I recall inquiring a new client that essentially seem to be a software consulting firm whether it had IP (“intellectual property”) and whether it retained such IP when providing software consulting services to their clients. Its CEO replied in the affirmative. However, when I began to do my due diligence, I noted that the IP was non-existent. Maybe there was a misunderstanding. Yet, not having IP severely impacts the valuation of this type of company, I concluded.
As I have related to someone else, if it is not “written somewhere”, it does not exist. That is true for IP. IP must be registered or secured somehow by notices or security. There are 2 major categories of IP — that IP which is registered and notified as being protected through registration, and that IP that has notification but held as trade secret.
For the first category, we all know about patents. There are fairly well understood rules regarding patents that include vetting and registration. In other words, if not properly registered, the IP is not protected. There is some form of notification, “patent pending”, to offer some notice of the process. I certainly did not see any such notification from this client.
Then there are the registrations for trademarks and copyrights. The former has an approval process as well during registration, and, when in process, there is a form of notification on any mark. Copyrights can be filed and require notification by the ubiquitous “©” symbol. Again, did I see any such marks or copyrights for this client, the answer is still negative.
Finally there is trade secret that has no registration. Instead, any third party must be notified on every document or page, that the information or formula is protected. Every page must warn through the appropriate label the viewer of its protected claims. Otherwise there is no protection. Again, nothing that the client demonstrated to me showed that protection.
With regard to this client, I knew that it developed software for the telecom industry. I also noted that it had no registered trademarks, no patents pending, or even trade secrets. Now, in this software industry, it is hard to argue “trade secret” to coding, since software codes are designed to bring certain results and, through minor modifications, codes can be rewritten and still bring about the same results. Code alone is not protection. Since the results are not protected, that leaves little or no room to protect code.
Now, as GC, I have invariably received notices from outside counsels from potential investors to produce “any and all IP” held by the company. Unless I have documentary proof of the IP, I would have considerable difficulty of delivering such IP requested through due diligence by outside counsel. And, when I fail to produce such documentation, I immediately know that it would have an impact on the valuation of the company.
All of this analysis makes common sense. Now, going back to this client. Should the client re-evaluate its claims regarding IP? The answer is affirmative. Can it then begin to buttress its IP portfolio? And the answer is still affirmative. Look at Apple: it continuously files for patents, marks every year. It is not only a reflection of its innovation but also its acknowledgement that the innovation needs to be protected somehow. IP creates not only branding; it increases barriers to entry for competitors. Hence IP adds to the valuation of the firm. So every company’s CEO must be made aware that there is no avoidance in the very request about its IP portfolio and it must be produced upon request. That is what that every client should know.