What Is Intellectual Property and What Are Some Types?

What Is Intellectual Property?

Intellectual property is a broad categorical description of a set of intangible assets that are owned by a company or individual. It's legally protected from outside use or implementation without consent. An intangible asset is a non-physical asset.

The concept of intellectual property relates to the fact that certain products of human intellect should be afforded the same protective rights that apply to physical property, called tangible assets. Most developed economies have legal measures in place to protect both forms of property.

Understanding Intellectual Property

Intellectual property is a category of intangible assets. They can't be held and don't necessarily have a physical presence. These assets are created using human intellect. Such property can take many forms and can include artwork, symbols, logos, brand names, and designs.

Companies are diligent when it comes to identifying and protecting intellectual property because it holds such high value in an increasingly knowledge-based economy. Producing intellectual property requires heavy investments in brainpower and time of skilled labor. This translates into heavy investments by organizations and individuals that shouldn't be accessed by others with no rights.

Extracting value from intellectual property and preventing others from deriving value from it is an important responsibility of any company. It's an intangible asset but intellectual property can be far more valuable than a company's physical assets. It can represent a competitive advantage and is fiercely guarded and protected by the companies that own the property as a result.

Special Considerations

Many forms of intellectual property can't be listed on the balance sheet as assets because it's hard to objectively value each asset. However, the value of the property tends to be reflected in the price of the stock because market participants are aware of the existence of the intellectual property.

Some intangible assets such as patents are recorded as property when they meet certain accounting criteria such as having an objective measure of their value and probable economic benefits. They're listed as assets and then expensed against profits during their useful economic lives. This expense is called amortization.

Amortization is an accounting method that decreases the value of an intangible asset over time. This process helps the company to reduce its income by expensing a set amount each year for tax purposes as the useful life of the intangible asset winds down.

A patent might only have 20 years remaining before it's registered as public domain. A company would assign a total value to the patent. The patent would be expensed or amortized by the same amount each year for 20 years by dividing the total value by 20 years. The amortized asset amount would reduce the company's net income or profit for tax purposes each year.

Intellectual property that is considered to have a perpetual life, such as a trademark, isn't amortized because it doesn't expire.

Types of Intellectual Property

Intellectual property can consist of many types of intangibles.

Patents

A patent is a property right for an investor that's typically granted by a government agency such as the U.S. Patent and Trademark Office. The patent allows the inventor exclusive rights to the invention, which could be a design, process, improvement, or physical invention such as a machine.

Technology and software companies often have patents for their designs. The patent for the personal computer was filed in 1980 by Steve Jobs and three other colleagues at Apple (AAPL).

Copyrights

Copyrights provide authors and creators of original material the exclusive right to use, copy, or duplicate their material. Authors of books have their works copyrighted as do musical artists. A copyright also states that the original creators can grant anyone authorization through a licensing agreement to use the work.

Trademarks

A trademark is a symbol, phrase, or insignia that's recognizable and represents a product that legally separates it from other products. A trademark is exclusively assigned to a company. It owns the trademark so no others may use or copy it.

A trademark is often associated with a company's brand. The logo and brand name of Coca-Cola is owned by the Coca-Cola Company (KO).

Franchises

A franchise is a license purchased by a company, individual, or a party called the franchisee. It allows them to use the franchisor's name, trademark, proprietary knowledge, and processes.

The franchisee is typically a small business owner or an entrepreneur who operates the store or franchise. The license allows the franchisee to sell a product or provide a service under the company's name. The franchisor is paid a start-up fee in return as well as ongoing licensing fees by the franchisee. Examples of companies that use the franchise business model include United Parcel Service (UPS) and McDonald's (MCD).

Trade Secrets

A trade secret is a company's process or practice that isn't public information and provides an economic benefit or advantage to the company or holder of the trade secret. Trade secrets must be actively protected by the company and are typically the result of a company's research and development (R&D). This is why some employers require the signing of non-disclosure agreements (NDAs).

Examples of trade secrets could be a design, pattern, recipe, formula, or proprietary process. Trade secrets are used to create a business model that differentiates the company's offerings to its customers by providing a competitive advantage.

Digital Assets

Digital assets are also increasingly recognized as intellectual property. These would include proprietary software code or algorithms and online digital content.

Intellectual Property Infringement

Certain rights known as intellectual property rights are attached to intellectual property. They can't be infringed upon by those without authorization to use them. Intellectual property rights give owners the ability to bar others from recreating, mimicking, and exploiting their work.

• Patent infringement occurs when a legally protected patent is used by another person or company without permission. Patents filed before June 8, 1995 were valid for 17 years. Patents filed after this date are valid for 20 years. The details of the patent are made public after the expiration date.
• Copyright violations occur when an unauthorized party recreates all or a portion of an original work such as art, music, or a novel. The duplicated content need not be an exact replica of the original to qualify as an infringement.
• Trademark infringement occurs when an unauthorized party uses a licensed trademark or a mark resembling the licensed trademark. A competitor might use a mark similar to its rival's to disrupt business and attract their customer base. Businesses in unrelated industries may use identical or similar marks to capitalize on another company's strong brand image.

Trade secrets are often protected by NDAs. They've violated the agreement and infringed upon the trade secret if a party to the agreement discloses all or parts of a trade secret to uninterested parties. It's possible to be guilty of trade secret infringement when an NDA isn't present.

Avoiding Intellectual Property Infringement

Infringement is often done unwittingly. Make sure that your business isn't using copyrighted or trademarked material to avoid being sued for infringement on intellectual property. Be sure that your brand or logo isn't too similar to that of others so it could reasonably mislead someone into thinking it was the other brand.

It's also a good idea to do a patent search to ensure that any ideas are your own. You may be able to find ways to license them through the proper channels if they're not. Intellectual property lawyers specialize in this process to make sure that you aren't using anybody else's protected intellectual assets.

Make sure the contract explicitly states that any creative work that's generated becomes the property of the company and not the person you hired if you hire someone to do creative work for you or your company.

Example of Intellectual Property

A widely publicized intellectual property case in 2017 involved a company called Waymo that sued Uber over alleged stealing and implementation of technology that related to Waymo's self-driving car program.

The plans for the technology weren't yet completely viable but they constituted significant intellectual property for Waymo. They were able to take action through the court system to attempt to prevent Uber from utilizing the information to enhance their own self-driving car program when they alleged that Uber had obtained their intellectual property.

The Bottom Line

Assets come in many shapes and sizes but some don't have a physical presence. Often called intangible assets, intellectual property holds just as much value for corporations as tangible assets. Logos and brand names that can be patented and trademarked help consumers recognize popular companies and their products. Companies should take the necessary steps to protect these assets so they aren't misused or infringed upon by others.