Intellectual property risks of enterprises can be summarized as intellectual property risks that may be encountered in the production and operation activities of enterprises and may bring adverse effects on enterprises.

Under the background of globalization of knowledge and economy, in order to maintain the leading position in the market or compete for the share of emerging markets, enterprises have taken intellectual property rights as an important means of competition. Firstly, this article combs all kinds of intellectual property risks that enterprises may face from the two dimensions of internal management and external environment; then, it expounds the construction of enterprise intellectual property risk management system, and puts forward four principles plus three core system construction ideas; finally, it provides several suggestions on intellectual property risk management.

1.      Enterprise intellectual property risk identification

(1)   Internal management of enterprises

There are different intellectual property risks in every link of enterprise production and operation. This article combs the intellectual property risks in the processof R&D, procurement, production and sales.

a)      R&D link

For high-tech enterprises, new technology and new products are the core competitiveness of enterprises.The intellectual property risks faced by enterprises in R&D links (including technology R&D and product development) mainly include (1) Repeated research and development without retrieval of relevant patents before launchingR & D project; (2) R&D personnel’s lacking awareness of intellectual property protection which leadsto the technical content of new technologies and new productsare inappropriatelydisclosed without the protection ofintellectual property; (3) Improper security measures, poor management or loss of core R&D personnel lead to imitation and plagiarism of technology and products by others; (4) Intellectual property risk investigation was not conducted before R & D, resulting in infringing on others' prior rights; (5) In cooperation with other entities, failing to specify the ownership of technological achievementswhichleads totheillegal occupation ofintellectual propertybycooperative partners; (6) Disputes onownershipof intellectual property rights caused by unclearagreementswithemployees.

b)      Procurement link

Procurement of means of production is the premise to ensure the production and operation of enterprises.The intellectual property risks involved in the procurement process are mainly therisks caused by the infringement or suspected infringement of the intellectual property rights of other enterpriseswhile purchasing means of production, such as equipment, instruments, materials and parts, and the disputes between enterprises and suppliers caused by intellectual property issues.As the patentee can claim the right against any manufacturer in the supply chain, the enterprise may become the defendant for purchasing and using the suspected infringing means of production.Once involved in litigation, enterprises not only need a lot of manpower and material resources to deal with litigation cases, butmay also encounter the dilemma that the equipment and materials accused of infringement cannot be used anymore. If the contract between the enterprise and the supplier does not clearly stipulate the supplier's liability, it is difficult for the enterprise to claim against the supplier for the costs and losses.

c)      Production link

Whether an enterprise has its own factory to manufacture products independently, or entrusts other companies to manufacture products, or is entrusted by other companies to manufacture products, the risk of intellectual property rights in the production process cannot be ignored.

If a company fails to do a proper job of secrecy in its own production process, there will be a risk of leakage. When the enterprise entrusts other companies to produce products on behalf of it, it will provide relevant technical data, which may result in a risk of leakage of technical solutions in the process of cooperation. For example, Apple Inc. commissioned Foxconn to make the iPad 2, and Foxconn R&D staff sold the data regarding the back shell for a fee.Buyers used the data to make iPad 2 condoms ahead of time, putting Apple and Foxconn in an awkward position. When an enterprise is the OEM, if the client is not the patenteeor has not obtained the authorized permission of the patentee, the enterprise will possiblyinfringe other people's intellectual property rights.

