In a previous article we discussed the importance of carrying out IP audits. In this article we outline the steps that need to be carried out in order to complete an audit. It is now well-established by business valuators that the intellectual property constitutes, on average, 75% of the saleable asset value of twenty-first century corporations. So IP auditing is an important management tool.
Identification of Intellectual Property (“IP”)
The first objective is to locate relevant IP, including inventions, trademarks, material subject to copyright, designs, know-how and confidential information. Licenses and any other royalty arrangements granted to or by the company should be included. In most cases, the competencies and time required for this step may best be addressed by the engagement of outside counsel and valuation experts.
Identification of Existing Registrations and Pending Applications
The next step is to determine what existing registrations or protection exist for the IP that has been identified and whether they are current and in good standing. In some cases it will be easier than in others to determine whether registrations or pending applications exist.
Unprotected IP
Once the above steps have been carried out, IP may be identified that has not been protected but it is nonetheless a significant corporate asset. For such IP, the scope of the right to use and exploit it, and to stop others from using or exploiting it, should be considered. Consideration should also be given to protecting it. For example, if the company has spent substantial time and effort in having third party developers create software for it, in the absence of an assignment of copyright, there may be problems.
Consideration should be given to the corporate processes or physical security that protect against abuse or theft of IP. Computerized files are an obvious object of such protective measures. Are they protected by passwords, electronic audit trails, or copying restrictions? More detailed consideration should be given to confidential information and know-how, and how they are protected.
Employee contracts, third-party consultant agreements, and joint venture agreements should be considered. Do they explicitly protect the enterprise’s IP, with provisions of confidentiality, non-disclosure, and transfer of ownership interest to the enterprise?
Identify Potential Infringements
If processes are being used or other unregistered IP rights are being utilized consideration must be given as to whether it is legally permissible to use them. There may be issues with respect to potential claims for infringement if third parties became aware of the use of the IP in issue.
Valuation
Finally, once all these issues have been dealt with, consideration should be given to itemizing and valuing the various pieces of IP. By proceeding in this fashion a better idea can be obtained of the value of the company.
Better Strategic Decisions
Carrying out an IP audit should result in better strategic decisions concerning the devotion of scarce management time and corporate assets. Risks of violating others’ IP may be detected before problems arise. IP Audits may also reveal opportunities for new revenue streams through licensing or other forms of monetization.
John McKeown
Goldman Sloan Nash & Haber LLP
480 University Avenue, Suite 1600
Toronto, Ontario M5G 1V2
Direct Line: (416) 597-3371
Fax: (416) 597-3370
Email: mckeown@gsnh.com
Ruth M. Corbin
CorbinPartners Inc.
The Corbin Professional Centre
39 Pleasant Blvd, Suite 200
Toronto, Canada M4T 1K2
416-413-7600
Email: rcorbin@corbinpartners.com
These comments are of a general nature and not intended to provide legal advice as individual situations will differ and should be discussed with a lawyer.