Among the educational resources offered by the Society are the Mission:Intangible® Monthly Briefings. These one hour events, moderated by Mary Adams who chairs our Member News Committee, comprise about 45 minutes of prepared remarks backed up by presentation materials, and 15 minutes of responses to questions submitted by listeners. Often, because of time constraints, there are questions leftover.

The 8 January 2010 Mission: Intangible Monthly Briefing comprising a robust panel of Society committee chairs evoked many questions. As promised, here is the third and final potion of leftovers.

QUESTION TO JUDY GIORDAN: You talked about capturing the value from open innovation. When companies do this, do they see it in terms of the relationship with IA management? Does the question matter?

ANSWER: The concept behind Open Innovation (a term promoted by Henry Chesbrough, a professor and executive director at the Center for Open Innovation at UC Berkeley) is that companies can and should use external ideas as well as internal ideas and paths to market. As described by Chesborough and others, central to open innovation is that in a world of widely distributed and ever increasing information and knowledge, companies cannot afford to rely entirely on their own internal research, but should instead buy or license processes or inventions (e.g. patents) from other companies as well as find opportunities for internal inventions not being used in a firm's business to be commercialized outside the company (e.g., through licensing, joint ventures, spin-offs).

Explicit to all of this is the IP question – who owns the rights to the IP of the technology – and this is the aspect being focused on by companies. What is implicit and is an opportunity that is not being capitalized upon is for reputation enhancement from the standpoint of IA around open innovation. That is – demonstrating that the ability to creatively and facily interact in the open market for innovations creates a competitive edge for a company –by capturing value through the process of bringing in technology, aligning it well to corporate goals and monetizing as well as process of spinning out unused technology.

Judith Giordan.
Steel City Re

QUESTION TO DAVID HETZEL: You talked about the market for patents maturing. Is this something that will happen organically or can it be speeded up? If so, how?

ANSWER: The re-institutionalization of the public, real-time live auction ala Ocean Tomo would assist. Now that OT auction are under the umbrella of ICAP, we'll have to see what they do. ICAP, as you may know, has tremendous resources. I'm sure standardizations around patent quality and valuation would go a long way to accelerating the market's development.

David Hetzel
Motorola

Among the educational resources offered by the Society are the Mission:Intangible® Monthly Briefings. These one hour events, moderated by Mary Adams who chairs our Member News Committee, comprise about 45 minutes of prepared remarks backed up by presentation materials, and about 15 minutes of responses to questions submitted by listeners. Often, because of time constraints, there are questions leftover.

The 8 January 2010 Mission: Intangible Monthly Briefing comprising a robust panel of Society committee chairs evoked many questions. As promised, here are some more of the leftovers.

QUESTION TO JON LOW: You talked about how we shouldn't look to the accounting profession for support on intangibles yet you also call for comparability. If we don't get this from financial data, where will we find it? What will it look like?

ANSWER: Useful, comparable data supporting the growing economic importance of intangibles will most likely come from practitioners who perceive a financial benefit to themselves. Historically, this is where such innovations have come from as opposed to regulators or stolid, conservative and internally conflicted practitioner groups like the accountants. In the case of comparable data for intangibles we are already seeing growing interest in certain segments like reputation, brand and R&D as a proxy for innovation. Sustainability in its various manifestations is also gaining as a topic of interest.

From these basic roots, successive branches will grow as more factors become important to more industry segments. For instance, once M&A activity revives, data on post-merger integration success or failure – already a subject of considerable research – will probably also blossom.

It would be nice to think that some supra-national organization like the UN or OECD will take the lead, but they see no financial incentive or moral imperative to do so. Self-organized groups like WICI might have been able to lead had they adopted a more open-source approach, but they appear to be pursuing the secretive ‘let’s corner the market and see how much we can charge for our insights’ approach that has failed repeatedly in the past. Any group wedded to a particular technology or set of what they hope will be patented-able processes are similarly doomed because the market is simply too dynamic and unmanageable at this stage. Again, this is not a philosophical, political or doctrinal point of view, it is simply a reflection of natural phenomenon based on historical experience.

