IP Audits Can Help Businesses Prosper

Intellectual Property Update

Date: October 30, 2013

What Is an IP Audit?

An intellectual property (IP) audit is a systematic review of a company’s IP assets and related risks and opportunities. They can help assess, preserve and enhance IP; correct defects in IP rights; put unused IP to work; identify infringement by a company’s competitors or risks that a company infringes another’s IP; prepare a company for financing, sale or merger; and help a company implement best practices for IP management. A thorough IP audit involves not only a review of a company’s IP assets, but also its IP-related agreements, policies and procedures, and competitors’ IP.

Because IP rights are created and defined by law, an IP audit is typically conducted by a lawyer. The lawyer is often new to the company being audited and has a broad range of experience with various types of IP and IP valuation matters. The company selects a point person to work with the lawyer – ideally, someone who knows IP concepts and IP-related aspects of the company’s business. When an IP portfolio’s monetary value is of chief concern, the team also includes an accountant or economist who has dealt with IP valuation issues.

An IP audit can be general in scope or focused on a particular event or type of IP. General purpose audits help startups and established companies to not only assess and protect their IP, but also identify IP development needs, opportunities and risks. An event- or IP-specific audit can be triggered by a company’s need to:

  • Assess the impact and potential value of obtaining or selling IP, or licensing IP in or out
  • Evaluate IP rights and risks involving the acquisition or launch of a new product or service
  • Assess IP rights and risks involved in expanding into new markets or channels of trade
  • Determine whether the company’s licensees are complying with the terms of a license
  • Help ensure that an R&D program is designed to best capture future business opportunities
  • Identify risks involved in adopting a new trademark or new product claims and warranties
  • Evaluate the integrity and strength of trade secret protection procedures and agreements
  • Gauge the impact of a key employee’s departure on IP rights and value
  • Assess a third party’s infringement claims and the possible consequences
  • Weigh the consequences of the expiration of IP rights and consider possible actions
  • Evaluate and address the consequences of a change of status in a competitor’s IP rights
  • Establish the company’s value when preparing to obtain or provide financing or investment capital
  • Demonstrate the company’s value in preparation for a merger, joint venture or sale
Why Does My Business Need an IP Audit?

Investment in patent protection is on the upswing, with a record number of new U.S. patents – approximately 300,000 – expected by the end of 2013. A December 2012 treaty makes it easier for U.S. companies to obtain design patents on a global scale. A bill pending in Congress will provide stronger federal protection against trade secret theft. Companies that know their IP and how to use it can expect competitive gains over those that don’t. An IP audit can give a company several advantages:

An audit identifies what IP is owned. A successful business is well-managed. IP is a business asset and requires management just as equipment, inventory and accounts receivable do. If a business does not know what IP it owns, it cannot manage that property and protect it from damage or loss. So a first important advantage is that an IP audit  informs the company about the IP it owns so it can make decisions about protecting, developing, and sometimes licensing and exploiting its IP assets. An audit may also reveal defects in chains of title and outline steps to correct them. Any existing IP-related agreements, such as licensing agreements, assignments, employment and independent contractor agreements, joint venture agreements, tech transfer agreements and settlement agreements, can be reviewed to help ensure that IP rights have not been encumbered or compromised.

It preserves and enhances the value of existing IP. Formal patent applications must be prepared and filed to protect patentable inventions and product designs, and patent rights can be irretrievably lost if a company mishandles the invention or application. An audit can identify problems and corrective action that, if well-timed, can restore and enhance patent rights. Trade secrets and trademarks are protected by a matrix of federal and state laws without need of formal applications, but a company loses trade secrets rights when employee agreements and the like are not in place to preserve secrecy, and federal trademark registrations, while optional, can strengthen and expand a company’s trademark rights. Federal copyright registrations enhance the rights in copyrightable works of authorship, and patent, trademark and copyright notices enhance rights in those forms of IP. An audit helps a company ensure it is taking these and other reasonable steps to preserve and enhance its existing IP.

It identifies new opportunities to profit from IP. IP law has many nooks and crannies, and even basic differences between patents, trademarks and copyrights are sometimes not understood. Many potential inventors do not understand the level of inventiveness required to obtain a U.S. patent or the kinds of inventions and product designs that can be protected by patent. Some companies are not aware that new opportunities in domestic and foreign markets can be exploited via IP licenses and that their competitors’ efforts to obtain potentially troublesome IP can be monitored and sometimes stopped. An IP audit can teach decision makers, innovators and marketers about IP and how to proactively protect IP opportunities before they are lost.

It anticipates and sometimes averts costly disputes. IP litigation is typically complex and expensive, and the sad truth is that costs sometimes force small companies to reject litigation and capitulate, even when they have meritorious and winnable positions. An IP audit can assist a company in anticipating possible disputes and planning successful avoidance and resolution strategies. An audit may identify a need for a freedom-to-operate study, which identifies competitors’ conflicting IP rights and options such as designing around, licensing or anonymously challenging those rights in the U.S. Patent and Trademark Office. An audit also can result in a more formidable IP portfolio that can in turn cause a competitor to take a different technology or marketing direction rather than initiating a costly fight.

It facilitates and optimizes business transactions. IP has figured more prominently in business deals since the dot-com boom of the 1990s, and this is especially true of patents. The monetary value of IP can be estimated using accounting and economics methods, such as assessing the cost of developing alternative technology, isolating the amount of profits generated by IP-protected features, and determining third-party royalties being paid for similar IP assets. Because an IP audit gives a company a current understanding of its IP assets and their estimated value, the company is better prepared to deal with opportunities that might arise, such as a third-party offer to buy the company, or a new sales or expansion opportunity that may require financing.

What Will an IP Audit Cost?

IP audits come in all shapes and sizes, and the time required to perform one correspondingly varies. An audit is typically billed at a lawyer’s hourly billing rate or in accordance with an alternative fee arrangement. The company should budget for an experienced IP lawyer who is knowledgeable about IP and has had experience gauging its value in the marketplace, for example, by obtaining and exploiting IP rights, negotiating IP licenses and other IP-related business transactions, and litigating and resolving IP disputes.

In its most basic form, a general IP audit consists of educating company management about the various kinds of IP that are available, surveying the types of IP the company presently owns, and answering questions as to how the company’s IP position can be preserved and enhanced. If no complex technology issues require attention, the audit may end with confirmation that important IP is adequately protected. Assuming that the lawyer spends four to eight hours preparing for and conducting the audit and the law firm bills by the hour, the cost of the audit can be measured in terms of four to eight hours of an experienced lawyer’s time, plus expenses if any.

An IP audit for a company with complex or numerous IP issues will be more involved and time-consuming. The company may want the audit to include a determination as to whether particular technological improvements are likely to be patentable and worth patenting. The company may be aware of an issue or dispute concerning its IP and want the audit to address likely outcomes and provide recommendations. The cost of this work cannot be determined until the number and complexity of the issues are known, and the fees will be based on hourly rates or an alternative fee arrangement. In many cases it is important for the audit to be conducted by a lawyer who is part of a full-service IP group, since this allows parts of the project to be handled by lower-rate IP professionals.

Conclusion

Management and enhancement of IP assets may seem a daunting task for companies that have not done it before and for those whose IP is in disarray. But effective IP management is important and often critical to business success. An IP audit is a best first step toward using IP to help achieve business goals.

 

FOR MORE INFORMATION

For more information, please contact:

Clifton E. McCann
202.263.4159
Clifton.McCann@ThompsonHine.com

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