d)     Sales link

Sales department is the most direct realizer of enterprise benefit, butriskalwayscompanies withbenefit.One of the sources of intellectual property risks in sales are the rights and obligations related with intellectual property in sales contracts. Some enterprises do not attach much importance to the agreement on the rights and obligations relatedwith intellectual property in sales contracts with customers. They think that everything is good when they get an order, as they have no idea that there is a great risk in sales contracts.For example, the contract of sale stipulates that the enterprise should bear all the losses and expenses caused by intellectual property disputes, although in many cases these losses and expenses should not be borne by the enterprise. For instance, the enterprisemanufacturesproducts according to the design scheme provided by the customer infringe others’ intellectual property rights, while the design scheme is the cause of infringement. Another case scenario is thatthe sales contract stipulates that the enterprise shall license all intellectual property rights contained in the product to the customer, and that the license is free, permanent, unlimited and can be sub-licensed.The acceptance of such terms implies that both the customer and its suppliers, that is, the direct competitor of the enterprise, may indefinitely and freely use the technologyprotectedby intellectual property rights of the enterprise. This will seriously devaluethe intellectual property rights of the enterprise, so that the effectiveness of intellectual property rights defense weapons stockpiled by enterprises will be greatly reduced.

(2)   External environment

We are going to summarize the intellectual property risks faced by enterprises from the perspective of external environment.

a)      Cooperative partner

With the increase of technology complexity, it is increasingly difficult to obtain technology results by relying solely on the R&D strength of enterprises. The mode of joint development through the cooperation betweenupstream and downstream enterprises, theconsociationamong enterprises, universities and research institutes is becoming more and more common. The accompanying intellectual property risks may come from suppliers, customers or other partners of enterprises. These risks include: although enterprises and cooperative partners have signed a confidentiality agreement, the business secrets (including technical secrets and operating secrets) of enterprises are still leaked in the process of cooperation; The unclear attribution of technological achievements in cooperative development results in disputes over ownshipof intellectual property rights, enforcement ofjoint intellectual property rights, and income distribution;disputes between enterprises and customers,enterprises and suppliersdue to patent infringement;

b)      Competitors

Using intellectual property litigation (including patent litigation, trade secret litigation, trademark litigation, etc.) to attack competitors has become the norm of inter-enterprise competition. In the field of smart phones,mostoftheenterprises are not spared. LED is also a field with a high occurrence rate of patent litigation, and the five big LEDfactories includingNichia Corporation have launched patent litigation frequently all over the world.In addition to initiating intellectual property litigation directly, competitors often use trademarkto set up barriers for competitors. The competition of trademark registration is often seen. It is also a common practice to apply for patent related to the new products of competitors .

c)      NPE

In addition to all kinds of intellectual property barriers imposed by powerful competitors, enterprises also need to deal with risks arising from non-practice Entity (NPE), that is, the institutions with patents or other intellectual property rights which do not engage in the production of products, including universities, research institutes, and patent assertionentites that specialize in making huge profits through litigation.In the United States, NPE has initiated many patent lawsuits because of the lower threshold for filingcomplaint andhigher awardeddamages.NPEs usually send warning letters to many companies. If the companies ignore or mishandle the warning letters, the NPEs will force them to entersettlement negotiations oracceptcontract termsthathave not been agreed beforeby launchinginfringement litigation. Once the enterprise is involved inlitigation, it not only needs to pay high lawyer fees, expert fees,damages and so on, but also needs to deal with complicated legal procedures, including the discovery procedures which are a huge burden for the enterprise.

d)     Macro policy

Government policies have great impact on intellectual property rights of enterprises.In China, the government's subsidies for patent application and maintenance, the criteria for identifying high-tech enterprises, and the  preferential tax policies for high-tech enterprises will all havemanyeffects on business operations. In other countries, enterprises are also facing similar situations. For example, the Apple Incorporationhas been finedfor13 billion euro by European Union for setting up a company in Ireland to avoid taxes. It also unveiltheso-called“Double Irish Dutch Sandwich”tax avoidance arrangementwhich are often usedby multinational enterpriseslike Apple, Google, Microsoft . Through this arrangement, these companies transfer income and profits from abroad to tax havens to obtain tax deferral effects.The American law allows an overseas subsidiary of an American company to retain income obtainedfrom non-American intangible assets, the Americancompany doesn’t need to pay taxes until the offshore subsidiary transfers profits back to the United States. The income earned from intangible assets is mainly intellectual property (patent) licensing revenue.

e)      Laws and regulations

In China, the creation, amendment or abolition of laws, regulations, rules and normative documents related to intellectual property rights by the state, local people's congresses and governments such aschanges of the provisions and interpretation of laws, regulations, and judicial interpretations regarding the ownership of employee inventions and cooperative inventions; adjustment and change of the standard of infringement identification; and the adjustment of the amount of damages, etc. will have an impact on enterprises'intellectual property risk management.

