Intellectual property auditors are viewed with unwarranted suspicion. In truth, such audits are as valuable to a corporation as an annual health check-up at the doctor’s clinic is to a person. The result of an audit can be employed by the brand equity manager and other decision makers in a corporation to address shortcomings, identify hitherto unused revenue streams and utilize corporate resources more effectively. Corporations that are IP-dependent (very few are not) and those at particular risk for being targeted by counterfeiters must conduct such audits on a regular basis.
What is an IP Audit?
In a nutshell, it is the process by which the nature and extent of a corporation’s intellectual property rights and the value of such rights are identified. In other words, it is a systematic review of the intellectual property of a corporation and the creation of an intellectual property balance sheet. On the one hand, intellectual property assets, such as patents, trademarks, copyrights, trade dress, trade secrets, etc., are listed, and liabilities, such as potential for infringement, involuntary abandonment, thirdparty claims, unaddressed counterfeiting issues, etc., are listed on the other. Remedial action is prescribed so that the corporation’s IP portfolio remains in good fettle. A good analogy is a person visiting the doctor for a periodic health checkup.
An IP audit is not, as is sometimes heard, an attempt to ferret out and broadcast weaknesses in a corporation’s intellectual property or brand equity department. To the contrary, it is a vital tool that assists the intellectual property department in its efforts to keep the corporation’s portfolio well-structured and able to withstand challenges in the future. The goal is preservation of hard-won brand equity.
How Does it Help?
Conserve Resources. It may seem counterintuitive, but IP audits save money and other corporate resources over the long term. In the evolution of a corporation’s IP portfolio, some limbs (especially trademarks) tend to fall into disuse with no future plans to use those parts. However, these parts continue to be carried, with concomitant costs of maintenance, fees and other resources. Indeed, the corporation may have already lost the exclusive right to use these unused facets of its IP portfolio. The audit would corral such deadwood, so that informed decisions may be taken as to whether such parts of the portfolio need to be continued.
Integrate Old and New. The IP portfolio is an organic entity that is augmented depending upon a myriad factors. Elements are added in with a view to market conditions, future direction, present crisis management, etc. Often, the overall picture is lost resulting in the company paying to maintain parts of its portfolio that are at odds with each other. For example, a corporation may obtain a patent for technology that it continues to go to great lengths to protect as a trade secret. At other times, new acquisitions are piled high without care to strengthen the foundation on which the structure rests. An interesting case involved a corporation permitting its registration for a word mark to lapse, while keeping alive its registration of stylized fonts combined with a logo. A timely audit would identify issues such as these so that later developments are properly meshed.
Draw Attention to Deeper Issues. The IP audit would draw attention to deeper branding issues and direct focus on strategic goals. Take for example, a company C that sells fruit beverages. C enjoys a good market share. It acquires a small regional company R in the business of fruit spreads, primarily for R’s recipes that are a trade secret, as well as its state-of-the art processing plant. R’s trademarks are also assigned to C. The fruit spreads are subsequently marketed under both R and C brands. The superior reputation of C’s brand causes sales under the C brand to far outweigh those under the R brand. The IP audit would help focus on issues such as whether the C brand has cannibalized the R brand, whether the R brand should be discontinued, whether the R brand’s goodwill could be used to drive sales of goods that are closer to fruit spreads than beverages (such as fruit-filled pies), etc.
Triage. In flush times, it is easier to put off hard decisions regarding excesses because the company has the strength to carry the flab. However, when lean times come around, it is necessary to place the IP portfolio into tiers in order that maximum resources are expended on the most vital elements. The less critical tiers would receive resources in consonance with their importance to the company. One of the by-products of the audit process would be to identify and categorize the portfolio in order that the brand equity department can utilize resources in a manner that will be of maximum benefit to the company.
