In a financial audit, an external auditor, among other things, verifies physical assets such as inventory, the existence of capital equipment carried on the books, and the like. In this sense, an IP audit is a somewhat similar exercise, in that an initial step involves simply finding the relevant IP. This activity, however, is not always a trivial exercise. Intangible assets can be finicky and amorphous. In many cases, for example, people in an organization don't realize they are sitting on a potentially valuable patentable development. As a lawyer engaged in an IP audit, one of your big jobs is to raise the awareness level about IP, so people can know what they're looking for.
Defensive Searching
Often one of the key results of an IP audit is the realization that someone else owns the crown jewel that you were hoping was yours. For instance, in the context of a technology company, once you understand what new products your R&D team is working on, you will want to run a patent search for two reasons. First, you'll want to see whether the way is clear for you to obtain a broad, valuable patent so you can enhance your own company's competitiveness and economic value. But you'll also want to know if someone else has already filed a patent for the same invention, such that your proposed design may be problematic from an infringement perspective.
In other words, you also conduct IP audits for defensive purposes, to make sure you don't step on someone else's toes. And this is why an IP audit very early in the life cycle of a new product is crucial, because if the unfortunate third-party patent does materialize while you're still in the early development stage, you may well be able to design around it. If you're about to release the product, and only then do your audit, the patent search result that reveals the conflict with a previous patent could ruin your whole day-and possibly your career if the stakes are high enough.
So you've found your IP, now what? The single biggest mistake organizations make at this point is they tend to move directly to protecting it. While protection is obviously important-see below-the intermediate step is to value the IP. I don't necessarily mean a financial valuation. More to the point is a strategic, or at least tactical, evaluation.
This is where it is critical to bring senior management into the process. Some important questions need to be asked. What is the overall direction of the business? Where do we want to be in five years? What key product and geographic markets do we want to play in? For the younger company: what do we want to be when we grow up?
Then, in light of the answers to these sorts of questions, you can sensibly determine how the IP you've uncovered fits into the bigger picture. Protecting IP for IP's sake is a questionable business proposition; much to be preferred is protecting IP in order to achieve concrete business objectives.
Now that you know what you are protecting, and equally important "why," you can proceed to the activity of protecting it. Here again, patents require a particularly deft touch in terms of timing. The key thing to remember is that if you disclose your invention to the public before you file your patent application, in many countries you'll lose the ability to file for a patent. So time is of the essence. You need to know this and, as importantly (if not more so), your R&D and marketing/sales people need to know this. I have received calls from people in the past who happen to mention that they will be unveiling their latest product at some trade show the following week. What follows is a mad rush to get a patent application filed before the start of the show. This generally produces a high-stress situation all around. A much better approach is the proactive filing, well in advance of the commercial release of the product, which produces a more efficient use of management (and lawyer) time.
Registering trade marks involves a very similar calculus. Again, the objective is to file an application before you unveil the new name, and again, this is often left to the last minute. The crammed, leave it to the last nano-second approach often means appropriate searches cannot be run. For example, you'll probably want to see, at a minimum, if the mark is available in the U.S. as well, and similarly you'll need to understand whether the dot-com domain name is free (or more likely, can be purchased at a reasonable cost), etc.
With respect to copyright (which would include all-important software source code), it is imperative that people who work on your code sign a piece of paper giving your organization the copyright (and other intellectual property rights) in the material. A huge hole often occurs when contractors are retained to develop software and they do not sign over their rights. What follows is a messy legal dispute as to who owns the resulting code. This mistake has been repeated many times over, as illustrated by the amount of litigation in this area. The objective of an IP audit is to learn from these mistakes of others so you can avoid them.
As part of the IP audit, you'll want to review all the relevant paperwork that your organization has staff, as well as third parties, sign in respect of the development and exploitation of your organization's IP assets. On the exploitation side, for example, if you are a technology company you'll want to review the recent jurisprudence on limitations of liability to make sure your protective provisions are up-to-date. Software licences and similar agreements are like software-they need to be updated from time to time to stay current with new legal developments.
Human nature being what it is, IP audits are typically left too late. They usually are undertaken when some action forcing deadline, such as a financing or M&A deal, causes the IP situation to be reviewed for purposes of the giving of representations and warranties, etc. Unfortunately, when an IP audit at this late stage uncovers a deficiency, there is usually little that can be done to rectify the situation.
Of course conducting the IP audit earlier presents real time-management challenges. Unfortunately, in my M&A work for technology companies I've seen all too often a last-minute precipitous drop in the purchase price because of some material hole in the target's IP-a hole that cannot be rectified the day before closing. Remember, it's less painful to learn from the mistakes of others.
George S. Takach is the head of the technology law group at McCarthy Tétrault LLP, the author of Computer Law, and a special lecturer in computer law at Osgoode Hall Law School in Toronto. This column is intended to convey brief, timely but only general information and does not constitute legal advice; readers are encouraged to speak with legal counsel to understand how the general issues noted above apply to their particular circumstances.