CONDUCTING AN IP AUDIT :
1. Starting With a Detailed Check List
(a) An IP auditor normally starts works from a detailed checklist, which is modified for the type and size of the company’s business, relevant IP laws of the relevant countries, desired purpose(s), and the desired outcome(s) of the audit.
(b) A good checklist minimizes the chances of leaving out one or more relevant steps from the process. Each member of the audit team should be provided the relevant part of the detailed checklist.
(c) To produce a comprehensive, company-wide IP audit report reflecting the entire development and decision-making process for each of the company’s products and processes, the audit team should collect, review, and organize.
The Steps of an IP Audit (in case of M&A)
(i) M&A Non disclosure Agreement (NDA)
This agreement is designed to protect the confidentiality of information exchanged in connection with the consideration and negotiation of transaction and information exchanged in the course of a party’s due diligence review of the other. NDA can be entered into independently as a stand alone agreement or it can be contained in the MOU for the proposed transaction.
(ii) IP Audit Preparation
(i) Researching background information on the business.
(ii) Preparing an IP audit plan, defining the scope of the audit, target intellectual properties, time table of the audit and responsible person(s) for the audit.
(iii) IP information analysis:
A classical IP audit can be said to be focused principally on two concerns:
(a) Does the company own all the intellectual properties of concern?
(b) Does the company infringe on the intellectual property rights of others in the conduct of its business?
(iv) IP evaluation
In the IP evaluation stage a range of different valuation technologies, including replacement value, discounted cash flows and comparable sales can be used.
(v) Negotiation
Based on the results of IP analysis and evaluation the proposed dollar range of the value of target intellectual property is exchanged on the negotiation table.
(vi) Contract formulation
Not only the IP information but also all the agreements that may affect the IP portfolio of the company. It may also have to do or get done relevant IP searches in all key markets.
2. Auditing Different Contracts/Agreements
A key part of an IP audit is to identify and assess the adequacy of relevant provisions in all agreements that concern the protection of IP. These may include the following agreements:
(i) Licensing agreements
(ii) Assignment agreements
(iii) Employment and Independent Contractor Agreements
(iv) Joint Venture & Collaboration agreements
(v) R & D Grants
(vi) Other agreements
Other kinds of agreements that could have a significant impact on a company’s IP will include:
(a) Technology transfer, or know how, or technical assistance agreements;
(b) Design and development agreements;
(c) Settlement agreements;
(d) Franchise agreements;
(e) Royalty agreements;
(f) Marketing agreements;
(g) Distribution/Distributorship agreements;
(h) Sales representative agreements;
(i) Consulting or management agreements;
(j) Outsourcing agreements;
(k) Maintenance and repair agreements;
(l) Material transfer agreements;
(m) Programming agreements;
(n) Source code escrow agreements (in connection with software).
3. Auditing IP Assets
After auditing agreements, the IP Auditor starts to audit the IP assets of the company. There are four steps for this stage:
(i) Identifying and recording IP assets
In this step, the assets will be initially catalogued and a description will be provided:-
(a) It is the basic stock taking exercise that will serve to create or update the intangible asset portfolio of a company.
(b) It will serve to inform the company of its IP assets, which may or may not be used or used differently depending on the goals of the business.
(ii) Determining ownership and legal status of the IP assets
The assets will be evaluated as to whether they are owned by the company and if so, whether they are or should be, protected as IP rights.
(a) It will include assets created by the company itself, and those that are acquired or used with or without the express consent of third parties.
(b) It will enable the company to see where, if any, ownership problems exist, why they exist and what should be done to prevent or solve such ownership issues.
(c) It will also reveal whether adequate systems are in place to protect these assets or, alternatively, whether and what internal obstacles exist to their protection, and whether and how these may be overcome.
(d) The main subjects the auditor should note with respect to each asset are:-
− Ownership: 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).
