session-12 ip audits

7/27/2019 Session-12 IP Audits

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IP Audits


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Outline

Introduction

What is an Intellectual Property Audit?

When an Audit Should Be Undertaken

Scope of the Audit

Who Should Do the Audit?

Audit Plan Initial Information Gathering

Written Report of Results of the Audit

Federal and State Filings

Ownership Issues

Infringement Issues Other Issues

The Importance of an Intellectual Property Audit


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AUDIT OF INTELLECTUAL PROPERTY

The importance of Intellectual Property and the laws regulating it have

undergone sweeping change in the last few years. Considering the value

and power of intellectual property it is not surprising that infringement

lawsuits are proliferating.

Too much is at stake to ignore infringement of such valuable property. It

thus become mandatory from any organization to protect and safe guardsits intellectual capital.

In order to do so it is imperative for the companies to understand as to what

rights the organization owns, whether the organization is protecting its right

properly, is the mode of protection adequate, whether it has proper

procedure to determine what rights it should be registering, whether it has a

system to minimize the risk of infringing third party rights, evaluation of

contractual term for the right assigned or used under license, how trade

secrets are protected from employees, should the organization develop

back up 'mark' and such other important issues.


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Introduction

IP Audit as Intellectual property has animportance today greater than ever

before. The success of companies depends onmore intangible assets than tangibleassets.

A generation ago, about 80% of a typicalcompanys assets were tangible(buildings, equipment, and the like) and20% were intangible.

By the turn of the Millennium, the relativevalue of tangible and intangible assetshad essentially reversed so thatapproximately three-quarters of a typicalcompanys assets were intangible assets.

The core of many business and theirsuccess secrets are their intangibleassets The Intellectual Property.

The more you have the better of you are.

Hence there is a need of managing yourIP Assets like managing your othertangible assets. Audit is one of theessential instruments to keep track of yourassets.


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Changing Scenario of IP


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An IP audit - keeping track of your IP

Nearly all companies own some form of IP that is important to their

operations and ongoing success. IP can be simple information such as a

customer list that should be kept confidential.

The circumstances in which a company's IP may have come into existence

are almost unlimited.

An example might be a patented product arising from significant researchand development undertaken by employees who are bound by

confidentiality obligations. Other examples might be through acquiring IP as

part of a new business, or an unforeseen and fortuitous by-product resulting

from a core business activity.

The sheer diversity of types of IP, and circumstances surrounding itscreation, often makes it impossible for a company to be aware of the full

extent of its IP. An IP audit can help redress this.


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Start with a preliminary audit

If you have not conducted an IP audit before, now is a good time to start.

An IP audit will give you a broad picture of your IP assets. Many who

conduct an IP audit for the first time are surprised by not only how many IP

assets their company owns, but also how important these are to their

business.

There are two types of IP audits:

A preliminary audit, which gives you an overview of your IP, and the value it

contributes to your enterprise; and

A comprehensive audit, which is usually conducted when you have a

specific purpose to address, such as due diligence or to enforce or defend

legal action. In cases such as these you should engage a qualified IPpractitioner to assist you (eg. a recognised accountant, lawyer or patent

attorney).


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Where is your IP?

Registrars files

Floor files

Retail

Publications

Marketing

Legal

Directors office

Contracts dept.

Photography

Archives

Film/Video

Information

Technology

Exhibition

Education Design


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What is an Intellectual Property Audit? Identification of IP Ascertain

and confirm its existence

IP Ownership and rights:Confirm that it is available tobe exploited

Technical Validation of IP -Confirm that it works

Business Validation of IP -Formulate a strategy to realiseeconomics benefits Many perspectives on the

what and why and how of anIP Audit

In time available, these slides

will focus on one oftenneglected aspect of IP Audits

That is the due diligence onownership and rights that alicensor should prudentlyconsider undertaking on itselfand its own IP


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What is Intellectual Property Audit?

One traditional definition of an intellectual property audit

is a cataloging of a organization's intellectual propertyassets. It is required for an organization to meet its due-diligence requirements for mergers, acquisitions, or othertransfers.

