IP in times of crisis

Updated: Apr 6, 2020

In the last 100 years, the world has been marked by crises, namely the Great Depression, World War 2, the civil rights movement, the space race, as well as a series of different epidemics (e.g., HIV/AIDS, Ebola, Zika) and pandemics (e.g., H1N1). History has shown that “crises are periods of significant innovation[1],[2],[3]. Some notable “recession inventions”[4] include Scotch Tape, the iPod®, fluorescent light bulbs, among many other research activities in a variety of industries (nuclear, pharmaceutical, mechanical, etc.), each of which were subject to one or more of the usual forms of intellectual property (“IP”) rights (e.g., patents, trademarks, copyright, trade secrets, etc.).

IP as an economic driver and mitigator of the impact of an economic crisis

Many of these “recession inventions” as well as IP, at large, may act as economic drivers, moving “productivity and income growth forward”[5], with “greater levels of technology transfer and increased domestic inventive activity”[6]. Based on 2010 figures, and in the U.S. alone, “IP-intensive industries accounted for USD 5.06 trillion in value added, representing 34.6 percent of U.S. GDP and directly supporting 27.1 million jobs.”[7] Considering the value of IP, it could “[…] give enterprisers a kind of business stability. Times like these encourage innovation, new ideas, methods and IP based activities”[8] as well as “[…] mitigate the impact of economic crisis”[9].

IP as an asset and IP-based financing models

In most cases, a company’s most valuable asset is its IP portfolio. This IP portfolio, or portions thereof, can be used to secure funding for different reasons, including new R&D activities. In this regard, several IP-based financing models can be considered, including, for example:

  1. IP and equity finance;

  2. IP and debt finance (e.g., loans, wherein IP can be pledged as collateral in a loan agreement, and “IP sale and lease-back”), amongst

  3. other models.

As noted, in part, by Ogier[10], the benefits and challenges of IP-based financing include:

Benefits of IP-based financing

  • Potential for value appreciation – the IP assets of a well-run business increase in value over time, whereas the value of most tangible assets depreciates;

  • A wider pool of assets – lenders often face situations where “good” customers want to borrow more than allowed by established asset lending ratios. The value of core intangible assets provides a means to lend more with additional security;

  • Stronger repayment incentives – where intangibles comprise the essential component of business activity, they provide a powerful incentive for borrowers to honor repayment commitments;

  • Improved security – defining intellectual assets as part of a lending agreement puts a bank (or lender) in a stronger position in the event of financial difficulties; and

  • Alternative to personal guarantees – IP and intangibles provide an additional source of security that is directly related to a company and not an individual, thereby making it easier to recover funds if necessary.

Challenges and risks associated with collateralizing IP rights

  • Visibility of IP assets - the significant investments made in internally-generated IP rarely appear on company balance sheets. Company directors need to understand and explain the value of their intangible assets in a way that allows lenders to understand it, ultimately resulting in a more representative picture of company resources and value;

  • Understanding value/managing risks - the value of some intangible assets, such as brands, can change rapidly in line with company fortunes, as well as expenses relating to maintaining the validity of IP rights;

  • Defaulting - defaulting on the loan could result in the forfeiture of your IP rights, and leave you with little to no assets;

  • Limited number of creditors - there is a limited number of lenders and/or creditors in the market; and

  • Valuation - it may be difficult to arrive to a sound valuation of the IP rights.

So, in times of adversity, where does innovation come from?

  1. Change. “In times of growth or recession ideas and opportunities are everywhere. They may look different or be directed towards different goals, but a creative mind can find ways to use whatever energy is in the air to support their ideas.”[11] In other words, individuals will look for change  the betterment of their lives – and will ultimately innovate;

  2. Understanding and satisfying customers’ changing needs[12];

  3. Finding small solutions to big problems - “small innovations can be huge” [13] because they are usually more affordable to create, and they respond better to consumer priorities. However, if possible, they should be protected by a form of IP (e.g., patent, trademark, copyright, etc.) as well; and

  4. Leadership and business advisory.

For more information regarding our legal and business advisory services, please contact us.

[1] https://www.theatlantic.com/national/archive/2009/07/innovation-and-economic-crises/20576/. [2] FILIPPETTI, A., ARCHIBUGI, D., Innovation in times of crisis: National systems of innovation, structure and demand, Research Policy, vol. 40, issue 2, March 2011, pages 179-192, available at: https://www.sciencedirect.com/science/article/abs/pii/S0048733310001794 and http://www.danielearchibugi.org/downloads/papers/2017/11/striking.pdf. [3] PECKHAM, R. (2013) Economies of contagion: financial crisis and pandemic, Economy and Society, 42:2, 226-248, DOI: 10.1080/03085147.2012.718626, available at: https://www.tandfonline.com/doi/full/10.1080/03085147.2012.718626. [4] https://www.thestreet.com/personal-finance/coolest-products-released-during-recessions-html. [5] Enquiries Into Intellectual Property's Economic Impact, OECD (2015) available at: http://www.oecd.org/sti/ieconomy/KBC2-IP.Final.pdf. [6] GOLD, R.E., et als., Does Intellectual Property Lead to Economic Growth? Insights from an Improved IP Dataset (May 31, 2017). Regulation & Governance (2017) DOI: 10.1111/rego.12165. Available at SSRN: https://ssrn.com/abstract=2978025. [7] https://www.wipo.int/wipo_magazine/en/2016/01/article_0002.html. [8] CHOPRA, S., NEGI, A. , Role of Intellectual Property during Recession, Journal of Intellectual Property Rights, Vol 15, March 2010, pp 122-129, available at : http://nopr.niscair.res.in/bitstream/123456789/7621/1/JIPR%2015%282%29%20122-129.pdf. [9] Id. [10] See note 7 above. [11] https://hbr.org/2008/10/how-recessions-drive-new-ideas.html. [12] https://hbr.org/2008/06/recession-the-mother-of-invent. [13] https://hbr.org/2010/11/finding-competitive-advantage-in-adversity.

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