Michael D. Moberly July 14, 2014 ‘A long form blog where attention span really matters’.
A not-so-hypothetical circumstance…
The following represents a not-so-hypothetical circumstance which I’m confident many readers have encountered. For me, as an intangible asset strategist and risk specialist, it represents one of the more consistent and disconcerting challenges insofar as safeguarding intangible assets, for which I have no one-size-fits-all answer. The hypothetical begins this way. I have been invited by Company A’s management team to conduct intangible asset awareness training and assess their intangible assets.
During the early stages of the engagement, it quickly becomes apparent that Company A has developed and utilizes company centric proprietary intellectual capital (know how) that delivers efficiencies and market – sector competitive advantages. However, as the engagement proceeds, it becomes even more apparent that the firms’ management team lacks sufficient operational familiarity with those and other particularly valuable intangible assets they have produced in terms of identifying, unraveling, assessing, distinguishing, utilizing, exploiting, and safeguarding, etc.
With respect to each of the latter, the company’s failure to recognize the contributory value, sources of revenue, and competitive advantages their specialized proprietary intellectual capital (intangible assets) are delivering represents an obvious breakdown in asset stewardship, oversight, and management. Fortunately, it is a breakdown that not only must, but usually can be remedied providing the value and functionality (life) cycle of the asset or assets remain relevant and durable.
In defense of management teams…
I should say in defense of management teams’ absence of operational familiarity with (their firms’) intangible assets, such circumstances, unfortunately, are relatively common. That is, countless companies globally have deeply embedded, in their routine business operations and processes, a myriad of intellectual, structural, and relationship capital and other forms of intangible assets which frequently, for lack of a better explanation, are taken for granted and therefore remain unacknowledged, undervalued, and thus, at risk.
So, the maximum contributory value, competitive advantages, and efficiencies these assets could deliver may remain un-exploited, if not idle, throughout their potential functionality – value cycle. Importantly, under such circumstances, a company may never fully recognize the economic or competitive advantage benefits. An especially unfortunate element to this hypothetical is that a company management team may have no perspective for the importance or necessity to preserve (safeguard) the contributory value and competitive advantages the asset are delivering, and which the company has likely, but unknowingly, grown dependent.
Ex post facto trade secrecy requisites…
So, one important question is, can, or should this company’s proprietary intellectual capital as portrayed here, be cast (ex post facto) as trade secrets? This of course, representing one strategy to help remedy the situation? More specifically, can these intangibles meet the six requisites of trade secrecy (ex post facto) when in fact, the proprietary intellectual capital has not previously been recognized nor treated in a manner consistent with those criteria? Nor are any procedures/practices in place to safeguard, i.e., preserve control, use, ownership, and monitor value, materiality and risk to those assets, i.e., infringement, theft, and/or compromise? Admittedly, I am doubtful.
A second, and equally important question is that if, not when, this particular proprietary intellectual capital is stolen, copied, or otherwise compromised, absent having any specific (trade secret requisites) safeguards in place, does Company A have grounds to mount a viable legal recourse in terms of seeking damages, assuming of course, the firm becomes sufficiently aware in a timely fashion that such adverse acts, i.e., the loss, theft, and/or compromise, have actually occurred?
The patent statute…
As articulated by Scott Hampton, Hampton IP and Economics, USC 35, 284, 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 of the intangible assets, but previously unacknowledged user, has neither filed or been issued a patent, so this prospective remedy strategy seems, at best, very shaky, if not irrelevant.
Given my predilection that risks, i.e., theft, misappropriation, compromise, etc., to most intellectual capital assets will materialize with litigation promoted as the relevant strategy to try to regain control and use of the assets, plaintiffs will routinely endeavor to make a determination, usually early, as a element of the pre-litigation process, whether to seek lost profit – competitive advantage damages, or limit the remedies they are seeking to a reasonable royalty? Again, its doubtful either are viable strategies for this particular hypothetical, but nevertheless, worth exploring.
Most companies do not go down the conventional intellectual property path…
It’s useful to recall at this point that today, globally speaking, it is an economic fact that 80+% of most company’s value, sources of revenue, and ‘building blocks’ for growth, profitability, and sustainability either lie in – evolve directly from intangible assets of which conventional intellectual properties are merely one type or category of intangible asset. However, a reasonably high, but realistically unknown percentage of companies with developed intellectual and structural capital assets presumably and purposefully opt out of the conventional intellectual property (patent) path due in large part no doubt to the expense.
So, the intent of this post is to bring clarity to the initial dilemma (question) in Company A’s hypothetical, that is, with its contributory value and efficiency – competitive advantage delivering intangible assets, can it be realistically be positioned (ex post facto) to legally seek monetary damages if key proprietary intellectual capital – structural were to be stolen or compromised when conventional intellectual properties, i.e., patents or trade secrets were not in place from the outset?
Panduit Corporation v. Stahlin Brothers Fibre Works, Inc.
Hampton points out, as we know, there is no single method for calculating lost (profit) damages, but the most common is a four-part test first recognized in 1978 in case of Panduit Corporation v. Stahlin Brothers Fibre Works, Inc. According to the Panduit test, says Hampton, to obtain damages, the profit, in our Company A hypothetical, a real patent owner must prove…
- a demand exists for the (patented) product or presumably process, i.e., intellectual and structural capital.
- there is an absence of acceptable (non-infringing) substitutes in the current market space.
- there is sufficient manufacturing and marketing capacity to exploit that demand, and
- with some reasonable precision, the amount of profit Company A would have made, had the adverse act not occurred.
Hampton also points out there are other means of proving lost profit damages in addition to the above Panduit test, such as measuring increases in the cost of product inputs. Is it feasible then, for Company A to plausibly characterize the latter as costs related to the development (internally) or acquisition (externally) of other suitable (replacement) intellectual capital for that which had been misappropriated – comprised?
Please consider the following as a respectful call to action! That is, 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 the use and exploitation of their intangible assets, i.e., intellectual, relationship, and structural capital, most all of which are quite vulnerable when effective processes – procedures are not in place, i.e., (a.) to sustain – preserve asset control, use, ownership, value, and monitor their materiality and risk, and (b.) for asset stewardship, oversight, and management,
A special thanks to Scott Hampton, Hampton IP and Economics for the inspiration for this post at https://hamptonip.com
As always, reader comments are most welcome.