Intellectual Property Law Blog

The Whats and Whys of IP Audits

April 12th, 2018

By Jeffrey W. Gluck, Ph.D.

Why Consider an IP Audit? 

The What and Whys of IP Audits

An IP audit is a systematic examination and verification of a company’s intellectual property assets and an analysis of strengths and threats. A company’s IP assets may be invaluable. In 2017, Forbes identified Apple as the most valuable brand, with a brand valuation of $170 billion. Determining and recording the proper valuation of your IP assets is, for that reason, an important component of an audit.

An audit can inventory, assess, and help you protect your IP assets, such as patents, trademarks, copyrights, trade secrets, and domain names. Audits generally create a catalogue of assets owned (used or non-used), sometimes their valuation, and all pertinent documentation, and identify a central repository for these items. They can help identify IP-related risks—current and future—and can develop strategies and practices for minimizing them. They can help to develop ways to monetize IP assets through tactics such as commercialization, in-licensing, out-licensing, sale, or enforcement. Company policies may be reviewed to ensure that appropriate procedures are in place to protect your intellectual property and to make certain that you are not infringing on the rights of others. Audits can reduce costs by identifying obsolete assets and disposing of them or discontinuing their maintenance. They can help to reduce costs associated with potential litigation by identifying and setting up policies to prevent infringement. Audits can help to create an IP culture, nurturing and encouraging IP creation within your business.

Types of Audits

Audits can be general-purpose, creating a comprehensive overview of the company’s assets and reviewing IP management approaches. Event-driven audits, generally referred to as IP due diligence, may occur in advance of the following, for example:

  • Mergers, acquisitions, or joint ventures
  • Financial transactions such as IPOs or private placements
  • Launch of a new product or service
  • IP assignments and licensing
  • Bankruptcies or reductions in force
  • Preparation for litigation

What’s Involved in an IP Audit?

An audit is often conducted by a team including someone from company management completely familiar with company goals and business strategy, as well as members from all departments of your company where IP comes into play—R&D, production, sales and marketing, and human resources. In-house and outside counsel should also be part of the team, and your outside counsel will play an important role in directing the audit and determining whether your policies protecting IP—whether in place or to be developed—are sufficiently robust.

After the goal, purpose, scope, and budget of your audit are determined, information gathering begins. Depending on your circumstances, the team may gather information through the use of on-line questionnaires, in-person interviews, and the review of all contracts, laboratory notebooks, and computer files.

One important goal for an audit includes identifying all IP assets and verifying who owns them—do you have a clean title to them? Assets can include patents, patentable inventions, trademarks, copyrights, domain names, trade secrets, and technological know-how. Are these assets properly protected? For any non-company-owned assets used, are the proper licensing agreements in place? For any IP assets being used by others, similarly, are proper licensing agreements in place?

Identifying all risks is critical. Document any and all cases where your IP is infringed, as well as where you are accused of infringing the rights of others. Assemble all IP-related contracts such as assignments, licenses, franchise agreements, joint venture agreements, non-disclosure agreements, or material transfer agreements, for example. Are these agreements still in force? Collect all materials used in sales and marketing, including information on competitors. Gather all data sheets and specifications for any products you manufacture. Amass all information about technologies under development and any disclosures that have been made. Risk can arrive in the wake of employee hires or departures, or via outside contractors. Do you require non-compete, non-disclosure/trade secrets agreements, and assignment clauses for employees?

Not all audits analyze IP valuation, but audits for mergers and acquisitions may do so. To determine valuation, consider what it would cost to replace an asset if it were lost. What are the current or future cash flows? What is the market value of the asset? What did it cost to acquire or develop? What would your company be worth without the asset? Would your products and services be identified with the company if the asset were lost (for example, in the case of a trademark)?

Audits not only uncover risks and pinpoint savings to be realized, but they may also illuminate ways to build value through avenues such as creating non-core revenue streams, licensing core business assets, and discovering unclaimed business opportunities, for example.

End Results

Ideally, your IP audit will produce an exhaustive catalogue of IP assets and ownership, a procedure for updating the compilation and maintaining each asset, and a determination of the costs involved in maintaining your company’s assets. You will identify all risks of infringement from any direction and will develop strategies and procedures for eliminating or minimizing those risks. If a limited IP audit is conducted, at least some of these may be produced.

Your intellectual property may be your most valuable asset. Knowing what you own and use, determining where the risks are lurking, and developing strategies for maximizing revenue streams and minimizing the possibility of disruption, is vital to your company’s well-being.

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