With the global transition to a knowledge-based economy, the importance of intellectual property (IP) has skyrocketed, making it an indispensable part of business in today’s world. Until a few decades back this aspect of business was neglected as enterprises and businesses failed to appreciate its importance, focusing more on tangible assets such as buildings, factories and machineries, and not on intangible assets like trademarks, copyrights, patents and geographical indications. This recognition of IP and its importance has brought the concept of IP audits to the forefront.
IP audits are systematic reviews of IP owned by the enterprise and their related risks and opportunities. They involve analysis of IP owned, used and acquired by a business, and how it is managed, maintained and utilized. IP audits examine the IP assets and explain how they may be used by the enterprise to promote its business objectives and goals. They also help in identifying those IP assets not being utilized to their optimal potential. They can help examine, protect and enhance IP, and implement best practices for IP asset management.
Why audit IP?
Like tangible property, IP has to be identified, protected and maintained to maximize its value, diminish the possibility of third party abuse and prevent accidental loss. A thorough examination and analysis of intangible assets is extremely crucial as this allows enterprises to identify their IP assets and make decisions with respect to those assets. It also brings to the forefront any danger or possible infringement of the IP assets.
The importance of IP audits is discernible in the case of Dow Chemical. In 1994, Dow saved US$50 million in taxes and maintenance fees on unneeded patents and US$25 million from patent licensing revenue by employing IP audits. Similarly IBM has, since 1993, earned US$1 billion by licensing its noncore technologies; if not for having performed an IP audit, these would not have been used.
Importance of IP audits is further reinforced by the Rolls Royce deal of 1998. In 1980 Rolls Royce plc sold Rolls Royce Motors to Vickers plc, a British company. In 1998, Vickers decided to sell Roll Royce Motors, and in the process Volkswagen outbid BMW. But Volkswagen later on realized that they had only bought the Rolls Royce plant, its Spirit of Ecstasy mascot and its characteristic radiator grille shape, but not the brand and logo, which still belonged to Rolls Royce plc, the parent company. Later, the same year, Rolls Royce plc licensed the brand and logo to BMW for GBP 40 million (US$62.5).
How to go about it
An IP audit begins with determining the objective and scope of the audit, as the type of audit employed depends upon the objective and scope. This is followed with the appointment of the audit team. There is no hard and fast rule regarding the team’s composition, though it should be carefully constituted, keeping in mind the objective of the audit. It should consist of legal members, managerial staff as well as members having technical knowledge when technological issues are involved.
Information pertaining to the enterprise must be collected by the team. A questionnaire may be circulated among employees, who should provide the team with a clear understanding of the scope and extent of the business, the kind of goods and services offered, the relationship of the goods and services with IP, internal policies and procedures followed and information pertaining to past dealings.
The next step is to prepare the audit plan. This will set out the purpose, scope, expected timeframe, budget and who will be responsible for which area of the audit plan. The audit team should make a checklist to ensure that no aspect is left out from this process of examination.
The team must review internal policies and procedures and examine the confidentiality process followed by the company on a day to day basis. For example, novelty is a prerequisite for grant of patent. Any failure to maintain confidentiality with respect to the invention may result in depriving the enterprise of its right to a patent, thereby resulting in business losses. Policies should be made so that employees have access to information on a need to know basis. The team must identify IP assets and determine their ownership and legal status.
When entering into contracts, the team should review the procedure, followed by the enterprise. The enterprise’s in-house counsel along with the technical head, if necessary, should examine agreements before they are finalized to ensure that the rights of the enterprise are adequately protected. The audit team must also analyse agreements such as employment agreements, marketing or comarketing agreements, franchising agreements and documents pertaining to litigation.
Once the IP audit process is complete, an IP audit report is issued. This report begins with stating the object of the audit, the audit plan, how it was carried out and the result of the analysis. The report identifies each IP asset owned by the enterprise and specifies its date of acquisition, developer, licence (if any), assignment, transfer and whether it has been registered. The report also states any defects that the audit team encountered and the means by which those defects or problems can be rectified. An audit may reveal that a company’s use of an IP violates the rights of a third party. The warning of infringement allows the company to take pre-emptive measures, i.e. obtain a licence or, at the least, evaluate its liabilities and defences. The audit report is highly classified and should be given only to the enterprise and its employees.
In today’s world, enterprises view IP audits as a form of self-assessment in which the enterprises engage to assess their own assets, decide how to maximize their interest and keep up with the changing values of their assets in the face of an ever-changing economic and legal world. An extremely crucial factor for a company’s success is fully recognizing the IP owned by the company and understanding and exploiting its real value.
Periodic IP audits should be conducted as they ensure that the enterprise and its employees are following the recommendations mentioned in the audit report as well as complying with the policies, guidelines and procedures of the enterprise. Once a comprehensive IP audit has been performed, a smaller effort at less expense is needed at regular intervals, so that IP assets are reviewed and appropriate decisions taken, depending on the needs of the company.
Manisha Singh is a partner and Raashi Jain is an associate of LexOrbis
709/ 710, Tolstoy House, 15-17 Tolstoy Marg New Delhi – 110 001 India
Tel: 91 11 2371 6565
Fax: 91 11 2371 6556