Black Swan events and IP: Managing today’s IP policies and IP strategies for tomorrow’s dawn

Given the recent developments due to the pandemic, including the unprecedented challenges companies will surely face in the coming months and years, the are are considerable IP based implications for innovation and stimulus policy makers, companies, and IP owners to start to act on.

In the short term, we can see the IP shifting in the market in the following ways – with the needs diverging between companies impacted negatively by Covid-19 related slowdowns and those “doubling down” as the work to carve out solutions for global need.

There are at least 4 key topics that will emerge for all firms to start to consider – both offering challenges and opportunists depending on the path taken:

1) Cash flow challenges:

Organizations facing liquidity issues often sell IP well below market value, or fully abandon their IP, with historical and well-publicized bankruptcy IP sales seeing over 80% discounts on expected portfolio values. With cash flow becoming a challenge for some firms, the IP on the open market may only increase with the possibility of lower pricing to come for some portfolios. For companies facing bankruptcy and potential liquidation of assets there is the real threat that the assets will be sold at a high discount, leaving Freedom to Operate control in the hands of competitive ventures or larger market players with the capital to acquire assets for future market control.

Who will come out on top?

2) Resource allocation:

Companies planning to survive and grow need to be vigilant of their short term finances and any return on investment and may move to reduce IP budgets or abandon patents or even reduce IP jobs to control costs. Unfortunately, patents are often a costly item that may only be seen to pay dividends 3-5 years in the future and thus may be deferred in favor of today’s finance needs.

Who will come out on top?

  • Companies that have a robust IP strategy that takes into account how to spend less but still create or retain intangible value over the long period. While access to continued capital for maintenance of patent portfolios will be important, those that understand which areas of the portfolio to “double down on” and which to divest or abandon that may only have secondary value will be much better position on balancing short term finance needs against long term value retention.
  • Likewise, those that have “IP thinking” embedded into key management roles (R&D, Finance, Marketing) will ensure continuity of an IP plan should talent need adjusted. Past investments in IP education for management will payoff today.
  • Finally, while some firms cut back on IP it will be those that continue IP investments where possible who will widen the “IP gap” between themselves and market competitors – and do so with the same level of planned investment. Going forward this is an unprecedented opportunity to take advantage of.

3) Market vertical adaptation

Many firms are now seeing a shift to support the short term global needs such as medical or health-technology. In addition, there will be many complementary technologies evolving outside the immediate health-tech area will evolve in the longer term, such as water purification or air filtering technology, due to the potential increase in the compromised health of all global citizens.

Who will come out on top?

  • Firms who have spent time building IP portfolios that are broad enough to shift to cover adjacent verticals will be in a strong position. The can begin to leverage their internal skills to not only shift to the market need, but do so knowing their medium and longer term IP position has some level of coverage to protect the investment.
  • Second it will be firms who begin to adapt now to todays market needs but also move in parallel to ensure the have Freedom to Operate, with particular attention spent on acquiring lower cost competitive portfolios to build their IP position at a low cost (see point #1 above).
  • Firms that work in a collaborative manner (i.e., via a Patent Collective) to develop pooling agreements to reduce the FTO restrictions on their respective teams and enable faster co-development for market ready products. This may already be underway in some areas as the WHO has already been asked to create a voluntary IP pool to develop Covid-19 products, and we are certain some individual Governments are moving to support the same approach within their own borders.

4) Licensing and technology investment approaches

Many firms who in-license technology may already have licensing terms that dictate the requirements of the IP owner to maintain or work to enforce patents – both that require active cash flow from the licensor – meaning if the licensor is unable to meet the terms due to financial difficulty then portions (or all) of the agreement may become void. Similarly, those who rely on out-licensing may also have minimum requirements to be held up by the licensor for them to maintain their geographic or other exclusive rights. Co-development of R&D projects may be contingent on background IP, as well as shared allocations of foreground IP based on continued investment.

Who will come out on top?

  • Firms who are reviewing IP clauses of existing contracts to ensure they will not be in breach based on failure to maintain minimum payments, levels of agreed on asset maintenance, or other IP based triggers that will put them at a competitive advantage or disadvantage or the coming months and years.
  • In addition investment firms who have considered IP assets as collateral may be in the strongest position to retain and control key assets of the firm if it goes under financial challenges, and likewise those that begin to request IP as collateral going forward will be in a stronger position.

