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This article is written by Samyukta Shankar pursuing Diploma in Intellectual Property, Media, and Entertainment Laws from LawSikho.

Introduction

We live in a world where what was considered impossible a couple of years back has been made possible today. A world where every day is fuelled by creativity and innovation. Every day people in this fast-paced world enter into numerous transactions that are filled with value and possibility. Intellectual property is one of the most basic assets of any business, big or small, old or new. Take the example of Nokia’s industry-leading patent portfolio that has invested over €129 billion in research and development over the past two decades and is composed of around 20,000 patent families, including over 3,500 patent families declared essential to 5G. Right from the manufacturing processes or machines that lead to efficient functioning; or trade secrets that protect formulations; or copyrights that protect the literary, dramatic, or musical works; to trademarks that protect the logos, name and even the identity of a business intellectual property is ever-present. 

When Intellectual Property is exploited it leads to value generation. Intellectual property protection is a reward for innovation. One could refer to the multiyear agreement (streaming rights) rumoured worth $ 1 billion entered into between Netflix and Sony Films to understand the potential of well-protected intellectual property. While this does depict an optimistic phenomenon, it also poses several challenges due to enterprises ignoring and failing to recognize the worth of their intellectual property. The primary reason for this is that for a very long time enterprises have perceived assets to be only tangible/physical assets like land, machinery, etc. The intellectual property of any kind mostly falls under the bracket of intangible assets, due to this and its subjective nature it also becomes very hard for businesses to ascertain its value and factor in the same. It is in this situation that conducting an intellectual property audit becomes important.

Intellectual property

The World Intellectual Property Organisation defines intellectual property as creations of the mind such as symbols, musical work, and images that are used in commerce. It further subcategories intellectual property into five types;

  • Copyright

Copyright is a legal term used to describe the rights that creators have over their literary, artistic, musical works, etc. Works covered by copyright range from books, music, paintings, sculpture, and films among others.

  • Patents

It is an exclusive right granted for an invention? Generally speaking, a patent provides the patent owner with the right to decide how – or whether – the invention can be used by others. In exchange for this right, the patent owner makes technical information about the invention publicly available in the published patent document.

  • Trademarks

Refer to a sign capable of distinguishing the goods or services of one enterprise from those of other enterprises.

  • Industrial designs

Constitute the ornamental or aesthetic aspect of an article. A design may consist of three-dimensional features, such as the shape or surface of an article, or two-dimensional features, such as patterns, lines, or colour.

  • Geographical indications

Are signs used on goods that have a specific geographical origin and possess qualities, a reputation, or characteristics that are essentially attributable to that place of origin.

When we talk about intellectual property of any kind it can broadly fall into two categories, IP that needs to be registered (patents) and IP that need not be compulsorily registered, where it is optional for example- copyright, trademark, etc. Registration allows the rights associated with the intellectual property to be enforced easily when compared with the rights associated with unregistered IP which necessitates proving that a certain right exists and is owned by a party. It is for this reason (to avoid any confusion or conflict in the future) that businesses are advised to conduct a proper assessment of these assets, especially those that are intangible.

Intellectual property assessment

Due to the immense potential and value that Intellectual property has a lot of businesses have started to keep track of the extent, quality, and use of intangible assets. The reason for this is simple, if you don’t know what you have you won’t know what you are missing. It is important for enterprises to have a well-updated documentation of the IP to not just improve the management of the intangible asset or to assess its value but to also be able to track the asset in terms of licensing, assignment in the case of misappropriation or infringement. 

An intellectual property assessment is the first step towards aligning the IP strategy with the business strategy. In order to assess the Intellectual property of an enterprise three essential steps are involved;

  1. A full IP audit, which involves compiling a comprehensive inventory of all IP assets in the business.
  2. A due diligence investigation, into the validity and the ownership of the assets involved.
  3. A valuation, which determines a fair price or value of the assets. 

Understanding intellectual property audit

An intellectual property audit (IP Audit) in simple words refers to the systematic collection, collation, and analysis of all the IP assets owned, acquired, licensed, assigned, used, or unused. It can thus be compared to a comprehensive inventory, which allows an enterprise to review and keep track of its assets. An IP audit helps in identifying threats to the IP assets and helps businesses in developing strategies to foster their growth and competitive standing in the market. Since an IP Audit reviews all the Ip assets and the policies associated with the same, it helps in identifying and analysing an IP infringement.

 

When is an intellectual property audit conducted

An IP audit is conducted in numerous instances. For example when an enterprise is acquiring an IP company, when an enterprise is selling its IP assets, when it wants to conduct a valuation of the assets, when an enterprise wants to develop systematic guidelines to protect the IP asset, or when the business wants to check if its asset is being infringed, etc it conducts an IP audit. Whatever may be the purpose it is important to keep that in mind, as it is this purpose that decides the kind of IP audit that is going to be conducted. 

Types of intellectual property audits

Based on the purpose IP audits can be classified into three types such as;

  • General-purpose IP audit

It is an audit that is conducted when a new company is being established, or when a business is considering implementing new policies or considering a new marketing approach, etc. It is mostly done with the aim of getting a general idea about the assets under/with the business.

