This post is written by Gunjan Richharia, Associate, SUO Law Office. You can connect with her on LinkedIn here.
Intellectual property (“IP”) assets can be defined as “Things of value that are not tangible but can be measured and managed and to which a value may be attached“. On the other hand, IP audit can be defined as a systematic review of collated IP: owned, acquired, utilised or needed by a business in order to identify – under-utilized IP assets; any unrealised threats to an organization; and to enable businesses to form wholesome strategies that will manage and enhance the organizations’ market position.
Intellectual property forms a substantial part of a company’s net resources. IP exists and is owned by companies in various forms. Not all its forms are germane to every company. But, indisputably, intellectual property in some form is certainly important to virtually every company. An organization needs to efficiently manage its IP’s by:
- maintaining up-to-date collated IP records
- protecting IP by taking deterring steps against infringers in several jurisdictions
All of this requires sizeable time, money and manpower. Furthermore, management and preservation of intellectual property assets may seem like a demanding task for both:
- companies that have been at it before
- companies whose IP is in major disarray.
Irrespective, efficient management of intellectual property is fundamental and often crucial for wide array of businesses to succeed. An IP audit is the most effective, and at times, the only first step toward achieving said goal.
A well-maintained and up-to-date inventory of all IP assets aids businesses in making multifarious informed decision for its future ventures and vision. Thus, once all the IP assets are inventoried and all existing IP procedures are documented, the future vision for development and venturing can be made parallel with respect to a company’s business policies. This helps them to formulate long term, business oriented strategies. Sorting out the nitty-gritties of IP assets is also a pre-requisite to get finance. Adequate IP audits facilitate towards formulating a proposal for obtaining desired finances, improving loan rates and escalating share prices.
TYPES OF IP AUDIT AND THEIR SIGNIFICANCE
1. General Purpose IP Audit
General or broad IP audit is undertaken in order to manage and control the IP assets of a business. This type of IP audit helps in maintaining the overall health of the IP of any business by reviewing and assessing for any statutory requirements for maintaining patent/trademark applications.
A general or broad IP audit is done in the following situations:
Before establishing a new company it is always important for a start ‐up Company to be aware of intangible assets it owns and/or needs to protect. When a business is considering implementations of new policies, standards, or procedures relating to IP.
When a business is considering implementations of new policies, standards, or procedures relating to IP.
When a business is considering implementing a new marketing approach or direction, or is planning a major reorganization of the company.
When a new person becomes responsible for IP management.
Once a comprehensive IP audit has been undertaken, a smaller effort and expense is desired at regular intervals, such as on an annual basis, so that IP assets are reviewed and appropriate decisions taken, depending on the current and emerging needs of a company.
2. Event Driven IP Audit
Event driven IP Audit is generally much narrower in scope than a broad or general purpose IP audit. Further, the nature and purpose of such an audit is reflective of the event in question, and the time and resources available for the same. It is often referred to as “IP Due Diligence”, when it is done to assess, as objectively as possible, the value and risk of all or a part of a target company’s IP assets. It is undertaken by a third party before an IP portfolio is bought or invested in and it provides information that affect the course of the proposed transaction.
Few events that require Event Driven IP Audit/IP due diligence are:
Merger & Acquisition or Joint Venture
Launching a new product or service
Buying or selling a business division or IP transfer
3. Limited Purpose Focused Audit
A limited purpose audit is typically much narrower in scope than the aforementioned two and is performed under highly constrained time schedules. These audits tend to be situational in nature. They are typically used to justify a certain legal position or the valuation of a particular IP. It is majorly done in the following cases:
Foreign IP Filings:
Before a company takes up an aggressive program of filing IP applications in other countries, that is, before entering a new market abroad (by way of, say, exporting, or expanding overseas through off‐shoring/outsourcing some of its activities, or by licensing, franchising or merchandising) an IP audit helps to sensitize the company to market‐specific IP laws, rules, customs and practices affecting IP rights.
Significant changes in IP law and practice:
Where there is a significant change or development in IP case law or statutory law in a relevant market it may necessitate review of existing products for possible infringement of the IP rights of others.
Before a major personnel turnover of in‐house research and development or marketing, especially if it involves disgruntled employees, an IP audit should be done to secure the status of a company’s IP assets.
