Intellectual Property (IP) is an integral part of many of today’s companies’ overall value. Indeed, studies show that up to 80% of the value of a typical business is IP, and as of 2020, more than 84%—$19 trillion—of the S&P 500’s market cap is represented by intangible assets like IP.
However, even the biggest corporations aren’t properly valuing or protecting their most valuable intangible assets.
“Very few companies recognize the value of their IP, nor have they secured an IP strategy that mirrors their long-term corporate strategy in order to maximize this value,” said Brian Hinman, Chief Innovation Officer at Aon and Head of EMEA for Aon’s Intellectual Property Solutions.
Seeing that even the biggest corporations aren’t properly protecting and leveraging their IP, we’re guessing that you probably aren’t either. This series is aimed at serving as a wake-up call for you to consider whether your business has IP that’s worth protecting and discussing the best ways to go about doing that.
Last week, in part one of this series, we discussed some of the strategies you can use to safeguard, value, and generate income from your IP assets. Namely, these strategies involved identifying, documenting, and registering these assets with the proper trademarks, copyrights, and patent protections, as well as using legal agreements to ensure that you fully own—and can financially benefit from—all of the intangible capital your company creates.
Here, in part two, we’re going to look at what can happen when you fail to secure the proper protections for your IP. In addition to addressing the disastrous results that can occur from not properly protecting your IP during your lifetime, we’re also going to discuss how you can further safeguard and leverage your IP, so that your loved ones can continue to benefit from these most valuable assets following your death or incapacity.
To demonstrate the crippling costs that can result from not properly safeguarding your company’s IP, read the following true story about how one up-and-coming blogger’s decision to go without a trademark cost her millions of dollars in potential revenue, stunted her ability to expand her business, and greatly reduced her ability to leave an inheritance for her heirs.
While the following events are entirely true, the names have been changed for privacy protection.
The Blogger Who Lost Her Own Name
Julie was a food blogger, who’d been in business for about 11 years, and she was making significant revenue from the blog—more than $300,000 in one quarter alone. She called John, an intellectual property lawyer, looking to get her name trademarked and asked him how much that would cost. John told her he charged a flat fee of $1,000 to get the trademark registered, but Julie thought that was too much money, and said, “No thanks,” even though John estimated that she probably made $1,000 from advertising just in the short time they had talked on the phone.
About six months later, Julie called John in a panic, telling him that she needed a trademark done that very day. When he asked her why, she told him that a big food company was selling frozen foods using her name. The company had changed her name just a little bit in order to get the trademark, and they now owned the trademark to her own name.
What’s more, the food company not only filed for a trademark using her name in the class of goods that included frozen foods, but they also filed for a trademark that allowed them to sell the packages online. It turns out that Julie wanted to start selling goods through her website, but now she couldn’t do that because the company had already registered a trademark using her name in the online retail class of goods.
Ultimately, Julie made two mistakes. First, she failed to trademark her name. The food company registered a trademark for the name she wanted, and even though she technically had a common-law trademark, in order for her to go after them for infringement, she’d have to take them to court. John’s firm charged $650 per hour to enter into litigation, and the case would likely take several years. In the end, not paying the $1,000 to get her name trademarked to begin with could now be a multi-six figure investment, if she decided to try to claim prior use of the mark.
Second, not only did Julie fail to protect the IP she had at the moment, she also didn’t think down the road to anticipate how she might expand her business by selling goods on her website. So now Julie is stuck with just the blog, which brings in decent income, but she’s unable to expand her business into goods. Finally, if she ever decides to sell the company, she doesn’t even own the rights to her blog’s own name, so that could make the business unsellable, leaving her without intellectual property rights to pass on to her family outside of the blog.
Don’t let something like this happen to you or your business. While registering a trademark or copyright might cost you time and money, failing to register your brand can ultimately cost you exponentially more in legal fees and the lost value of your assets, especially if you end up in court, trying to fight for what you thought you owned.
Protecting Your IP Through Estate Planning
In addition to protecting your intellectual property during your lifetime, make sure your estate plan covers your intellectual property as well, so your heirs are able to continue to use your intangible assets in the event of your potential incapacity or upon your eventual death. To prevent your family from losing out on your most valuable assets, as well as ensuring they don’t get caught up in long, costly court battles over the ownership of these assets, it’s imperative that you invest the time and money to protect these assets now.
And just like any tangible asset you’d want to protect and pass on to your loved ones, you can achieve protection for your IP through your estate plan.
When it comes to protecting your IP in your estate plan, the first step is to review the operating agreement or bylaws of your business entity. And if you don’t have an operating agreement or bylaws, now is the time to put these essential legal agreements in place.
Who Gets What: Distributing Your IP Assets
When reviewing your governing documents, you’ll want to ensure that they properly address the ownership rights to your company’s IP upon an owner’s death or incapacity, as well as upon the sale or dissolution of the business. If your business has multiple owners, you’ll ultimately want to make certain that the governing documents equitably distribute the ownership rights to the IP between the owners.
As with tangible assets owned by the business, there are numerous different ways you can divide the ownership rights to the IP among its owners. To ensure these assets are fairly distributed and this distribution is properly spelled out in your governing documents, you should consult with an experienced business attorney like us, who has experience in both intellectual property and estate planning.
Once you’ve ensured the proper distribution of your IP assets through your company’s governing documents, you should use your estate plan to protect and pass on the ownership rights to your share of the IP. And at the heart of any estate plan that includes a business is a comprehensive business succession plan.
As with the failure to properly protect their IP, far too few business owners take the time to prepare for their company’s continued success following their retirement, death, or incapacity. However, creating a comprehensive succession plan as part of your overall estate plan, is just as crucial as any other planning you do for your business, if not more so.
Leveraging Your IP For the Benefit of Future Generations
After you’ve decided how you want your business to be run in your absence and formally spelled this out in your succession plan, you’ll want to consider which estate planning vehicles are best suited for protecting and transferring ownership of your IP rights to your heirs. In most cases, the best planning vehicle for this purpose is going to be a trust, either a revocable living trust, an irrevocable trust, or a combination of the two.
Using a trust, you can spell out exactly how you’d like your IP assets distributed to your beneficiaries. In addition to considering the best way to distribute your IP to your beneficiaries, you’ll also want to consider which of your loved ones is best suited for owning and managing your intangible assets, as well as how you’d like those assets to be used for the benefit of your heirs.
For example, trademarks, copyrights, and patents, can be leveraged to create revenue in a number of different ways. Your beneficiaries could simply sell any of your IP assets outright, or they could use the IP as the collateral to take out a loan. But they could also decide to license the use of your IP to others, which can generate an ongoing revenue stream that can last indefinitely.
Protect and Leverage the Value of Your IP Assets
There are countless opportunities for leveraging your IP assets, which is one of the reasons such intangible property is so valuable. To this end, it’s vital that you consult with us to not only protect your intangible capital, but to also ensure that it provides the maximum benefit for your heirs following your death. With our guidance and support, we can ensure that your loved ones can benefit from these creations for generations to come.
This article is a service of Liz Smith, Family Business Lawyer™. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule.