How IP Audits Can Become a General Counsel’s Secret Weapon
Why IP Audits Are Your Litigation Lifeline
Avoiding litigation is ultimately about managing risk – and nowhere is that more critical than with intellectual property (IP). IP rights often overlap, evolve quickly, and can be notoriously hard to define.
For General Counsel, an IP audit is more than a compliance exercise. An IP Audit should be a comprehensive review of the business’ IP assets and allow you to recognise and mitigate risks before they materialise while also revealing untapped opportunities. By systematically assessing the business’s IP landscape, an audit gives you the foresight to act rather than react.
Stay Out of Court: How an IP Audit Helps You Dodge Legal Trouble
There are two elements to avoiding litigation: not being sued and not having to sue. A well-executed IP audit helps you avoid both.
An IP audit allows you to establish that the business has freedom to operate and will help you answer questions such as:
- Are the business name, logo, sub-brands or marketing materials too similar to existing trade mark rights (registered or unregistered) or copyright works?
- Do any relevant patents or registered designs cover any part of the business’ commercial activities?
- Do you have licences for all third party software (or other IP) that the business uses?
- To what extent might any creative works produced by employees or independent contractors have taken inspiration from an existing, copyright-protected source?
If you’re unsure about any of these, the business is exposed and it is taking the risk of becoming involved in a costly infringement action.
An IP audit is an opportunity to document the business’ practices, search for any applicable IP rights owned by third parties and navigate a non-infringing path. Even if an infringement has occurred, advance warning allows the business to either stop the infringing activities, obtain a licence from the rights owner or evaluate its liability and defences. Conducting regular IP audits can also improve internal compliance and reinforce your company’s IP culture.
Warranties, Indemnities, and Reputation Risks
There are many times where a business gives IP warranties and indemnities as part of an agreement with a third party. Common warranties are that the business is the sole owner of any IP it uses and that using its products or services won’t infringe any third party rights. If the business has given these warranties, you don’t want to subsequently find out that its chain of title is imperfect, or there’s an infringement issue. This may lead to a breach of contract case and damage the business’ reputation with its partner(s).
Perhaps less obvious is the fact that third parties are less likely to infringe solid, clearly defined IP rights. Most businesses would prefer to avoid an IP dispute, especially if their position is weak. Disputes are more likely to arise where there is uncertainty as to the scope, validity or existence of the IP rights.
For that reason, it is critical to secure the business’ IP early on to reduce the need to enforce its rights through litigation. This includes registering trade marks, patents and designs, clearly marking copyright material and securing confidential information (both contractually and by limiting its exposure through internal processes). It also involves investing the money required to obtain quality IP assets; a poorly drafted patent or trade mark, even if registered, is more likely to be litigated.
When to Act: Key Moments to Launch an IP Audit
IP audits require time and resources, so timing them strategically is key. Here are the moments that matter most:
Startup Phase: An IP audit conducted soon after establishing the business sets it up for success. It allows it/you to create a suitable IP strategy, avoid costly mistakes and identify new opportunities, from the outset.
Business Strategy Changes: After an initial IP audit, it is worthwhile conducting updates whenever the business changes its broader strategy.
Annually: Annual IP audits are recommended to capture informal strategic developments.
New Product Launches: There are discrete events that should trigger a smaller-scale IP audit. For instance, when developing a new product or service, all aspects of that new offering should be audited.
Before A Deal: More comprehensive IP audits should be considered when seeking investment, or a possible merger or acquisition. Not only could this uncover potential issues that can be addressed before due diligence begins, having a solid understanding of your IP portfolio can also improve the business’ valuation and negotiating position.
The IP Audit Process: Your Three-Step Blueprint
The steps required for an IP audit are specific for each business, but any audit should include three broad steps: data gathering, analysis and recommending action items.
Step 1: Data Gathering – Know What You Own (and What You Don’t)
The data gathering process involves taking a detailed look at all areas of the business affected by IP. Key areas include:
IP Inventory: All IP assets used, owned or licensed by the business should be identified and recorded in a manner commensurate with the size and complexity of the business.
Legal Status: The legal status of each asset should be assessed. This involves determining (a) whether the IP asset is protected or protectable, (b) the expected duration of the right and (c) any territorial limitations.
Commercial Value: Review or rank the commercial importance and potential of each asset to determine its value to the business. High-value assets can include key branding and identity elements, technical procedures or systems (covered by registered or unregistered protection) and confidential information. Understanding which assets are of high priority, assists with commercial and strategic decision making later in the audit.
Ownership: The ownership status of each asset should be determined. This includes ascertaining the legal entity(s) that own the right, the nature of that ownership (e.g., sole or joint), and whether there may be any doubts over the ownership. For any IP assets that the business owns, take time to confirm the chain of title. If the rights were developed by employees or independent contractors, review the relevant employment or engagement agreements to ensure that the assignment is clear. If the rights were assigned from another business, check that the assignment is in order. Any licences or encumbrances that apply to the IP right should also be noted. This step is critical to foreshadowing potential issues.
Confidential Information: Assess how the business protects its confidential information. How is the information stored, who has access to the information, how much of the information can each person access, how do they access it, and are they bound by appropriate confidentiality undertakings? All confidentiality or non-disclosure agreements should clearly identify the protected information and provide sufficient safeguards.