An intellectual property audit provides an assessment ofthe intangible assets of a company.

The audit helps to quantify the value of the intangibleassets to the extent that such value depends on the legalright to those assets.

The audit examines and evaluates the strengths andweaknesses in the procedures used to protect eachintangible asset and secure appropriate intellectualproperty rights.


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Why IP Audit


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What is a due diligence, and who does it

Due diligence is the name for an IP Audit, when it isdone by:

Someone interested in acquiring an interest in IP

An IP buyer

An IP Licensee An investor into a company that owns or has licensed IP

Object of the due diligence is to check and validate

That the IP exists

That the IP is owned by the person who believes thatthey have rights in respect of the IP

Prudence requires this due diligence on the part ofthe IP buyer or licensee


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What is a due diligence, and who does it

Due diligence is also done by a Company seeking toraise capital from the public by IPO

Important civil and criminal consequences follow frommisleading the public in the Companys statements inits capital raising document (Prospectus, InformationMemorandum etc)

Statements about

Companys ownership of IP Companys rights over IP

Checked and validated

To ensure that there are no false (even innocentlyfalse) statements made about the IP

Prudence requires this due diligence on the part ofthe Company and capital raising promoters


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Should a licensor do a due diligence upon itself ?

Not commonly done

Licensors are often passive

They submit to a due diligence by a licensee or buyeror investor

Sometimes licensors do not pay a lot of attention toownership and rights over their IP

Sometimes licensors assume that they own the IPthat they have available to them

That assumption

sometimes made unconsciously, occurring only because

they have possession of the IP, and

no third person has challenged the IP in any way.


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Should a licensor do a due diligence upon itself ?

But the licensee / assignee / investor

will undertake a robust due diligence

will not assume that licensors ownership of the IP

Instead, will approach the task with

the presumption that there is something wrong withthe ownership and rights over the IP, a due diligencedefect, and

the challenge is to find it

The robust due diligence will include

Searches Reviewing legal agreements

Interviewing persons involved with the IP


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When an Audit Should Be Undertaken

An intellectual property audit may be appropriate in anumber of situations. For example, an audit isappropriate before a significant acquisition of atechnology or product.

An audit may be performed in the early stages of atechnology companys formation to institute systematicprocedures for protecting and perfecting intellectualproperty rights, particularly for core technologies.

An audit may also be used at critical junctures in a

companys life cycle to ensure the continuing adequacyof such procedures and to detect defects therein.


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Scope of the Aud i t

The appropriate scope of the audit is often situationspecific. For example, if a company is conducting anaudit of its company-wide procedures for acquiring,perfecting and enforcing its intellectual property rights,

an intellectual property audit of broad scope isappropriate.

Audits more narrow in focus may be appropriate when,for example, a company is facing possible trademarklitigation and an investigation limited to the trademark at

hand may be all that is required. Narrow audits may also be confined to examination of

procedures, for example, the clean room proceduresused to develop a new software product.


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Who Should Do the Aud it?

The designation of an audit team depends onthe nature and scope of the audit.

A companys own personnel may have sufficientfamiliarity with the facts and issues involved to

perform an audit. Generally, because of the inherently legal nature

of an audit, a companys in-house legal counselshould be involved in the audit. In many

situations, the company personnel may not havethe time or expertise to perform a full-scale auditand outside counsel should be brought in toconduct the audit.


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Audit Plan

For most intellectual property audits of substantial scope,

a written audit plan should be prepared in advance. The

plan should define the areas of inquiry of the audit, the

scope of the inquiry, the schedule, who has responsibility

for each area, and the form of expected report.

The plan should also define the documents to be

reviewed and the personnel to be interviewed. The

documents needed and personnel to be interviewed maynot be known in detail in advance of the audit, and the

plan may need to be revised after the audit is begun.


