Research in Motion (RIM) is a Canadian high tech company probably little known compared to the name of its electronic communications platform and device beloved of corporate and entertainment stars, the BlackBerry. However, RIM itself appeared in the headlines in March 2006 when it settled a patent infringement lawsuit that threatened to shut down the BlackBerry system, whose subscribers provide most of its revenues.
The case, brought by NTP, a private US company founded by an inventor in 1992, illustrates how critical intellectual property risks are to businesses today, especially in the high tech field.
Having fought for nearly four years against a judgement by US courts in favour of NTP and an injunction that would have shut down the BlackBerry system, RIM agreed to settle the case for US$612.5m. Previous provisions and tax recovery reduced the impact on RIM's profit and loss account for the year to 4 March 2006 to $352.5m, a material figure nonetheless out of the firm's total revenues of $1,350.4m for the year.
During the life of the law suit, shares in RIM were even more volatile than the index for NASDAQ, the high tech US exchange on which RIM is listed in addition to the Toronto Stock Exchange. Over the 12 months between May 2005 and May 2006, the price swung between $51.9 and $90.5. There was a small rise when the settlement was announced, and on 12 May, the shares stood at $73.
Disputes over intellectual property are an occupational hazard for certain types of business, especially those with high tech brand visibility. Scarcely was the ink dry on RIM's settlement with NTP than another company, the venture capital backed Visto, brought an action against RIM also alleging patent infringement and asking for damages and an injunction. Like NTP before it, Visto is an intellectual property asset owner, rather than a competing manufacturer or service provider.
On 1 May, RIM issued a statement challenging Visto's claims and indicating it would consider asserting its own patents against Visto. 'RIM is fully prepared and equipped to deal with the matter, and will continue to disclose material information as it becomes available.' The company reassured its customers that they should not be affected by the complaint and said it was unlikely any material court proceedings would begin before the middle of 2007. Shortly afterwards, RIM filed a counter suit against Visto.
The stakes are high, and companies that own patents and do not apply them, but take an aggressive approach to other companies to claim licensing fees are sometimes disparagingly labelled 'patent trolls'. It takes nothing more than a court fee to rattle a sabre, and that can create the desired intimidation. Defending a case can be protracted and expensive, and, according to Matthew Hogg, intellectual property underwriter for Kiln at Lloyd's, intellectual property suits settle less frequently than other types of commercial case. He says that costs in US actions increasingly go over $10m, not only because of legal fees but also because of the technical expertise required.
In its Canadian annual information form for 2005, RIM explains that regardless of merit, infringement claims can among other things:
- adversely affect customer relationships
- cost considerable time and money to evaluate and defend
- divert management attention and resources
- create significant liabilities
- require the company to stop certain activities or cease selling products and services in some markets.
Risk management in motion
For companies that both exploit and develop technology, there are symmetrically opposed risks involved with their patents and other intellectual property. On one side they may infringe someone else's rights and face litigation that could ultimately end in a judgement that forces them to abandon a product or service. On the other hand, they could fail to protect their own rights and lose the revenue they could generate.
In its annual information filing, RIM says, 'The company's commercial success depends upon the company not infringing intellectual property rights owned by others.' Shortly afterwards, it adds, 'The company's commercial success also depends on its ability to develop new or improved technologies and products and obtain patent or other legal protection for them and devotes significant resources to protecting its proprietary technology.'
Although they are essential to business survival, these risks typically do not come under a corporate risk manager or risk management department. Matthew Hogg says, "What there isn't, more often than not, is ownership of the intellectual property risk. Disparate groups tend to be involved across the company. Lawyers have drafted the documents and they do not want to believe they can go wrong. The risk manager has a broad view of the business, but probably does not get involved in all aspects of intangible assets, as it is expected senior management will do that."
Paul Hopkin is an experienced risk manager who worked for two UK based businesses with substantial intellectual property assets, the BBC and Rank, and is today technical manager of the UK risk management association AIRMIC, for whom he conducts enterprise risk management courses. He confirms that intellectual property is not usually part of the corporate risk manager's province, although he or she may be responsible for its inclusion on the risk register. He adds, however, "The risk manager may not be involved, but there is certainly a role for risk management tools and techniques."
