Pillars of IP governance for financial institutions

September 2022 | SPOTLIGHT | BANKING & FINANCE

Financier Worldwide Magazine

September 2022 Issue

With intangible assets now representing over 90 percent of value in S&P 500 companies, intellectual property (IP) governance is relevant to all industry sectors. While some industry sectors, notably pharmaceuticals and technology, have long been used to having robust IP governance, this is not so in other industry sectors, including financial institutions (FIs), where these valuable assets have not always received the attention they deserve. This has led to an underinvestment in developing a culture of IP at all levels of the business, failure to identify and act on risks early, and failure to extract maximum value from a business’ existing and potential IP-rich assets.

In this article, we consider how FIs can approach best practice IP governance, strategies for minimising IP risk, and procedures for addressing issues when they do arise. The key takeaways for FIs are: (i) understand what you own and compare that to what you need to operate and succeed; (ii) make sure intangible assets feature on board meeting agendas; (iii) engage appropriate experts to inform you on best practice, protection and commercialisation options and strategies; (iv) make IP work for the business by embedding conversations, processes, policies and strategies to foster a robust IP culture; and (v) put in place proactive and appropriate measures to minimise risks and respond to issues when they arise.

The changing role of IP from the boardroom down

The banking and insurance sectors have traditionally been focused on the management of tangible property, investment strategy and risk management, requiring the C-suite and board to be experienced banking professionals. These days, that dynamic is increasingly being replaced by cryptocurrencies, non-fungible tokens, the metaverse (in which Onyx, the blockchain unit of JP Morgan, opened a lounge earlier this year), big data, artificial intelligence (AI) or machine learning (ML), and FinTech – requiring a different skillset, and a different attitude toward the role and value of IP.

We can see the personnel shift in these industries toward general counsels with technology backgrounds and boards introducing more tech-savvy members. Board director industry bodies such as the Australian Institute of Company Directors are focusing their training and recruitment efforts on digital and tech-savvy director skills.

The disruption of the financial services industry is being accelerated using IP and, increasingly, FIs are being faced with new offerings being blocked by IP-rich competitors, including other FIs, FinTechs, or large technology companies that have not traditionally provided financial services and are increasingly looking to use IP as a lever to carve out their market positions, including by building up their patent positions.

Best practice IP governance: where to start

Against this backdrop, how can FIs establish and maintain a culture of best practice IP governance?

A good place to start is with an audit of existing IP assets and preparing a register of IP. With a comprehensive IP register in place, a business can and should engage with the C-suite and board for a strategy to manage, protect and commercialise these assets with the business’ innovation strategy, competitive market position, monetisation goals and overall appetite for risk in mind, in the same way that they might approach the management of tangible assets. This type of engagement is likely to require, at least, an education process about the types of assets and what they contribute to the business, ideally supported by clear financial data.

Hopefully a register build is a one-off activity, but the ongoing maintenance and reporting should become routine, along with other governance reporting. Such reporting will involve not only a periodic recalibration of the business’ IP strategy to align with current objectives, but also regular updating on notable IP issues, potential risks or claims, mitigation strategies and associated costs. In today’s world of big data, AI and ML, data will be an increasingly key focus of FIs’ IP strategies, so IP governance will also need to intersect with data governance and its associated legal risks, including privacy and cyber security.

Building a culture of IP

With all of the background work done, a business can have more open conversations about its intangible assets and their protection, to embed a culture in the organisation of understanding and valuing IP. In some cases, this will involve IP filings and registrations, but a business’ IP strategy should have a broader focus beyond mere registrations on a holistic framework for directing resources to capture and monetise the value of technology, data or other IP, grounded in business strategy, people and community objectives.

To embed a culture of IP, the legal team should prepare cohesive processes, policies and templates embodying both strategy and execution around IP and metrics to allow the C-suite or board to meaningfully assess the performance of the assets. To maintain that culture, there needs to be both a top-down and a bottom-up approach. Not everyone needs to be an expert, but everyone needs to have a basic understanding of what IP is and why it is valuable to the business.