When comparable data emerge I believe they will look like the sort of ratios and benchmarks that managers use as a practical means of evaluating their performance. This is in contrast to the increasingly ambiguous or obfuscated metrics served up by GAAP or international accounting standards. The basis of intangibles importance to managers is their usefulness in evaluating and predicting performance, not in enabling arcane acts of financial sleight of hand. It is this usefulness that has prevented their oft-predicted demise and will support their ultimate adaptation.

Jon Low.
Predictiv

QUESTION TO NIGEL PAGE: You predicted a convergence of IP and IA/IC. I agree with you although in my experience, many folks in the IP space have a very strong prejudice that leads them to think (and often say) that intangibles outside of traditional IP (patents, trademarks, copyrights and trade secrets) have limited value. How do we cross this chasm?

ANSWER: I suspect that the events of the coming few years will see this prejudice start to disappear. Most organisations are likely to refocus their priorities as they emerge from recession and, as they do so, they will begin to pay far greater attention to the whole range of intangible assets they own, as well as the potential for monetising these assets. At the same time, CIPOs (or equivalent) will increasingly realise that the best way to secure C-suite attention for their efforts will be to make sure that they incorporate IP into a broader reputation-based 'package'. CEOs will sit up and pay attention to IP if and when they can be made to understand that it is a cornerstone of their corporate reputation, and not a techy side-avenue that's best left to in-house counsel.

Nigel Page
Intellectual Asset Management Magazine

Among the educational resources offered by the Society are the Mission:Intangible® Monthly Briefings. These one hour events comprise about 45 minutes of prepared remarks backed up by presentation materials, and about 15 minutes of responses to questions submitted by listeners. Often, because of time constraints, there are questions leftover.

The 8 January 2010 Mission: Intangible Monthly Briefing comprising a robust panel of Society committee chairs evoked many questions. As promised, here are some of the leftovers.

QUESTION TO CATHY REESE: Your comments about the concept of director's duty of oversight driving greater attention to intangibles management are intriguing. Must a new area like this be built case by case or can there be a catalyst that speeds up the process (such a new set of laws and/or regulations). Is this reasonable to expect in the space of the next ten years?

ANSWER: Directors and officers currently have an affirmative duty under Delaware fiduciary law to oversee and monitor corporate assets and liabilities. Delaware's highest court has said that directors and officers can be held personally liable for losses suffered by the corporation as a result of their inattention. That court has also said that directors violate this duty by failing to (i) implement "reporting and information systems and controls" designed to ferret out such risks and report them on a timely basis to the board, or (ii) failing to monitor and update such systems and controls and thus ignore red flags that can lead to corporate liability. The losses engendered by one patent infringement suit can be enormous, particularly in a wilful infringement suit where damages may be trebled because the company "wilfully" continued to infringe when it knew or should have known of the infringement. I believe that the catalyst that will speed up the process and lead to nationwide awareness that this body of law applies to IP or IA risks and losses, would be one shareholder suit against corporate directors seeking to recover from them personally these infringement damages. Another route might be a shareholder suit to recover market losses for director and officer failure to monitor or address reputational risks before they damaged the value of the company. Shareholder actions for breaches of fiduciary duties by director and officers that are filed in the Delaware Chancery Court receive nationwide attention from corporate lawyers and the boards that they advise and can lead to instant changes in board focus.

Cathy L. Reese, Esq.
Fish & Richardson P.C.

QUESTION TO MARK LUCIER: In your presentation, you made reference to “IA-based financial products and investment vehicles.” How do we position these products so as to avoid being tainted by the recent financial derivatives debacle?

ANSWER: When I was talking about financial products and investment vehicles, what I was referring to was inventing new ways to "ring fence" intangible assets and the risks associated with them, thereby enabling investors to own or finance those assets or bear those risks. The creativity and complexity, then, is more about how we isolate the assets and risk than in how we slice, dice and allocate cash flows among various classes of investors.....think of it more as creating an intangible asset tracking stock or risk-linked security than as engineering a multi-tranche royalty-based CDO or securitization. Alternatively, to the extent we're able to quantify value & risk associated with intangibles, and further, if we can somehow link that to more traditional measures of financial or equity value and risk, then that could serve as the basis for a financial product that enables a company or its outside investors to share in the value being created by the company's intangibles or to hedge against the risk associated with those intangibles.

