IP Audits

Outline
Introduction What is an Intellectual Property Audit? When an Audit Should Be Undertaken Scope of the Audit Who Should Do the Audit? Audit Plan Initial Information Gathering Written Report of Results of the Audit Federal and State Filings Ownership Issues Infringement Issues Other Issues The Importance of an Intellectual Property Audit

AUDIT OF INTELLECTUAL PROPERTY

The importance of Intellectual Property and the laws regulating it have undergone sweeping change in the last few years. Considering the value and power of intellectual property it is not surprising that infringement lawsuits are proliferating. Too much is at stake to ignore infringement of such valuable property. It thus become mandatory from any organization to protect and safe guards its intellectual capital. In order to do so it is imperative for the companies to understand as to what rights the organization owns, whether the organization is protecting its right properly, is the mode of protection adequate, whether it has proper procedure to determine what rights it should be registering, whether it has a system to minimize the risk of infringing third party rights, evaluation of contractual term for the right assigned or used under license, how trade secrets are protected from employees, should the organization develop back up 'mark' and such other important issues.

Introduction
IP Audit as Intellectual property has an importance today greater than ever before. The success of companies depends on more intangible assets than tangible assets. A generation ago, about 80% of a typical companys assets were tangible (buildings, equipment, and the like) and 20% were intangible. By the turn of the Millennium, the relative value of tangible and intangible assets had essentially reversed so that approximately three-quarters of a typical companys assets were intangible assets. The core of many business and their success secrets are their intangible assets The Intellectual Property. The more you have the better of you are. Hence there is a need of managing your IP Assets like managing your other tangible assets. Audit is one of the essential instruments to keep track of your assets.

Changing Scenario of IP

An IP audit - keeping track of your IP

Nearly all companies own some form of IP that is important to their operations and ongoing success. IP can be simple information such as a customer list that should be kept confidential. The circumstances in which a company's IP may have come into existence are almost unlimited. An example might be a patented product arising from significant research and development undertaken by employees who are bound by confidentiality obligations. Other examples might be through acquiring IP as part of a new business, or an unforeseen and fortuitous by-product resulting from a core business activity. The sheer diversity of types of IP, and circumstances surrounding its creation, often makes it impossible for a company to be aware of the full extent of its IP. An IP audit can help redress this.

Start with a preliminary audit

If you have not conducted an IP audit before, now is a good time to start. An IP audit will give you a broad picture of your IP assets. Many who conduct an IP audit for the first time are surprised by not only how many IP assets their company owns, but also how important these are to their business. There are two types of IP audits: A preliminary audit, which gives you an overview of your IP, and the value it contributes to your enterprise; and A comprehensive audit, which is usually conducted when you have a specific purpose to address, such as due diligence or to enforce or defend legal action. In cases such as these you should engage a qualified IP practitioner to assist you (eg. a recognised accountant, lawyer or patent attorney).

Where is your IP?

Registrars files Floor files Retail Publications Marketing Legal Directors office Contracts dept. Photography Archives Film/Video Information Technology Exhibition Education Design

What is an Intellectual Property Audit?

Identification of IP Ascertain and confirm its existence IP Ownership and rights: Confirm that it is available to be exploited Technical Validation of IP Confirm that it works Business Validation of IP Formulate a strategy to realise economics benefits
Many perspectives on the what and why and how of an IP Audit In time available, these slides will focus on one often neglected aspect of IP Audits That is the due diligence on ownership and rights that a licensor should prudently consider undertaking on itself and its own IP

What is Intellectual Property Audit?

One traditional definition of an intellectual property audit is a cataloging of a organization's intellectual property assets. It is required for an organization to meet its duediligence requirements for mergers, acquisitions, or other transfers. An intellectual property audit provides an assessment of the intangible assets of a company. The audit helps to quantify the value of the intangible assets to the extent that such value depends on the legal right to those assets. The audit examines and evaluates the strengths and weaknesses in the procedures used to protect each intangible asset and secure appropriate intellectual property rights.

Why IP Audit

What is a due diligence, and who does it

Due diligence is the name for an IP Audit, when it is done by:
Someone interested in acquiring an interest in IP An IP buyer An IP Licensee An investor into a company that owns or has licensed IP

Object of the due diligence is to check and validate That the IP exists That the IP is owned by the person who believes that they have rights in respect of the IP Prudence requires this due diligence on the part of the IP buyer or licensee

What is a due diligence, and who does it

Due diligence is also done by a Company seeking to raise capital from the public by IPO Important civil and criminal consequences follow from misleading the public in the Companys statements in its capital raising document (Prospectus, Information Memorandum etc)
Statements about Companys ownership of IP
Companys rights over IP Checked and validated

To ensure that there are no false (even innocently false) statements made about the IP Prudence requires this due diligence on the part of the Company and capital raising promoters

Should a licensor do a due diligence upon itself ?

Not commonly done Licensors are often passive They submit to a due diligence by a licensee or buyer or investor Sometimes licensors do not pay a lot of attention to ownership and rights over their IP Sometimes licensors assume that they own the IP that they have available to them That assumption sometimes made unconsciously,
occurring only because they have possession of the IP, and no third person has challenged the IP in any way.

Should a licensor do a due diligence upon itself ?

But the licensee / assignee / investor will undertake a robust due diligence will not assume that licensors ownership of the IP Instead, will approach the task with the presumption that there is something wrong with the ownership and rights over the IP, a due diligence defect, and the challenge is to find it The robust due diligence will include Searches Reviewing legal agreements Interviewing persons involved with the IP

When an Audit Should Be Undertaken

An intellectual property audit may be appropriate in a number of situations. For example, an audit is appropriate before a significant acquisition of a technology or product. An audit may be performed in the early stages of a technology companys formation to institute systematic procedures for protecting and perfecting intellectual property rights, particularly for core technologies. An audit may also be used at critical junctures in a companys life cycle to ensure the continuing adequacy of such procedures and to detect defects therein.