2.      Construction of enterprise intellectual property risk management system

(1)   Four principles for risk management of intellectual property rights in enterprises

In order to do a good job in intellectual property risk management, we must first clarify the basic principles of intellectual property risk management and carry out specific work under the guidance of the principles.

a)      Principle of strategic consistency

Enterprise intellectual property risk managementshould serve the overall strategic objectives of the enterprise, adapt to its development stage, and coordinate with its positioning in the market.If the enterprise’s development strategy is to vigorously explore overseas markets, then the focus of intellectual property risk management should also be on overseas intellectual property risk management and control.If the enterprise's development strategy is gradually shifting from hardware products to hardware-software integration and Internet of Things, intellectual property risk management should also be inclined to software copyright, internet, Internet of Things, etc.

b)      Cost benefit principle

Enterprise intellectual property risk management should take full account of costs and benefits.Effective risk management is to control risk within a reasonable range while controlling human, financial and time costs. Risk control without consideration of costis not in line with market rules. Major risks that may seriously endanger the operation of enterprises should be dealt with strictly and eliminated to the maximum extent. Take the risk probe of intellectual property rights before launchingnewproductsas an example,for technology-intensive products, because the products involve a wide range of technology, the investigation of all technical points willlead to huge economic cost and high time cost, so that will postpone the new prodcts’launchingtimeand leave opportunities for competitors.In this regard, targeted investigation strategies can be adopted by focusing on the new technologies,the main selling pointsand the highlyrecognizable characteristics; the geographical scope of intellectual property risk investigation lies at the intersection of major market countries and the regionswithhighintellectual propertyrisks.

c)      Forward-looking principle

Risk management of intellectual property rights asks enterprise totake precautions. Enterprises need to have a foresight of intellectual property risks, do conduct investigation in advance and prepare for future crises.If an enterprise intends to develop overseas markets, it should apply for overseas trademarks ahead of time. For important technologies and products, it alsoshould managepatentmapahead of time, including applying for patents ,purchasing patents from other party or obtaining patent licensestoeliminate patent barriers, prevent others from setting new barriers of resistingtheenterprise’sdevelopingnew technologies and products.If the competition in the industry is already fierce, the possibility of competitors using intellectual property litigation to attack enterprises is extremely high, so that enterprises should be prepared to respond well and counter attack strategy. If the enterprise takes the initiative strategy, it needs to clarify the purpose and objectives of the litigation, and then formulate a detailed litigation plan, while preventing competitors from fighting back.

d)     Universality principle

Intellectual property risks run through all aspects of production and operation of enterprises, therefore, intellectual property risk management should be popularized to all relevant departments to raise the awareness of intellectual property risk, including management and ordinary staff, because they may face intellectual property risk in their daily work. The intellectual property risk management departments may take the lead in organizing intellectual property risk management and control training for different levels and departments, so as to raise the awareness of intellectual property risk of the whole staff.At the same time,they can also guide and encourage employees to do intellectual property risk management and control work, and further optimize and improve the relevant system according to employee’s feedback through formulating and implementing various types of intellectual property risk management reward and punishment system.Only in this way can they ensure the effectiveness of intellectual property risk management, avoid loopholes and minimize risks.