Of course, your point is well taken that regulators and the general public are skeptical of (read: hostile toward) anything that requires more than one or two boxes and arrows to describe its structure. A financial product's purpose should be plainly evident to those on Main Street and not just to those of us on Wall Street. If we are to be successful in creating these instruments and having them be broadly accepted, our driving motivation needs to be a focus on creating something that funnels capital to intangible assets to support and encourage innovation, rather than on cleverly shuffling the capital structure deck and obfuscating the instrument's true purpose. If we approach the creation of new financial products from that perspective, then "positioning" what we've created will simply be about highlighting the substantive economic benefits, rather than hiding something from the regulators or the Wall Street Journal.

Marc Lucier
Deutsche Bank

To kick off the new decade, on Friday, January 8, we are hosting a live panel discussion among Society committee chairs about the critical intangible asset issues we will face in the '10s. Each of our chairs working in a different segment of the intangibles market will share their ideas on the most important issues. Our panel includes Scott Childers, Walt Disney Company; Marc Lucier, Deutsche Bank; David Hetzel, Motorola; Jon Low, Predictiv; Cathy Reese, Fish & Richardson; David Gould, Buchanan Ingersoll; Andy Gibbs, Andy Gibbs; Nigel Page, IAM magazine; and Judy Giordan, Steel City Re.

You too can participate in this special Mission:Intangible Monthly Briefing. You can register for free, and slides will posted on the website in advance of the event. Questions submitted by the audience in advance or during the broadcast will be fielded and addressed.

But we thought we would also reach out to a broader audience in the blogosphere and Twitterdom. We're talking to you. You may not be able to tune in to the Briefing, but you are interested in intangible asset finance. What do you think are the critical intangible asset issues for the coming decade? Please share your thoughts through comments on this post and help us spread the word about the discussion. If communicating by Twitter, please include #IAFS in your tweet. We will share highlights from the comments in the call as well as in follow-up posts on this blog. Or send us your questions directly at questions@iafinance.org.

We look forward to hearing from you and working with you in the coming decade to help spread the word about excellence in intangible asset management and corporate reputation.

And to all, best wishes for a happy, prosperous and new year.

Mary Adams, Moderator, M:I Monthly Briefings
Nir Kossovsky, Executive Secretary, IAFS

Nell Minow, editor and co-founder of the Corporate Library, a provider of corporate governance research, ratings and investment risk analysis, penned a Financial Times op ed piece on 2 October suggesting that going forward, fund managers and analysts will look at four new fundamental elements “that will become as important as cash flow and return on investment.” To no surprise around here, these four comprise intangible asset metrics and business processes. While we do not necessarily agree with Minow's views, her comments are worth noting. This is what she wrote, briefly:

1. Accounting: Investors will demand better information about human and intellectual capital, risk management processes, and sustainability. Our friend, Ken Jarboe of the Athena Alliance, has been delving into this topic for years. You can link to the Athena Alliance here.

2. Boards of Directors: Investors will demand greater competence and selfless engagement from members of the Boards of their companies. They will want from Directors what private equity firms demand of early stage company executives: "skin in the game." This notion compresses to the concept of Governance, about which the Society has organized a Committee chaired by Cathy Reese. Without leaving with us a pound of flesh, you can download her 6 Feb 09 "how to" presentation on this subject from our Events page.

3. Compensation: We read Minow’s comments in this light: executive compensation must better align the interests of senior management with the long-term interests of the firm and its stakeholders. Compensation processes, writes Minow, are a key indicator of risk. While we still see benefits in incentives and material compensation, notwithstanding the growing chant of mobs with pitchforks, we like the part in Minow's piece about processes and risk management. In fact, we like anything that links risk management to overall corporate reputation. This is especially when a company uses financial instruments to signal superior risk management. The Society presented a Mission:Intangible Monthly Briefing on Risk and Reputation Management 10 July 09 that you can download from our Events page.

4. Investors: Going forward, investors will look to see if the existing investors are providing sufficient oversight to ensure that the Board of Directors is providing sufficient oversight to ensure that management is providing sufficient oversight of the firm’s operations. Did you follow that? The business process is oversight; the intangible asset affected is trust. To us, the take home message is this. The greater the trust (a product of transparency), the less oversight burden for all. And how can investors signal trust? According to Minow, investors can signal trust by being "overweight relative to the index." In other words, extra skin in the game. See #2 and #3 above. 

