You’ve heard of Enron, of course—the energy company brought down by accounting scandals and financial mismanagement in 2001. You’ve heard of Sarbanes-Oxley too—the tough legislation passed by the US Congress the following year that was designed to prevent the reoccurrence of similar corporate meltdowns. You’ve almost certainly heard your colleagues in the accounts department and the financial law team complain about the new rules and the obligations that they place on them. But you’re a trademark attorney—so you don’t need to think about these kinds of things, right?
Well, unfortunately, you do. The Sarbanes-Oxley legislation requires public companies to assess, manage and monitor their IP portfolios and disclose material risks of IP threats and claims of infringements. Although it applies to companies listed in the US, in theory the rules could also extend to companies headquartered elsewhere. In addition, the rules that emerged in the US following the accounting scandals in the early part of the decade are being closely watched—and in many cases adapted and adopted—by government watchdogs in other parts of the world keen to impose some tougher corporate governance and financial reporting rules of their own.
If you are not sure how you and your IP team should respond to the new rules, a team of IP and financial law specialists will be providing advice about the kind of things you need to do to make sure that you comply with the obligations set out in Sarbanes-Oxley at session today (IT01—Industry Breakout—Financial Services: Sarbanes-Oxley: It’s No Longer Just for Corporate Lawyers).
In particular, the panel will discuss how the transparency and reporting rules imposed by Sarbanes-Oxley affect trademark owners and practitioners, as well as share tips about how to raise awareness about IP rights and establish internal processes within corporations to comply with the legislation.
“IP is not really mentioned in Sarbanes-Oxley but part of the general requirements that come out of it are that companies are expected to monitor and disclose IP events, including the relationship between their intellectual property position and their financial performance,” says Leo Longauer, head of IP at Swiss-headquartered UBS bank and the moderator of today’s session. That obligation is particularly important for IP-rich companies such as those in the pharmaceutical sector, but also places a heavy burden on the growing number of businesses whose intellectual property is an increasingly important part of their assets and revenue.
Longauer says that the organizations that set the accounting standards that companies use to manage their books are now paying more attention to intellectual property, and clarifying how it should be treated for accounting purposes.
But of course few accountants are specialists in intellectual property and the role that it plays in a company’s business. That is why it is particularly important that IP counsel help to explain the issues to their colleagues in other parts of the business: “IP lawyers need to sit down with their tax and finance people and discuss the issues,” says Longauer. Gary Bender, an IP specialist at Ernst & Young and a panelist on today’s session, agrees: “I have seen IP valuations during major acquisitions go awry because they were based on assumptions about the asset that were simply wrong—for example, assumptions that effectively extended the life of the patent portfolio that formed a big part of the deal.” Such mistakes could have expensive consequences, as well as creating regulatory headaches for company executives who may be asked to explain themselves in front of watchdogs such as the Securities and Exchange Commission.
Communication within the company is a two-way process that also enables IP lawyers, more familiar with managing trademark renewals and protecting their brands from infringers than with the rules of the International Accounting Standards Board, to understand how IP is treated in the company’s books. IP professionals should also ensure that they communicate regularly with the people who develop and maintain the IT systems that are used to monitor the business’s intangible assets. Says Bender: “Often the people managing a company’s trademarks and domain names are removed from those that develop the broader IT systems. It is not good practice to have these kinds of functions explicitly defined. They need to be coordinated.”
Bender advises companies to establish procedures for regularly monitoring their IP assets. This may involve adding a new IP-specific section to the business’s existing enterprise resource planning (ERP) system, or developing new software tools to manage the company’s IP rights—and to enable staff to carry out regular audits. Whatever options the company chooses, it needs to introduce written procedures explaining how often the IP is to be monitored, when and how the monitoring should be carried out and how it should be done. Then the company’s executives need to make sure that the policies are adopted as part of the company culture: “It shouldn’t be on someone’s C drive, or on an Excel spreadsheet. It needs to be managed in such a way that it survives employee attrition,” warns Bender.
While emphasizing the importance of developing a proper IP monitoring and auditing system, Bender says that companies should take their time to develop a strategy that meets their own business needs: “I have seen one large financial services firm that started to develop a program to value its IP but which didn’t understand when or how to do it,” he says. “There was no coordinated business process for dealing with IP—there was just a sense of urgency and knee-jerk reaction from the executive board that had seen other companies doing it. They wanted a gold-plated IP program but had no idea of what made sense for their organization. Controls for their own sake can be just as ineffective as having no controls as all.”
Upside
Although many practitioners regard the auditing and reporting obligations that Sarbanes-Oxley imposes on them as an important but rather tedious chore, they could also have potential benefits for the company’s bottom line. Companies that carry out regular audits of their IP assets often discover that they have amassed rights that they no longer require and which they could abandon, or even rights that they could sell or license to third parties for a profit.
Advice from the experts
1) Encourage good communication between different parts of your business.
2) Ensure that IP policies tie in with the company’s wider strategic initiatives and business direction.
3) Consider appointing a chief IP officer who is given executive authority and exposure to the board of directors.
4) Appoint dedicated personnel in charge of IP issues, rather than giving corporate counsel additional responsibly for managing intellectual property.
5) Set up formal systems for managing and auditing IP within the company. This may involve developing special software or setting up a special module within an existing ERP (enterprise resource planning) system within the company.
6) During a transaction, employ specialist advisers to carry out IP due diligence and valuation.
Financial service companies wake up to trademarks
The value attributed to IP in general, and to service marks in particular, is an increasingly large proportion of the assets of banks, insurance companies, investment funds and stock exchanges. One case being heard in Germany at the moment has highlighted just how much is at stake for businesses in the financial sector that make money from licensing—or from using—trade marks.
Stock exchanges and compilers of indices such as the FTSE 100 or the Dow Jones have traditionally raised cash by licensing the rights in their names to banks and financial services companies that want to benchmark their products’ performance against the performance of certain listed shares.
So when Commerzbank decided to stop paying Deutsche Börse for the right to use the term DAX, the name of the German stock exchange index, after complaining about sharp increases in licensing fees, in-house lawyers in stock exchanges around the world paid attention.
The bank terminated its deal with Deutsche Börse and asked the courts to clarify that it was allowed to refer to the index names in a neutral way, without the stock exchange’s consent.
In 2006, the District Court of Frankfurt ruled in favor of Deutsche Börse, but that decision was overturned in February last year by the Court of Appeal in Frankfurt. The case is now on appeal before the Federal Supreme Court, which is not expected to hand down a ruling until 2009.
The case is being watched closely by banks and exchanges around the world—many of whom are facing similar issues. The stakes are high.
Sarbanes-Oxley
Passed by the US Congress in response to the financial scandals of Enron and WorldCom, the Public Company Accounting Reform and Investor Protection Act of 2002 (better known as Sarbanes-Oxley or Sox) was designed to prevent the recurrence of such scandals and restore investor confidence in the financial markets. It sought to do this in four distinct ways: establishing a public oversight body independent of the audit profession called the Public Company Accounting Oversight Board (PCAOB); strengthening auditor independence; strengthening audit committee requirements; and augmenting internal control requirements with respect to financial reporting.
PCAOB’s main functions include registering public accounting firms, promulgating auditing standards, inspecting registered public accounting firms and enforcing auditing standards.