Scope of the Audit

The appropriate scope of the audit is often situation specific. For example, if a company is conducting an audit of its company-wide procedures for acquiring, perfecting and enforcing its intellectual property rights, an intellectual property audit of broad scope is appropriate. Audits more narrow in focus may be appropriate when, for example, a company is facing possible trademark litigation and an investigation limited to the trademark at hand may be all that is required. Narrow audits may also be confined to examination of procedures, for example, the clean room procedures used to develop a new software product.

Who Should Do the Audit?

The designation of an audit team depends on the nature and scope of the audit. A companys own personnel may have sufficient familiarity with the facts and issues involved to perform an audit. Generally, because of the inherently legal nature of an audit, a companys in-house legal counsel should be involved in the audit. In many situations, the company personnel may not have the time or expertise to perform a full-scale audit and outside counsel should be brought in to conduct the audit.

Audit Plan
For most intellectual property audits of substantial scope, a written audit plan should be prepared in advance. The plan should define the areas of inquiry of the audit, the scope of the inquiry, the schedule, who has responsibility for each area, and the form of expected report. The plan should also define the documents to be reviewed and the personnel to be interviewed. The documents needed and personnel to be interviewed may not be known in detail in advance of the audit, and the plan may need to be revised after the audit is begun.

Initial Information Gathering

In virtually every case, substantial initial information will need to be gathered and presented before the auditors can efficiently begin their detailed investigation. The types of information that will be needed include: Information concerning the nature of the assets Background research Data gathering Logistics of access

Written Report of Results of the Audit

The report should discuss the development history of the technology at issue, describe and evaluate intellectual property defects uncovered in the audit, propose and describe specific remedial action that needs to be taken or that has been taken, and respond to any other specific need for information the parties commissioning the audit may have. If the audit was conducted in the context of an acquisition transaction, the report should provide the information necessary to decide whether the rights available are the rights required by the acquiring party, and should provide a basis for valuing the rights to be acquired. Necessary remedial action can be implemented either before the transaction is consummated or after the acquisition.

Infringement Issues

If the audit reveals potential infringement of third party rights, licenses may be sought or the product at issue may be redesigned around a patent that covers the product, or technology that may be the trade secret, or copyrighted work of another may be removed or redeveloped. In transaction related audits, if it appears that consummation of a proposed acquisition will precipitate a lawsuit, it may be possible to obtain a partial or complete indemnification from the present owner or a third party. Purchaser control of any potential lawsuit might also be sought during the negotiations. The audit may reveal areas of particular risk in which a clean room development should be used to develop a new product or portion thereof. Alternatively, if clean room procedures were used and the audit reveals defects in such procedures, portions of the product may need to be redeveloped, or a detailed examination of the resulting product may need to be made to determine whether there is substantial similarity to the product of another. Missing or inadequate affidavits from the clean room participants may need to be remedied.

Other Issues

If the future value of a product depends heavily on retaining certain key personnel, some potential problems can be avoided by developing contractual or other incentives for such personnel to stay on. Prospective legal, marketing and research and development strategies can be designed to minimize the exposure from defects discovered in the audit.

Valuation of Intellectual Property Assets

1. Reasons for valuation of IP
Own exploitation Licensing Sell Merger and acquisition Joint venture Privatization Fundraising IPO Litigation

Basic Principles of Valuation of Intellectual Property Assets

2. Definitions and recognition of Intangible assets

An asset is intangible if it meets the following 3 criteria: Identifiable Controllable Posses future economic benefits

Basic Principles of Valuation of Intellectual Property Assets

2.1. Identifiable means the Intangible Asset
is separable (can be separated and sold, transferred, rented or exchanged)

2.2. Controllable means

An entity has power to obtain the future economic benefits flowing from the intangible asset

2.3. Future Economic Benefits means

Revenue stream from the sales of the products or services or cost saving or other benefits resulting from the use of the asset by the entity

Managing Your Intellectual Property Assets

Analyze legal status of rights Register copyrights, trademarks, & domains Track renewal dates Track status and ownership Track license restrictions Ensure proper and Develop technical requirements Invest in software and/or Intranet

The Importance of Conducting Intellectual Property Audit

An IP audit is a systematic review of the IP owned, used or acquired by a company. An audit's principal goal is to identify all the IP your company may have. By conducting an IP audit, however, you can also establish: Whether or not your IP rights are registered; Who owns the rights and, if you do not, identify any conditions that apply to their use; An assessment of whether your IP is being used effectively; Whether your rights are being challenged or threatened by others; Whether you have an effective IP management and maintenance plan in place; and Records of your IP creation and ownership.

Conclusions

IP strategy is an important aspect of business strategy for modern companies In developing IP strategy , IP audit and valuation is important For IP audit, the WIPO Audit Tool can be used IP valuation is a new field and complex exercise that requires engaging professions to do it, although creating awareness amongst company staff may be required

CONCLUSION

s the intellectual property is comprehensive and the range of assets covered by those rights are diverse and extensive, to apprehend their commercial importance and the scope of exploitation becomes difficult. It would therefore be desirable for organization to put itself to audit of IPR undertaken by a team of experts in order to build up the IP monitoring system and to formulate the correct procedure and guidelines to protect and enhance the commercial value of intellectual property.