Licences: For any IP assets that the business uses but does not own, establish its legal entitlement for that use. Is it public domain and free from any rights? If you rely on a licence from a third party, review the terms of the licence: is it exclusive or non-exclusive, what is its duration, are there any geographical limitations, and what activities are permitted by the licence?
Contracts: A thorough IP audit should also assess all of the business’ relevant contracts. Employee contracts should adequately address IP ownership and assignments, confidentiality and moral rights. Consultancy agreements, joint venture and other business-to-business agreements should also be reviewed: do they clearly establish (a) which entity owns pre-existing IP assets and any IP assets created during the relationship, (b) which IP assets fall within each class, and (c) who will take the necessary steps to protect and/or enforce them? Many agreements with customers touch on the ownership and use of the business’ IP, and information that the customer provides to the business. IP warranties given in any agreements should also be noted.
Step 2: Analysis – Is Your IP Strategy Fit for Purpose?
With data in hand, you’re ready to analyse the business’ IP position. For any IP assets owned by the business, critically evaluate the quality of the protection secured and ask:
- Have you registered all important rights?
- Should your registered patents, trade marks and designs be strengthened?
- Are adequate contractual and technological processes in place to protect confidential information?
- Do you need to take any steps to shore up the ownership position?
An IP audit is the ideal opportunity to reflect on the efficacy of the business’ overall IP strategy. As businesses continue to innovate, it is common for products and processes to drift away from rights that may have been registered many years earlier. How well does your IP protection reflect the business’ current and future position and operations? Should you try to broaden your registered trade mark rights to cover new brands, goods or services, or your registered patents to cover new ways of doing things?
If you find the business is not adequately protected, ask why the deficiencies weren’t identified earlier through existing procedures. Are the administrative and legal procedures required to create, identify, protect and maintain IP assets still optimal, or can they be improved?
It is worthwhile ascertaining the relevance of each IP asset to your business, and the cost of maintaining it? Money spent protecting unimportant assets is wasted.
- Can you loosen any confidentiality restraints to improve efficiency?
- Can you let go of any registered IP assets to save money?
- Can you license or assign any unimportant assets to others?
Licensing has myriad benefits: (a) it can create new revenue streams for the business; (b) you can avoid incurring litigation expenses whilst you decide whether an IP right is worth enforcing and (c) a competitor with a licence to your superfluous IP may stay away from infringing your critical IP.
More broadly, is the business deriving the predicted value from its IP assets? If not, are there systemic processes or policies responsible for that failure?
You might like to consider whether you have clearly flagged your IP rights to the marketplace. For instance, does your packaging or marketing materials identify any relevant IP rights?
Investigate whether the business might be infringing other’s IP rights. If the business is using an IP asset that it does not own, ascertain whether any third parties may have relevant rights by ensuring all relevant trade mark, patent and design searches have been conducted. If the business relies on a licence, compare the terms of the licence to the business’ actual (and intended future) use to ensure that it is (and will remain) compliant. For any potential issues, assess whether it is possible to cease using that right, modify operations so there is no infringement, obtain a licence from the rights holder, expand an existing licence, or acquire those rights.
Assess whether any contractual IP warranties given to third parties may leave the business vulnerable.
Where there may be infringement or warranty issues, address both the symptom and the underlying disease. Think about both how to fix the particular issue and also identify the policies or ways of doing business that created the IP infringement risk, so you can ensure it doesn’t happen again.
Step 3: Action Plan – Turn Insight Into Impact
An IP audit is likely to uncover many areas for improvement. Create a list of action items to clearly document your findings and prioritise the most urgent. Improving the protection of critical IP assets and/or stopping an ongoing infringement may take primacy over addressing more systemic issues.
Spend time with others in the business and, where appropriate, external consultants and experts, to create a plan for addressing each item.
Even if plans are not implemented immediately, they can be developed as a contingency to be rolled out quickly in the event that litigation becomes likely.
Conclusion: Don’t Wait for Court – Audit Before It’s Too Late
If you do not conduct IP audits routinely, you run the risk of being blindsided by an infringement suit brought by an aggrieved rights holder or being put in a position where you need to resort to litigation to protect your hard fought commercial position. In either case, the consequences of litigation are often costly, both in terms of the direct cost and the attendant uncertainty on your business.
Proactively and systematically auditing your business’ IP position will identify both acute and systemic risks and reveal strategies that will best mitigate those risks. The confidence that you can take from completing a successful IP audit makes it well worth the investment.
For more information about this topic or our Wrays Litigation and Dispute Resolution Services please contact the below:
Andrew Mullane
Andrew is a Special Counsel in the Wrays Litigation and Dispute Resolution practice who assists his clients to resolve their contentious intellectual property issues, particularly those relating to patents, designs and confidential information. Andrew has extensive experience with advising and representing clients during negotiations, as well as litigating matters in court and before IP Australia.
Michael Pasquale
Michael is the IP Management & Strategy Consultant at Wrays, where he collaborates with clients to ensure their intellectual property assets and strategies deliver optimal outcomes. Working within the Management and Strategic Services division, Michael assists clients in managing their IP assets, developing business and management strategies, and exploring the commercial potential of innovations.