The bottom line is this. Investors will seek companies that have their business processes under better control, can quantify and report the value of these proceses to their stakeholders, can manage their risks, and can signal their material conformance with the preceding  through non-traditional channels. The Society provides a working environment for best-practices discovery for executives seeking to accomplish the above. Won't you join us?

During the 6 February 2009 MISSION:INTANGIBLE Monthly Briefing, Fish & Richardson’s Cathy Reese, who chairs the Society’s IA Corporate Governance Committee, indicated that under Delaware Law, Directors and Officers had a Duty of Care to oversee the management of the business processes that help establish reputation. She noted that absent oversight systems, Members of the Board could be personally liable to shareholders for adverse events that impaired a company’s reputation.

Cathy’s warning of shareholder-driven exposure is just the beginning. Now companies are seeking restitution, too. According to the newspaper Deutsche Welle, after spending nearly 2.5 billion euros to cover legal bills and fines stemming from an international bribery scandal, Munich-based Siemens AG (NYSE:SI) is seeking payments from its former leadership team. Siemens was investigated for paying 1.3 billion euros in kickbacks between 2003 and 2006 to potential buyers in 12 countries, including Italy, Greece, Russia and Nigeria. In Germany and in the United States, the company was found guilty of corruption and ordered to pay combined fines of just over a billion euros. After the 2006 investigation, Siemens then accused some of its former managers of having failed to stop illegal practices and wide-ranging bribery.

It gets more interesting. The Financial Times reports that some of Siemens’ investors have threatened to sue the company if it did not claim damages from its former managers.

The value of risk and reputation management at the board level should be painfully obvious. The consequences of failing to manage a firm’s business processes for ethics, sustainability, innovation, quality, safety, security, etc. – the drivers of reputation – can place officers and directors at great personal peril. Yes, it’s personal.

From IP 360, the legal newswire, we share the following: "Two makers of virtual clothing, sex toys and erotic animations for sale in the online alternative reality game Second Life have slapped the game's maker with putative class action allegations of trademark and copyright infringement, saying the company allows piracy of their products to run rampant in Second Life and even profits from it."

The Intangible Asset Finance Society takes interest in this IP issue. We are intrigued because virtual sex toys and erotic animations are unambiguous examples of intangible assets and because the alleged millions of dollars at stake comprise a material level of finance.

We quote from the legal blog, Above the Law: "We’re intimately familiar with neither Second Life nor sex toys, but our understanding is that the two go hand in hand. Eros LLC, a virtual sex toy maker, has apparently made a pretty penny selling sex goods in Second Life. But now other Second Life vendors are ripping off its designs and selling knock-offs. Eros’s CEO Kevin Alderman — who goes by Stroker Serpentine in Second Life and built the first in-world sex bed, a digital bed with built-in sex position animations — is filing a class-action suit against Second Life’s creators for enabling this virtual counterfeiting. Alderman, who has been called “the ‘Hugh Heffner’ of the digital millennium,” wants Second Life to shut down its virtual version of Canal Street (counterfeit central in New York). "

The working elements of the Society are its standing committees that address areas of intangible asset finance practice. We asked Darren Cohen, Chair of our Quality & Integrity Asset Management Commitee, and partner in the Intellectual Property Practice Group at Reed Smith, to give us the "inside baseball" view of this case. We also asked David Ruder, Chair of our Trademark Asset Management Committee; VP, Business Development, at RPX; and a founder of Terrier IP Investments, LLC, a private investment firm focused on intellectual property-based investments in firms backed by hedge funds and private equity, for his perspective on asset monetization.

First, Darren's perspective:

At first glance, this case challenges accepted notions of intellectual property infringement. For example, under established trademark law, infringement arises when there is a likelihood of consumer confusion among the relevant purchasing public. On this basis, a plaintiff in a trademark case may likely claim damages based on lost or diverted sales, which seem on its face to be anathematic to the use of trademarks, copyrights or other intellectual property on Second Life.

However, it is undeniable that the Second Life population and the "real" life population overlap, and behavior in one medium can surely have an effect, adverse perhaps in this case, on the other. Indeed, reputation and risk management is just as vital in these nontraditional venues as they are in the ordinary course of trade (the standard for bona fide trademark use in commerce). This type of activity may further prevent one from being able to fully exploit IP rights and build IP equity, in particular brand equity, by weakening, diluting and tarnishing trademark rights or serving as a barrier to potential licensing opportunities and avenues. It should not be lost on any holder of IP rights that real profits are being made in forums like Second Life, and whether or not a rights holder wishes to enter these untraditional and "secondary" markets, they should have the same enforcement and exploitation rights, as well as brand and reputation control, as in any other channel of commerce. 

