Infringement of Intangible Assets…

Michael D. Moberly    May 12, 2009

In any business transaction in which intangible assets, IP, and (proprietary) competitive advantages are in play it’s essential that the owners – holders of those assets, and those having fiduciary responsibilities for their stewardship, oversight, and management recognize the challenges posed by the ever growing global culture of infringing and counterfeiting goods and services.

Aside from the largely subjective, but nevertheless extraordinary estimates of losses attributed to infringement, counterfeiting, and product piracy, its important to recognize that those illicit activities represent substantial (and growing) percentages of many country’s (a.) GDP, (b.) sources of employment and personal income, and (c.) manufacturing base.  Business (transaction) teams must conclude that infrigement, counterfeiting, and piracy have moved well beyond merely being annoying probabilities to very costly inevitatiblities if left unchecked or un-considered in either pre and/or post transaction contexts.

When assessing – negotiating the expectations of a transaction, especially those in which intangible assets, IP, know how, and competitive advantages are in play prudent decision makers should recognize there are few deterrents and/or impediments that infringers, counterfeiters, and product pirates will encounter in many countries. In part this is because (a.) start-up costs are frequently minimal, if not subsidized, (b.) they can operate in relative anonymity locally as well as globally, (c.) the legal deterrents are lax, inconsistent, or non-existant, (d.) there’s enormous potential for quick and very substantial margins (profits), and lastly, (e.) the extraordinary speed in which counterfeiting and product piracy operations can materialize and adversely affect a company’s margins, reputation, image, and goodwill.

The following represent key questions in which decision maker prudence is urged relative to taking time to fully assess each transaction in which intangibles, IP, know how, and competitive advantages will be transferred:

    – what is the company’s threshold for loss tolerance (i.e., tipping point) insofar as economic, competitive advantage, market share, image, goodwill, consumer confidence, etc.?

    – what is the probabilility such losses, when they occur, will be irreversible and permanent, what, if any, recovery options are available, and much will they cost?

    – what is the degree of universality of the company’s products and/or services (globally) and are there any potential dual-use components or applications within those products?

    – what is the cultural (business, legal, government) receptivity to (climate for) infringement, counterfeiting, and product piracy in the host country (region) where the transaction will be executed, i.e., products manufactured.

These represent only a few of the considerations that transaction teams are urged not to dismiss solely for expediency of consumating a deal.  It’s equally important to recognize that economic – competitive advantage hemorrhaging (attributed to counterfeiting, piracy, etc.) can occur well before the ink dries on  transaction contracts.  A reality is though, some management teams (still) assume they can consummate deals and commence revenue streams before any of their assets are infringed (counterfeited, pirated).   In the ultra-competitive, predatorial, winner-take-all global business arena, such a position could be accurately characterized as ‘permissive neglect’.


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