This article is written by Purvi Khandelwal, pursuing a Diploma in Intellectual Property, Media and Entertainment Laws, from LawSikho. 

Introduction

When Intellectual Property became the necessity for the survival of Business houses, then somehow arose a question as to what will be the cost of such IP when we sell a business, will it just be the few bills added to its registration cost or can such Intellectual Property actually add up to the value of the business.

The similar scenario all over paved a way to Intellectual Property Valuation, which sounds similar to asset valuation but in reality is much broader a term and difficult to understand and more difficult to actually perform.

IP Audit

Just like the audit of assets and capitals, An Intellectual property audit is a tool for identifying your potential IP Assets. Through an IP Audit, the Inventory of IP Assets can be maintained which is the easiest way to keep records of the Intellectual Property owned by the Entity and their performance, competition, infringement etc. can be referred to from time to time. 

Types of IP Audit

WIPO segregated IP Audits in three major categories:

• General purpose 

As the name suggests, this is for the new entries in the market and is used for implementing new IP policies or standards for the startups.

• Event driven 

Also known as IP due diligence, this type of auditing is used to assess the value and risk of Company’s IP assets. This type of auditing is used to perform functions like mergers and acquisitions, while including IP in financial transactions of the Company, launching new products or services, licensing or assignment of the IP or during the circumstances of layoffs or bankruptcy.

• Limited purpose

The narrowest form of audit targeting only a specific purpose and done typically during instances like litigation, or evaluating personnel turnover or for similar episodes.

Now, the biggest and most expensive kinds of Intellectual Property, till date, are the Patents, and in this article I am discussing the basics of Patent Audits performed for valuation of the Company’s Patent/s.

The first thing to be discussed is the Patent Portfolio Management.

As easy as the latter two words sound, those, when combined with Patents, becomes the biggest headache of the Companies as to how should it put its IP to performance. A Patent Portfolio is a collection of patents owned by a Single entity. Depending upon the variety of Products offered by the entity, the Patents may be related to each other or may be completely different from each other. The Patent Portfolio keeps the records of all the patents, their performing capacity, their demand in the market and the revenue generation out of those. An effective management of the Patent Portfolio can help the Entity to keep a track of its patents- which patent has become obsolete, which is not performing well, which is generating highest revenue, the market demand rates and all related study and thus can keep the Intellectual Property performance of the Company to its fullest.

After Managing the Portfolio, comes the next step of auditing the managed Portfolio, commonly referred to as Patent Portfolio Audit.

When we talk about Patent Portfolios, we are automatically referring to Industry giants as small companies would not have as many patents as to put more efforts for its valuation and management. The Big Fat Companies who have more than 50 to 100 patents registered under their name and for whom such Patents add to the good part of their revenue, only those companies seek for some methods that can increase their revenue and most importantly adds security to their Intellectual Property Assets. 

What Financial Audit is to Business Finances, A patent portfolio audit is to IP development. An Active patent portfolio can be a significant enabler of a business’s ability to differentiate itself in the target markets, and that can have a meaningful impact on its finances. 

A patent portfolio audit is typically defined as a process by which a business reviews the status of all its granted patents, pending patent applications, and other licensed patent rights. The initial focus of this process usually involves a complete inventory and general organization of all the information related to patents filed, owned, and licensed by the business. 

Identifying patent portfolio objectives

The Objectives of drawing the patent portfolio depends upon the reasons of the Company to do so. It may be simply for asset valuation, or it may be done with the intention of revenue generation. 

• To keep the inventory of patents obtained, granted or licensed or pending.
• To study in detail, the revenue generation from the patents. The Patent Portfolio, as discussed above, is the basic source of reviewing the revenue sharing of the Company from the IP Assets.
• To keep up with the competitors. If the patents of the Company are left to remain on their own, the Company would lose the monopoly over its Patents and infringement actions will become common, thereby hampering most of the revenue generation via patents.
• Determine how well the patent strategy aligns with corporate strategy. Identify present and upcoming products and services that are patent protected, and what specific features of those products and services are to be protected by specific patents.
• It helps the company to identify all the possible risks and trade-offs involved with licensing agreements, and allows the company to safeguard itself. 
• Identify patents which are not protected but can be used as a defense mechanism.
• If the patents have no strategic value, can they be licensed or sold and whether it’s intelligent to hold up to those patents.
• Evaluate merger, acquisition, or joint venture opportunities and the capability to leverage its patent portfolio. Additional research may include competitor-oriented patent landscape studies.
• Perform market and technology research to assess relevant information associated with current industry standards.
• Assess the use of open source software or hardware that may impact the ability to enforce patent rights.
• Assess the strategy associated with the expiration of IP rights and the impact on products and services.