(2)   Three core risks of enterprise intellectual property rights management

The core of enterprise intellectual property risk management can be summarized as human management, financial management and event management.It is necessary to establish a complete system for the management of people, finance and events and to coordinate the relationship among them so as to control the intellectual property risks of enterprises in an all-round, comprehensive and effective way.

a)      Organization and talent management

Effective management of intellectual property risks requires the establishment and continuous optimization of intellectual property risk management and personnel management. In terms of organizational management, special departments and posts should be set up according to the specific conditions of the enterprise, and as for personnel management, specialized personnel should be selected to meet the needs of the posts. Intellectual property risk management of enterprises needs comprehensive consideration from multiple dimensions of technology, law, and business, and the managers should also deepen their understanding from these three aspects. Intellectual property risk managers should not only know the laws and regulations of intellectual property rights, but also be familiar with the professional technology of the industry in which the enterprise is located. They should also have the ability of management and inter-departmental coordination. Intellectual property risk managementneeds specialized personnel, including patent analysis personnel, licensing negotiation personnel, litigation personnel, etc. Enterprises can strengthen team building by combining internal training with external introduction to form a team of talents with complementary advantages and both offensive and defensive abilities.It should be emphasized that human management cannot be simply understood as the management of individual employees, but the management of human abilities, the management of knowledge, skills, and even experience in dealing with business work, and establishing and adopting a complete knowledge management system, training system, knowledge and experience sharing system.

b)      Financial management

When it comes to financial management, intellectual property departments are usually defined as cost centers. Companies acquire intellectual property rights such as patents through R&D. Their value is not reflected in financialstatus as promptly as product production and sales. R&D investment and patent application fees are usually considered as the costs of the enterprise, but not the assets. In 2006, the Accounting Standards of Enterprises were revised. The R&D expenditure of enterprises is divided into two parts: research and development. When the latter meets certain conditions, it can be regarded as intangible assets of the company.In different enterprises and different stages of development, the orientation of intellectual property departments in financial management should also be adjusted accordingly.On the one hand, they should make a good financial cost budget, including intellectual property application and maintenance costs, service fees paid to agents and law firms, internal management costs, etc.; On the other hand, they should make rational use of intellectual property to realize income, including accumulation of intangible assets, collection of licensing fees, gainingrevenue from transfer of intellectual property rights,financing through pledge orsecuritizationof intellectual property rights, securitization of intellectual property rights, and share-holding of intellectual property rights.

c)      System construction and implementation

The management of events is embodied in the construction and implementation of intellectual property risk management system. According to the various intellectual property risks summarized above, enterprises can carry out the construction of intellectual property risk management system in the following aspects: (1) Intellectual property management system, including patent management system, trademark management system, copyright management system, trade secret management system, etc.; (2)Technical management systems related to intellectual property, including intellectual property risk assessment in the process of R&D, development, transfer, licensing, investment, joint venture and cooperation, and archival management of R&D raw materials; (3) Intellectual property risk investigation system, mainly for enterprises independent research and development technology, products, or the purchase of key materials and technology; (4)Intellectual property-related personnel flow management system,the enterprise should strengthen intellectual property risk management in employee recruitment, induction, transfer and resignation, including examining whether the prospective employee hasnon-compete agreements withhisprior employer, requiring the employee to sign a confidentiality agreement, non-competition agreement, employee invention ownshipagreement, etc.; (5) Reward and punishment system for risk management of intellectual property rights ofenterprises; (6) intellectual property risk training system for enterprises: organizing targeted trainings for different departments and different levels in the enterprise; (7) Intellectual property contract management system, including patent sales contracts and patent licensing contracts; (8) The litigation management system of intellectual property disputes, including intellectual property disputes management and intellectual property litigation management. In the process of implementing the system, it is necessary to adjust and perfect the system according to the development of the enterprise, so as to make it more in line with its development strategy,and further achieve strong pertinence, practicality and operability.

3.      Suggestions on risk of intellectual property rights in enterprises

(1)   Establishing the intellectual property risk management committee

Considering the importance and universality of intellectual property risk management, it is suggested that enterprises establish a special intellectual property risk management committee in order to promote intellectual property risk management on the strategic level, coordinate with the enterprise strategy, arrange and allocate resources as a whole, and make the intellectual property risk management work systematic and thorough. For example, when an enterprise is involved in a major intellectual property litigation, it needs the cooperation of all departments: the intellectual property department shouldtake the leadinthe litigation/prosecution/counterclaim process; The technical department cooperates to make technical analysis and provide alternative design; Sales department is responsible for customer communication and soothing work; If the purchased componentsare involved, the procurement department is responsible for claiming damages fromsuppliersor replacement of infringing components; Brand departmentshould be prepared for public opinion guidance; Other relevant departments shall take other measures according to the specific circumstances of the case.

