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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.