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Initial Information Gathering

In virtually every case, substantial initial information will need to begathered and presented before the auditors can efficiently begin

their detailed investigation. The types of information that will be

needed include:

Information concerning the nature of the assets

Background research Data gathering

Logistics of access


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Writ ten Repo rt of Resu l ts of the Audit

The report should discuss the development history of the technology at issue,

describe and evaluate intellectual property defects uncovered in the audit, proposeand describe specific remedial action that needs to be taken or that has been taken,

and respond to any other specific need for information the parties commissioning the

audit may have.

If the audit was conducted in the context of an acquisition transaction, the report

should provide the information necessary to decide whether the rights available are

the rights required by the acquiring party, and should provide a basis for valuing the

rights to be acquired. Necessary remedial action can be implemented either before

the transaction is consummated or after the acquisition.


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Infringement Issues

If the audit reveals potential infringement of third party rights, licenses may be sought or the

product at issue may be redesigned around a patent that covers the product, or technology that

may be the trade secret, or copyrighted work of another may be removed or redeveloped.

In transaction related audits, if it appears that consummation of a proposed acquisition will

precipitate a lawsuit, it may be possible to obtain a partial or complete indemnification from the

present owner or a third party. Purchaser control of any potential lawsuit might also be sought

during the negotiations.

The audit may reveal areas of particular risk in which a cleanroom development should be used

to develop a new product or portion thereof. Alternatively, if clean room procedures were used andthe audit reveals defects in such procedures, portions of the product may need to be redeveloped,

or a detailed examination of the resulting product may need to be made to determine whether

there is substantial similarity to the product of another. Missing or inadequate affidavits from the

clean room participants may need to be remedied.


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Other Issues

If the future value of a product depends heavily on retaining certain key personnel,

some potential problems can be avoided by developing contractual or other

incentives for such personnel to stay on.

Prospective legal, marketing and research and development strategies can bedesigned to minimize the exposure from defects discovered in the audit.


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Own exploitation

Licensing

Sell

Merger and acquisitionJoint venture

Privatization

Fundraising

IPO

Litigation

1. Reasons for valuation of IP

Valuation of Intellectual Property Assets


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2. Definitions and recognition of Intangible assets

An asset is intangible if it meets the following 3 criteria:

Identifiable

Controllable

Posses future economic benefits

Basic Principles of Valuation of Intellectual

Property Assets


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2.1. Identifiable means the Intangible Assetis separable (can be separated and sold, transferred,

rented or exchanged)

2.2. Controllable meansAn entity has power to obtain the future economic

benefits flowing from the intangible asset

2.3. Future Economic Benefits meansRevenue stream from the sales of the products or

services or cost saving or other benefits resulting from

the use of the asset by the entity

Basic Principles of Valuation of

Intellectual Property Assets


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Managing Your Intellectual Property Assets

Analyze legal status of rights

Register copyrights, trademarks, & domains

Track renewal dates

Track status and ownership

Track license restrictions

Ensure proper and

Develop technical requirements

Invest in software and/or Intranet


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The Importance of Conducting Intellectual Property Audit

An IP audit is a systematic review of the IP owned, used or acquired

by a company. An audit's principal goal is to identify all the IP your

company may have. By conducting an IP audit, however, you can

also establish:

Whether or not your IP rights are registered;

Who owns the rights and, if you do not, identify any conditions that

apply to their use;

An assessment of whether your IP is being used effectively;

Whether your rights are being challenged or threatened by others;

Whether you have an effective IP management and maintenanceplan in place; and

Records of your IP creation and ownership.


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IP strategy is an important aspect of business strategy for

modern companies

In developing IP strategy , IP audit and valuation is

important

For IP audit, the WIPO Audit Tool can be used

IP valuation is a new field and complex exercise that

requires engaging professions to do it, although creatingawareness amongst company staff may be required

Conclusions


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CONCLUSION

s the intellectual property is comprehensive and therange of assets covered by those rights are diverse and

extensive, to apprehend their commercial importance

and the scope of exploitation becomes difficult. It would

therefore be desirable for organization to put itself to

audit of IPR undertaken by a team of experts in order tobuild up the IP monitoring system and to formulate the

correct procedure and guidelines to protect and enhance

the commercial value of intellectual property.

session-12 ip audits

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