Audit evaluation framework

The framework for audit evaluation includes anything and everything that a Company’s Legal team needs to frame to conduct a detailed audit of the Patent Portfolio. The Audit shall include each and every patent owned by the Company or licensed to Company along with the Patents licensed by the Company and also the Patents that are pending registrations. Once the list of the Patents is created, such patents shall be evaluated on monetary basis and the revenue generated from the Patents in the previous year or estimated revenue that can be generated in the upcoming years shall be penned down.  

Further, the area of R&D should be outlined to obtain new Patents to stay in the competitive market. The Non-performing Patents should be highlighted to be studied and analyzed and marketed and put to performance to generate revenue. 

The Companies interested in obtaining the Patents on license shall be also approached and better negotiation strategies shall be practiced.

The hand in hand work of Legal, Marketing as well as the research team shall be the basic need for conducting the Patent Audit.

Patent assessment criteria

First criterion: The patent system should accommodate new technologies. A system granting even temporary monopoly rights to developers of one technology but providing no incentives to developers of other, including substitute, technologies obviously would be hostile to innovation over the long run.

Second criterion: The system should reward only those inventions that meet the statutory tests of novelty and utility, that would not at the time they were made be obvious to people skilled in the respective technologies, and that are adequately disclosed. 

Third criterion: Descriptions of patented inventions should be as complete, clear, and accessible as possible and disclosed in a reasonably timely manner, and there should not be deterrents to consulting the patent or any other technical literature.

Fourth criterion: Administrative and judicial decisions entailed in the patent system should be timely, and the costs associated with them should be reasonable and proportionate. 

Fifth criterion: Access must be balanced against the incentive to invent and disseminate technology.

Sixth criterion: In an economy where a significant share of its technology-intensive products are bought and sold internationally, the compatibility of national patent systems can be a facilitator of trade and investment and therefore innovation. Indeed, there is an efficiency argument for the integration of the U.S., European, and Japanese patent systems to reduce public and private transaction costs.

Seventh criterion: There should be a level field, with intellectual property rights holders who are similarly situated (e.g., state and private institutions performing research) enjoying the same benefits, while being subject to the same obligations.

Once the Patents are recorded, valued and put to use, the next step is the patent monetization.

Patent monetization refers to revenue accumulated by a person or company by licensing or selling its patents. Patents can only generate value from market preemption and transactions. To accomplish market preemption, enforcement of patents is an essential backup. For transactions, there are three major types of daily transactional activities: Selling and Buying, Licensing and Pledging. Although there may be other new and innovative IP businesses models generated every day, the foundation remains with the abovementioned activities.

Patent monetization transforms the patent into revenue. Therefore, it is easy to observe that while some patent holders involved in monetization can take lessons from the monetization stage in order to improve preparation and prosecution practices, which will in turn help to positively affect the return on investment (ROI.) 

Conclusion

An organization that owns a large number of patents but doesn’t know how to manage these assets is just like a person who has plenty of money but doesn’t understand how to generate even more income by investing it wisely. An Active Patent Portfolio Management can not only add to the revenue generation of the Organization but multiply the revenue generated from the “so called non performing or similarly tagged IP assets.” The Cost of obtaining a patent is like a glass of water from the ocean which costs Rupee 1 and generates Rupees One Crore if put to performance. Thus more and more Boutique law firms are now providing the services of IP audits to the Organizations and thereby adding value to the IP Assets of the Organization. 

References

1. https://www.wipo.int/sme/en/ip_audit/#:~:text=An%20intellectual%20property%20(IP)%20audit,identifying%20your%20potential%20IP%20assets.&text=Through%20an%20IP%20audit%20you,Determine%20ownership%20of%20these%20assets 
2. https://en.wikipedia.org/wiki/Patent_portfolio 
3. https://medium.com/@jimmoeller149/patent-information-analysis-for-strategic-business-decisions-the-patent-portfolio-audit-b116adefd18 
4. https://blog.ipleaders.in/patent-portfolio-audit/ 
5. https://www.nap.edu/read/10976/chapter/5#42 
6. https://www.inquartik.com/inq-patent-lifecycle-monetization/ 
7. https://www.inquartik.com/inq-patent-portfolio-management-then-and-now-1/ 

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