According to a study by Ocean Tomo LLC, Intellectual Property (IP) accounts for as much as 84 percent of the market value of S&P 500 companies. With so much value at stake, companies often look to an IP audit to inform corporate directors, executives, and legal counsel about the status of the company’s IP and to educate these decision makers on strategies to improve protection, maintenance, and enforcement efforts against infringers.
Let’s examine what’s involved in an IP audit and how one could strengthen the governance of your enterprise.
What Is an IP Audit?
The two most common types of IP audits are an IP inventory audit and a comprehensive IP audit. The purpose of an IP inventory audit is to identify the IP assets of a company: patents, trademarks, copyrightable works, and trade secrets. The resulting list of assets is crucial because it may reveal IP that is outdated, underutilized, or that no longer has value. Companies may undergo an IP inventory audit prior to a merger or other corporate transaction, or simply when leadership wants an updated IP status report.
The comprehensive IP audit begins with the compilation of IP assets, but the real purpose is to review and analyze how the company utilizes its IP. Effective IP management requires careful attention to protecting, maintaining, and enforcing IP, and the comprehensive IP audit can be a powerful tool in this regard.
IP protection involves securing rights, and how this is done depends on the type of IP.
- • Trademark protection derives from use in the marketplace, and those rights can be enhanced upon registration at the U.S. Patent and Trademark Office (PTO).
- • Copyright protection exists when an original work of expression is fixed in a tangible form, e.g., a contemporaneous speech is not protected but an audio recording of it is. Similar to trademarks, copyright protection can be enhanced through government registration (via the U.S. Copyright Office).
- • Patent rights exist only upon registration with the PTO.
- • Trade secret protection exists once the company has taken reasonable measures to safeguard the secrecy of information that gives it economic advantage, such as the formula to Coca-Cola.
The comprehensive IP audit can reveal gaps in protection and candidates for enhanced protection (e.g., trademarks or copyrightable works that the company uses but has not registered with the PTO or the U.S. Copyright Office). Also, if the company holds valuable trade secrets, the comprehensive IP audit helps determine whether the company has closely guarded them via employee nondisclosure agreements or other internal protocols.
The comprehensive IP audit will also reveal whether the company is meeting its periodic registration renewal deadlines, or, more formally, performing sound IP maintenance practices. It should also reveal whether the company is using its IP consistently and correctly (e.g., using a trademark as an adjective to describe a product or service rather than using it as the product name itself). In the case of trade secrets, the comprehensive IP audit should cover whether the company continues to adhere to whatever confidentiality protocols it used to establish trade secret protection in the first place.
A comprehensive IP audit can also help guide IP enforcement efforts. Effective IP enforcement includes policing against misuse and infringements and taking appropriate measures to stop violations.
A Comprehensive Report to Guide the Future
The comprehensive IP audit results in a written report that accompanies the list of IP. A good report will contain best practices and advice on ways the company can enhance, strengthen, and better protect the IP. This report acts as a roadmap for an effective long-term IP management strategy, and it can help the company proactively get in front of issues, implement changes in its IP policies and procedures, prioritize the company’s IP needs, and, importantly, budget for all of the above. This makes IP management more cost effective in the long term rather than waiting to put out fires when issues inevitably arise, and it is a positive risk management practice for boards to add to their oversight duties.
The written report can also provide insight into potential liabilities caused by the company’s current practices. Liability can occur for several reasons. For instance, a company can be held liable if it uses another’s IP without permission or beyond what may be permitted in a license agreement. Another common scenario that exposes a company to liability is if the company is not properly protecting itself when it allows users to post content to the company’s website. The audit report can highlight these issues and offer recommendations to curb and correct these behaviors.
Any time is a good time for a company to conduct an IP audit, especially if one has never been conducted or especially if new leadership has taken over and new strategies are being implemented. Preparing for an initial public offering, undergoing a merger or acquisition, or implementing a corporate restructuring are all prime situations that warrant an IP audit. An IP audit is a prudent next step in making sure that the company is doing everything it can to protect its valuable assets.
Adam W. Sikich, Esq. is senior counsel at Dunner Law PLLC in Washington, DC. Sikich specializes in all aspects of counseling in the areas of trademark, copyright, trade secrets, and licensing. He can be reached at firstname.lastname@example.org.