One traditional definition of an intellectual property audit is “a cataloging of a organization’s intellectual property assets.” It is required for an organization to meet its due-diligence requirements for mergers, acquisitions, or other transfers. Today, organizations see an intellectual property audit not only as a balance sheet for intangible assets but also, more importantly, as a self-evaluation that the organization constantly and consistently engages in to determine the value of its own assets, determine how to best capitalize on those assets, and keep abreast of the changing values of its assets in the face of the ever-changing economic and legal ecosphere.
Who Should Conduct an Intellectual Property Audit?
“Intellectual property audit” is perhaps something of a misnomer. It indicates that the audit is a mere counting up of assets, and the person conducting the audit merely adds up the intellectual property found in the organization and reports the value. Nothing could be further from the truth. An intellectual property audit is an inherently legal undertaking , and should therefore be performed by a team consisting of at least an attorney with expertise in the law of intellectual property, either in-house or outside counsel, or by the in-house personnel of the organization, if they have sufficient knowledge of the organization’s intellectual property to perform the activities required for an intellectual property audit of the organization. An intellectual property audit is not an accounting function. The intellectual property audit is an assessment of the legal status and value of an organization’s intellectual property, especially targeting those areas where the marketing and management goals of the organization and the existing protection of the organization’s intellectual property are somehow not well suited to each other. The attorney or attorneys and other team members (the team might consist of the intellectual property attorney and at least one representative from each of the management, marketing and technology areas ; because of the inherent legal significance of the intellectual property audit, at least one member of the team must be an intellectual property attorney) selected to perform the audit should therefore have some expertise with the organization’s technology, the marketing and management goals of the organization, and have some familiarity with what is involved in intellectual property protection: prosecution of the registration application, maintenance of the property, and on through defense of the intellectual property through litigation and the appellate process.
When to Conduct an Intellectual Property Audit
When should an organization consider conducting an intellectual property audit? Attorney Leslie J. Lott has identified several appropriate times in the life of an organization for intellectual property audits ; in this subsection, I borrow heavily from her listing and commentary.
New Intellectual Property Management
If the organization has new intellectual property management, the new intellectual property manager should have a thorough intellectual property audit performed to become familiar with the status of the portfolio.
Merger, Acquisition, Significant Stock Purchase
A significant corporate change (merger, acquisition, significant stock purchase) can impact intellectual property ownership; this is another signal for an intellectual property audit.
Transfer or Assignment of Interest in Intellectual Property
A transfer or assignment of intellectual property from one organization to another calls for an intellectual property audit of both organizations’ intellectual property. Here, the intellectual property audit allows the organizations to be sure the transfer or assignment meets the interests of both by ensuring that the intellectual property is properly protected and enhances the acquiring organization’s existing intellectual property interests, and that the intellectual property does not leave any unplanned vulnerabilities for the organization transferring the interests.
An intellectual property audit should be performed when an organization sets up an intellectual property license or licensing program, and on a regular basis thereafter. This is important whether the organization is the licensor or the licensee.
If the organization licenses its intellectual property to others, it must of course actually own the intellectual property that it is licensing. Also, there must be no existing licenses that would interfere with the proposed new license.
If the organization is the licensee, obtaining the intellectual property rights of another, the audit determines that the scope and extent of the license to be obtained is adequate for its purposes.
Significant Change in Law
A significant change in case or statutory law may require an organization to re-evaluate its intellectual property.
One such change in statutory law occurred when Congress passed the federal anti-dilution statute. This change in the law significantly impacts the analysis of the potential liability of an organization for infringement of the trademarks of others and also affects the analysis of whether or not others are infringing the organization’s rights.
Four examples of case law which arouse the need for an intellectual property audit are the Qualitex case (which deals with the protection of color as a trademark), the Sony case (which deals with the question of whether a device that can be used for copyright infringement is itself an infringement of copyright), the Festo case (which deals with the Doctrine of Equivalents in patent prosecution), and the KSR case (which deals with the concept of obviousness in patent law).
Financial Transactions Involving Intellectual Property
Financial transactions involving intellectual property might include loans, public offerings, private placements, or any other transaction which directly involves an organization’s intellectual property, or in which the intellectual property of the organization is or could be significant.
New Client Program or Policy
An organization should conduct an intellectual property audit in connection with new programs or policies, such as an aggressive foreign filing program, new marketing approach or direction, expansion of a product line or services, corporate reorganization, or any other corporate change that could affect the interaction between the organization’s intellectual property and the marketplace.