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The Importance of Periodic Intellectual Property Audits

Andrew J. Sherman, Partner, Dickstein Shapiro Morin and Oshinsky LLP

Despite the critical importance of the role of intellectual property and intangible assets as key components of the net worth and overall shareholder value of many fast-track growth businesses, many entrepreneurs fail to appreciate and take inventory of the assets they have developed and as a result under-leverage these assets.

At a time when entrepreneurs and companies of all sizes are under pressure to make more out of what they already have developed and to create incremental revenue streams and new opportunities, it is critical that you consider a periodic intellectual property audit and strategic analysis.

Companies of all sizes and in many different industries should undertake a strategic review process known as the Intellectual Property Protection and Leveraging Analysis (IPPLA). The IPPLA provides a growing company with a realistic and creative assessment as to what intellectual property assets the company has, the strength of these assets, and the opportunities for leveraging these assets into new markets or revenue streams or to improve existing channels.

Among the questions that are addressed during an IPPLA:

  • What technologies have non-competing applications that could be licensed to others?
  • What brands offer value in a brand-extension licensing or co-branding relationship?
  • What distribution channels or partnering opportunities can be strengthened if the company had greater control over these channels or relationships?
  • What growth and expansion strategies are being used by the company's competitors? Why? How are their circumstances different, if at all?
  • Where are the strategic/financial holes in the company's current licensing and alliance relationships?
  • What is the company's online and e-commerce strategy? How could it be strengthened or improved?

The driving force behind the need for an IPPLA may be the senior management of the company, the chief patent counsel, or even board members/outside shareholders (or venture capitalists in earlier-stage venture-backed companies) who are pressuring the company to produce new revenue streams before another infusion of capital can or will be committed.

The strategic objectives of the IPPLA include:

  • Determining the origin of intangible assets and the extent of the company's interest in technology and related intellectual property rights;
  • Determining the scope of rights that third parties may have, by license, ownership, or otherwise, in the company's assets;
  • Instituting systematic procedures for protecting and perfecting the company's intellectual property rights;
  • Detecting defects in the company's existing intellectual property assets and establish the mechanisms and procedures for protecting and perfecting the same;
  • Taking steps to prevent the assertion of some of the more common defenses available to misappropriators and infringers (such as estoppel, laches, and waiver); and
  • Avoiding liability for third party claims of infringement resulting from the development of new products.

In preparing for the IPPLA, prepare an audit plan outlining the:

  • Specific areas of inquiry (e.g., divisions, lines of business, affiliated or non-affiliated agency operations);
  • Scope of inquiry (e.g., only registered assets or a broader scope);
  • Timetable for the IPPLA;
  • Responsible parties for each part of the IPPLA; and
  • Format of the final report to be produced.

In terms of initial information gathering, identify those intellectual property rights such as patents, copyrights and trademarks that have already been registered or are in the process of being registered.

Next, obtain obtain copies of all affiliate agreements (e.g., administrative services, cost allocation), employment, consulting agreements (including Web site design agreements), license and maintenance agreements, joint venture agreements, distribution agreements, security documents and UCC filings, confidentiality agreements, litigation files (including outside counsel responses to auditor's letters), source code escrow agreements (in connection with software), any documentation relating to "clean room" development of software, database licenses, and relevant corporate policy statements including document retention policies.

After the relevant documentation has been identified and organized, prepare an electronic index of the materials, noting with respect to each intellectual property asset:

  • The nature of the company's ownership interests (e.g., sole or joint ownership, exclusive or non-exclusive license, the royalty or other costs associated with the license and the estimated legal duration and period of technological usefulness of the asset) and whether the nature of the interest is in doubt;
  • Any restrictions on the use of the asset (e.g., product or agency-related restrictions, territorial restrictions, assignment or transfer restrictions, time restrictions, non-compete clauses);
  • Relevance of the asset to the core business of the company (e.g., whether the asset is a critical asset or an ancillary asset) and connection with other key non-intellectual property assets of the company;
  • Whether the asset has been pledged, or in any other way encumbered; and
  • Potential for a third party claim of infringement or damages due to the company's use of the asset.

In the course of analyzing the assets, the decision may be that it is necessary to directly interview the company's personnel responsible for the development, acquisition, or use of the intellectual property assets.

© 2006 Andrew J. Sherman. All rights reserved.

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