Stroock Special Bulletin
The IP Audit -- An Effective IP Asset Management Tool
IP Audits – Unlocking the Value of IP Assets
Does your company have an effective Intellectual Property asset management strategy? Is it being fully implemented? Does your IP strategy maximize the value of your company’s IP assets? Among the most important assets of a company is its intellectual property (IP) – a term that generally refers to patents, trademarks, copyrights, and trade secrets. Indeed for many companies, IP is the most valuable asset. Each type of IP asset is valuable in its own way, and each needs to be protected differently. Yet many companies lack an effective strategy for managing their IP assets.
An initial step in developing an effective IP asset management strategy is to conduct an IP audit. IP assets need to be inventoried and managed in much the same manner as other company assets. The information gained from an IP audit can be a powerful tool to gain access to capital, to develop a business strategy or change an existing business strategy, or to obtain a realistic idea of the value of your company when assessing mergers, acquisitions, or divestitures. Ready access to the type of information generated by an audit is invaluable when having discussions with potential investors or creditors. A prospective deal partner will look much more favorably at a company that has a well-organized and complete understanding of its IP assets.
Having a good understanding of exactly what IP assets your company owns or controls is vital, and having a comprehensive IP asset management strategy should be a key element in any company’s business plan. This article provides an overview of the characteristics of each type of IP asset and describes some of the basic steps for conducting an effective IP audit.
IP Assets in a Nutshell
A patent gives the owner the right to exclude others from making, using, offering for sale, selling, or importing the patented invention. Examples of patentable subject matter include a new product or service, compound or composition, method of treatment, method of manufacture, business method, software, a new apparatus or an improvement to a known (perhaps a competitor’s) apparatus.
A copyright protects works of authorship that embody the expression of an idea, not the idea itself. Unless otherwise agreed in writing, the law presumes that the author is the owner of the copyrighted work. A copyright owner controls the rights to copy, publish, reprint, sell or otherwise distribute or display the copyrighted work, prepare works that are derived from the original work, as well as assign, sell, or license the copyrighted work. Software code, manuals, articles, advertising copy or other printed works are some examples of copyrightable subject matter.
A trademark is generally any word, name, symbol or device adopted and used by a company to identify its goods or services, and distinguish those goods or services from those of third parties. A trademark is generally an adjective and is preferably not used as a verb or a noun. Product names, logos, product or package shapes, even a distinctive sound or color can serve as a trademark.
A trade secret is proprietary technology or business practices that a company has chosen, for reasons of competitive advantage, to keep secret and not patent or otherwise disclose. Trade secrets must be carefully guarded by the company, sometimes even from certain of its own employees. Proprietary formulations or methods of manufacture, customer or supplier lists, and marketing plans and strategies, are some examples of trade secrets.
The IP Audit
The IP Audit Report
In its simplest form, an IP audit should yield an itemization of all of the company’s IP assets: i.e., patents (both issued and pending), trademarks, copyrights, trade secrets, inventions that have not yet been protected, and license agreements that govern out-licensed or in-licensed technology.
The IP Audit Team
Inside counsel, outside counsel, the IP Director, or R&D personnel, working alone or in conjunction with each other,may perform the audit. To ensure that no items are overlooked, many companies work with a law firm with lawyers who specialize in IP matters. Such a firm can provide an unbiased look not only at existing assets, but also whether potential but untapped IP assets are being systematically identified, analyzed for value and protected or exploited, as appropriate. For example, companies generally focus on their R&D efforts when they think about IP assets. But other areas of the company that often are overlooked, such as the marketing, business development, and information technology (IT) departments, may also be sources of valuable IP assets. An outside view also can be helpful in identifying not only hidden gold mines of IP, but, of equal importance, potential problems in areas of the company where IP assets are being lost or squandered through lack of education or inattention.
If your company has in-house IP counsel, that person typically is chosen to manage, or at least serve as a logical starting point for, the conduct of the audit. In any event, to demonstrate the company’s commitment to the audit and also to ensure compliance throughout the organization, a person in upper management should be given primary responsibility for the success and thoroughness of the IP audit. Although others may actually perform the primary data gathering, having a person of authority be ultimately responsible can send a strong signal to company personnel that the IP audit task is an important one for the company.
There are many ways to proceed with the audit, but they generally fall into one of two methodologies. The first is a top-down methodology; in which the auditor or audit team works downward in an organization by interviewing middle- and lower-level managers to assess what is being done in their respective areas of responsibility. If the company has utilized outside IP lawyers, those lawyers should be interviewed and their records reviewed as well. The managers or other personnel to be interviewed should be told what information will be expected, so that they can in turn seek out the information from their key personnel. Frequently, more than one meeting will be necessary to set requirements and gather all needed information.
The second and arguably more thorough methodology is a bottom-up process. Although more time-consuming than the top-down methodology, the bottom-up process often provides a better perspective and more thorough information. The bottom-up process involves identifying all employees within the organization that have the potential to create IP assets and then meeting with them to collect information. This enables the IP manager or outside auditor to gain a more in-depth understanding of not only the types of IP assets that are being developed within the company, but where those assets are being developed and by whom. Furthermore, the bottom-up approach enables the IP manager or auditor to determine whether the persons responsible for such technology understand what should be protected, how it can be protected by the company, and who to turn to when they think they have developed something of potential value. Employee meetings of this type are often eyeopening events for both management and staff. Thus, the bottom-up approach is a highly valuable management tool, since more than just raw data is collected.
In part two of this article, which will appear in an issue of Stroock’s I .P. Newsletter, we will discuss in greater detail what types of information will be generated by an IP audit and how that information can be used effectively to unlock the value of a company’s IP assets.