According to Hopkin, the process should be one of identifying the risks, devising control measures, auditing their implementation and, if the control measures break down, investigating the circumstances to identify weakness and improve the controls. "Risk management and internal audit need to develop closer relationships. Risk management identifies the risks and devises the controls, while internal audit is responsible for auditing their implementation and investigating failure. There needs to be a feedback of experience loop between them."
Generally, insurance for intellectual property risks is not a major element in the risk management process. The market is small and specialised with Lloyd's and American International Group being the leaders. Probably the biggest sector of the market is insurance against third party actions, and there are also a few underwriters who offer cover for the cost of pursuing enforcement actions. According to Matthew Hogg, this type of policy suits small companies because it gives them the resources to take on large businesses.
Finally, Kiln itself has devised what Hogg believes is a unique policy that aims at balance sheet protection, a sort of business interruption policy for intellectual property assets. It responds to the financial implications of loss or impairment to an intellectual property asset, for example if a judgement goes against a company and it can no longer sell a particular product or service.
Less transparent
RIM has clearly identified intellectual property risks, which are set out in public documents. The rest of its risk management process is less transparent and it only uses the specific expression risk management in terms of financial risk in its corporate documents. RIM did not respond to our questions. However, it is possible to infer some of the ways it works to protect its intellectual property, primarily by preventing threats to its own assets, rather than managing claims from third parties.
The company states that it has a team of in-house and outside patent lawyers, who work with employees, review invention disclosures and prepare patent applications on a broad core of technologies and skills. As a result, RIM owns rights to an array of patented and patent pending wireless communication technology inventions.
The company does warn that assessing the risk of challenges is very difficult, 'The company cannot determine with certainty whether any existing third party patents or the issuance of any new third party patents would require the company to alter its technologies, obtain licenses or cease certain activities.'
If the market judged that in settling the NTP suit RIM 'had dodged a bullet in its intellectual property suit,' New York based marketing and communications expert, Gabriel Stricker believes the greatest risk now facing RIM is commercial. Writing in BrandChannel.com, the e-zine of leading brand consultancy, Interbrand, Stricker warns that since the inception of the BlackBerry in 1999, RIM had effectively exploited its near monopoly position in the market. This has disappeared, and 'our beloved wireless fruit' faces competition from formidable foes, including Microsoft and its high profile launch of Windows Mobile.
RIM, he says, need to provide subscribers with more exciting applications and greater overall innovation, otherwise its stranglehold on the market will soften. RIM has to become 'more than just a company that relays email to wireless devices.' Senior management has to manage these risks.
Lee Coppack is a risk management writer and analyst. She is also editor of StrategicRISK's sister publication, Catastrophe Risk Management, E-mail: lee@coppack.co.uk
RIM RISK FACTORS
In RIM's 2006 annual report, the risk of third-party claims for infringement of intellectual property rights by RIM, and the outcome of any litigation in respect of this is top of the company's list of key risk factors. Among others are:
- RIM's ability to successfully obtain patent or other proprietary or statutory protection for its technologies and products
- RIM's ability to obtain rights to use software or components supplied by third parties;
- RIM's ability to enhance current products and develop and introduce new products
- the efficient and uninterrupted operation of RIM's network operations centre and the networks of its carrier partners
- RIM's ability to establish new, and to build on existing, relationships with its network carrier partners and licensees
- RIM's dependence on its carrier partners to grow its BlackBerry subscriber base and to accurately report subscriber account activations and deactivations to RIM on a timely basis
- fluctuations in RIM's quarterly financial results and difficulties in forecasting the growth rate for BlackBerry subscribers
- the occurrence or perception of a breach of RIM's security measures, or an inappropriate disclosure of confidential or personal information
- intense competition within RIM's industry, including the possibility that strategic transactions by RIM's competitors or carrier partners could weaken RIM's competitive position
- the continued quality and reliability of RIM's products
- RIM's reliance on its suppliers for functional components and the risk that suppliers will not be able to supply components on a timely basis or in sufficient quantities
- RIM's dependence on a limited number of significant customers
- dependence on key personnel, and RIM's ability to attract and retain key personnel
- reliance on third-party network infrastructure developers and software platform vendors
- RIM's ability to manage production facilities and its reliance on third-party manufacturers for certain products
- risks associated with short product life cycles
- government regulation of wireless spectrum and radio frequencies
- restrictions on import of RIM's products in certain countries due to encryption of the products.
