Conducting an intellectual property audit is an important business process. It can insure a company's IP assets are being adequately identified, protected, and enforced; provide information to potential investors; and inform a potential licensee or acquirer of an IP asset's value. In addition, an IP audit can result in company executives adopting or changing an approach toward IP that adds value and reduces risk to the company.
At times, IP audits are deficient in a number of areas, leaving potential investors, acquirers, and/or licensees not only without meaningful information on which to base an informed decision, but also greatly exposed. Although IP audits may differ depending on their purpose and the particulars of the company - its maturity, marketplace, development process, etc. - there are some common areas to be covered in any IP audit.
The typical approach
In the typical approach, an IP audit includes a review of all patent applications and issued patents (and perhaps trademarks) for completeness. The report generated by this review often includes only a listing of the patents and patent applications, as well as a summary of whether declaration documents were properly signed and filed, assignment documents are in place, priority claims were made properly, the claims appear well written, and perhaps, the duty of candor has been, on its face, complied with. Although this information is critically important, it reveals only a small part of the picture and may mean very little to a potential investor.
Evaluate infringement risk
As an example, let's consider how to appropriately conduct an audit on a start-up company which has a single product in a particular market.
The first and perhaps most important area - often overlooked in the IP audit process - is determining the risk that our company's product infringes the IP rights of another. This determination is different from establishing what level of patent protection may be available to our company on its product. (In fact, patent protection may be available to a company on its product despite the existence of a patent which presents the company with infringement risk if it sells that product.)
In this first area, we would identify the product, its technical details, the marketplace, and the competitors or potential competitors working in that area. If not already done, IP counsel should conduct an up-to-date patent search to determine whether any patent presents an infringement risk to our start-up, and, if so, the level of risk.
Perhaps a design-around solution is possible, or a license is available for a reasonable fee. Mitigating business factors might even indicate a low risk that the patent owner would ever pursue an infringement claim. These, and other, issues need to be investigated fully.
The second piece of an IP audit is determining the scope of patent protection available to our start-up on its product. (This determination is different from whether the patent filings are being handled well.)
To evaluate the scope of protection effectively, we must learn, at a minimum, the technical innovation that has occurred, who developed that innovation, and when it occurred. Any pertinent employee or third party contracts into which our start-up has entered, as well as any relevant prior art, must also be reviewed.
Through this exercise, we may learn, for example, that significantly more (or less) protection is available to our company, a determination which could greatly affect an investment decision and valuation. In addition, it can guide our start-up in handling its IP going forward.
Interview execs and employees
The third question an IP audit should answer is whether the patent filings have been handled well, not only by patent counsel but also by our company. Such a determination involves not only a review of the files, but also must involve probing interviews of company executives, inventors and patent counsel. Examples of issues which could be discovered include whether the patent applications were properly filed on a timely basis in accordance with U.S. and foreign patent office rules/laws, whether priority was properly claimed, and whether inventorship was properly determined, among others.
Three-step process
The following three-step process in conducting an IP audit covers the areas mentioned:
- Triage. An interview with potential investors in, or acquirers of, the company helps determine whether their interest is in the company, its technology, the market, an individual or management team, or the brand. A similar interview of company executives reveals the company background, product or service, release dates, markets, views on IP, legal opinions, agreements in place, awareness of possible infringements, threats of suit, and so forth.
- Smoke-Out. Patent counsel is interviewed on the specifics of the patent applications and how each is handled.
- Detailed diligence. This involves a more thorough review of any issues identified during the triage and smoke-out steps before a final report is assembled.
The final report should indicate whether there exists any risk of infringement and what that risk is, what level of patent protection is available to the company, how the files have been handled, and recommendations for the future handling of the company's IP.
RANDY J. PRITZKER is chairman of the electrical and computer technologies group at Boston law firm Wolf, Greenfield & Sacks PC.
First published in Boston Business Journal September 5-11, 2003 issue.