Identify Untapped Revenue Streams. A company may have several patents and trademarks in its portfolio that are unused, but may be licensed profitably to third parties. It may possess common-law rights in restricted geographic areas that could be expanded if properly protected. It could identify and co-opt infringers, rather than fight them, thereby increasing its market share without having to stretch itself too much. A well-conducted audit would highlight several opportunities for extracting more profit from an existing IP portfolio. For example, as a result of an audit, a garment manufacturer identified underutilized brands in its trademark portfolio, and engaged celebrities to endorse clothing branded with those trademarks. The company was able to give renewed life to those trademarks and created an additional revenue stream.
Timely Corrective Actions. An audit turns its sharpest focus on the issue of ownership of intellectual property. Ownership aspects are the most frequently litigated issues and non-ownership is a defense that is used often in intellectual property infringement cases. A corporation should not have to learn during discovery demanded by the alleged infringer that its ownership of the asserted intellectual property is flawed. By that point in time, it is likely too late to take any remedial action, resulting in colossal waste. A regularly conducted audit will identify problem areas much earlier, possibly even allowing for an opportunity to fix the problem.
The IP audit also identifies infringing activities by third parties for further action as well as the company’s own potentially infringing activities. Before large sums of money are invested, it may be possible to work around infringing another’s intellectual property. In this way, the company can be more assured that its investments are safe and it can stanch loss of profits to infringers.
Secure Protection. An audit also closely looks at a company’s systems for maintenance of IP rights, such as docketing systems, chains of command and repositories of data. Trademarks that are critical to the business are placed with watch services. Any lacuna is highlighted in order that the corporation not lose its intellectual property rights on account of slack maintenance.
Enter into Agreements That are More Fail-proof. A corporation that possesses trade secrets, enters into trademark licenses, hires independent contractors, outsources manufacturing or marketing, or is in joint venture situations, places its ownership of intellectual property at risk if the documents are not properly drafted. The audit will identify weaknesses in a company’s agreements, thereby averting harm at a later date.
Why is an IP Audit of Particular Importance to Companies that are Targets for Counterfeiters?
The laws of the United States and of several other nations offer protection under their respective anticounterfeiting laws, civil and criminal, only to registered trademarks. Moreover, governmental agencies, such as customs and border police, require that the trademarks be registered before these agencies will prevent the importation of infringing goods. The audit flags threats to brand equity from counterfeit goods. It also ensures, by securing the ownership and registration aspects, that the trademarks implicated will receive the full measure of protection contemplated by the anti-counterfeiting statutes.
How Should an IP Audit be Conducted?
Audits are tailored to each unique situation. However, features common to the conduct of all IP audits are:
- create an inventory of every IP asset in a company’s portfolio, including trademarks, trade dress, copyrights, patents, trade secrets, licenses and other contracts, and domain names;
- trace the ownership of each asset and following every document that may have a bearing on the chain of title to the asset, such as security agreements and assignments;
- determine the worldwide registration status of each asset;
- interview personnel from R&D, marketing, sales, designers, etc.;
- review all contracts that have a bearing on the intellectual property assets;
- review threatened and ongoing litigation;
- review matters associated with the Internet presence of the corporation, such as domain names, web pages, linking, metatags, etc.;
- review sample advertising and marketing materials; and
- determine brand hierarchy and brand extension.
To What Use can the Results of an IP Audit be Put?
Once the audit exercise has yielded its results, the IP portfolio may be valued. The results of the audit and the valuation can be used by the brand equity team to streamline its efforts; by the legal team to bridge gaps, plug loopholes and initiate remedial action against infringers and counterfeiters; by the R&D team to direct future research efforts; by the finance department to allocate funds in a more efficient manner; and by management to draft policies that will alleviate the problems highlighted.
An intellectual property portfolio, like any delicate mechanism, needs periodic attention and fine tuning. Neglecting to undertake the vital task of auditing the portfolio, especially when a corporation is IP-reliant, virtually ensures that its intellectual property rights will not receive the full measure of protection of the law. Corporations that are waging active battles with counterfeiters will be well-served by conducting immediately, at the very least, trademark audits to ensure that civil and criminal remedies are available when needed. When the advantages to be gained for the corporation from an audit are weighed against the resources devoted to the audit process, it will be found that the scales are heavily in favor of conducting these audits regularly – not only at times of mergers and acquisitions.