In summary:

The seismic shift of world economy has been best summed up in 1 tweet, as quoted by Paul Graham earlier yesterday: “A week is the new year”

For many firms successful short term management of challenges today is key but IP may be the cornerstone that also enables them to succeed or fail tomorrow. And as a “week is the new year”, things will only move faster than before.

A recent editorial by IAM Media’s Joff Wild does provide an optimistic view of “This, too, shall pass…” but at least in the short term the successful firms and IP strategist will be those who advocate, explain, and demonstrate the central role IP can play in developing IP strategies for this new world.

Policy makers need to consider the IP implications of medium and long term innovation investments, realizing that now is the time to ensure innovation is coupled with IP support and specific IP investments. This will ensure firms will be supported well beyond the economic situation we see today. Likewise companies and IP owners need to work to ensure strategic IP positions are managed appropriately (cost control, divested when necessary, re-positioned and refunded when required, or contractually supported), and assessed from the view of both a short term and long term position.

While innovation is needed for today, now is the time for firms and policy makers (corporate and governmental alike) to use this disruption to their advantage and ensure economic prosperity that grows well beyond these troubled times.

Up next post we’ll outline the challenges specific to SME’s, and how they can start to assess and make tangible moves to address IP risks and opportunities today.

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A Canadian Patent Collective

Almost 24 months ago, in response to Canada’s announcement of a national IP strategy, both Jim Hinton and I called for Canada’s need to move towards a more innovative intellectual property strategy. In our discussion we focused on the dismal amount of IP our research institutions and companies generate in relation to the rest of the world, and suggested approaches to consider. At that time, CIPO’s / Statistics Canada’s estimation was only 9% of innovative SME companies in Canada had an IP strategy. One of our suggestions was to consider a Patent Collective, formed to help companies address the IP gap we have when compared to the global IP environment we need to operate in.

The importance of this topic is a critical discussion to have:  In the past years there has been additional  moves to help shift Canada’s IP position, but the ability and pace to enact change is similar to a David vs Goliath story compared to the larger ecosystem . In reality countries like China and the US have increased patent filings in areas such as Artificial Intelligence, and IoT, where other countries investments of combined IP + research have not kept pace.  To support this example view, not a month seems to go by without yet another report from entities such as WIPO, who release data or press releases on how the “AI IP boom” is expanding.  For example, WIPO’s recent AI trend report indicated the CAGR of machine learning patents ranged from 46% to upwards of 174%, with leaders such as IBM and Microsoft as having AI portfolios in the range of 8200 and 6000+ inventions respectively.

(Source: WIPO)

While AI is only one example, there are other technology sectors where similar trends are playing out. Yet regardless of the trend the fundamental issue seems to remain for Canadian companies – IP attention by our SME’s appears lacking in comparison to the world growth rate.

In other words: We seem to do relatively very little in IP, and even less “IP strategy”.

Two years ago I wrote that few Canadian SME’s exporting at key conferences such as CES appear to have very little in the way of a developed IP strategy, in the range of 10%. The data I compiled is slightly higher for 2019 CES, but not substantially.  This estimate matches with Statistics Canada’s figures, which is a concerning trend because the same Statistics Canada report suggests IP is a component of successful SME exporting, finding SME’s in Canada who have formal IP are 2 to 4x more likely to export, and 60% more likely to be high growth. To support this, a study on SME’s in Europe out of Paristech Mines suggested startups were 3x more likely to be successful if they had 1 patents, and 5x if they had a number of patents.

In other words: We seem to do relatively very little in IP, and even less “IP strategy”, despite IP holdings and IP strategy being linked to SME success.

As a component of the national IP strategy, Canada’s recent announcement towards operationalizing a Pilot Patent Collective program may be just the pilot tool to help SME’s address or jump the “IP gap” they currently face. With IP linked to SME success, we now have the opportunity to support our innovation and SME research investments with similar IP based initiatives.

Modernizing Board Governance through Intellectual Property

“IP in the boadroom” is one thing, but “IP culture consistently championed by directors in and out of the boardroom” is another. So how can directors and boards create value and lower risk via IP?

For my final resarch paper for my LLM in Intelletual Property at Osgoode Hall, I researched how board governance needs to evolve given the current IP challenges in today’s business world,  what legal requirements they had to meet that aligned with both IP and Director requirements, and finally what best practices directors and boards should have.

The abstract is below, and I will post a longer business oritned writeup in the coming months. In the mean time a copy of my paper is up for peer review on SSRN or here for download. Comments are always welcome.