Second, David's perspective:

When I look at trademark rights, the perspective I usually take is a financial one: whether I can acquire the relevant trademark and create licenses across territories and different classes of goods and services and make money. To put this in relief, consider a hypothetical brand licensing campaign by Eros LLC that wants to license out its “SexGen” brand of virtual sex toys to the “real world” in multiple countries or even to a company that wants to sell SexGen sex toys in the Second Life world. If I were a potential licensee one of the questions I would pose to Eros is what trademark rights Eros actually possesses.

To defend its assertion that it owns trademark rights, Eros would point to its US Federal trademark registration 3,483,253 which covers “providing temporary use of non-downloadable software for animating three-dimensional characters.” What is interesting is that in the goods and services there is no mention of “sex toys” at all. In fact, this is in fact a broad description of software. Interestingly, given some recent caselaw this registration may be considered overbroad and thus cancelled if it the statement of use should have been limited to just sex toy software downloads. I have not done research to see if Eros has made non-US trademark applications and in the United States, but Eros did include a specimen of use including a Second Life screenshot to obtain its trademark registration and trademark registrations are presumed to be valid.

From a territorial standpoint one would ask whether Eros has any rights to its trademarks beyond the United States. Again, I don’t know if Eros has secured any non-US trademark registrations. I don’t know if SexGen’s use on servers outside the United States satisfies use requirements to establish rights in other countries. I also don’t know if use is satisfied by consumers on their US computers accessing non-US servers or non-US computers accessing US servers. As a potential licensee, all I have to go on thus far is the US trademark registration and the use on the Second Life game. Based on trademark law as I know it, if the registration is valid, I would think that Eros has the rights for SexGen not only in Second Life, but also any other virtual world that might be created by any software company. I might consider licensing the SexGen trademark for other virtual worlds, but thus far I think I would only have US protection.

From a goods and services standpoint, it seems at first blush that Eros has established no trademark rights at all to any actual real world sex toys as everything so far has been limited to just software as described in the registration. I would not be comfortable as a potential licensee that I should invest resources to create a real world SexGen sexy toy line via license unless there was some concrete evidence that the SexGen brand is used on real life sex toys or that there is actual confusion among consumers of real life sex toys and virtual sex toys as to source. Again I think this trademark really only would cover software.

If I were to challenge the rights of Eros, I would address the question of how “commerce” is established by Eros in the Second Life world and whether it meets the threshold of use in commerce under trademark law. I don’t know if Eros has made any kind of concessions via license agreement or otherwise to Second Life in its ability to log into the Second Life servers and create its virtual sex toys using Second Life software and servers without giving its rights away. What kind of “commerce” is occurring here and how exactly is Eros paid for offering its software services (and who actually pays Eros)? These are very fact-specific determinations that go to the heart of why trademark rights are granted for any kind of product or service.

Assuming Eros can prove that it has direct relationships with end users that knowingly pay Eros money for use of the virtual sex toys or that Second Life knowingly agreed to a mechanism whereby Eros is paid for its virtual sex toys, then I think Eros has a strong case that it has established trademark rights and these likely have value. It would be especially valuable for Eros to prove users have knowledge of the SexGen brand outside of the Second Life world. For instance perhaps rights can be purchased through eBay.

So far I’m leaning in favor of Eros having valid trademark rights but I would not be comfortable licensing the SexGen brand for anything at this point because I think the rights are in flux and a court needs to make a ruling about what rights actually exist at this point, if any. Even if a court affirms that Eros has rights in the Second Life realm, if I were Eros I wouldn’t be hoping for much compensation unless it can somehow enjoin Second Life from selling virtual sex toys (or if it has broader coverage, the Second Life software altogether). Second Life could simply respond by programming away sex in its world altogether (opening a new branch of virtual anti-trust law, I’m sure). 

The objectives of the Intangible Asset Finance Society are to increase the visibility, transparency, and value of intangible assets through education, advocacy, and the promulgation of standards. Leverage is a common instrument of value deployment, and IP as collateral is one of several favorite topics among Society members. Which is why we couldn't pass the opportunity to share this note on an IP secured loan-gone-bad.

