DIRECTORS N DI NISTITTE ExecutiveD ExchangeI · – 2013 AIPLA Report of the Economic Survey...

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natIonal dIreCtorSInStItute ndI Executive Exchange

NDIThe New Normal

an Interactive exchange about the Future of Governance

Board Oversight of Intellectual Property Strategy

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Board Oversight ofIntellectual Property Strategy

November 13, 2013

©2013 Foley & Lardner LLP

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■ Panelists

– Sharon Barner■ VP and General Counsel, Cummins Inc.

– Gary Roth■ President and CEO, Syntroleum Corp.

– David Schellhase■ General Counsel, Groupon Inc.

■ Moderator

– Jeanne Gills■ Partner, Vice Chair of IP Department, Foley & Lardner LLP

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■ Overview of Level of Board Involvement

■ IP Litigation

■ IP Procurement and Strategy

■ Corporate IP Due Diligence

■ Board Involvement with Public Disclosure

■ Practical Tips for Directors


Overview of Level ofBoard Involvement


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■ What should the Board know about IP?

– Questions the Board should ask about IP strategyand philosophy

– Management must show it knows what is importantand why

■ Litigation and Non-Litigation

■ Offensive or defensive or both

■ Calibrated for industry, size, growth path and accounting for future changes

■ Protective versus existing and future competitors

– Hard IP assets (patents)

– Soft IP assets (brand protection)

– Issues related to trade secret protection and theft

Overview


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■ What should the Board hold management accountable for?

– Having a crisp strategy (offensive anddefensive) and executing it

– Comparing itself to competitors and industry

– Reporting meaningful information (especiallyif public disclosure will happen) on a timelybasis to the Board

Overview

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■ Practical tips for Directors

– What reports should the Board routinelyreceive?

– What is the Board not asking for but should?

– Is the Board asking the right questions to holdmanagement accountable?

– How much time should the Board devote to IPissues (absent material litigation, acquisitionsand/or divestitures)?

Overview


What the Board Should KnowAbout IP Litigation


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■ Reporting to the Board – Who reports IP matters to the Board?

– Typical Route

■ Chief IP Counsel → Gen. Counsel → CEO/Board

– Direct Reporting Not Common

■ Historically, aware of only one Fortune 200 company that had the Vice President of IPreporting directly to the Board (ITW); no longer thecase

IP Litigation


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■ What should the Board be asking about IP Litigation?

– (Plaintiff): Focus on company’s strategy:■ Does the litigation impact value of the IP?

■ Does the IP add value to the bottom line?

– (Defense): Focus on company’s strategy:■ What is the exposure (monetary/non-monetary)?

■ Factors relative to competitor vs non-competitor litigation?

– Company goals or objectives for the litigation?■ What are the goals/objectives of the litigation?

■ What guidelines are followed that have an overarching strategic impact for the company?

■ Consider the impact of litigation on company resources (time devoted by personnel, etc.)

■ Is settlement advisable, and what is the timing to broach settlement?

IP Litigation

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IP Litigation

When should theBoard ask about

IP Litigation?

When does yourBoard ask about

IP Litigation?vs.

– “Big” cases only?

– Does it depend on the adverse party?

■ Competitor

■ Customer

■ Big player

■ Former senior employee/executive

– Any adverse publicity involved?

– How does it get settled?

What enemies are you making?


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■ Does your company need Board approval to initiate litigation?

■ Should the Board ask about the cost of litigation?

IP Litigation

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■ Should the Board ask about defending litigation brought by NPEs?

– Depends if NPE litigation impacts the biggerstrategy picture of the company

■ Depends on the number/impact of troll cases

■ Nature of the technology of the patents-in-suit

■ Board more concerned once discovery begins (i.e., disclosure of information, employee time devotedto litigation)

■ Does the Board get involved in lobbying?

– Not per se, but some policy issues may havean impact on the company’s bottom line

IP Litigation


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■ What should the Board hold management accountable for regarding IP Litigation?

– Reporting meaningful information:

■ Status updates of important litigation (i.e., cases involving customer, any adverse publicity, etc.)

■ Litigation that involves a significant product or service of the company

■ Budget information

■ Information on whether exposure is significant and factors that impact the exposure

■ Details of cases need not be communicated

IP Litigation

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■ IP Litigation by the numbers

– Patent holder success rates

■ Overall: NPEs – 24%; Practicing entities – 34%

■ Trial cases: NPEs – 65%; Practicing entities – 66%

– Litigation duration

■ Median time to trial is between 23.5 – 30 months

■ Considerable variation across jurisdictions

IP Litigation


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■ IP Litigation by the numbers

– Patent Damages Awards: PwC 2013 Study– The median damages awarded by courts has declined:

■ $4.9M from 2007-2012; $6.5M from 2001-2006; $5.4 from 1995-2000

■ Although three of the biggest damages awards came in 2012 (Monsanto v.DuPont, Apple v. Samsung, and Carnegie Mellon Univ. v. Marvell)

