Intellectual Property Audits: How to Verify That You Own Your IP

Posted 2008-01-18

Intellectual Property Audits: How to Verify That You Own Your IP

You are understandably proud of yourself, and with good reason. As CEO, you've run a tight ship. You've used outside contractors instead of full-time employees whenever possible. And you've managed to keep costs to a bare minimum. When your lawyers offered to draft you up a bunch of agreements to govern those outside contractor relationships, for example, you told them to hit the road-you would do just fine with a handshake deal, thank you very much. None of that pay-by-the-pound legal mumbo jumbo for you.

To finalize the acquisition deal, you'll have to endure due diligence, of course, which is when the buyer's lawyers get to look closely at your company-closely enough to satisfy themselves that their client is not buying a headache. One of the many things they will want to review is your IP (intellectual property) portfolio.

It is at this point that your dream becomes a nightmare.

Late one night, the buyer's CEO calls to break it to you. The lawyers have concluded that, because you did not execute something called work-for-hire agreements with your outside contractors, your company does not own their work product. They do. If you don't own the underlying work product, you don't own the IP in that work product. And it was the prospect of market exclusivity afforded by your IP that moved the buyer to set a $100 million purchase price on your company in the first place. You cannot sell what you do not own. No IP, no sale.

"The hell you say," you say. "I paid good money for that work product, and I paid to file the patents!"

The buyer's CEO says she's sorry but she trusts her lawyers, who say your patents are worthless because you do not really own them. She says she considered offering to hold back a 10 or 20 percent discount from the total sales price ($10-$20 million) to be kept in escrow as a war chest to fund the defense of the lawsuits that will inevitably arise when your independent contractors realize how rich you have gotten by selling what rightfully belongs to them. But in the end, she figured that this whole independent contractor thing is probably just the tip of an iceberg of headaches, so it's just best for her to pass. No deal. 

Sometimes the nightmare is not independent contractors. Sometimes it's a forgotten founder, a person who was in the room helping to work out the initial inventive leaps that led to the company's core innovations, but then left the company without signing the proper documents. Sometimes it's an NDA (nondisclosure agreement) that terminates too early, or a patent application that was filed too late. Sometimes it's a missing trademark search. The nightmares are legion.

Insufficient attention to sound IP practices and controls can, especially in the purposefully ungenerous view of someone else's lawyers, gut your IP portfolio, completely deflate your company's valuation and leave you with nothing.

Don't panic. Your entrepreneurial dream does not have to become a nightmare. There's still time to fix these problems. How? The way to begin is with an IP audit.

The goal of an IP audit is to verify the answers to these questions:

    1.  Do you own your IP? In the parlance of lawyers, do you have clean title to your IP assets and do you own them free of liens and encumbrances?
    2.  Is your IP portfolio complete? Are you protecting everything that is capable of being protected?
    3.  Is your IP strong and enforceable? If you sue someone for infringing it, will you win?

A complete IP audit identifies ­the IP assets in your company for which the answer to any of the above questions is "no," and recommends remedial steps for changing the "no" to a "yes," as well as the appropriate processes and procedures (and, yes, contracts) for ensuring that the answers will henceforth always be "yes." 

What It Takes


­Correcting IP title defects requires getting the proper ownership agreements signed between the company and the people who created the IP assets. Mind you, this is always legally more powerful before the assets are created (which is what the new processes and procedures are meant to enforce in the future), but an after-the-fact agreement still works. And make no mistake, you'll be going back to a former outside contractor on bended knee asking for a new agreement to be signed months or years after the work was originally done. This can be awkward at best and expensive at worst, as the contractor is always likely to detect the sweet smell of money in the air and attempt to part you from some of it in exchange for the signature you request.

Correcting completeness defects is simply a matter of filing for whatever patents, copyrights and trademarks are missing in the portfolio, and instituting internal disclosure and management procedures for identifying and assessing new innovations on a constant basis so that new IP doesn't slip through the corporate cracks in the future.

Finally, correcting strength and enforceability defects requires a measure of strategic attention to ensure that the company's innovations are being protected in the strongest possible ways in light of the competitive landscape in which they exist. For some innovations, a slew of patents will be the answer; other innovations will best be kept confidential in reliance on trade secret law; for yet others, a mix of patents and trade secrets, as well as copyrights and trademarks, will provide the most bang for your buck.

IP law is esoteric, arcane and often counterintuitive. Normal business assumptions do not always apply, and can prove to be quite risky. Aggressive, thoughtful, expert management of your IP portfolio is a sound, conservative business practice.

IP rights, especially patents, have lately become a thriving form of currency among a large and growing number of market participants. An entire subculture of IP "investment banks," speculators, traders, "trolls," auction houses and the like has arisen to make a market in IP.

Underlying the growth of this market is a shared understanding of the fundamental principle that IP generates licensing revenues when asserted against potential infringers-who often agree to pay royalties as a much cheaper and more predictable alternative than the exorbitant expense of IP litigation-and can ultimately result in large damage awards against competitors who refuse a license.

This, in turn, means that more applications to secure IP rights are being filed every year as more companies attempt to establish exclusionary beachheads in what they imagine to be the important technologies of the future. It also leads directly to more IP being asserted more aggressively than ever against potential infringers. It is not hyperbolic, then, to suggest that viable participation in modern commerce requires careful attention to one's IP.

The expense of an IP audit is always directly proportional to the number of documents requiring review. If the IP portfolio is large, so too will the legal bill be. Nonetheless, maintaining a strong IP portfolio is an essential strategy in today's knowledge economy. Thus, an IP audit is almost always worth the money, if only so you can sleep at night. 

Brent C.J. Britton is a lawyer in the Tampa office of Squire, Sanders & Dempsey LLP, a global law firm. A graduate of the MIT Media Lab, he practices intellectual property and corporate law.

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