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Intellectual property “self” audits — a must for ICT firms

Ernest Graf, Information Age

24/02/2004 14:22:31

The word audit may conjure scary images of tax laws and big government, but ICT businesses large and small should perceive intellectual property (IP) audits as welcomed and necessary procedures. Benefits resulting from IP audits can be substantial and there are effective ways to reduce the costs associated with IP audits. This article summarises the purposes and benefits of IP audits, outlines the elements of an IP audit, and describes how firms can perform cost-effective IP “self” audits using in-house personnel.

Purposes and benefits of IP audits Intellectual property is now the most valuable asset of many businesses. Nevertheless business managers generally, and Australian business managers in particular, often do not dedicate the resources necessary to capture and protect IP. That situation could improve however through the increased use of IP audits. IP audits give business managers an opportunity to analyse their intangible business assets so that the profitability of those assets can be maximised.

Effective IP audits should provide managers with a broad analysis of their IP portfolio that evaluates IP Strengths, Weaknesses, Opportunities and Threats (SWOT). For example, strengths in an IP portfolio first require recognition of the existence of intellectual property. IP audits help companies review their products and research work to identify latent IP that has not previously been recognised as valuable. Only then can steps be taken to protect and extract profits from that IP.

Weaknesses in an IP portfolio often involve ownership issues. ICT firms are particularly vulnerable to unhappy “surprises” concerning ownership and use rights regarding software. Lack of ownership entirely, joint ownership with another organisation, or ineffective licence rights are often the primary weaknesses in a company’s IP portfolio. Such weaknesses can be discovered and mitigated through an IP audit.

Opportunities revealed in IP audits include helping a business receive financing. Venture capitalists, other investors, and state and federal government grant administrators often require assurances that a business owns its IP and that threats against that IP are recognised and managed. Also, creditors may want to use a business’s IP as collateral and may require an IP audit to verify the IP’s value.

Finally, IP audits can help reveal both indirect and direct IP threats to a business. For example indirect threats may appear in the form of unpaid patent maintenance fees that may result in a business’s patents lapsing prematurely and unintentionally. Direct threats include IP infringement suits, where third parties sue for infringement of their patents, copyrights, or trademarks. An IP audit may therefore include focused searches of third-party patents and trademarks in an attempt to assess the risk of such infringement suits.

Elements of an IP audit To provide management with a comprehensive SWOT analysis of a company’s IP portfolio, an effective IP audit should therefore include, for example, a review of the following elements:

Company policies Is there a written company policy concerning IP ownership? One of the most common but dangerous management misconceptions is the premise that because a business funded particular research or development work, that the business therefore owns all resulting inventions, software and other IP related to the work. That premise is generally wrong. Without written agreements stating otherwise, ownership in IP generally resides in the individuals who created the IP.

Is there a written policy stating that all employees must formally document and report inventions and ideas to management? Are policy statements widely available to all employees and frequently reviewed? Are all company publications and public disclosures reviewed to avoid premature disclosure of confidential information?

Confidentiality agreements Have all employees and consultants executed written pre-employment or pre-contract agreements concerning the ownership and confidentiality of their work? Are exit interviews conducted when employees leave the company so that employees are reminded of post-employment confidentiality obligations? Are all agreements with contractors, suppliers, manufacturers and distributors regularly reviewed to ensure that confidential information is protected?

Patents, copyrights, trademarks, designs, trade secrets and domain names • Does an effective system exist to ensure that all annuities, maintenance and renewal fees are timely paid? • Are appropriate copyright legends included on all software, Web sites, publications and materials? • Are trademarks used appropriately on all products and materials? • Have all domain names and trademarks been registered? • Has the company considered business method patents? • Has the company considered alternative forms of IP protection for its products? For example, some software applications may be protectable using multiple forms of intellectual property including patents, copyrights, trademarks and trade secrets. • Are trade secrets adequately protected?

Licences (company as licensee) Has the company investigated commercial use restrictions related to any freeware or shareware incorporated into the company’s products? Do existing licences with third-party software vendors authorise the company’s intended commercial and geographic uses of the third-party software? Do any government or other funding agreements include restrictions on IP?

Licences (company as licensor) Has the company thoroughly reviewed opportunities for licensing its IP to third parties?

Are existing licences reviewed regularly to ensure that all milestone and minimum payments have been received?

Contracts Is appropriate IP indemnification and disclaimer language included in all company contracts?

Third-party IP Is the company aware of its competitors’ IP? Has a search been conducted to determine whether the company’s products and services might infringe patents, copyrights or trademarks owned by third parties?

Cost Effective “Self” Audits Knowledge gained from IP audits can play a critical role in an ICT company’s success. That is particularly true for young and fast growing companies where management may not have the time to regularly review IP issues.

Unfortunately, in order to save costs, young and fast growing companies are often the companies that are most inclined to avoid IP audits. Managers of a small company with just a few employees may decide that the company is just not big enough to require a procedure that has a name that sounds as formal and bureaucratic as “intellectual property audit”. Nevertheless such small companies are often the companies that could benefit most from a structured review of their IP portfolio. For these firms that might otherwise eliminate IP audits altogether, IP “self” audits present a low-cost and effective way to gain most of the above-described benefits of an IP audit.

When conducting an IP self audit, outside legal costs related to an IP audit can, and perhaps should, be minimised. In fact, a lower cost IP self audit that uses minimal outside legal counsel may prove to be more valuable to a business than a more traditional audit that would be conducted primarily by outsiders. The reason is that, to achieve the maximum benefit from an IP audit, firms need to have their own management actively involved in the audit process. Close-up participation in and execution of an IP audit is the best way to make management acutely aware of the company’s IP strengths, weaknesses, opportunities and threats. It is the company’s own management team and not outside legal experts who need such knowledge most.

Conducting IP “self” audits is thus similar to the voluntary implementation of ISO 9000 quality standards that are so familiar to many ICT businesses. IP “self” audit processes, like ISO 9000 quality standards, should be implemented not because a government regulatory body requires them — but simply because such implementation makes good business sense.

To control costs, small businesses may thus use effectively their outside patent and trademark attorneys or IP lawyers to act in a limited role as coordinators of an IP self audit. As IP audit coordinators, patent and trademark attorneys or IP lawyers can provide an effective structure for an audit, steer company managers in the right directions during an audit, and provide summary documentation. But most of the audit review and investigation can occur in-house — significantly reducing costs.

Of course, depending on the purpose of the audit, the above strategy of “self” auditing has limitations. For example, where IP audits are requested by investors or creditors, an IP audit will need further outside professional involvement in order to acquire the necessary impartiality and objectiveness that is expected in traditional financial audits.

Conclusion Although it is sometimes under-appreciated by management, intellectual property is now a critical asset of all high technology companies. IP audits help companies evaluate strengths, weaknesses, opportunities and threats concerning IP so that maximum profits may be extracted from IP assets. Today’s ICT businesses in particular cannot afford not to conduct intellectual property audits. However, in many circumstances, the costs of IP audits can be decreased through the strategic use of IP “self” audits.

Ernest R. Graf is a Registered United States Patent Attorney employed by Fisher Adams Kelly in Brisbane, Australia. He can be reached at egraf@fak.com.au.