Abstract: This paper examines the gap between the historical prioritization of non-IP (intellectual property) issues for board of directors against both the legal requirements and market activities which suggest IP should be a key topic for boards to consider. A survey of current law and literature was conducted to identify the top IP specific governance challenges, looking at business IP transactions and patent pools as proxy to extract governance related topics. As a result, this paper provides a better understanding of the top IP related governance issues and opportunities boards and directors should consider, and recommends five best practices to enact an IP governance framework. In assembling these best practices this research has implications beyond board members and directors. Shareholders, analysts, regulators, and policy makers need to be aware and actively influencing boards to prioritizing IP assets and IP risks in their governance frameworks.

 

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Part 2: Intellectual property and artificial intelligence: what does the future hold?

In April we looked at IP and Artificial Intelligence, based on my recently published IAM article, specifically where ownership sat by country and company. The key takeaways were three fold:

  1. There are key players leading the AI patent charge (Microsoft, IBM, Facebook, Qualcomm, etc.)
  2. US and Chinese ventures are leading in terms of AI investments, and will have a huge advantage over other countries R&D direction (Canada, France, UK) in the future.
  3. China is poised to be well ahead of the US by 2020, and the push is coming from the research institutions

As an AI researcher, startup-venture, or institutional policy maker, how do we address this?

AI researchers:  it is critical to ensure a plan of IP protection is discussed as a critical component of both the research plan and commercialization plan.  Foresight is needed to ensure relevant patents are filed, and rights are either kept by the research institution for future license opportunities, or freedom to operate for commercial spin-offs. While technology and IP transfer to an industry partner is one option, patent protection with a non-exclusive license may keep future opportunities open to the institution to build on the research in their own commercial setting.

Startup Ventures:  As with researchers, foresight through the creation and execution of a patent strategy is critical. This will reduce the freedom to operate risk as the venture scales, as well as ensure intangible asset value is built into the venture for future needs of cross-licensing or M&A.

Policy makers: To ensure some level of returns can be generated for AI based research investments, policy makers must ensure funds allocated to AI based investments are not left as unprotected research. Further, as some level of protection is sought, ownership must be structured to ensure future access to the IP. This could be done through retaining either freedom to operate access, or preferred licence access.  This future access is critical to ensure the policy investment can be built on with future investments.  Alternately, following the model by Israel’s Office of the Chief Scientist, IP can be acquired and but require monetary level of reimbursement to the policy maker to ensure funds for re-investemetns continue to grow if the technology or R&D roles are transferred out of the Israeli jurisdiction.

In summary, any research group, scale-up, or multinational working and patenting (or not patenting) in AI should be aware of their competitive IP position against the patent pace of both US based corporations and Chinese based research institutions.  The future of AI is on pace to be owned by a select few – yet a well crafted and cohesive strategy for a researcher, startup, or policy group has the ability to level the playing field.

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Part 1: Intellectual property and artificial intelligence: what does the future hold?

Last month I co-authored an article with James Hinton in IAM Magazine, entitled “Intellectual property and artificial intelligence: what does the future hold?“.We looked at the IP trends in AI, specifically where ownership sat by country and company.

Overall, any research group, scale-up, or multinational working and patenting (or not patenting) in AI should be aware of their competitive IP position – and unless the group is from China they are already at a disadvantage for the future.  While companies like Microsoft, Alphabet, IBM, Facebook, Qualcomm, Yahoo! and Amazon are leading the way and ahead of most companies, they will be poised to relinquish their IP leadership to Chinese institutes and companies soon.

Our research indicated that US and Chinese ventures are leading in terms of patent ownership, and other countries investing in AI technology (eg, Canada, France and the United Kingdom) need well-crafted and cohesive strategies that consider the country’s position in the international landscape or else technology startups from these countries will be paying royalties to US and China based ventures in the future.

In more detail – where is the Chinese push coming from?  AI, a research heavy technology, is primarly being protecetd by Chinese institutes:  China accounts for 15 of the top 20 research institutions filing AI patents, while the United States accounts for the other five.  My estimate is that this push by China is likley strongly supported from their 2006-2020 Medium and Short Term Development Plan, which has China targeting to be one of the top 5 patent countries with patents granted to its own citizens by 2020.

I would encourage you to read the article and consider the strategy shifts and action plans we propose.  (Download is here)

Until then – as an AI researcher, startup-venture, or institutional policy maker – where does this leave us, and what do we do about it?

That’s a discussion for Part 2….

 

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