Covid-19 and the management of intangible assets
17 April 2020
Covid-19 has ushered in an evolving “new normal” for companies and businesses. The ensuing economic decline, which will face most countries, also ushers in a new winter of disquiet and discontent, possibly of long duration.
An organisation’s management of intangible assets (“IA”) would include both intellectual property (“IP”) assets and other assets such as data, knowhow and goodwill. The latter assets may not fall neatly into a classification for rights protection, but would nevertheless carry sufficient value to matter to an organisation.
During this period when government measures stipulating safe distancing are in place, businesses and employees have to operate from home, and anticipate falling revenues, recurring fixed costs (e.g. rent and salaries) and other regularly occurring expenditure, as well as deal with disrupted supply chains and third party vendors going into liquidation or unable to effect proper contractual performance. There is a general trepidation that in these dynamic and uncertain times of flux, businesses would not be able to optimise efficiency and liquidity.
When so many imperatives rally for attention, it may not occur to business leaders to revisit or address for the first time, the management of IA. It is timely now to address the management of IA for the following reasons:
- Increased liquidity (through costs management)
- Risk management
- Optimising dispute resolution outcomes
These considerations should undergird a larger strategy review for any organisation to face a post-Covid-19 economic landscape with measured alacrity, confident in the knowledge that best endeavours have been exercised to manage longer term liquidity and cash flow against falling revenue and rising costs (also buttressed by government support and stimulus measures).
Liquidity and cash flow
Review registered IP
To increase cash flow and liquidity during this period of restricted movements, businesses need to review their registered IP, such as trade marks and patents, to see if further economies can be pursued.
- For trade marks, it may be timely to review historical and current filings and registrations, to see if the portfolio can be further rationalised, so as to purge it of dated trade marks and specifications. Unnecessary renewals should not be pursued, and this is an area where if nothing is done, renewal fees fall to be due every ten years for posterity (subject to continued genuine use). Organisations should legitimately question the currency of the portfolio in relation to current branding strategies (lawyers and trade mark agents must realise that very often the branding function sits differently, but at same time is not divorced from trade mark protection).
- For patents, the monetary choices are even more compelling. Should an organisation continue to maintain a patent “in force” with continued annuities until the end of the 20-year patent term (bearing in mind that annuities increase in quantum leading up to expiration), or should a decision be taken to recognise an end-of-life within the first ten years of the date of grant? Further questions need to be asked. Should patent families be trimmed? Should standard essential patents be identified, ring-fenced and set apart for the purposes of industry?
The territoriality of IP rights dictate that these questions should also be asked at a jurisdictional level, and in tandem with commercial decision making, such as the shifting or downsizing of manufacturing and supply chain rationalisations.
With registered IP, there are obvious billing “milestones” (e.g. after filing, after office actions, publication and grant) which IP owners should reassess with their IP agents to see if the billing cycles can be adjusted to maximise an organisation’s liquidity. Instalment payments or separating of disbursements (e.g. official filing fees) from professional fees may be suggested as “tie-overs” during the Covid-19 period. If more flexibility is shown in this process, it may be less forbidding for any organisation to confront its overall IA costs. The exercise may be rendered far easier given that many IP offices in the world have announced extensions of time for business transacted under principal statutes to be deferred for fixed periods of time. In Singapore, the Intellectual Property Office of Singapore Registries Practice Direction No.1 of 2020 provides broadly for an extension of time for all business transacted or are due to be transacted in the time frame of 7 April to 7 May 2020. Other IP offices across the globe have also issued equivalent or comparably similar directions. These extensions of time will push back the time frames for official fees to be paid, and should be considered when strategising to maximise liquidity.
IP management software solutions
For experienced IP service providers, we typically deploy IP management software solutions to assist with prosecution and management of IP rights and IA generally. In times of crisis, the challenge is to move all processes online and a well managed and maintained software solution supports this endeavour. We now run our IP practices online. It is a capability which we hope our clients will appreciate as there is no diminution in service quality or client attention. Above all, the considerations discussed here are well served by an up to date state of the art system, which will facilitate the right decisions to be taken during the Covid-19 crisis, and beyond. The challenge that remains must be that the costs of IT systems and management solutions should not be passed on to the customers, for these costs move against the greater priority of liquidity, which we must champion on behalf of our clients. To recover the capital expenditure for the development or acquisition of a system, the costs incurred should be amortised over an extended period of time. This is done in the greatest consciousness of the current circumstances.
Risk management
For acquired IA, the challenges facing an organisation would include recovering the carry-on value of the asset in question. Many organisations are and will be brought to the point when an impairment assessment will have to be made, which is based on the higher of fair value less costs of disposal, and the value in use, i.e. the present value of future cash flows that are expected from the IA in question. By definition, these calculations will yield low valuation outcomes for many organisations.
In the current Covid-19 season, it would be timely to revisit valuations and streamline the current IA class. The measures that assist liquidity and cash flow also contribute to the impairment assessment for organisations. Driven by necessity, the IA base should be valued every six months, against changing assumptions during the current turbulence. The management’s imperative is to evaluate how these assets should continue to feature in the balance sheet.
