IPToolbox Intellectual Property Management Conducting an IP Audit Conducting an IP Audit What this module is about Why auditing your IP is important for your business. What is an IP audit. Initial checklist to prepare for an IP audit. When you should conduct one, and how thorough it should be. Case studies to help you understand the process. Conducting an IP Audit An IP audit - keeping track of your IP Nearly all companies own some form of IP that is important to their operations and ongoing success. IP can be simple information such as a customer list that should be kept confidential. The circumstances in which a company's IP may have come into existence are almost unlimited. An example might be a patented product arising from significant research and development undertaken by employees who are bound by confidentiality obligations. Other examples might be through acquiring IP as part of a new business, or an unforeseen and fortuitous by-product resulting from a core business activity. The sheer diversity of types of IP, and circumstances surrounding its creation, often makes it impossible for a company to be aware of the full extent of its IP. An IP audit can help redress this. Conducting an IP Audit The importance of conducting an IP audit An IP audit is a systematic review of the IP owned, used or acquired by a company. An audit's principal goal is to identify all the IP your company may have. By conducting an IP audit, however, you can also establish: Whether or not your IP rights are registered; Who owns the rights and, if you do not, identify any conditions that apply to their use; An assessment of whether your IP is being used effectively; Whether your rights are being challenged or threatened by others; Whether you have an effective IP management and maintenance plan in place; and Records of your IP creation and ownership. Conducting an IP Audit Start with a preliminary audit If you have not conducted an IP audit before, now is a good time to start. An IP audit will give you a broad picture of your IP assets. Many who conduct an IP audit for the first time are surprised by not only how many IP assets their company owns, but also how important these are to their business. There are two types of IP audits: A preliminary audit, which gives you an overview of your IP, and the value it contributes to your enterprise; and A comprehensive audit, which is usually conducted when you have a specific purpose to address, such as due diligence or to enforce or defend legal action. In cases such as these you should engage a qualified IP practitioner to assist you (eg. a recognised accountant, lawyer or patent attorney). Conducting an IP Audit Checklist: identifying your IP Be systematic in identifying your IP and do not be too conservative about the time and resources you allocate to doing the job thoroughly. You need to ask questions about IP assets that are key to your competitive advantage and should in turn be protected. The following is a sample of the type of questions you should be asking: Do you have any registered trade marks, designs or patents? If so, do you know when they are due for renewal? Do you own the IP you are using? Can you prove it? Do you have the contracts and other proof that a court of law would require? What are the processes or knowledge critical to your business success? Are they unique to your business? If so, have you protected them? Do you have signed agreements with key personnel, contractors, consultants or other external suppliers which assign any IP they develop, when working for you, to your business? Do you have valuable customer lists or databases? You should also address the development, protection management, commercialisation and overall responsibility for all the forms of IP in your firm. Consider seeking the services of a lawyer or a patent attorney if you are not sure about any of these issues: Who has written and designed your marketing and promotional material, including printed brochures and leaflets? Were these done in-house or did you obtain the services of a graphic designer or professional writer? If you used external contractors, did their contracts specify who owned the IP that was created? Does your firm have policies and procedures in place specifically to manage and protect your IP? Do you have a staff education program that covers the protection and management of your IP? The issue of education is essential if your firm's core business involves the creation or use of IP. IP education ensures your employees are able to assist you to appropriately protect, manage and commercialise your IP. Even if you do not regard IP as a core business asset, it is worth educating staff on IP issues so they can take steps to avoid infringing or inappropriately using the IP of others. During this simple audit process you may identify a number of IP assets you did not know your company owned. You may also realise that IP assets you are aware of are not adequately protected. For example, have you registered your business name as a trade mark? If you have not, it is something worth thinking about. Your responses to these initial questions will hopefully lead to questions about your IP strategies and ongoing IP management. Together, these should lead to making your IP an integral part of your business strategy and planning. You should also consider whether these questions apply to other, not necessarily registrable IP, such as customer lists, manuals, software and photographs. A sample asset register can be downloaded in PDF format to enable you to create your own simple register. Click here to download your proforma asset register. Conducting an IP Audit When to do an IP audit IP audits are commonly undertaken either: As part of an ongoing IP asset management program; When a business is being bought, or sold; or When you are enforcing or defending your IP rights. IP as part of a management strategy All viable businesses seek to preserve and generate increasing returns on their assets. Failure to preserve and enhance your IP may result in missing opportunities for growth and possibly jeopardise your company's viability. Once you have set up your IP register, you can develop policies and procedures to ensure that each time you create new IP it can be identified and effectively maintained and protected. Periodic IP audits will help keep your register up-to-date. A precursor to a purchase or acquisition An audit of IP rights (also referred to as IP due diligence) should be conducted when any purchase or acquisition is being considered. It will identify the company's IP assets and related liabilities, and help you assess the overall value of the business. If a business is perceived as having particularly valuable IP, the audit will assume primary importance in the due diligence task. Due diligence in connection with a competitive takeover is usually subject to secrecy to avoid the target or the market being alerted to the takeover activity. In these circumstances, the IP audit might be confined to a review of information on the public record, such as databases of IP registrations. Company directors may also seek independent expert verification on matters relating to IP ownership. To prepare for an ASX listing During the sale of a business, an IP audit may be necessary to protect the vendors from liabilities which may be imposed by specific laws or the terms of the sale documentation. This type of review is again referred to as 'due diligence'. For example, if a public company's directors decide to list the company on the Australian Stock Exchange (ASX), they