− Restrictions on use: Any restrictions on the use of the asset (e.g., product or agency related restrictions, territorial restrictions, assignment or transfer restrictions, time restrictions, noncompete clauses)
− Relevance to business: The 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 any connection with other key non-IP assets of the company,
− Encumbrances: Whether the asset has been pledged, or in any other way legally encumbered.
− Infringement: The potential for a third party claim of infringement or damages due to the company’s use of the asset.
(iii) Detecting infringement of IP rights
Review company’s policies with respect to the enforcement of its IP rights as well as its own systems for respecting the legal rights of others.
(a) If the assets are owned by the company then an audit may provide information as to whether they are infringed by others.
(b) The IP audit may provide information as to assets that the company thinks it owns but in reality it does not and could give rise to problems of third party infringement.
(iv) Taking necessary steps for creating and maintaining IP assets
(a) An IP audit will reveal where there have been lapses in the administrative, legal and regulatory procedures necessary for creating and maintaining IP assets.
(b) An IP audit will provide the necessary impetus to take care of such requirements by creating or improving the relevant in-house policies, procedures and management practices.
4: After Completing an IP Audit
(A) Using the results of an IP Audit
(i) IP analysis
(a) Evaluate and analyze whether the IP assets are serving the strategic objectives of the company and, if not, what should be done to change that;
(b) One technique that would help at this stage is to divide the results of the IP inventory into three groups:
− Group 1: Techniques, innovations, and ideas that are essential to your products and services, and to the markets your company has decided to serve.
− Group 2: Intellectual assets of real potential but not necessary to your company.
− Group 3: ‘Assets’ that seem, on balance, to have no great value to your company or to anyone else.
(ii) Evaluating IP assets
(a) The results of IP audit will be the basis for evaluation of IP assets;
(b) Properly valuing the benefits that may accrue from any IP asset requires an assessment of:
− Speed with which a particular market values and devalues that type of asset.
− The cost of developing alternative IP assets to fulfill the same or comparable market needs.
− Royalties being paid for similar assets.
− Market recognition of the asset.
− The cost of developing such recognition if it is deficient.
(iii) Overall review on IP assets and IP policy
An IP audit will provide the management of the company with the basic information as to whether its IP assets are being used to attain the company’s strategic objectives.
(a) The management has to check if its business objectives, business model and its IP management policies are in alignment with each other.
(b) This can be identified by evaluating the relevance and tangible benefits obtained by using or leveraging IP assets that a company owns or has access to.
(iv) Preventing or being prepared for litigation
(a) A carefully conducted audit may result in a determination that the company’s use of its IP violates the rights of a third party.
(b) Advance warning of infringement allows the company to cease infringing activities, obtain a license or at the least, evaluate its liabilities and defenses.
(v) Business strategy formulation
At this stage of an IP audit the management matches its newly established inventory of IP assets to its strategic business objectives. The objectives include:
− The types of products or services on which the company intends to focus its resources;
− The markets it intends to serve;
− The return on investment it requires in order to satisfy its owners or shareholders.
(B) Building IP Value Through IP Audits
Dynamic IP asset managers have used IP audits to build corporate value in many different ways. Some of the more popular approaches are discussed below:
(a) Building value in IP asset creation.
(b) Building value of existing IP assets.
(c) Reducing costs of third party IP claims.
(d) Building value from product markets using IP assets.
(e) Creating non-core revenue streams.
(f) Creating additional revenue through core business licensing.
(g) Building value in corporate transactions.
(h) Reducing costs of unused IP assets.
(i) Receiving tax deductions for IP asset donations.
(j) Reducing new product development costs (product clearance).
(k) Evaluating the IP assets of an acquisition or investment target (due diligence).
(l) Assessing business direction and strength.
(m) Discovering unclaimed business opportunities.
(n) Discovering business expansion opportunities.
The results of the IP audit may add a new dimension to strategy discussions and may lead to new business strategies for the domestic or export markets.