What Is Intellectual Property, and What Are Some Types?

What Is Intellectual Property?

Intellectual property is a broad categorical description for the set of intangible assets owned and legally protected by a company or individual from outside use or implementation without consent. An intangible asset is a non-physical asset that a company or person owns.

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, which are 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 assets that are intangible. This means that they cannot be held and don't necessarily have a physical presence. These assets are created using human intellect. Intellectual property can take many forms and includes things like artwork, symbols, logos, brand names, and designs, among others.

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

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

Special Considerations

Many forms of intellectual property cannot be listed on the balance sheet as assets since there aren't specific accounting principles to value each asset. However, the value of the property tends to be reflected in the price of the stock since market participants are aware of the existence of the intellectual property.

Some intangible assets, such as patents, are recorded as property because they have an expiration date. These assets are recognized by a numerical value through the process of amortization. Amortization is an accounting method that decreases the value of an intangible asset over a set period of 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.

For example, a patent might only have 20 years before it's registered as public domain. A company would assign a total value to the patent. Each year for 20 years, the patent would be expensed or amortized by the same amount by dividing the total value by 20 years. Each year the amortized asset amount would reduce the company's net income or profit for tax purposes. However, intellectual property that is considered to have a perpetual life, such as a trademark, is not amortized since it doesn't expire.

Types of Intellectual Property

Intellectual property can consist of many types of intangibles, and some of the most common are listed below.

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

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

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

Franchises

A franchise is a license that a company, individual, or party–called the franchisee–purchases allowing them to use a company's–the franchisor–name, trademark, proprietary knowledge, and processes.

The franchisee is typically a small business owner or 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. In return, the franchisor is paid a start-up fee and 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 is not public information, which 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), which 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 IP. These would include proprietary software code or algorithms, and online digital content.

Intellectual Property Infringement

Attached to intellectual property are certain rights, known as intellectual property rights. These are rights that cannot be infringed upon by those without authorization to use them. IPRs 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, whereas patents filed after this date are valid for 20 years. After the expiration date, the details of the patent are made public.
• Copyright violations occur when an unauthorized party recreates all or a portion of an original work, such as a work of 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. For example, a competitor might use a mark similar to its rival's to disrupt business and attract their customer base. Also, businesses in unrelated industries may use identical or similar marks in an effort to capitalize on other companies' strong brand images.

Trade secrets are often protected by NDAs. When a party to the agreement discloses all or parts of a trade secret to uninterested parties, they have violated the agreement and infringed upon the trade secret. It is possible to be guilty of trade secret infringement when an NDA is not present.

Avoiding Intellectual Property Infringement

Infringement is often done unwittingly. To avoid being sued for infringement on intellectual property, make sure that your business is not using copyrighted or trademarked material, and be sure your brand or logo is not too similar to that of others that it could reasonably mislead somebody to think it was the other brand.

It's also a good idea to do a patent search to ensure that any ideas are your own. If not, you may be able to find ways to license them through the proper channels. There are IP lawyers who specialize in this process to make sure that you are not using anybody else's protected intellectual assets.

If you hire somebody to do creative work for you or your company, make sure the contract explicitly states that any creative work that is generated becomes the property of the company and not the person you hired.

Example of Intellectual Property

There was a widely publicized intellectual property case in 2017 in which a company called Waymo sued Uber over alleged stealing and implementation of technology relating to Waymo's self-driving car program.

The plans for the technology, although not yet completely viable, constituted significant intellectual property for Waymo. When they alleged that Uber had obtained their intellectual property, they were able to take action through the court system to attempt to keep Uber from utilizing the information to enhance their own self-driving car program.

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 ones. Logos and brand names, which can be patented and trademarked, help consumers recognize popular companies and their products. That's why it's important for companies to take the necessary steps to protect these assets so they aren't misused or infringed upon by others.