Full Court Press for Intellectual Property
By Tim Lovoy, Managing Partner, Deloitte & Touche

The number of intellectual property (IP) lawsuits in the news seems dizzying. Currently, the highest profile is SCO Group's $3 billion suit against IBM, which it claims moved Unix code into Linux. This past summer, IBM filed a countersuit and Red Hat also filed suit against SCO. Meanwhile, Cisco is suing Huawei Technologies of China for blatant copying of software code, user manuals and other intellectual property.

While all these announcements make it seem as though the lawyers are the only ones doing business anymore, in reality lawsuits are usually seen as the last resort among companies that want to protect their IP. It's costly and time-consuming, and a jury verdict can be unpredictable at best.

So, when a company believes that there is a problem-unpaid royalties, a misuse of a patent license or a suspected copyright infringement-there's a lot of evaluation and preparation that takes place to determine what the strategy should be to right the perceived wrong.
Generally speaking, companies have spent a lot of money to develop intellectual property and they realize that they have to protect it as a part of their business's best practices. It's part of their fiduciary responsibility.

Thou Shalt Not Steal
Outside of the courtroom, experts in this area shy away from referring to any of these issues as "IP theft," wanting to avoid the connotations of criminal activity. Inside the courtroom's a different story. When it comes to questionable practices in areas of trademark, patent, copyright or trade secrets, the goals are nevertheless to root them out so that the IP owners can determine how best to proceed.

One way that companies keep an eye on how well licensees are complying with their agreements is to review the licensees' annual reports or other SEC filings. If numbers don't look quite right, it might trigger an audit. Whether unintentional or truly audacious, suspected noncompliance does require that kind of investigative work. In an agreement between parties, there are usually audit provisions which give the licensor a right to audit the licensee if they suspect a problem.

Although audits can be costly, most cases will identify more than enough unpaid royalties to pay the audit fees. It's key to get information ahead of time rather than asking for it once on site as it is an expensive process. It's common that everyone's on good terms and licensees believe they are compliant. Only when you start digging around do skeletons come out of the closets. Often licensees will realize there's a problem and come clean and offer to cut a check.

To Sue or Not to Sue
Even bad news isn't an automatic litigation instigator. Most executives try not to create an adversarial situation in any event, especially because litigation is expensive. Indeed, once the facts are in hand, business executives need to know what exactly they want to achieve as they move forward, especially if they're contemplating a lawsuit.

According to a recent American Intellectual Property Law Association survey, the costs of litigation can run from about $249,000 for a copyright infringement suit in which less than $1 million is at risk, to $3.9 million for a patent infringement suit in which more than $25 million is at risk.

Ultimately it comes down to something for the courts, a matter of creating law, or a case of negotiation.

Typically once a suit is filed, other alternatives develop, including a range of dispute resolution venues such as mediation (non-binding) or arbitration (binding).

Between 90 and 95 percent of cases settle. Sometimes the parties are able to achieve an agreement between themselves, sometimes through a mediator. What you get with a settlement is certainty. And, sometimes the settlement happens after the jury makes its decision.

Worldly Complications
Resolving IP complaints can be even more challenging if the problem takes place outside the United States, particularly in Asian countries. As part of joining the World Trade Organization in 2001, China, for instance, agreed to change its commerce-related laws to conform to worldwide norms, including those addressing IP infringement. However, enforcement is still in question.
Madrid Protocol, an international treaty that facilitates protection of U.S. trademarks throughout the world, is a good start in standardizing protections globally. Starting in November, a U.S. trademark owner will be able to file a single online application with the U.S. Patent and Trademark Office, pay a fee, and potentially obtain protection for its mark in any or all of the 58 Madrid Protocol member countries.

Companies have to pay attention to cultural differences when entering into agreements with companies in other countries. The trend is that we are a global marketplace and economies are emerging from third-world nations that are embracing capitalism but not intellectual property rights. So, you need to have an equity position in the company you're doing business with to have someone watching the register.

Tim Lovoy is the managing partner of Deloitte & Touche's Pacific Southwest Technology, Media & Telecommunication (TMT) practice. Tim can be reached at (213) 688-6543, or via tlovoy@deloitte.com.

Take me back to the SCribe - March 2004

Site Hosted by