What Is Intellectual Property?

A company’s or an individual’s collection of intangible assets that are legally protected from being used or implemented by third parties without permission is referred to as intellectual property. A company’s or individual’s non-physical assets are known as intangible assets.

The idea behind intellectual property is that some creations of human intelligence need to have the same legal protections as tangible goods, which are physical property. Laws protecting both types of property are in effect in the majority of industrialized economies.

Intellectual Property
Intellectual Property

Understanding Intellectual Property

Intangible assets fall under the category of intellectual property. This implies that they are not necessarily physically present and cannot be retained. These resources are the result of human ingenuity. Intellectual property encompasses a wide range of items, including but not limited to artwork, symbols, trademarks, brand names, and designs.

In today’s increasingly knowledge-based economy, intellectual property is so valuable that companies take great care to identify and safeguard it. Additionally, creating valuable intellectual property involves significant time and brain investments. This translates into significant financial outlays made by businesses and private citizens that others shouldn’t be able to access without authorization.

Extracting value from intellectual property and preventing others from extracting value from it is an essential obligation of any business. Intellectual property may be significantly more valuable than a company’s physical assets, despite being an intangible asset. The businesses that control the property aggressively maintain and protect it since it can be a competitive advantage.

Special Considerations

Since there are no particular accounting procedures to determine the value of each asset, many types of intellectual property cannot be represented as assets on the balance sheet. Nonetheless, since market players are aware of the intellectual property’s existence, the value of the asset often reflects in the stock price.

Since patents and other intangible assets have an expiration date, they are registered as property. Amortization results in the recognition of these assets by a numerical value. The accounting technique of amortization lowers an intangible asset’s value over a certain length of time. Through the annual expensing of a predetermined amount for tax purposes, this procedure assists the corporation in lowering its revenue as the useful life of an intangible asset expires.

Intellectual Property
Intellectual Property

For instance, a patent may only be valid for twenty years before it becomes publicly known. A business would give the patent its total value. We would divide the whole value of the patent by 20 years, and each year for 20 years, we would expense or amortize the same amount.

For tax reasons, the amortized asset amount would lower the business’s net income or profit each year. However, because it never expires, intellectual property that is thought to have an endless life, like a trademark, is not amortized.

Types of Intellectual Property

Intangibles can take many different forms, but some of the more popular ones are included here.

Intellectual Property
Intellectual Property

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. For example, the patent for the personal computer was filed in 1980 by Steve Jobs and three other colleagues at Apple (AAPL)

Copyrights

Authors and other producers of original work have the only right to use, reproduce, and recreate their creations thanks to copyright protection. Both musicians and writers of books enjoy copyright protection for their creations. Additionally, a copyright specifies that the original authors may authorize anybody to utilize their creations by way of a license agreement.

Trademarks

A trademark is an identifiable phrase, symbol, or insignia that legally distinguishes one product from another. An exclusively allocated trademark belongs to a firm; this means that no one else may use or reproduce the brand.

A trademark and a company’s brand are frequently linked. For instance, the Coca-Cola Company owns the Coca-Cola logo and brand name.

Franchises

A franchise is an agreement that permits a business, an individual, or a third party—referred to as the franchisee—to utilize a business—the franchisor—name, trademark, proprietary information, and procedures.

Usually, a small company owner or entrepreneur runs the franchise or store as the franchisee. The franchisee’s license permits them to use the company’s name when selling goods or rendering services. The franchisee pays the franchisor a start-up fee and continuing license costs in exchange. McDonald’s and United Parcel Service (UPS) are two instances of businesses that employ the franchise business model (MCD).

Trade Secrets

Any procedure or technique used by a business that is not generally known to the public and offers the business or trade secret holder a financial advantage is considered a trade secret. Since trade secrets are usually the product of research and development (R&D) efforts, it is necessary for the firm to aggressively safeguard them. For this reason, some companies demand that employees sign non-disclosure agreements (NDAs).

A design, pattern, recipe, formula, or unique procedure are a few examples of trade secrets. Utilizing trade secrets gives the company a competitive edge and allows it to develop a business plan that sets its services apart for its clients.

Digital Assets

Additionally, the recognition of digital assets as IP is growing. These would include digital information found online and software code or algorithms that are proprietary.

Types of Intellectual Property

Intellectual Property
Intellectual Property

Intellectual Property Infringement

Certain rights, referred to as intellectual property rights, are associated with intellectual property. Those who do not have permission to exploit these rights cannot violate them.

Owners have the power to prevent others from copying, exploiting, and remaking their work thanks to IPRs.

When a corporation or individual uses a legally protected patent without authorization, it is known as patent infringement. Patents submitted before June 8, 1995, had a 17-year validity period; patents filed after that date had a 20-year validity period.

  • The patent’s information becomes available after the expiration date.
  • When someone without authorization replicates all or part of an original work—like a piece of music, art, or literature—copyright infringement takes place. The redundant material doesn’t have to be a precise duplicate of the original in order to be considered an infringement.
  • When someone uses a licensed trademark or a mark that closely resembles a licensed trademark without authorization, it is considered trademark infringement. For instance, in an attempt to disrupt business and draw in customers, a rival may adopt a mark that is similar to that of its rival. Additionally, companies in other sectors may attempt to profit from the strong brand perceptions of other organizations by using identical or similar marks.
  • A lot of the time, NDAs safeguard trade secrets. A party has breached the agreement and infringed upon the trade secret when they divulge all or portions of the trade secret to parties that have no interest in learning about it. If there is no NDA in place, one may still be guilty of trade secret violation.

Avoiding Intellectual Property Infringement

Unintentional infringement is common. Make sure your company doesn’t use copyrighted or trademarked content, and make sure your logo or brand isn’t so similar to someone else’s that it may reasonably lead someone to believe it’s the other one, in order to prevent getting sued for intellectual property infringement.

To be sure that any ideas are your own, it’s also a good idea to conduct a patent search. If not, you might be able to license them via the appropriate channels. To ensure that you are not utilizing someone else’s legally protected intellectual property, there are intellectual property attorneys that specialize in this procedure.

When hiring someone to perform creative work for you or your business, be sure the agreement clearly indicates that any original work produced belongs to the business, not the person you employed.

Example of Intellectual Property

A startup named Waymo sued Uber in a highly publicized intellectual property action in 2017 for claimed theft and use of technology connected to Waymo’s self-driving vehicle development.

Waymo owned a substantial amount of intellectual property in the technology plans, despite the fact that they were not yet fully feasible. They were able to use the legal system to try to prevent Uber from using the knowledge to further their own self-driving vehicle development after they claimed that Uber had stolen their intellectual property.

What Is the Purpose of Intellectual Property?

In addition to being utilized for marketing and branding,Intellectual Property can also be used to safeguard resources that provide a competitive edge.

The Bottom Line

Assets are diverse in terms of size and form. However, some are not materially present. Intellectual property, sometimes known as intangible assets, is equally as valuable to businesses as physical assets. Brand names and logos, which are patentable and trademarkable, aid in the recognition of well-known businesses and their goods by consumers. Because of this, it’s critical that businesses take the appropriate precautions to safeguard their assets and prevent exploitation or infringement by other parties.

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