Intellectual property – which include patents, copyrights, trade secrets and trademarks – is among your company’s most important and valuable assets. It defines your brand and gives you a competitive advantage in the marketplace. Whatever goods or services your company may offer, protecting your IP portfolio should be among your company’s most important business goals. Your company cannot adequately protect and manage its IP unless it knows what assets it owns and understands their value to your business. An IP audit allows you to do just that.
An IP audit is a systematic review of a company’s IP assets and an analysis of their strengths and weaknesses. The goal of an IP audit is to first determine what IP a company owns and second develop a strategy to effectively use and manage those assets to maximize their value to your company. More specifically, an IP audit allows your company to:
- identify under-used processes and how they can contribute more to your company’s bottom line
- review and update standard operating procedures, effectively train your employees to protect your company’s IP
- review licenses and contracts with third parties, and
- assess the risk that your company may be infringing upon other companies’ IP rights.
Implementing better IP controls across your company is likely to have a positive effect on other aspects of your business, such as securing critical data and streamlining internal IP application processes. A thorough and effective IP audit should align a company’s IP portfolio with its business objectives. Regardless of your company’s specific objectives, regular IP audits are useful because they help to create a corporate culture that values the protection of these important business assets.
When Are IP Audits Conducted?
There are many good reasons to conduct an IP audit, but essentially they fall into two general categories: (1) general management audits, and (2) event-driven audits.
An IP audit undertaken as a general management activity should be conducted at least once a year.
General Management Audits of IP
An IP audit undertaken as a general management activity should be conducted at least once a year. When it’s part of a regular business practice, an IP audit provides information, not only about the value of an important asset, but about the processes by which a company manages that asset. Specifically, comprehensive IP audits identify gaps and deficiencies that might detrimentally affect a company’s IP rights. Like other property rights, IP rights are a creation of law and the failure to use or protect them properly means that you could lose them.
For example, for information to qualify as a trade secret under the Uniform Trade Secrets Act and the Defend Trade Secrets Act of 2016 it must, among other things, be the subject of efforts that are reasonable under the circumstances to maintain its secrecy. Because these statutes employ a reasonableness standard — as opposed to one of absolute secrecy — there is no bright line test of what is reasonable. Courts have found that contractual protections – like non-disclosure agreements – are a basic and reasonable step that companies should use, in combination with other measures, for their confidential information to qualify as a trade secret.
An IP audit will inform you as to whether appropriate agreements are in place, and, based on the nature of your company’s business activities, whether the right people have executed a non-disclosure agreement. For instance, if your company conducts R&D activities involving subcontractors and consultants, it should require those individuals to sign appropriate invention assignment and non-disclosure agreements. Thus, a contract review can be an important part of an IP audit by allowing a company to determine not only whether and which individuals may have had access to its sensitive commercial information without any contractual obligation to refrain from disclosing or using it, but how its contracts should be updated and improved to protect its intellectual property moving forward.
Event – Driven IP Audits
The second category is event-driven IP audits, where due diligence is a critical aspect of the transaction. Common examples are a merger, an asset sale, or a corporate restructuring. Also, a company should consider performing an IP audit when there is a significant transfer of intellectual property, such as an assignment or the entry into a licensing agreement. An IP audit is a necessary tool for the acquirer in a merger or acquisition to ensure that it’s obtaining the intellectual property free of any encumbrances. In particular, the audit may identify potential defects in the chain of title or claims on certain IP by an alleged lien-holder or co-inventor. An audit performed with regard to the renewal of a license agreement may identify terms that were being ignored by the licensee that could significantly affect the licensor’s business. Specifically, an audit may reveal that the licensee was not making the required royalty payments or misusing your company’s software, logo, or derivative works. An audit may also reveal that your company is infringing – intentionally or otherwise – on a third party’s IP, which could pose a significant risk of litigation for your company. This is important information that affects a company’s brand and bottom line, and should be known and understood by you.
An Overview of the Process
Proper planning is important before the substantive work of an audit begins. As part of the planning phase, a company should determine the purpose, scope, and budget for the audit. Defining the goals of the audit and the financial resources available to achieve them focuses the tasks and creates a roadmap for success. After the planning is finished, the information gathering begins.
IP audits are conducted by a team consisting of company management, business people, and attorneys, both in-house and outside counsel. It’s often the case that the team is cross-functional and includes personnel from R&D, sales and marketing, and potentially other disciplines, such as operations, if for example, they can provide insight into the competitive landscape or potential infringements of another’s intellectual property rights.
The audit is typically directed by outside counsel, working closely with in-house attorneys and management to make sure the audit reflects your stated goals and your company’s business strategy. The first step is to identify the company’s intellectual property; its patents and pending patent applications, trademarks, copyrights, and trade secrets. An IP audit also may include the identification of rights that a company licenses to and from third parties. Information should be obtained directly from your company’s personnel through in-person interviews and questionnaires, as well as from reviewing documents, such as relevant contracts, patent and trademark filings, and laboratory notebooks.
Reviewing patent and trademark files, both for the United States and internationally, is a critical step in the IP audit. If mandatory filings have not been made or are deficient, or if your company has failed to pay the requisite maintenance fees, you may inadvertently abandon important IP rights. Moreover, interviewing employees can reveal potential defects in IP rights. For instance, the patent laws require that a patent name the correct inventor. It’s not uncommon, however, for companies to retain independent contractors who have a particular expertise to work on an R&D project. If the work on that project leads to patentable inventions, the company to which the patent has been assigned should confer with its employees to identify whether the contractors conceived of any patentable inventions as part of their work on the project.
After the IP is identified and relevant information is collected, a report is generated that sets out the following basic information:
- the owner of each item of IP;
- the remaining life of each item of IP;
- a description of whether and how the IP is being used, including any potential infringements and misuses by the company and third parties; and
- the evaluation of any defects and recommended remedial action.
The report may include other information, depending on the reason for the audit. For instance, if the audit was conducted as due diligence for a merger or acquisition, the report may provide information about a product or process that your company may be acquiring that is not subject to a patent. Ascertaining such information gives the acquiring company an opportunity to negotiate with the seller to make the necessary filings to perfect its anticipated IP rights as a condition of the deal.