes attempt the caper to test a firm's vulnerability. One investigator claims to have walked out with more than $1 billion of a company's secrets in three days. The company involved had protected its perimeter but had forgotten about its employees.
WarRoom Research, a Baltimore consulting firm, surveyed 205 of the Fortune 1000 companies in cooperation with the U.S. Senate's Permanent Subcommittee on Investigations and discovered that 20 percent of all inside computer hacking incidents cost the companies between $50,000 and $200,000 per incident. Even worse, a company rarely knows that it's been compromised until its plans and technology show up in the marketplace - and by then, it's often too late.
Some CEOs recoil from the idea that they cannot trust employees and that they should have a healthy paranoia about intellectual property. Both go against the grain of empowerment and openness for which managers strive. But in an intensely competitive environment where some will forego fair play in favor of a competitive edge, there can be a dark side to workplace democracy. Some competitors and employees engage in business without a sense of fair play. Others lack good judgment or have an exaggerated notion of justice that they believe entitles them to harm one whom they perceive has hurt them. Still others simply want to come out on top.
To handle intellectual property well, "IP-smart" companies adopt security policies to protect systems and data and make these known throughout their organizations. Plans should be implemented for handling intrusions and losses that encourage reporting of suspicious incidents. IP-smart companies attempt to recover stolen material and let offenders know that they will seek criminal prosecution for IP theft. Moreover, they analyze major threats to intellectual property and know how to deal with them.
IP-smart companies, such as Honeywell, Unocal, and Fonar annually evaluate their patent portfolios for patents that should be licensed, sold, or otherwise used to produce revenue. Their plans come with revenue targets for patent managers to achieve and involve discussions of potential litigation their companies might race during the coming year and how their firms plan to handle them using existing patent portfolios. They review employee access to sensitive data annually, as well as changes in employment law that might threaten their protection of IP assets. And their CEOs receive an annual presentation from in-house counsel that discusses how their companies protect trademarks from theft or from becoming generic terms.
In an era of international competition and free trade, protection of IP assets is more important than ever. Industrial spies range the world, looking for intellectual property that makes companies more productive and efficient. U.S. corporations learned the hard way in the 1980s that foreign manufactures sometimes use IP more effectively than the American originators of the assets. To guard against this threat in the future, CEOs should take steps to avoid finding their own inventions and intellectual property thrown back at them in the marketplace.
Jan M. Conlin and Ronald J. Schutz are partners with the law firm of Robins Kaplan Miller & Ciresi. Conlin enforced Honeywell's patents in Honeywell v. Minolta. Schutz enforced Fonar's patents in Fonar v. General Electric.