HISTORICALLY, sources of strength for a business were its tangible assets such as land, buildings, machinery and equipment. Today, however, more and more businesses rely on their competitive strength and intangible assets, especially on trademarks, patents, trade secrets, copyright, and designs.
An IP audit is a systematic review of the intellectual properties owned, used or acquired by a business so as to assess and manage risk, remedy problems and implement best practices in IP asset management. Nowadays, an IP audit is an indispensable tool for successfully managing knowledge-driven business by aiding the process of creating or revising its IP strategy.
It involves undertaking a comprehensive review of a company’s IP assets, related agreements, relevant policies and compliance procedures. An IP audit helps a business to make an inventory of its IP assets or update it and analyse:
- How the IP assets are used or unused.
- Whether the IP assets used by the business are owned by the company or by others
- Whether these IP assets are infringing the rights of others or others are infringing on these rights.
An IP audit seeks to uncover unused or under-utilised assets, to identify any threats to a company’s bottom line, and to enable businesses to devise informed business and IP strategies that help maintain and improve its competitive position in relevant market(s).
There are basically three types of IP audits: General purpose IP audit, Event driven IP audit and Limited purpose focused IP audit.
(1) The General purpose IP audit, is done in the following types of contexts:
- Before establishing a new company it is always important for a start-up company to be aware of intangible assets it owns or needs to protect.
- When a business is considering implementing new policies, standards, or procedures relating to IP.
- When a business is considering implementing a new marketing approach or direction, or is planning a major reorganisation of the company.
Once a comprehensive IP audit has been undertaken, a smaller effort and expense is needed at regular intervals, such as on an annual basis, so that IP assets are reviewed and appropriate decisions taken, depending on the current and emerging needs of a company.
(2) The Event driven IP Audit is generally much narrower in scope than a broad or general purpose IP audit. Further, the nature and scope of such an audit is determined by the event in question, and the time and resources available for doing it.
- Event driven IP audit is often called “IP due diligence” when done to assess, as objectively as possible, the value and risk of all or a part of a target company’s IP assets.
- IP due diligence is a part of a comprehensive due diligence audit that is done to assess the financial, commercial and legal benefits and risks linked to a target company’s IP portfolio, typically before it is bought or invested in. Before starting the IP due diligence process, a mutual non-disclosure agreement should be signed between (a) the potential acquirer, investor, or creditor and (b) the target company.
- When done properly, IP due diligence provides detailed information that may affect the price or other key elements of a proposed transaction or even aborting the further consideration of the proposed transaction.
IP due diligence generally seeks to:
- Identify and locate IP assets, and then assess the nature and scope of the IP to evaluate their benefits and allocate risks associated with the ownership or use of the relevant IP assets; in particular, it seeks to determine whether the relevant IP is free of encumbrances for its intended business use(s).
- Identify problems in and barriers to the transfer, hypothecation or securitisation of the IP assets under consideration.
- Identify and apportion between the two parties the expenses incident to the transfer of IP assets under consideration.
When is it done?
IP due diligence is done in the following types of contexts:
- Merger & Acquisition or Joint Venture
It provides a basis for assessing the risk and value of relevant IP assets in a proposed acquisition or sale of intellectual property, as for example, prior to entering into any serious negotiations for a possible merger or acquisition, or a joint venture arrangement. It could lead to a significant increase in the value of the acquired company or the resulting merged entity.
On the other hand, such an exercise may significantly reduce the acquisition cost or lead to a cancellation of the acquisition process if the due diligence process reveals major IP risks or IP problems in the target company.
- Financial transactions
IP due diligence is important before entering into a financial transaction involving IP, such as before an initial public offering or private placement of stock, or significant stock purchase, or before taking of a security interest in IP, as all of these have an impact on the ownership of IP. Through an IP audit, a potential lender will be able to more meaningfully assess a structured IP portfolio as part of its overall analysis of the credit worthiness of a target company.
- Buying or selling a business division or IP transfer
Before a company buys or sells a division or a product line, a seller will generally make a series of representations and warranties as to the ownership, non-infringement and marketability of the IP assets linked to the transaction in the ensuing written agreement.
Before a transfer or assignment of interest in IP, an IP due diligence should be done separately by both parties to ensure that the transfer or assignment meets both their respective business interests.
- Launching a new product or service
When a significant new product or service is being developed or about to be launched, risk of infringing IP rights of others might be especially high. An IP audit needs to be taken to address any possible infringement or freedom to operate issues linked to new product development and launch of such a product on the market.
- IP licensing
A potential licensor has to ensure, for example, that it actually owns the IP that is sought to be licensed to others. Also, it has to be sure that there are no existing licences that would interfere with the proposed new licence.
A potential licensee has to ensure, for example, that the potential licensor has the necessary rights to the IP in question so as to legitimately transfer the rights and that scope and extent of the proposed licence will duly serve its intended purpose.
(3) Limited purpose focused audit is typically much narrower in scope than the other two types and is performed under much constrained time schedules.
They are typically used to justify a certain legal position or the valuation of a particular IP.
A limited purpose focused audit is done in the following types of contexts:
- Foreign IP filings : Before a company takes up an aggressive program of filing IP applications in other countries, that is, before entering a new market abroad, an IP audit helps to sensitise the company to market-specific IP laws, rules, customs and practices affecting IP rights.
- Using the Internet for business purposes
Before having an Internet presence, doing an IP audit helps it to identify the needs of e-commerce and registration of appropriate domain names and so forth.
Aleck Ncube is an Intellectual Property Scholar. He can be contacted on [email protected] or follow me on Twitter: @aleckncube