INTELLECTUAL PROPERTY (IP) AUDITS
What is an IP audit?
An IP Audit is a thorough, systematic review of the IP assets owned, used or acquired by a business. Its purpose is to uncover under-utilized IP assets, to identify any threats to a company’s bottom line, and to enable business planners to devise informed strategies that will maintain and improve the company’s market position and possible tax optimization.
Why does my business need an IP audit?
An IP audit identifies the IP your business owns. IP is a critical component of any successful business and requires careful management. It is no less important than equipment, inventory, and accounts receivable. If a business does not know what intellectual property it owns, it cannot manage that property and protect it from damage or loss. An IP audit is designed to identify and inform your company about the intellectually property it owns so it can make decisions as to the IP’s protection, development, and sometimes licensing and exploitation. 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.
An IP audit can also identify roadblocks and prevent costly disputes. Intellectual property litigation is typically complex and expensive, and the sad truth is that small companies must sometime forgo litigation and capitulate, even when they have meritorious and winnable positions. An IP audit can assist companies 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 intellectual property rights and options such as designing around, licensing, or anonymously challenging competitors’ rights. An audit can identify weaknesses in the audited company’s intellectual property rights that can be addressed with timely corrective action, resulting in stronger rights that are less likely to be challenged when those rights are asserted.
What does an IP audit involve?
The first step in the audit process is to identify the readily identifiable IP. Assets falling into this category will include any registered trademarks, copyrights, designs or patents owned by your business, any licenses to third parties and any licenses from third parties, including cross-licenses. Also included in this category are things such as in-house work manuals, databases, recipes, franchise agreements, publications and product/process know-how. Once identified, the IP is then scrutinized to determine who owns them, whether they have not lapsed (remain registered) and enforceable and whether they are being effectively used. The individual components are also given an importance rating – by looking at factors such as whether or not they are embodied to core technologies, the life expectancy of the underlying IP in the said technology and the potential or actual exclusivity of the technology.
The second step is to itemize what might be termed external or market influences. These will include the company brand, product brands, company and product get-up, goodwill, product certification, export certifications, regulatory approvals, distribution and raw material networks, client lists, and marketing and advertising programs.
In trying to estimate the value of any of these items, a good question to ask is how much will it cost to replace the item if it were lost, what is the expected income, e.g. in the next five years, that can be generated by the underlying IP assets and how is it being used. Several IP valuation methods can be used to establish the value of an underlying IP asset.
In conducting IP audits, the following kinds of helpful information are most often identified:
- Valuable product and process features that could be but were not as yet patented;
- Correctable defects in existing patents;
- Missing and deficient employee agreements that risked competitors’ access to trade secrets;
- Trademarks and copyrights central to companies’ identities that were not adequately protected from copying;
- Product configurations that could be but were not yet protected by design patents;
- Patent and trademark royalty payment terms that were being ignored;
- Missing notices of patent, trademark, and copyright that were limiting the company’s ability to enforce IP rights and claim damages; and
- Valuable opportunities for licensing IP in new markets and channels of trade.
What Does an IP Audit Cost?
IP audits come in all shapes and sizes, and the time required to perform an audit correspondingly varies. IP audits are typically billed at a lawyer’s hourly billing rate. Our firm has an alternative fee arrangements that give your business certainty as to up front costs. Upon the completion of some initial fact finding we will quote you a flat rate fee for the handling of the audit.
In its most basic form, a general IP audit consists of educating company management as to the various kinds of intellectual property that are available, surveying the types of intellectual property presently owned by the company, and answering questions as to how the company’s intellectual property position can be preserved and enhanced. If no complex technology issues require attention, the audit may end with confirmation that important intellectual property is protected and correctly titled. Alternatively, an IP audit may result in recommendations for additional work necessary to adequately protect your company’s IP portfolio. Such work, if performed, would be billed at an hourly rate plus expenses.
Furthermore, it may be that you have IP tax considerations which need to be taken advantage of to optimize your tax planning. Our firm’s tax department has a substantial knowledge base in counseling on these issues.
Management and enhancement of intellectual property assets may seem a daunting task for companies that have not done it before and for companies whose IP is in major disarray. But effective management of intellectual property is important and often critical to business success. An IP audit is a best first step toward achieving that goal.