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IP holding companies offer potential added protection benefits

published in McAfee & Taft tIPsheet | December 1, 2016

By Zach Oubre and Will Silvia

Protecting intellectual property — from theft or misappropriation, infringement, or even from potential creditors and judgments — is a chief concern among businesses large and small and can be accomplished in a variety of ways. One manner of protection involves the formation and use of a holding company to own the registered or unregistered rights to your company’s patents, trademarks, copyright and/or trade secrets.

Benefits of separating IP assets from company operations

A major benefit of an intellectual property holding company is that it separates your intellectual property from the operations of your business, which limits liability by protecting such assets from putative plaintiffs and creditors. For instance, a holding company could be used to license certain intellectual property rights to an affiliate operating company. If that affiliate is sued, the separation of IP assets from the affiliate would likely protect that property from potential judgments in the lawsuit. Conversely, if your intellectual property assets are held by an individual or directly by the affiliate operating entity rather than a holding company, they are more susceptible to being used as part of a potential recovery in litigation.

In addition to providing a potential layer of liability protection, an intellectual property holding company also centralizes IP assets, makes administration more efficient, eases licensing or sales, and may even attract potential investment. Historically, intellectual property holding companies have also been formed to take advantage of states with favorable tax laws; however, this strategy has been hindered by recent changes in certain state laws.

Potential drawbacks

Even given all these benefits, holding companies do have their drawbacks, so it’s best to consult with your legal advisor as well as your accountant to see whether forming one makes sense in the larger context of your business.

In the context of patent infringement, courts have found that a non-exclusive license by a holding company to the operating company prevented the collection of lost profits in a successful infringement suit. In the context of trademark rights, an intellectual property holding company must have sufficient quality control over the trademarks licensed. Lack of quality control may create what is known as “naked licensing,” which can create problems with enforcement and potentially affect the status of trademark registrations.

Entity selection and formation

Selecting the most appropriate type of business entity — one that enables you to separately maintain the intellectual property in a manner that best fits your business model — is perhaps one of the most important aspects of forming a holding company. Although there are several different types of business entities, limited liability companies (LLCs) are a popular choice because this structure provides the most flexibility in structuring and operating a holding company. In particular, if your intellectual property is owned in part by others, the options available for defining the relative rights and obligations of the members of the LLC are often less restrictive than other business entities, which allows you to more effectively tailor the holding company to match your particular circumstances. Regardless of the type of business entity you choose to form, you should always ensure that the structure of the holding company is in compliance with the regulations that govern that type of entity.

The decision of whether or not to use an intellectual property holding company is specific to each business’s particular circumstances and long-term goals. While maintaining your intellectual property in a holding company is not an absolute guarantee of increased value or protection from a lawsuit, it can be a valuable step toward protecting and better exploiting the intangible assets of your business.