Bearing the Bear Market: Article 3

As economists warn of an imminent economic recession, companies should take the time now to consider their Intellectual Property (IP) strategies and determine how to preserve legal spend while simultaneously adding value to their IP portfolio.

With these considerations in mind, there are a few strategies that can be put in place early on to help recession-proof an IP strategy. This should include evaluating the company’s product roadmap to identify high-value assets, managing legal spend through rebalancing trade secret and patent protection, and implementing risk mitigation measures regarding company IP prior to reductions in force (RIFs).

Evaluate Product Roadmap to Prioritize High-Value Assets

Even in bull markets, companies should routinely evaluate their product roadmap to determine what is currently in development as well as the pipeline for future iterations and releases. This is even more important in bear markets, where competitive advantages and differentiators can be make-or-break for a company. Part of this evaluation includes a cost-benefit analysis between the cost of procuring the IP protection on a given technology or feature and the benefit of having enforceable IP rights.

Identifying High-Value Assets

To identify high-value assets suitable for IP protection, a company should look both at 1) the commercial value of a particular functionality or feature as compared to the product offering, and 2) the likelihood that a competitor will implement a similar functionality or feature. Innovations meeting one or both of these criteria should be flagged for potential IP protection.

Once a list of potential IP assets has been identified, the company should then categorize the assets according to level of importance. While this may seem like a subjective task, a given asset can be ranked by applying objective criteria. For example, the objective criteria can include weighing the following factors:

1. Detectability, or how likely it is that the company can identify the corresponding functionality or feature in a competitive product
2. Available Alternatives, or whether there are any reasonable alternative implementations that can satisfy the same function or feature
3. Criticality, or how necessary the function is to the system as a whole

As criticality and detectability increase and the number of available alternatives decrease, the level of importance correspondingly increases.

A similar evaluation can be made for existing IP assets. Especially during bear markets, companies should evaluate existing assets to determine whether maintaining such assets is still valuable to the company. For example, a feature or functionality that might have been a higher priority five years ago may have been phased out or is otherwise no longer in service.

Managing IP Legal Spend

Once high-value IP assets have been identified, companies can prune their portfolio as a quick way to manage legal spend. This can include targeted abandonment of pending patent applications covering lesser-value IP assets as well as foregoing payment of maintenance fees. Additionally, to the extent that the portfolio has foreign and domestic IP assets, similar analysis and pruning can be performed on foreign assets.

Where the company has high-value IP assets that are appropriate for protection, an option exists to file lower cost patent applications (called “provisional patent applications”) as a way to defer more extensive preparation and filing costs for a year.¹ In this way, provisional patent applications can offer a low cost solution that simultaneously preserves patent rights.

Rebalancing Between Patent and Trade Secret Protection

As part of developing an IP strategy, companies should have a litmus test for determining whether to maintain an innovation as a trade secret or to pursue patent protection. When rebalancing between these two options, while outliers may not significantly impact the bottom line, the bulk of the innovations could fall in the “maybe” range where they could be protected through either approach. Prioritizing the management of legal spend, however, can result in an organization choosing trade secret protection over patent protection.

Cost Considerations When Seeking Trade Secret Protection

It is important to note that, while trade secret protection itself is low cost, having the necessary processes and training in place to ensure that an innovation is maintained as a trade secret can be much higher. Typically speaking, maintaining additional trade secrets does not significantly impact the bottom line because the same processes and training can be applicable across any number of trade secrets. In these instances, given that the cost of training and processes would be frontloaded for any initial trade secrets, maintaining a greater number of trade secrets would result in a significant reduction in legal spend.

Word of Caution When Considering Trade Secret Protection

The rebalancing should take into consideration factors which weigh more heavily in favor of patent protection. Applying an over inclusive rule to forego patent protection on all innovations in favor of trade secret protection could result in a loss of IP rights down the road. For example, innovations which can be reverse engineered with relative ease are not appropriate for trade secret protection, regardless of the cost saving benefits. This is because a competitor can independently derive the same innovation, thus defeating your trade secret protection. As such, even if a company is rebalancing between patent and trade secret protection, it is important to consider factors which ensure that the innovations are suitable for trade secret protection – particularly for high value IP assets.

IP Risk Mitigation Measures Surrounding Layoffs

Reductions in force can cause consternation for many reasons. Outside of those that are obvious and impact both employees and the employer alike, layoffs can also expose a company to significant IP risks. Accordingly, it is important to have risk mitigation measures in place which begin at the start of employment and run through exit. While companies may be most concerned about employees leaving the company with confidential information in connection with downsizing, the process of ensuring a smooth departure begins at the time of hire and relies on a partnership between operations and human resources.

IP Considerations throughout Employment Term

At the time of hire, the first step is making sure all employees sign the appropriate documents to protect the company’s IP, including its trade secrets and confidential information. This is also the prime opportunity to ensure all invention assignment agreements are properly secured. The second step is to educate employees on what they are agreeing to. It does not require a comprehensive study to know that most employees do not carefully read all onboarding documents or even open the handbook. For this reason, human resources or another team member must discuss these agreements with the employee. Educating personnel is a key, but often underused, tool in preventing the outflow of sensitive information. This education should be ongoing, with regularly scheduled training, to ensure that employees understand their obligations throughout the duration of their employment. Good faith mistakes, for example, can be avoided by helping the employee understand their obligation. A common misconception is that “if I worked on it, it’s mine to take.” The reality is that any work done on behalf of the employer belongs to the business. However, a company that fails to educate its employees leaves the door open for a good faith mistake to turn into a capital problem.

Steps to Preserve IP when Layoffs are Anticipated

When a company anticipates layoffs in the near future, it should be proactive in ensuring that all IP assets have been flagged and properly assigned. This could include performing an “invention harvesting” session with employees to identify any recent developments or new innovations that are suitable for IP protection, and potentially file provisional applications as appropriate. Additionally, the company should ensure that all assignment agreements have been executed by the employees which are likely to be laid off.

At the time of exit, and especially during layoffs, human resources should have this conversation with employees again. An educational, rather than threatening, approach is advised, and amnesty should be offered. The conversation should enable and encourage an employee to report what they might have done in error, cure the problem, and leave on good terms. For employees with particularly sensitive access or roles, companies typically employ a “trust but verify” approach. After the exit interview – which should include a confirmation that the employee is not departing with any company property, intellectual or otherwise – IT may review the employee’s email box, hard drive, or other communication or storage media to determine if any misappropriation occurred. In the event IT finds an anomaly, it is critical to act fast—it is always preferable to stop the harm before it happens.

As good employee hygiene gets baked into the company’s culture, the discussions become easier and communication more candid. Companies with valuable data should undertake regular review of employee-related agreements to ensure they remain compliant and up to date, and train human resources on the technical and employee-relation approach to protecting IP. For more information on how to navigate workforce reductions, please see our article Employment Dos and Don’ts When Implementing Workforce Reductions.

Conclusion

In conclusion, companies should continue to look for ways to optimize their legal spend by protecting high value assets and shifting the balance between trade secret and patent protection as the economy heads towards a bear market. If and when workforce reductions are anticipated, they should further implement risk reduction measures to ensure that IP assets are retained and secured for the company.

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