Michael D. Moberly May 11, 2013 ‘A blog where attention span matters’.
Here is a hypothetical which represents one of multiple issues in the global arena of intangible assets that I find pose persistently troubling aspects which I have yet to find definitive answers.
Let’s say for example, Company A produced, possesses, and utilizes, what I term ‘proprietary intellectual capital’ (know how) or ‘PIC’ for short. When I arrive at Company A, as an intangible asset strategist, to conduct training and assessment of their intangibles, it’s apparent management team are respectfully lacking in achieving operational familiarity with intangible assets, i.e., identifying, unraveling, assessing, utilizing, exploiting, etc.
Again, this is a hypothetical, but one which, I would venture to say most every intangible asset strategist and practitioner has or will likely experience. In this instance a management teams’ failure to recognize PIC as possessing and contributing identifiably specific value, efficiencies, or competitive advantages to their company.
I should say in this management teams’ defense however, this overall circumstance is not uncommon, in that many firms have, deeply embedded, in their routine operations and processes, a myriad of intellectual, structural, and relationship capital which frequently, due to its longevity and endurance is, for lack of a better explanation, taken for granted and remains unacknowledged as a distinguishable (intangible) asset that may deliver contributory value, competitive advantages, or efficiencies, etc., anyone of which could be exploited beyond their current use (status).
An additional (obvious at this point) exacerbating factor to this hypothetical is that the company management team has no perspective for the importance or necessity to preserve (safeguard) the contributory value and competitive advantages particular PIC is delivering and which the company has grown dependant.
So, one dilemma is, should or can PIC’s as portrayed here, be properly and defensibly cast, in an ex post facto manner, as trade secrets? Admittedly, that’s very doubtful. Or, could the PIC meet, again in an ex post facto manner, the six requisites of trade secrecy when in fact, the proprietary intellectual capital has neither been recognized nor treated in a manner consistent with the requisites of trade secrecy, nor are any procedures in place to safeguard – preserve control, use, ownership, and monitor value, materiality and risks associated with infringement, theft, and/or compromise of this PIC?
A second, and equally important dilemma in my view is that if, not when, this particular PIC is stolen, copied, or otherwise compromised, absent having any specific safeguards in place, does Company A have any recourse at all, in terms of damages, assuming of course, the firm becomes aware, in a timely fashion that such adverse acts have occurred?
As articulated by Scott Hampton of Hampton IP and Economics, Title 35, Section 284 of the United States Code, often referred to as the ‘patent statute’, states that patent infringement damages should be in an amount adequate to compensate the patent holder for the defendant’s infringement of the patent-at-issue. But, in this hypothetical, Company A, the developer and user of this PIC has neither filed or been issued a patent, so that remedy strategy seems, at best, irrelevant.
When litigation is evident to try to settle infringement, theft, misappropriation, and/or asset compromise claims, plaintiffs will routinely make a determination, usually early in the pre-litigation process, whether to seek lost profit damages, or limit remedies to only a reasonable royalty, again it’s certainly questionable whether either applies in this hypothetical.
Let’s recall now that today, globally speaking, 80+% of most company’s value, sources of revenue, and ‘building blocks’ for growth, profitability, and sustainability lie in – evolve directly from intangible assets of which conventional intellectual properties are one. But, a significant percentage of companies purposefully or otherwise, opt out of the conventional IP path.
Hopefully, this brings clarity to my initial dilemma (question), which is, can Company A, with its revenue – competitive advantage producing intangible assets, ever be positioned to seek lost profit damages if a key PIC were to be stolen when conventional intellectual properties, i.e., patents or trade secrets are either not in place or maintained? More specifically are there satisfactory remedies to firms like Company A proprietary intellectual capital has been misappropriated?
Hampton says there is no single method for calculating lost profit damages, but the most common is a four-part test first recognized 1978 in the Panduit Corporation v. Stahlin Brothers Fibre Works, Inc. case.
According to the Panduit test, to obtain damages, the profit, in this instance, Company A could make but for the infringed intangibles, a real patent owner must prove…
- demand for the (patented) product or presumably process.
- the absence of acceptable non-infringing substitutes in this market space.
- manufacturing and marketing capacity to exploit the demand, and
- the amount of profit (the patent owner), i.e., Company A would have made.
Hampton also points out there are other means of proving lost profit damages in addition to the Panduit test, such as measuring increases in the cost of product inputs. Could Company A then plausibly characterize the latter as costs related to the development (internally) or acquisition (externally) of other suitable intellectual capital to replace that which had been misappropriated – comprised?
Let’s be clear. I am only exploring potential remedies or defensible strategies to secure economic – competitive advantage relief for companies operating in the increasingly and irreversibly competitive and predatorial knowledge-based global economy where growing percentages of most company’s value, revenue, profitability, and sustainability are inextricably linked to intellectual, relationship, and structural capital, i.e., intangible assets, most all of which are quite vulnerable when effective processes – procedures are not in place, i.e.,
- to sustain – preserve asset control, use, ownership, value, and monitor their materiality and risk.
- for asset stewardship, oversight, and management.
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