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
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
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
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
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.
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
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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