It seems like everyone is becoming a healthcare entrepreneur: from Amazon and Apple to health systems with dedicated innovation teams to two women in a garage inventing the next great thing. Investors are fueling this trend with record levels of healthcare investments, particularly in health IT. One thing these entrepreneurs and investors have in common is that their businesses may be generating assets that are more valuable than they realize. In addition to their system, product or solution, they may also be creating valuable intangible assets known as intellectual property (IP).
This leads to some obvious questions for both entrepreneurs and investors: What are the different kinds of intangible assets? Why are they important? How can they determine what IP they have? What, if anything, should they do about it?
“Shark Tank” Is Wrong About Intellectual Property
We love the television show “Shark Tank,” in which aspiring entrepreneurs pitch their business plan to a panel of experienced investors (the “Sharks”) who then choose whether to invest as a business partner.
One of the first questions the Sharks ask is: “Do you have any patents?” It’s a good question, but it’s too narrow: intellectual property is much more than just patents.
There are four general areas of IP: patents, trade secrets, copyrights and trademarks. It’s important to understand the four types and how they differ.
Patents protect inventions. An inventor files an application with the U.S. Patent and Trademark Office (USPTO) that explains the invention in enough detail to enable a person with the typical skill level in the relevant field (e.g., a competent engineer) to make or use the invention. Once the USPTO publishes the explanation, the U.S. government grants the applicant a monopoly over the invention for twenty years from the date of filing the application.
Trade secrets are in some ways the flip side of patents. Trade secrets are information that provides value to a business so long as it remains secret. Trade secrets can include just about anything, whether technical or non-technical—even a soup recipe that has customers lining up around the block.
The law protects trade secrets as long as a business takes reasonable measures to protect their secrecy. What’s “reasonable” generally includes keeping confidential information under lock and key, restricting disclosure to a “need to know” basis, requiring signed nondisclosure agreements before discussing outside the company and training employees on how to keep trade secrets confidential. If properly maintained, trade secrecy can last forever.
Copyright protects a specific “expression” of a general idea. This protection is relatively narrow compared to patents or trade secrets. Although copyright originated with protecting artistic works, such as novels and paintings, it has since expanded to specific software code as another tool to safeguard the embodiment of a process or system.
Trademarks protect your brand identity from unauthorized use. Trademarks can be used without registering with the USPTO, but federal registration creates the presumption you own that mark in all 50 states.
Each form of IP provides a legal right that enables the asset’s owner to sue someone who uses their property without permission. Unauthorized use of a patent, trademark or copyright material is “infringement.” Ownership of patents and trademarks is publicly available, so the world is deemed to be on notice – and therefore, it is possible to unintentionally infringe on someone’s patents or trademarks. In contrast, copyright infringement usually requires intentional copying. Trade secrets are not public and unauthorized access to trade secrets is considered theft. However, there is no protection against someone independently developing your secrets, or reverse engineering from publicly available information.
A company can own all four types of intellectual property. For example, Google owns the trademark for its name, one of the world’s most valuable trade secrets (its search algorithm), numerous patents and all its software code (protected by copyright). It’s safe to say for Google and many other companies, intellectual property is their most valuable asset.
Why Is Intellectual Property Important?
A company’s IP makes a direct contribution to the company’s valuation. IP provides a legal right to exclude others from using it. This allows companies to protect the fruit of their innovations and development work. If there is sufficient demand for this IP, they can charge others for the privilege of using it and earn licensing fees for their ingenuity.
Investors care about IP too. For example, they usually want to see an IP portfolio and often base the amount of their investment on the development of IP. Similarly, in the mergers and acquisitions world, many companies buy a target company to acquire their patented inventions, software and trade secrets.