Identifying, Protecting and Leveraging Intellectual Property Assets

Federal and state utility regulatory agencies are placing increased focus on affiliated transactions involving gas and electric marketing, energy services, transmission, distribution and merchant services, transfers of customer information and utility property and the associated use of a utility's credit strength and retail market power. The basic concern is whether a utility or its affiliates has or may obtain a competitive advantage in the marketplace through such transactions. At the same time, utility holding companies are striving to increase shareholder value through investments in competitive enterprises in order to offset potential earnings erosion from regulated utility operations which are anticipated as a result of competition. While diversification activity and associated regulatory scrutiny involving real estate, power generation, fuel supply and financial services have received considerable attention over the past decade, an area that has only just begun to draw the attention of holding company executives, strategic planners and regulators is the identification, protection and leveraging of intellectual property assets and opportunities.

Identifying existing or potential intellectual property assets that have value in the competitive marketplace is a first and essential step in developing and implementing a plan to protect and maximize the value of these assets, as well as to proactively shape regulatory policies affecting the deployment and commercialization of these assets in the marketplace. As utility holding companies continue to take steps to transform their organizations into cutting edge diversified energy service companies and insource and/or outsource selected operation, maintenance, research, engineering, systems, software, equipment, personnel and services, a number of holding companies and their utility subsidiaries have taken, or are undertaking, efforts to ensure that the company is both protecting and realizing the maximum value of the intellectual property that it creates through shareholder investments. With respect to employees of the company and its affiliates, management is or should be taking steps to ensure that adequate protections are in place to prevent employees from developing intellectual property assets through corporate time and resources and taking these assets to a competitor or independently realizing financial gain from their commercial use or sale.

As utility holding companies and their subsidiaries begin to recognize the value of their corporate names in the context of the marketing of diversified products and services, steps should be taken to ensure that the value of it's name is protected from use by competitors, not only regionally, but nationally and internationally. These efforts extend to perfecting the asset value of trademarks by obtaining federal registrations where applicable. In circumstances where federal registration has already been obtained, some companies are investigating the potential expansion of the registration to cover goods and services that were not originally contemplated in prior years when the registration was first obtained. Changes in the United States Trademark Law permit filing of an application to cover products and services even before one has entered the market. This permits filing an application and obtaining preliminary approval through the United States Patent and Trademark Office prior to actually using the trademark for the product or service.

Another area that is receiving increased corporate focus by executives of utility holding companies and their subsidiaries involves intellectual property issues related to technology investments and acquisitions. This includes due diligence concerning the strength and quality of the intellectual property assets being acquired, including whether the seller in fact has unencumbered title to the intellectual property assets being sold or whether the purchaser is potentially buying into a patent infringement, trademark, copyright, trade secret or other intellectual property lawsuit. In addition to conducting thorough due diligence concerning intellectual property assets, the indemnification provisions of asset or stock purchase agreement must be drafted carefully to anticipate the potential for suits. In certain circumstances, placing a portion of the purchase price in escrow may also be appropriate until any uncertainties associated with the seller's right to the intellectual property are resolved.

Understanding the basic types of intellectual property is critical to any strategic business planning or investment decisions related products or services involving technology or proprietary corporate know-how. There are four basic types of intellectual property: patents, trademarks, copyrights and trade secrets.

Patents - "Utility" patents cover any "new and useful process, machine or composition of matter." "Design" patents cover any "new, original and ornamental design for an article of manufacture." Issuance of a United States patent gives the owner exclusive rights to the invention for a specific period of time in the United States. No other party can make, use or sell the claimed invention without permission of the patent owner. Patent applications can also be filed in foreign countries and licensed for use overseas. Patent protection is available for a computer program, if the program meets the above criteria. Patents can be licensed as a revenue source, sold as an asset, and/or can be used as bargaining chips. If a company is accused of patent infringement and it owns patents, it may be able to bargain with the other party by offering a cross licensing of technology. If the inventors work for the company, they should execute an employee invention agreement in order for the company to prove ownership. If the technology development is outsourced, development agreements should expressly define ownership with the company for all intellectual property.

Trademarks - Protection extends to a word, name or symbol which acts as a designation of the source of the goods or services. Trademarks and "service marks" include slogans, sounds and designs. Trademark rights are established by use of the mark. A federal registration affords the owner protection within the United States and can prevent a subsequent using party from using a mark which is likely to cause confusion. Trademark protection can extend for as long as the owner uses and polices its mark. Trademarks can be licensed to third parties at agreed upon fees. Trademarks allow the owner to establish an identity for its products and services. The goodwill attached to a mark can be of great value.

Copyrights - Protects any "original works of authorship fixed in any tangible medium of expression." Copyrightable materials include computer programs, manuals, brochures, charts and sales materials. Infringement of registered copyrights include both money damages and injunctive relief. Copyright protection can extend to as much as 100 years from the date of creation. The owner of a copyright has exclusive rights to the reproduction of that work including distribution and the creation of derivative works. Copyrights can be licensed much like trademarks and patents.

Trade Secrets - Extends to information including formulas, patterns, compilations (such as customer lists), program devices, techniques or processes that are maintained in secrecy and which have economic value by virtue of its unavailability to others. Trade secrets can carry great value. For example, the formula for Coca Cola is a trade secret.

A comprehensive intellectual property audit can be undertaken to determine the scope and value of a holding company's intellectual property portfolio. The audit enables the company to account for, itemize and evaluate current holdings, as well as provide a framework for establishing procedures so that future intellectual property is properly protected and valued. The audit will permit the company to determine what it owns, either for its own use or for licensing to others. It will also allow the company to identify and track opportunities related to the leveraging of intellectual property assets which are developed by third parties contractors such as software companies.

The audit should also include a review of the company's intellectual property documentation materials in order to determine whether the company has adequate procedures in place to document and maintain its rights and ownership (i.e., chain of title, employee invention agreements, consultant agreements, joint development and research agreements, etc.) For patents and trademarks, periodic fees are paid to the Patent Office in order to avoid abandonment of the patent or trademark. The audit will also permit the company to determine if the technology being contemplated by the company infringes on the intellectual property rights of others. This is a particularly important issue for acquisitions. The result of this due diligence will help to determine if the buyer is acquiring a lawsuit. The audit will also determine the extent of the company's licensing of any third party technology and ensure that the company is properly using the technology and has the requisite agreements in place. For example, if the company has a license to use developer tools, a provision should allow the company to have a perpetual, irrevocable license with the right to sublicense.

Once the company has identified and protected its intellectual property assets, a strategy should be developed to maximize their commercial value, including the identification of potential opportunities to transfer or license these assets to customers, an affiliate, or strategic alliance partner. Utility regulatory issues associated with such transfers or licenses must be clearly identified in advance before an investment is made or implementation plan is initiated. In the event that the intellectual property asset or opportunity involves affiliate transactions, such as the transfer of intellectual property asset or business opportunity within the utility subsidiary to an unregulated affiliate and potential regulatory issues arise, company executives need to consider the merits of establishing a transfer price or royalty arrangement upfront and obtaining any required regulatory approvals in advance as a condition precedent to the investment decision or implementation plan. Such a decision must carefully weigh the risks of failure to obtain an advance endorsement by state utility regulators against the potential for more explicit regulatory restrictions and approval requirements in the future after significant investments may already have been made, particularly in circumstances where the intellectual property asset has increased in value and the company may have less bargaining power with regulators over any conditions attached to the transfer.