Where loans have been taken against IA as security or collateral, a serious exercise of evaluating whether loan defaults is a real possibility. Such an event can potentially knock large segments of the IA base, which in turn would translate to a negation of commercialisation and short exploitation of the asset concerned. Where IP or IA licence agreements are used for collateral, a proactive discussion with licensors would be timely. The key question is whether the licence agreements can ultimately survive an insolvency event that may visit upon the licensor.
Concurrent with other audits that will be run by an organisation, a targeted audit of contracts that contain IP or IA clauses and obligations should also be undertaken. Know how transfer agreements and data transfer agreements are particular candidates for critical evaluation. IA that are not in rem rights (like IP) would be vulnerable to in personam liabilities, vitiations, and invocation of force majeure, particularly in a down market. The best recommendation would be to review these contracts systematically and proactively engage counterparties. This is preferable to managing later insolvency or litigation scenarios which would potentially drain more liquidity. It is also possible for such agreements to be determined as “onerous contracts” under International Financial Reporting Standards (where the costs of performance of contractual obligations exceed the economic benefits that are received), which from an accounting perspective, may also lead to provisioning and potential impairment loss on the asset in question. This is a serious and necessary exercise for organisations, which should be undertaken sooner rather than later.
Optimising dispute resolution outcomes
In this Covid-19 climate, organisations should reassess ongoing litigation matters and prospective disputes. For IP disputes, certain statutory time frames are unavoidable and will remain in force, e.g. patent linkage actions, where litigation may have to be commenced after marketing approval is sought for a drug to be sold in the market. An action has to be commenced within a specified time and is stipulated to conclude within a 30-month time-frame. Many court litigation actions have been deferred for new timelines and hearing dates to be fixed (see Supreme Court of Singapore Registrar’s Circular No 4 of 2020). For more urgent cases, such as search orders, virtual hearings will be convened. Counsel are adjusting to a new paradigm, and the intricacies and nuances of online advocacy are being imbibed and improved with each “appearance”.
Clients should expect their counsel to map out any dispute over the next 12 months, factoring in contingencies and adjournments, and present an estimate of costs and disbursements that may be incurred on a monthly basis over the period. Certain milestones may lead to a corresponding monthly increase that is commensurate with the work that is required to complete the task, e.g. the preparation of affidavits of evidence in chief. Increasingly, fee-cap arrangements are also not uncommon, and should increase with the prospect of litigation budgets being scaled back amid a poor economic environment.
Apart from costs, there are also practical concerns, such as the personal service of process on registered addresses that are closed during a restricted movement period.
It is also apparent that in this Covid-19 period, more transactions are being executed online. Virtual market places, social media and other e-commerce platforms are turning into new arenas for IP enforcement. It also remains consonant with the IP portfolio review that there is adequate coverage of rights to address potential infringements and use in an online environment (e.g. registering trade marks in class 35 for online retail services, in addition to traditional goods classes). Many platforms are also offering avenues for IP infringements and IP-based violations to be surfaced. These tools also form part of the IP counsel’s arsenal, going forward.
It is also envisaged that alternative dispute resolution options such as mediation will also increase. Litigants may be more readily cajoled into (online) mediation as a means to achieve a full and final settlement, against the prospect of escalating costs should the dispute proceeds towards full resolution before the courts, and appeals that follow therefrom to the Court of Appeal.
Recent initiatives to share IP and technology
There have also been recent examples of how a pandemic re-calibrates an IP owner’s view of rights assertion and protection. This is apparent from the two initiatives discussed below.
“Open Covid Pledge”
The “Open Covid Pledge” (“Pledge”) was launched in early April this year. The Pledge encourages organisations to grant free and temporary licences to use their patents and copyrighted technology to end the pandemic. Intel has joined the pledge as a founding sponsor, offering its global IP portfolio (more than 72,000 patents) to scientists and researchers, in addition to a pledge of $50 million. The import of the Pledge is that scientists and researchers can undertake unencumbered research without the fear of IP assertion.
“Covid-19 Technology Access Framework”
In a similar vein, Harvard University, Massachusetts Institute of Technology and Stanford University have established a “Covid-19 Technology Access Framework” (“Framework”). The Framework comprises a set of technology licensing principles which are aimed at incentivising broad access to university innovations during this pandemic.
Each of the universities would implement technology transfer strategies to allow for the rapid use of available technologies that can prevent, diagnose and treat the coronavirus. The Framework stipulates licensing guidelines that provide for non-exclusive royalty free licensing of technology during this period. In the downstream, the Framework also alludes to widespread distribution of resulting products at low cost.
Both the Pledge and the Framework attest to the laudable willingness of IP owners to contribute and facilitate solutions to the current uncertainties, and affirms the fundamental belief that IP stakeholders are fully prepared to share in the spirit of open innovation during periods of emergency and stringency, all in the interests of promoting broad access to resultant technologies.
During this pandemic, the imperative to manage IA is clear as is the need to optimise efficiency and liquidity, in readiness for the “new normal”.
Further information
Allen & Gledhill has a Covid-19 Resource Centre on our website www.allenandgledhill.com that contains knowhow and materials on legal and regulatory aspects of the Covid-19 crisis.
In addition, we have a cross-disciplinary Covid-19 Legal Task Force consisting of Partners across various practice areas to provide rapid assistance. Should you have any queries, please do not hesitate to get in touch with us at covid19taskforce@allenandgledhill.com.