Forget Patents Protect Intellectual Capital Instead

May 28, 2002
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GRAND RAPIDS — Only a couple of decades ago, our borders were relatively secure from importers. This was great for most American manufacturers because, although domestic competition existed, little competition existed from abroad. There was enough business to go around and life was good.

During that time, our manufacturers occasionally protected their inventions with patents, but, frankly, patents played a relatively small role in most U.S. companies.

They were principally used as “fences” to keep competitors from copying their products. Indeed, in seeking to protect their patents, businesses found it difficult to come by any damages — if they even were able to make it to the damage stage of litigation.

In the 1980s, small to mid-size companies riveted their eyes on global trade and business expansion. They knew that by exporting goods to foreign countries, they could increase sales and profits.

Globalization looked like ripe fruit ready for the picking. Never one to sit on its laurels, the United States led globalization by breaking down domestic barriers (not withstanding the Anti-Dumping Act). Unfortunately, American manufacturers soon realized to their horror that U.S.-based foreign manufacturers were eating their lunch.

Globalization became a double-edged sword.

It didn't take long for us to realize that U.S. companies simply couldn’t compete with second- and third-world manufacturers for domestic labor.

It also didn't take us long to realize that we couldn't make money by exploiting our natural resources.

But all was not lost. We knew we could easily outstrip our foreign competitors in one key area: innovation. Protecting our innovations so that we could be competitive on both a domestic and global scale became (and still is) an overriding concern.

Unfortunately, our intellectual property protection efforts were woefully inadequate because they were merely defensive. For example, patent protection was driven by research and protecting manufactured products. Occasionally, we might consider cross licensing some technology, but this was a rare occurrence.

We were ill prepared to take advantage of our one major commodity — innovation.

In the early 1990s, some companies realized that their intangible assets (e.g. intellectual capital) could create a larger share of company capitalization.

In fact, Standard and Poor's reported in 1998 that, over a 20-year period, the ratio of intangible to tangible assets of publicly held U.S. companies flip-flopped from 20-80 to 80-20.

But, many businesses still continued to be driven only by their tangible assets, not their intangible assets, even though intangible assets were the building blocks for their tangible assets, i.e., the brainpower behind the manufacturing capabilities.

Some astute business owners wondered how they could put their intangible assets (intellectual capital, or "IC") to work and use it to drive the business.

They began to focus on what intellectual capital is, realizing that it includes the sum total of the intellectual resources of an organization, such as manufacturing expertise, marketing expertise, research talent and intellectual property.

They quickly recognized that their business strategy was not aligned with their intellectual property direction and began to adopt programs to align their intellectual capital with their business strategy.

In some companies, intellectual capital became so important that it began to drive the business strategy.

Many U.S. businesses now face near-liquidation because of economic conditions. Layoffs are abundant and competition is fierce. Perhaps we can no longer rely on our manufacturing capabilities to carry the day. Perhaps it is time to look at our business strategy and intellectual property programs, if any, to determine how we can become more profitable with our intellectual capital.

Many organizations, from high-tech to low-tech, are, for the first time, focusing on their IC, organizing their companies around their intellectual capital and developing intellectual property programs that align with their business plan.

John E. McGarry is a partner in McGarry Bair LLP.

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