■ NPEs had much higher median damages awarded from 1995-2012:

– NPEs – $8.9M (all NPEs)

– Company NPEs – $11.2M (excluding universities, non-profits and individuals)

– Practicing Entities – $5.4M

– Reasonable royalty is the most predominant measure ofdamages (in part due to the volume of NPE litigation)

– Lost profits■ Complex and expensive to analyze

■ Patent holder may not want to produce certain financial information

■ Entitlement may be difficult to prove due to non-infringing alternatives (hypothetical and actual alternatives in market)

– Damages for price erosion have become “almost non-existent”

IP Litigation

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What the Board Should KnowAbout IP Procurement and Strategy



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■ Is the company spending enough on IP? Or spending too much?– 2013 AIPLA Report of the Economic Survey

■ Average (mean) corporate IP budget for 2012: $7.5M

■ Breakdown by technology focus (excl. litigation):

■ About 40% of respondents had an increase in budget compared to 2011; just over 40% saw no change in budget

IP Procurement and Strategy

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Source: Booz & Co.’s 2013 Global Innovation 1000 Report


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Source: Booz & Co.’s 2013 Global Innovation 1000 Report

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■ What questions should the Board be asking about IP Strategy?

– Focus: What is being spent on IP, and how is thatrelevant to what IP is being procured?

■ How is your company positioning its IP portfolio within your industry?

■ Board questions should go beyond merely a numbers game

■ Patent quality is more important than patent quantity

– Does your patent portfolio read on what the companyis doing? On what competitors are doing?

■ Is what you’re protecting aligned with the company’s own products/services and/or what the competition is doing?

– Patent protection vs. public disclosure

– Patent protection vs. trade secret protection



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■ Is your IP strategy in line with patenting trends?


Trend > more China

What is your company’sglobal footprint?

International filing activity: 50% of respondentsfiled more than half of their patent applicationsoverseas in 2012. This is a 20% increase from2011, reflecting the growing importance ofinternational patent protection among U.S.Companies.

2002-2007

2007-2012

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■ Monetizing IP should be discussed by the Board

■ Not because the company is going to monetize, but rather because others are going to try

■ What is the value of your IP portfolio?

– Examples:■ Google → Motorola Mobility: $12.5B sale (IP valued at $4B,

for 17k patents and 7.5k applications)

■ Microsoft → AOL: $1.1B for 925 patents

■ Rockstar (Apple/Microsoft/RIM/Sony/Ericsson) → Nortel:$4.5B for 4k patents

■ Lemelson: Collected over $1.3B in royalties

■ How does your strategy add to its value?



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■ What questions should the Board be askingabout Brand Protection?

– Brand value increasedduring economic “down”years

– Brand protection isrelatively cheapcompared to patentprotection


Top 10 Most ValuableGlobal Brands

Source: BrandZ™ Top 100

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■ What should the Board hold management accountable for regarding IP Strategy?

– Compare itself to competitors and the industry

– Report meaningful information

■ Information that will be publicly disclosed

■ Budget information

– Management must show it knows what isimportant and why

■ IP strategies vary by industry and size of company

■ IP valuation updates and monetization ideas (e.g., cross-licensing of IP)



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■ IP Procurement and Strategy by the numbers

– Breakdown of Corporate IP types of work


Source: AIPLA Report of the Economic Survey 2013

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What the Board Should KnowAbout Corporate IP Due Diligence



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■ What questions should the Board be asking about corporate IP due diligence?– Board involvement with all major acquisitions

and divestitures

■ What should the Board hold management accountable for regarding due diligencematters– Properly valuing IP that the company is purchasing

– Explaining how the company is protecting its IP

– Assessing the value extracted from sold IP assets

Corporate IP Due Diligence

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Board Involvement withPublic Disclosure



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■ Sarbanes-Oxley Filing Requirements:

– IP Holdings■ Form 10-K, Item 1: “…to the extent material to an

understanding of the registrant’s business taken as a whole,the description shall include . . . the duration and effect of allpatents, trademarks, licenses, franchises, andconcessions held.”

– IP Litigation■ Form 10-K, Item 3: “Describe briefly any material pending

legal proceedings, other than ordinary routine litigationincidental to the business, to which the registrant or any of itssubsidiaries is a party . . .”

Public Disclosure

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■ There is an inherent tension between the Sarbanes-Oxley Act and valuation of IP

– The SEC is trying to push for more disclosureof litigation/settlements etc.

– Most Boards want to avoid public disclosureof settlements

Public Disclosure


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■Public disclosure of IP Holdings

–Detailed vs. General

■Public disclosure of IP Litigation

–Detailed vs. General

Public Disclosure

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Practical Tips for Directors



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■ What reports should the Board routinely receive?

■ What is the Board not asking for but should?

■ Is the Board asking the right questions to hold management accountable?

■ How much time should the Board devote to IP issues?

Recap – Practical Tips for Directors

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DIRECTORS N DI NISTITTE ExecutiveD ExchangeI · – 2013 AIPLA Report of the Economic Survey...

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