As we discussed in our recent post How to Conduct Intellectual Property Audits, your company’s intellectual property (IP) is among its most important and valuable assets. The goals of an audit of that IP are to: 1) determine what IP your company owns, and 2) develop a strategy to effectively use and manage those assets to maximize their value to your company.
In order to get the greatest benefit from what could be a significant investment of time and other resources, it is important that you and your management team understand why your IP audit is being conducted and the company results you hope to support through the effort. Establishing clear objectives will help to keep the process on track. Clarifying whether the purpose is to reduce the risk of the company being sued for infringement or improving your business’ value will ensure that the investment yields the desired result.
Possible Benefit: Reduce the Risk of Being Sued for Infringement
Intellectual property litigation is expensive, and while it may not be entirely avoidable, an IP audit is an effective litigation avoidance tool and can reduce the risk that your business will be sued for infringement. An IP audit does this by assessing the potential that your company’s product infringes another’s patents, copyrights or trademarks, or misappropriates a third party’s trade secrets. Evaluating the risk of infringement is especially important for small companies that may not be able to afford a drawn-out and costly lawsuit.
To evaluate the likelihood of infringement, your company should analyze the technical and design features of its current or planned products and do the same of competitive products in the marketplace. In addition, a prior art search should be run by patent counsel or a prior art search company to get current information about patents and the risk they pose, especially to new products that your company plans to bring to market. A prior art search conducted for this reason is commonly known as a freedom-to-operate (“FTO”) analysis. FTO analyses provide vital information to a company about the risk of making or selling a new product. To be most cost-effective, an FTO analysis should be done early in the product development process, so that a company may make any necessary modifications to a product’s anticipated features to minimize the possibility of a lawsuit.
Another benefit of an IP audit, and an FTO analysis in particular, is identifying space within the relevant field that has not been patented, and thus, opportunities for further R&D and intellectual property protection. Because an FTO analysis can be expensive, they may be more appropriate in conjunction with the beginning of a new R&D project as opposed to part of a regular IP audit.
Possible Benefit: Improve the Value of Your Business
By obtaining a deeper understanding of your IP, your company is better suited to protect and exploit its value. For example, your company may use the results of the audit to analyze whether its trade secrets are embodied in its core products, the exclusivity that remains in those offerings by knowing the life of its patents, or how its trademarks are related to its brand and goodwill with customers.
Also, an IP audit can unlock hidden value through the identification of new business opportunities and product line extensions. By assessing the relationship between its intellectual property and its patents, your company may decide to strengthen its market position by filing continuation patent applications. Similarly, if your company assesses another company’s IP or products as part of the audit, it may choose to seek patent protection on its previously undisclosed methods and systems to maintain its standing in the marketplace and limit the market share of its competitors. Additionally, an IP audit may lead a company to try to obtain, through a sale or a license, the rights to a third party’s IP to address a gap or to increase the robustness of its IP portfolio and product offering. Thus, an IP audit can be an effective tool to create new revenue streams.
Intellectual Property Valuation
Generally, the value of IP is determined through accounting methods. Three of the most common valuation methodologies are the income approach, the cost approach, and the market approach. There is no “one-size-fits-all” way of valuing intellectual property and, depending on your company’s business model, and the information you learned from an IP audit, you may wish to employ alternative valuation strategies.
As noted above, contract and license reviews are important aspects of an IP audit, and can provide nuanced information about the value of your company’s IP rights. Consider a scenario where your company owns three patents. Each patent claims a different method of sensing a leak in a wine barrel. Your company exploits patent 1 by making and selling products covered by that patent. Your company enters into licensing agreements giving third-parties the rights to make and sell products covered by patents 2 and 3. The license for patent 2 is non-exclusive. The license for patent 3 is exclusive with one other company. Your company’s rights with respect to these three patents should be assessed as part of an IP audit. The legal affect of the licenses on your company’s IP rights goes into valuing its patent portfolio. Because your company has given another company an exclusive license to patent 3, you cannot make or sell products using that invention. By contrast, your company is still permitted to sell goods that use the inventions claimed in patent 2, because it has only granted a non-exclusive license. You can do what you wish with patent 1 inventions because you own the patent free and clear of any license arrangement.
Your company’s ability to exploit each of the three patents will affect their value to your business. Even though you can still sell goods that use patent 2’s inventions, you may have given the right to a competitor do so as well. Considerations arising out of an IP audit are likely to include whether to renew the non-exclusive license for patent 2, or whether your company should continue licensing the patents as opposed simply to owning them or selling them to the licensees if leak detection is not a core part of your business. This hypothetical situation shows how an IP audit reveals useful information about a company’s IP rights, and also how those rights can be aligned with current and future business strategies to maximize their value.
An IP audit should be part of your company’s plan to manage your IP assets. It’s important to know which assets you own, how you use them, and the associated risks. Through an IP audit, your company can identify and fix problems and develop strategies to protect and optimize the return on valuable assets. In short, an IP audit will contribute to the success of your business for years to come.