Clean room procedures:
The clean room procedure seeks to avoid infringement by ensuring that there is no “access” to copyrighted material of unrelated parties during software development project. Thus, an audit might be necessary to institute, or to review the adequacy of, clean room procedures used in the development of software products so as to reduce the risk of infringing third party copyright.
Preparing for litigation:
When considering or facing litigation, a company is required to show non‐infringement and no access to the work, complete or confirm the chain of title of the underlying IP rights or otherwise complete the documentation of the relevant IP rights.
Reasons for Undertaking IP Audits
Identify the IP owned by a particular company – every successful business requires well managed resources and that includes the intangible IP resources held by a company. For businesses to be able to efficiently manage, protect and utilise their IP, they need to be aware of the IP assets they own. Being aware of the nature of the IP owned by a company can ensure that proactive steps are taken towards protection, development, licensing, exploitation etc. of the valuable IP. An audit may also bring to light any defects in title and can help outline the steps to correct them. Any existing IP-related agreements including: 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 hindered or compromised.
- Preserve and increase the value of existing IP – IP of a company is protected by a matrix of laws. This said, a company can still make mistakes that may diminish or destroy the protections provided by law. Additionally, formal patent applications have to be filed to protect inventions and product designs, and patent rights are irretrievably lost if a company lapses proactiveness regarding the same. An audit narrows down such requirements and other kinds of steps that can be taken to prevent IP loss and enhance the value of a company’s existing IP.
- Prevent avoidable hurdles such as costly legal disputes – IP litigationsare complex and expensive. An IP audit can make companies aware of any possible disputes that may arise and thereby, help to plan successful avoidance and resolution strategies. An audit can further help recognize weaknesses in the audited company’s IP rights that can be addressed with timely corrective actions, resulting in stronger rights that are less likely to be challenged when those rights are asserted.Facilitate and optimize business transactions – An IP audit gives a company the most up-to-date understanding of its IP assets and their estimated value. It places the company in a pre-emptively prepared position to deal with opportunities that might arise, such as a third-party offer to buy the company or a new sales or expansion venture that may require financing.
- Can help identify new ventures to benefit from with company’s existing IP – Audits can help identify new commercial opportunities that can be exploited in both domestic and international market via IP licensing.
Broadly, IP audit helps businesses do a SWOT analysis – a study that determines:
Strengths (Company’s owned and licensed IP);
Weaknesses of the organization (inadequate preservation of company’s IP as elaborated above);
Opportunities for the company in the marketplace (licensing opportunities) and;
Threats that are perceived from the market (from competition and from within the organization).
IP audit further helps to make and update the inventory of the IP assets, and to analyse:
How the IP assets are being used and/or are certain, unknowingly, being left unused?
Which IP assets are owned by the company and which ones are licensed?
That IP assets are not infringing the rights of others and are also rather not being infringed by others?
What actions are required to be taken immediately with respect to each IP asset, or a portfolio of such assets, to serve the relevant business goals of the company?
In this date and age of knowledge based economy, sizeable economic value is locked into intangible assets of companies, particularly their IP. A fundamental issue for a company’s feat is to completely realise the IP owned by it and manage it in a fashion as to capitalize on its real value which usually is much more than a company might comprehend on its own. Precisely why, often companies underestimate the value of their IP and thereby fail to efficiently protect it. IP protection, through registrations, infringement prevention actions,etc., is not treated as a priority and the management of IP and related rights is regarded as a mere formality adding on to the company’s costs, rather than something that contributes immensely towards strategic corporate growth. Suchmisinformed approach could have serious drawbacks, which could be detrimental to the company’s future, including – missed opportunities, third party infringement, unavoidable and unforeseen expenses and efforts in developing new business models, fighting prized litigations, etc. At times, companies end up spending more finances in protecting their own IP rights which are being misappropriated by third parties due to company’s personal folly in effectively protecting their IP in the first place. Hence, it becomes particularly important to have a thorough knowledge of one’s own IP and the need to protect it in a timely and effective manner.
An IP audit collates all information on the nature and strength of IP as well as method to fully utilise these important resources. An IP audit is a relatively simple exercise, but it has a powerful role in avoiding various circumstances, such as violation of others’ rights, protecting one’s IP, reducing the risks of third party IP violation, clarifying IP ownership issues, etc. It also serves as a directional tool for maintenance, management and protection of IP rights throughout the life cycle of the intangible asset. As companies are made conscious, time and again, of the value of their IP and rights associated thereto, the importance of IP will naturally grow, and thus the need audits.