Intellectual property is an increasingly important part of the global economy. Reliable IP rights enable us to harness innovation to foster growth in existing industries, and give rise to new ones.
While IP value accounts for 70 percent of the equity value of publicly traded companies, financial, accounting, and other standards for the management of IP are slacking. With the recent news that the American National Standards Institute (ANSI) has named the Licensing Executive Society (LES) Standards Development Program an accredited organization, LES is establishing guidelines that will encourage best practices in IP management. LES Standards will increase technology deal-making and licensing, speed new products to market, bring greater transparency to public markets, and decrease abusive litigation.
LES Chair-Elect Bill Elkington, LES President and Board Chair Brian O’Shaughnessy, and President and CEO of Finjan Holdings Phil Hartstein sat down with Inside Counsel to discuss what the ANSI accreditation means for LES, what it means for IP worldwide, and why a new set of standards are essential.
“This confirms that LES has created an open, transparent, and equitable plan for the development of meaningful voluntary consensus standards for IP management and licensing,” O’Shaughnessy said. “By engaging the entire industry, and drawing upon its vast expertise, we will create a rich body of standards that are practical, prudent, and in the public interest.”
The importance of IP and IP management has grown dramatically since the 1970s throughout the world. The economic well-being of the world is now driven by IP, which is the result of innovation—innovation in technology, business processes, business models, and products and services.
“In the 1970s and prior, the book value—the tangible asset value—of operating companies was 70-80 percent of the equity value in publicly traded companies, with 20-30 percent of the equity value in intangibles (IP),” said Elkington. “These days that relation has flipped, with 70-80 percent of companies’ equity value now in IP and the balance in tangibles.”
Today, our business management education and finance & accounting rules have not kept up with this change. Our current processes for managing our IP assets are therefore in the early days of their development. There is diversity of understanding of what is reasonable to do in IP management in operating companies, universities, government agencies, courts, etc.
“Bad behavior in patent licensing is well-documented,” he explained. “But bad behavior isn’t restricted to patent licensing. It is quite wide-spread and is found often in companies and government institutions with asymmetric market power.”
Everywhere in the economy, IP transactions take too long to accomplish and are too expensive. For an economy to be innovative, IP transactions must become more efficient, so legal review must become more effective. IP management business processes must be developed to ensure that the velocity of innovation and the velocity of investment in innovation are not unnecessarily impeded by the slowness and costliness of executing IP agreements.
“The field of IP management is where quality management was 50 years ago,” said Elkington. “We need to build the management frameworks and business processes that will ensure that global innovation and global standards of living can reach their full potential.”
According to O’Shaughnessy, the LES Standards initiative will bring IP management into the 21st century, and represent the consensus views of the entire IP management and licensing industry. By reaching out to the entire community, LES will ensure that the standards it develops are fair and equitable for all involved.
“One of the most important things you see from the inside of a public company is that transparency in reporting and communicating material details of your business and operations is a covenant with shareholders and the investing public more broadly,” said Hartstein.
In the IP space, there is currently little to no transparency – this provides safe harbor to unscrupulous and bad behaviors which have drawn the spotlight away from ethical behaviors in licensing, which is the issue LES is working to address with its standards initiatives.
“Dozens of books have been published on best practices in IP management. Hundreds of articles have been written on the topic,” explained Elkington. “Yet bad behavior persists, IP transactions continue to be time-consuming and expensive, and knowledge of best practices is limited throughout large segments of the economy.”
Over the years, legislators have diminished the strength of the IP protection regime in the U.S. because of persistent bad behavior. The thought has been that the strength of the IP laws needed to be dialed back to control that bad behavior, but this is like expecting to improve product quality through new legislation. Legislation has its role, but it cannot take the place of best practices implemented in business process and management framework standards, according to Elkington.
The LES Standards are designed to implement best practices in IP management. It will verify that enterprises conform to these standards, and by being certified, enterprises will gain in their business reputations as well as in finding safe harbor from risks, such as share-holder suits. Enterprises will be rewarded with interest from others in doing business together.
O’Shaughnessy said, “It is simply unrealistic to expect that legislators or policy makers, no matter how informed or well-intentioned, will be able to unravel the complexities of the global IP management regime and devise laws or regulations that will contribute, rather than complicate, the business of developing IP into meaningful products for the improvement of the human condition.”
So, what does LES’ ANSI accreditation mean for IP worldwide?
According to Elkington, it means that stakeholders in IP have a place to come to develop global standards that affect the way they and their business partners across the world manage IP, and develop it into useful products.
“Initially, the LES Standards initiative was focused on U.S. and Canada, the two primary geographies encompassed by its members,” explained Hartstein. “However, the evaluation of various influences from, and impacts to, other countries with equally vested interest in strong IP rights have played a role.”
Most lawyers do tend to be skeptical of a standards-based approach to IP management. After all, the education and experience of most lawyers is in the use of the law, the courts, and legal processes to manage IP matters. Because of the high value of intellectual capital in the global economy and the importance of its creation, management, transaction outcomes, protection in many enterprises, there are necessarily many others active in its management.
“Think of the human resources function as an analog,” said Elkington. While there are many laws affecting the management of employees, human resources management is largely a business function, with business processes and management frameworks used predominantly.”
While legislation, litigation, and IP protection through legal processes will remain critical in IP management, the field will benefit from the addition of structured business processes—standards—to the approaches enterprises currently use to protect and extract value from the fruits of their innovation.