  • Event-driven IP

Is relatively narrower in scope when compared to a general-purpose audit and its scope/nature is determined by the event in question. An event-driven IP audit usually seeks to locate IP assets and then assess the value and risks involved. It is conducted during an IP transfer, IP licensing, when launching a new product or when the risk/value has to be evaluated in a proposed IP acquisition or sale. In all these situations/events while such an audit maybe be conducted to assess infringement it may also in the case of an IP transfer or acquisition/merger lead to an increase in the value of the acquired company/license fee or to a decrease in the value of the same depending on the extent of risks and IP problems involved.

  •  Limited-purpose audits

Being situational in nature, they are usually conducted to justify a particular legal position or the valuation of a particular IP. It is usually done when there are significant changes in IP laws and procedures, when a business decides to have an internet presence an IP audit helps identify the needs of e-commerce. A limited purpose audit may also be conducted during cleanroom procedures (procedures to ensure that no unrelated party has access to copyrighted materials during the development of software), to review the adequacy and necessity of such a procedure. It may also be conducted before a company decides to start its IP filing procedures across various jurisdictions. 

How is an intellectual property audit conducted

Having answered the what, and when of an IP audit it is now time to understand how an IP audit is conducted. 

  • In order to ensure that an IP audit addresses the client’s or business’s purpose in a pointed and directed manner, it is first important to define the objective and scope of the audit. 

For example, if company A wishes to enter into transactions with company B to license its IP for a certain period, then the IP audit will have to include a review of the IP assets owned by company A, the policies practiced by it,, and the valuation of the asset. 

  • After defining the scope of the audit the next step is to appoint an audit team. While in most cases an audit team consists of lawyers, it is also important to engage members who are well versed with the technical aspects of an IP or those who manage the IP. The reason for this is to ensure that the team conducting the audit has a broad and detailed understanding of the facts and issues involved. Since any communication between a client and legal counsel is privileged, but any communication between other members may not be confidential, it is important to ensure that NDAs are entered into with such members. 
  • The next step is to create an IP register for the review, this would help while gathering information. At this stage it is important to determine the documents that need to be reviewed and the people that need to be interviewed. After this is done an audit plan must be drafted which would include the area i.e., businesses/projects that need to be audited; the scope and schedule of the audit; and the division of responsibility amongst the team. 
  • Once this step is completed, the next resultant step is to gather information. The information gathered could include license contracts; R&D agreements; nature of the IP assets and their global filings/registrations; IP strategy documents; litigation history with respect to the IP; the list is endless.
  • A step that is usually undertaken at the beginning of the IP audit or during the information gathering stage is to interact with the employees of the business through questionnaires. The response to the questionnaires allows the audit team to understand the scope of the audit, the nature of the assets, the internal procedures followed while creating/acquiring/protecting IP assets, better. A sample questionnaire prepared by an audit team can be found here
  • Reviewing the information gathered is one of the most crucial parts of an IP audit. The review can be of the internal IP procedure, for example how confidentiality is maintained when it comes to trade secrets or other IP assets, or how an exit interview is conducted to ensure that the existing employees maintain confidentiality, or how agreements are finalised. The review can also be of the agreements that the enterprise has entered into or is about to enter into, review of the documents that contain a record of the registration of the IP, etc. 
  • The last step is to draft the IP register, which would consist of the register of intangible assets, register of consultations, and the register of related observations. Thus the IP register will describe/evaluate the defects in the IP if any, highlight the risks in the IP, and any other weaknesses involved. 
  • The audit team shall then draft an IP audit that will specify everything related to the concerned IP, starting from the date of its creation/acquisition, any license agreements associated with it, whether it has been registered or transferred. It also specifies remedial action that has been taken or that needs to be taken.

How intellectual property audit helps in addressing intellectual property infringement 

Now that we know how an IP audit is conducted, it is important to understand how it helps in addressing IP infringement. An IP infringement in simple words refers to the violation of any intellectual property right. An example of an intellectual property right could be the communication of work to the public in the case of a literary work, it could be the right to use the trade name/trademark of a business, etc. 

To understand how IP audits address IP infringement, let’s consider a situation. Company A is a production house that has been producing movies for the last 10 years it owns the IP in all the works, B an author has also contributed to the creation of these works on a work for hire basis. However, company A hasn’t maintained a proper inventory of the rights and assets. The absence of an inventory means that company A is not entirely aware of what it owns. 

A couple of years after working with company A, B publishes a series of plays which are more or less an exact copy of the scripts that B wrote for the films produced by company A. This ideally would fall under the infringement of the right to adapt the work created and since B worked on a work for hire basis the rights would be owned by company A. 

In such a situation company A would first be required to analyse the assets (movies/scripts) that it owns, it would also have to have a look at the agreements entered into between it and B, and then would it finally be able to take any action. What company A inter alia would be doing is conducting an audit to ascertain the rights, assets, and risks.

Conclusion

We thus see that with the ever-increasing rise in Intellectual property, the need to review and protect the same also increases. Big businesses which are involved in the creation/acquisition/transfer of IP constantly struggle with ensuring that an inventory of the same is maintained. An IP audit doesn’t just list out the IP assets of an enterprise, but it also makes sure that the assets of the enterprise do not violate any third party rights or no third party infringes upon the rights associated with the asset, by ensuring that proper license or assignment agreements are entered into. To cut the long story short you can’t protect the assets you don’t even know about and that is precisely what an IP audit does, it makes the business/individual aware of the assets it owns or has acquired and thereby helps it develop strategies to protect the same in a manner that aligns with its business model or strategy.  

References


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