Realising IP value

Robust IP governance should be seen as both a sword and a shield for generating value and minimising risk.

When approached correctly, IP can have tremendous value, which can be measured both in terms of its enterprise value and its people value. For example, IP has inherent economic value to the valuation of a business; it helps establish market exclusivity, can help manage risk and ensures organisations remain innovative and competitive, combatting the encroachment of new players into the financial services space. IP provides assets to share and trade, which in turn fosters collaboration, offers an anchor for diverse monetisation strategies, and prevents leakage of value to competitors and contamination of ownership of a business’ own technology, data and other IP assets.

Furthermore, a focus on IP is seen as a hallmark of an innovative enterprise and so can assist in attracting and retaining talent, which is a major challenge for businesses of all kinds in today’s competitive job market. IP is seen as critical to maintaining the technological edge that team members work hard to produce, and IP activity is seen as real recognition of innovative efforts.

Minimising IP risk

The other, equally important, side of the coin is ensuring that businesses have policies and processes in place to minimise the risks associated with, for example, misuse of third-party IP, failure to obtain necessary clearances before commencing use, or breaches of confidential information. In addition to fostering a general culture of IP awareness and IP hygiene at all levels of the business, specific higher-risk activities arising out of the types of disruptive activities discussed above may warrant more targeted and comprehensive risk mitigation strategies.

It goes without saying that employment contracts and co-development agreements should contain robust confidentiality provisions. Compliance with confidentiality obligations for particularly commercially sensitive projects can also be achieved by the use of technology tools, for example by restricting electronic access to key documents or files. This is of particular relevance in today’s remote working environment.

The creation or acquisition of a new piece of technology, or some other highly valuable form of IP, will often require enhanced due diligence prior to use, including potentially freedom to operate analyses. Patent searches and analyses require specialist input and there are often significant lead times required to clear a new piece of technology for use.

Another area of potential risk which commonly arises in the context of technological innovation is the use of third party technology and data, particularly open source software. While these can be useful tools, businesses seeking to leverage them should ensure that those responsible are well-educated about the terms on which they can do so.

When it all goes wrong

Of course, even with the best risk minimisation strategies, it is sometimes impossible to avoid ending up on the receiving end of a letter of demand from a third party claiming some sort of IP infringement, breach of confidential information, or related contractual breach. Resolving these types of disputes can be a costly and distracting exercise at best, or a significant business disruption and public relations headache at worst.

Unfortunately, FIs and FinTechs making use of new technologies are increasingly the targets of litigation campaigns commenced by non-practising entities or ‘patent trolls’, which acquire patents but do not actually utilise the patented inventions themselves. One recent example is a campaign by Auth Token against a large number of FIs asserting patent infringement in relation to the EMV payment method. Another campaign is being waged by Ward Participations asserting patent infringement in relation to the use of private keys for authentication in electronic transactions for FIs that support the mobile payment and digital wallet service Samsung Pay.

Therefore, even businesses that might not consider themselves active in the patent litigation space should have an IP litigation preparedness ‘playbook’ as part of their overall IP strategy. This might include a flowchart of action items, timeframes and responsible individuals, both within the business and key external legal and other advisers. This will allow matters to be escalated appropriately and action taken quickly and efficiently should the need arise, especially in the context of urgent interlocutory injunctions.

Frances Drummond is a partner and Isobel Taylor is a senior associate at Norton Rose Fulbright Australia. Ms Drummond can be contacted on +61 2 9330 8007 or by email: frances.drummond@nortonrosefulbright.com. Ms Taylor can be contacted on +61 2 9330 8400 or by email: isobel.taylor@nortonrosefulbright.com.

Frances Drummond and Isobel Taylor

Norton Rose Fulbright Australia