Death, taxes and patent risk

Benjamin Franklin declared death and taxes as the only things certain in life. As we enter the fourth industrial revolution, patent risk can be added to the list. At a time where it is intangible assets that make up the bulk of enterprise value, it should be a boardroom priority to understand new sources of risks facing the organisation and to ensure that appropriate resources are deployed to manage and mitigate that risk. 

So what is patent risk and how best should it be communicated to the board?

Quantification

A common way business risks are assessed is to identify all events that could impact that risk area and then score each event by combining both likelihood of occurrence and impact of the consequences. The same approach can be applied to patent risk.

Risk = Likelihood x Impact

By scoring each independently on a scale of 1-5, risk can be represented in a risk matrix, illustrated below:

The scores are Likelihood x Severity (25 being a risk which is both certain and catastrophic). The approach enables each of the patent risks to be ranked in a way that can readily be communicated. For example, for a hypothetical high tech company:

Intrinsic Risk might score 6, being the result of a Possible risk (the validity of patents are frequently challenged) with a Minor impact (reflecting that owners often have many patents relating to a single technology)

Assertion Risk might score 15. Most high tech companies end up with a suite of licenses and cross- licences (5 for Almost Certain) and the Severity can be moderate to major depending on prevailing royalty rates and the steps that the company has taken to mitigate this risk

The same approach can be taken for more granular assessment. For example, while many companies will have many competitors on their “threat list”, the increased availability of strategic patent intelligence makes it possible to quantify the relative threat from each (refer to Beyond Portfolio Optimisation, IAM 2020).

Patent risk sits at the heart of IP strategy

It would be tempting to read the news of $1B+ patent awards against Cisco and Apple and believe that patent risk only hits large companies. This is not true. The hallmarks of a company with high risk are growing revenues and a small patent portfolio. It is this set of companies who are typically the disruptors and in the public eye. This puts a target on their back.

While it’s great to see the rise of IP strategy, there are still too many companies who fail to prioritise the risks patents pose. What’s missing is a better understanding in the boardroom of the magnitude of the risk and the proven strategies for mitigating that risk. There are still too many companies where patents are seen as a cost, without full appreciation of the value they deliver. In this context, value is not a hypothetical. It can be calculated and communicated using strategic patent intelligence. Companies who adopt this approach typically prioritise investment in patent portfolios, favouring this approach to dealing with patent litigation at an inconvenient time. Which is always.

As part of our research into the quantification and mitigation of patent risk, we conducted a global survey and the Key Findings are available to download here. A more detailed analysis of these findings will be published in IAM shortly and the full Cipher Report on Patent Risk will be published in November.

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