iP Audit

Everyone thinks that an audit must be complicated and expensive. It’s scary to contemplate, but it shouldn’t be! As an iP owner, you get to determine how intensive an iP audit will be.

Even if this is the first time that you’ve conducted an iP audit, with a little planning, you can complete your audit without wasting too much time and money. What is your objective for the audit? 

The objective is important. If you want to get a valuation of your company’s intangibles that will be relied upon for a sale, security for a loan or the like, then you’ll need to satisfy a third party that the valuation is objective and thorough.

However, there are many other reasons to conduct an iP audit.

An annual audit of iP should be completed every year. This type of audit is an iP review that may be used by the owner to make decisions on what intellectual property protection should be allowed to lapse to save money, which iP to start protecting with intellectual property, and whether some iP deserves additional protection. 

An iP audit may help determine adjustments to your balance sheet for increases or decreases in the values of intangibles, such as good will. Good will is the value of your company’s brands. 

Your intellectual property counsel and financial advisers should help you collect the information for your iP audit and help analyze the results of your iP audit. 

While issued patents and pending applications are publicly available on the patent office website 18 months after the filing date, your patent attorney has access to everything that’s been filed, immediately, and all of the disclosures that you’ve submitted to counsel but haven’t been filed.

A search by your company’s name should find patents that have been assigned to your company and recorded with the patent office. A search by inventors’ names might find patents and applications that have not been assigned and recorded.

The trademark office database is easy to search for registered trademarks and pending applications. However, there might be common law marks that are not registered. An iP audit is a good time to inspect websites and marketing materials for unregistered brand names, slogans, taglines, jingles and trade dress. 

Trade dress is any type of distinctive packaging that develops a secondary meaning to customers as a way of identifying goods (or services) that originate from your company.

There are a few critical areas that need to be checked in every iP audit.

Ownership. 

Does the company own its IP? 

Are assignments for patents signed by all of the inventors and recorded at the patent office? 

Are all of the registered trademarks registered in the name of the Company? 

Has a clearance search been conducted for any unregistered marks found on websites and in marketing materials.

Does the company have and use work made for hire and assignment agreements for copyrighted works? 

Is the company using any unlicensed images in any of its marketing materials and websites, risking a potential copyright infringement lawsuit?

How is the company keeping track of its licenses for images and software.

Does the company have the userid and passwords for all of the domain name registrars?

Does the company have employment agreements that protect trade secrets and transfer all IP rights from employees to the company?

Does the company have NDAs and IP agreements with independent contractors, consultants? Customers?

Renewals & Deadlines

The value of iP can be impacted by missed renewals and deadlines. This is always an important check, also, because some missed deadlines may be corrected if identified and corrective actions are taken quickly enough. 

U.S. patents require maintenance fee payments at 3.5, 7.5 and 11.5 years. 

Many intellectual property offices elsewhere in the world require fees to be paid every year. 

Trademark renewals deadlines, for example, vary from office to office worldwide. In the U.S., renewals for trademarks are due at 5 years, 10 years and every 10 years thereafter. 

Have these fees and annuities been paid?

If applications are pending, what is the status of the applications and are there deadlines that must be met. Make sure that there is a system in place for tracking when responses are due.

Licenses.

What licensing agreements does the company have?

Are any intellectual property rights out licensed to third parties? Exclusive? Nonexclusive?

How much revenue are licenses generating, if any? Are there any cross licensing agreements that give the company rights to third party iP? Are these rights being used for any products or services?

Does the company have any other licenses to intellectual property owned by third parties?

Reporting

• Type of intellectual property
• Title
• Issue date
• Registration number
• Application number
• Expiration date
• How is the intellectual property being used?
• Is the intellectual property being infringed?
• What remedial actions should be taken?

Products

List the company’s products and determine if a freedom from infringement or freedom to operate search and analysis has been completed. Are any of the products covered by the company’s iP? If so, how much revenue is generated by the covered products.

Are the products covered by the company’s patents marked as provided by the patent marking statute? Have any patents expired requiring the patent number to be removed from the product marking?

Is there an estimate of how much the sale price is increased based on the existence of exclusive iP rights? Are any competitors infringing any exclusive iP rights of the company? What action has been taken about any third party infringement of the company’s intellectual property rights? 

Has a design around analysis and recommendation been made for products where third party patents have been identified as problematic? 

Audit Opportunities

Are there new products or processes that should be protected? 

An IP audit can unlock hidden value through identification of new business opportunities and product line extensions. 

Should you strengthen your company’s market position for products or services protected by intellectual property rights? Should the company seek to build up the hedge of protection around a particular product or family of products?

If your company assesses another company's intellectual property 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 you to try to obtain, through sale or license, rights to a third party's intellectual property. This may be desired to address any gaps in iP protection. 

An IP audit may identify new products for development and new revenue for the company.

Intellectual Property Valuation

The value of intangible property may be determined by any method, but there are three methods generally accepted. One is the income approach, which focuses on the impact of iP on revenue and profits. Another is cost accounting, which determines a value based on the cost of obtaining and protecting the iP. And lastly is the market approach, which looks for comparables in the marketplace for placing a value on iP.  

Recommended Audit Steps

• Identify company's intellectual property
  • Issued patents
  • Pending patent applications
  • Trademarks: brand names, logos, slogans, jingles…
    • Common law
    • Registered
    • Pending registration
  • Copyrights: registered and unregistered
  • Trade secrets: anything that provides value to the company by being kept secret. Uniform Trade Secrets Act, §.1.(4) (1985); 18 U.S.C. 41839(3).
  • Domain names: identify registrar and make sure company has userid and password. Locked? still needed?
• Identify company IP licensed to others
• Identify third party IP licensed to company
  • Images
  • Software
  • Other
• Conduct in-person interviews of inventors, marketing personnel and creatives to identify and disclose existing and newly identifed iP.  
• Review documents:
  • Agreements
  • Invention disclosures / notebooks