Bringing a new healthcare product, drug treatment or fuel additive, or high-tech produc to market can mean an investment of many years and millions of dollars for an organization. Automation technologies and electronic tracking systems are taking the R&D world by storm – streamlining research and driving discoveries and new-product development like never before. At the same time, they are generating massive amounts of R&D data, records and audit logs – electronic evidence of scientific intellectual property that one day could be called upon to support claims of first-to-invent and ownership. Unfortunately, if these electronic documents / records or data files has been tampered with, or even stolen, the entire investment could be lost.
How Scientific / R&D IP Disputes Arise
Because scientific / R&D intellectual property is a critical strategic asset, life sciences, bio-IT and high-tech companies can go to great lengths to protect their scientific / R&D intellectual property rights, or to limit the IP rights of their competitors. Scientific / R&D intellectual property disputes arise when multiple parties claim usage rights or ownership of a given IP asset. The two factors that drive many scientific intellectual property disputes are: Knowledge Diffusion. Institutional knowledge, knowingly or unknowingly, can be sent outside the organization to potential competitors. Once an IP asset is in the hands of others, it can be very difficult for companies to prove that they own the asset. A recent example in which knowledge diffusion may cost a company dearly is the Starwood Hotels case against Hilton in which Starwood contends two former Starwood executives who joined Hilton stole more than 100,000 electronic and paper documents containing "Starwood's most competitively sensitive information.” Probably the most well-known case, however, is the thwarted attempt by a Coca-Cola employee to sell formula trade secrets to Coke’s rival, Pepsi, in July 2006.3 Concurrent Development Among Competitors. In an increasingly competitive marketplace, it is common to have many high-tech companies racing to develop and launch solutions first. In the U.S. where the patent system is based on the principle of “first-to-invent,” a company must prove when it conceived its idea and also when it reduced the idea to practice. Without the ability to defend the lab documents and records that prove these critical dates and content, innovative companies can lose their scientific / R&D IP to competitors or to the public domain. Knowledge diffusion and a competitive marketplace are inescapable realities facing executives. The best strategy available is to be prepared to defend their scientific / R&D intellectual property in the face of a patent or legal dispute, especially if litigation is the likely route.
Proving IP Ownership
If you can’t prove time of invention or the integrity of your electronic documents / records, then you are at risk of losing your IP. There are two key factors that must be in play 1) they are kept in the course of regularly conducted business activity; and 2) the source of information or the method of preparation is trustworthy. Opposing counsel will not only challenge the authenticity and credibility of a company’s data, but also, the trustworthiness of the people, processes and systems responsible for their safekeeping. Companies can present scientific / R&D content that credibly supports their IP claims, but without irrefutable proof of their authenticity, they may be successfully challenged and eliminated as evidence. Such a challenge derives from the fact that unprotected electronic documents and records can be easily altered or fabricated. Opposing counsel will attempt to show that employees of the company have motive and opportunity to manipulate records. The two primary factors inside an organization that drives the need for R&D organizations to protect the integrity and prove the authenticity of their electronic records are: 1) motive and 2) opportunity. Motive: More than 60 percent of all IT security breaches are caused not by outside hackers, but by trusted insiders who have access to corporate intellectual property assets. Given the importance of intellectual property assets to a company’s success, it is not surprising that executives face pressure to retain rights to those assets. This pressure is often transferred to their employees. As a result, employees can easily succumb to unethical behavior, such as manipulating invention dates and altering metadata to meet rigorous objectives.
Opportunity: With more than 90 percent of all lab records and data now generated electronically, there are innumerable opportunities to tamper with electronic content. Forging or tampering with electronic records is easy to do and difficult to detect. Also, because of the workflows of most lab informatics systems, electronic records can be generated in one department, managed in another, and archived in yet another, there are multiple points in the organization where manipulation can occur. This decentralized lab data management process poses a significant risk to researchers and executives, who when challenged must be able to prove the legal credibility and authenticity of these records throughout their chain-of-custody or risk losing their company’s scientific IP assets.
Managing Intellectual Property Risk R&D organizations have three options to consider when managing the risk of losing their scientific intellectual property - they can assume it; they can transfer it; or they can mitigate it. IP Risk #1: Too Much to Assume The first option is to assume the risk. Companies that assume the risk of losing scientific intellectual property must hope that they never face a patent or legal challenge – a considerable risk, no matter how trustworthy their people, processes and systems may appear to be. According to the American Intellectual Property Association, the average cost to litigate a patent infringement lawsuit is greater than one million dollars.
When companies lose scientific intellectual property, the costs include damages, legal fees and often, unfavorable publicity – all of which impacts their earnings and their shareholders. Consequently, executives also risk collateral damage, such as product loss, class-action lawsuits and lower quarterly sales forecasts. These risks to the organization and to its shareholders are far too great for executives to bear. IP Risk #2: Impossible to Transfer In theory, a company’s second option may be to transfer the risk of losing their intellectual property to an insurance company. However, scientific IP is virtually uninsurable today. Though intellectual property insurance does exist, underwriters are only willing to cover up to $25MM of risk exposure. The massive legal fees and damages that can result from scientific IP litigation make such policies unattractive to R&D-driven organizations that need full coverage for their risk. Furthermore, neither the opportunity cost nor lost revenue due to litigation is covered under such policies. As a result, the intellectual property insurance market is small (slightly over $100MM in premiums written in 2008, versus $1B for the D&O insurance market) with modest prospects for growth.
Even smaller firms in the biotech and pharma markets would see little value in purchasing such a limited insurance policy to protect the future value of their scientific intellectual property. Therefore, R&D-driven organizations do not have a realistic means to insure their growing body of scientific intellectual property and most likely, they never will. IP Risk #3: Mitigation is the Best Option The final and best option for an organization is to mitigate the risk of losing intellectual property. The best way to mitigate this risk is to collect and secure those IP assets. Put in place security controls that enable the company to validate the integrity and prove the authenticity of the electronic lab data it needs to support its intellectual property claims. Such controls can prevent these files from being successfully challenged and eliminated as evidence, and can stand up and successfully be defended in terms of “ownership.”
Conclusion R&D executives have a fiduciary responsibility to their shareholders to maximize and protect the value of their organization’s assets. Scientific intellectual property, the most important of these assets, is often exposed in many innovation-driven companies because of the risk of losing that IP in the face of a patent or legal challenge.