Celebrity photographer Annie Leibovitz, who has photographed everyone from the Rolling Stones to Queen Elizabeth II, put her art, intellectual property and even real estate assets up for collateral last year when she consolidated her massive debts into one $24 million loan.  Leibovitz made her creditor an “irrevocable, exclusive agent” in December 2008 in exchange for the loan at a 12 percent interest rate. The collateral specifically included all photographs she has taken or will take.  Last Tuesday was the deadline for repaying the loan or surrendering the collateral - a deadline not met.

Friday, Bloomberg reported that Liebowitz bought back control to her photographs and real estate by renegotiating the terms of a $24 million loan from Art Capital Group. In return, the lender dropped its lawsuit against her.

The Society is pleased to announce the 28 May 2009 launch of the IP Finance Institute and to welcome the Institute into the Society’s global alliance. The Society also congratulates Pier Biga, managing partner of ICM Advisors, who is Executive Director.



The Intellectual Property Finance Institute is the first European research and competence centre focused on IP Economics & Finance. The Institute is a non-profit organization which promotes and develops know-how transfer, research initiatives and projects about the IP as an economic asset and its use in IP-based financing solutions.

The Institute was co-founded by the Innovation Studies Group of the Politecnico di Torino, a leading international technology university, and ICM Advisors, a leading international advisory and research firm specializing in intangible asset valuation and IP-based financing.

This note explores whether a proposed transaction by a $75B beverage company, Pepsi Inc. (NYSE:PEP), is motivated by costs savings, brand enhancement, or reputation protection. Seeing no perceptible movement in the reputation index of either the company or its arch rival, we conclude that notwithstanding which of the three was the initial trigger, the greatest value may be in reputation risk management.

On 20 April 2009, Pepsi proposed buying the outstanding shares it does not own in its two largest bottlers, Pepsi Bottling Group (PBG.N) and PepsiAmericas (PAS.N), in a $6 billion cash and stock deal. Many in the financial press suggested it was a cost-cutting initiative. Jon Baskin, a marketing iconoclast, a keynote speaker at the Society’s 2008 annual conference, and the author of the book, “Branding OnlyWorks on Cattle,” opined that the move represented brilliant, strategic branding. In Jon’s words:

Think about it. New packages and formulations, available at new and different locations, priced and supported in novel ways...all thanks to a holistic approach to the brand, vs. some archaic top-down application that sees it only as image and words. It's these actions, and real investments, that will build sustainable, long-term brand growth.

Cost savings and long-term brand growth are both good things, reflect well on management and enhance reputation. So, with two weeks having now elapsed during which the market has had an opportunity to digest the news, and while the deal is still in the negotiation phase (the bottlers rejected it on Monday), we called on the Steel City Re corporate reputation index to see what impact the news has had on the reputations of Pepsi and its arch rival, The Coca Cola Company (NYSE:KO).

As shown in the charts below, the short answer is “not much.” Pepsi tops the fifteen-member Soft drink sector; Coke is in the 92nd percentile. Volatility is nil. In fact, in the midst of the most tumultuous market since the great depression, these two iconic firms emerge with nearly identical profiles comprising exceedingly stable reputation metrics. With Pepsi and Coke’s market caps at $75B and $100B respectively, are they too big to budge?






Big, yes, but not too big to trip and fall. As we see it, both pay exquisite managerial attention to their reputations. Ethics, quality, safety, security and sustainability are all watchwords. Innovation is alive and well. So the competition between these two is analogous to that of two chess grandmasters. They see all, know all, and understand the implications of every move and its derivatives. The game, therefore, is waiting for one or the other to make a mistake. It is a game where risk management is the winning play. And given the relative values of the physical assets and intangible assets at the two companies, reputation loss arising from a business partner where visibility and control are weaker – supply chain headline risk, if you will – is one of the major risks we believe needs to be managed.

So let us put our own spin on Pepsi’s announced acquisition: from an intangible asset finance management perspective, it is a prudent move to manage reputation risk arising from a third party. While it may not increase Pepsi’s brand value or enhance its reputation, it may prevent the sort of reputation loss that destroyed nearly 14% of Coke’s value 10 years ago.