(2)   Strengthening enterprise internal collaboration

Intellectual property risk runs through all links of enterprise production and operation, and intellectual property risk prevention cannot be separated from the close cooperation between the intellectual property risk management department and other departments. Intellectual property risk management department can cooperate with other departments in such aspects as awareness enhancement, training, process specification, reward and punishment guidance, etc.The intellectual property risk management and control department should provide systematic and targeted training for personnel in procurement, sales, R&D and other organizational departments to increase the awareness of intellectual property risk. It should also timely participate in important projects to assist other departmentsto achieve better negotiation results.In addition, it should also establish a standardized process and reward and punishment system related to intellectual property rights to guide other departments to better carry out intellectual property risk management and control work.

(3)   Strengthening the utilization of external resources

Enterprises should pay close attention to intellectual property laws, regulations, rules and normative documents, and establish a mechanism for collection, collation and tracking.In the aspect of legislative amendment, enterprises can actively givefeedback which is in favor of the enterprisetothegovernment.Good communication channels should be established with various government departments, including the State Intellectual Property Office,its subordinate units such as the Patent Examination Collaboration Center,local intellectual property offices, mainly the offices in the area where the enterprise is located and enterprise's products are sold,courts at all levels, mainly intellectual property courts,other government departments related to intellectual property business, including local commercial commissions, customs, etc.

In terms of intellectual property protection, the strenghofindustry associations cannot be ignored. Industry associations are the bridge between the government and enterprises. The intellectual property policy formulated by government departments is usually implemented with the help of industry associations. Enterprises can also express their expectations to the government through industry associations. The trade associations play an extremely important role in dealing with intellectual property risks, especially litigation and licensing. When enterprises encounter critical litigationssuch as 337 investigation, anti-dumping investigation, etc., individual enterprises are too weak to cope with these kinds of events. However, the industry association can play a bigrole intheseissues: on one hand, it can form scale effect and integrate all kinds of resources and forces; on the other hand, it can reduce the burden of enterprises by sharingfees and costs. In the licensing negotiation, the industry association can obtain preferential licensing conditions for member enterprises and reduce the licensing cost by using the scale effect.

Enterprise intellectual property risk management cannot be carried out without the support of external forces. Excellent intellectual property service institutions will greatly improve the efficiency and level of enterprise intellectual property risk management.It is also very important for enterprises to select suitable intellectual property service providers and keep good cooperation with them to control intellectual property risks. At the same time,the enterprisealso need tostrengthen service providersmanagement, establish evaluation, feedback and elimination mechanisms, and control costs.

(4)   Establishing intellectual property risk reservesfund

In the case of intellectual property lawsuits, especially in the United States, Europe, the costs of lawyer fees and expert fees for patent lawsuits are as high as millions of dollars, while the costs of settlement and compensation for infringement are usually between millions and tens of millions of dollars. In the field of consumer electronics, the damages of more than several hundred million dollars are not rare. In order to deal with intellectual property litigation in time and reduce financial risk, it is an effective way to set up risk reserves fund.

The protracted patent lawsuits between Samsung and Apple, 337 investigation by the United States to HUAWEI and ZTE, and inspection of the exhibits of Chinese companies while attending exhibition in overseas all indicate the universality and importance of intellectual property risks for enterprises.The development of enterprises will inevitably face new opportunities and challenges, as well as various predictable and unpredictable risks. Enterprises should attach importance to risk management of intellectual property rights and establish intellectual property risk management system. It is hoped that the level of intellectual property risk management of domestic enterprises will continuously improve so as to escort the development and growth of enterprises.