will be required, by Australia's Corporations Law, to issue a prospectus in relation to the listing. The directors (and to a lesser extent, their advisers) expose themselves to personal liability for any misleading statements or omissions from the prospectus. To lessen this risk, directors should engage expert advisers to undertake an exhaustive due diligence review of the company's assets and undertaking. If the directors intend to base part of their offer price on the company's IP, or if there is any risk of the company being exposed to material claims of IP rights infringement, the due diligence process must involve a comprehensive IP audit by experts (eg. a recognised accountant or lawyer). For joint ventures If you are considering entering a joint venture, it would be wise to conduct a due diligence assessment of your proposed partners. If the joint venture is to enhance and exploit IP brought to the venture by one partner, other partners should verify that the partner has the necessary IP ownership before they enter into the joint venture agreement. A comprehensive IP audit will help establish this. To enforce or defend IP IP ownership carries certain exclusive rights that provide a competitive advantage. If undertaking an audit as part of defence or infringement action, it is likely that you will need to conduct a narrow audit relating specifically to the alleged infringement. For example, a company which owns copyright in a computer program might have formed the view that one of its competitors is using its program without a licence. If they can establish that non-licensed use, the company may be entitled to various legal remedies, including an award of damages and an order that the infringing software be destroyed. To convince a court to make such awards, the company claiming the infringement must prove it owns the software copyright which is alleged to have been infringed. The scope of the audit in this context would be limited to a review of the copyright ownership status, and might not extend to a total review of the company's IP. If your rights are threatened, you must take the following steps to defend that advantage: Thoroughly evaluate the extent of your rights; Assess the certainty with which they can be enforced; and Review the evidence which establishes that the rights exist and that you own them. Once you have identified and protected your IP, safeguard it on an ongoing basis by regularly reviewing the journals published by IP Australia (eg. Australian Official Journal of Patents). This will alert you to possible infringements. To make sure you do not infringe anyone else's IP rights: Search relevant IP databases such as the trade marks and patent databases held by IP Australia and do not use anything if another person has a prior claim to the IP. There are also commercial databases available - visit the library and links section of the IP Australia website http://www.ipaustralia.gov.au/ (See  The power of IP database searching); and Review your own compliance with the terms of any licence of IP rights which you use in your business. Conducting an IP Audit How far the audit should go Depending on its purpose, an IP audit may be narrow in scope, or extensive and rigorous. Relevant considerations in setting the scope of an IP audit include: The context of the audit, that is, whether it is part of a company's asset management, part of due diligence in a sale or acquisition, or part of enforcing or defending legal actions; The size of the company and the extent of its operation; and The strategic or other significance of IP in the company's corporate plan. The scope of the audit If the purpose of an IP audit program is to identify what IP a company owns, its current status and its commercial potential, the audit will be extensive. It might include: Questionnaires for present and former employees and contractors to acquire information on, for example, inventions, know-how and methodologies acquired, and computer software developed; Interviews with employees to uncover information about discoveries and creations; Review of contracts to which the company is, or has been, party. This will determine whether or not normal business activities could have given rise to the creation of IP, and if so, that there are contracts in place stating who owns that IP. Contracts to be reviewed should include agreements with employees and independent contractors, joint venture, licence and research and development agreements; Documents of Title as evidence of current registrations; Database searches, including commercial patent databases and searches of public registers such as IP Australia's database of patent, trade marks and designs. Court registries could be searched to identify any infringement actions against an audited company; and Publication reviews of trade journals and government gazettes (particularly in relation to applications for patents, trade marks and designs), as well as competitors' brochures and other marketing material, information memoranda and prospectuses to be kept informed of possible developments, infringements and compliance with legal requirements. Other considerations The size of the company being audited, the length of time it has been conducting business, and the extent of its activities, are further considerations in setting the scope of an appropriate IP audit. A multinational company may, for example, be suitable for an audit of IP rights in Australia and internationally. If particular IP is strategically significant for the company, the audit should focus on that IP in the first instance. That said, however, it is always safer for your IP audit to be broader rather than narrower. This will provide a good basis for ongoing IP management. Conducting an IP Audit Scope of due diligence The target is a financial services company with a strong technology platform supporting its business operations. This platform comprises a number of internally developed computer systems which give the target a competitive advantage. One of the main objectives of the takeover is the integration of these computer systems into acquirer's operations. A substantial component of the target's value is its computer systems. The quality of these systems has to be assessed by the acquirer to determine the price it will bid for the target's shares. A central task of the due diligence is an IP audit to determine: What computer software and hardware (technology) is used or required in the target's business operations; Whether the technology is owned by, or licensed (in the case of software) or leased (in the case of hardware) to, the target; and How the technology came to be owned, licensed or leased. It has to be established that the target is the legal owner of the technology it claims to own and is validly licensed to use the remaining technology. Conducting an IP Audit Scrutinising IP rights in computer software Activities undertaken during the audit include: Reviewing contracts with employees and independent contractors to determine if IP rights in all developed software are actually vested with the target; Reviewing licence agreements in respect of proprietary software of third parties to determine if all licences are legally effective, current, and permit the use of the software which the target had made; Preparing questionnaires, including some addressed to the internal legal counsel of the target, with a view to establishing that the target has not assigned ownership of computer software IP to any third parties; and Interviews with the Chief Information Officer and the legal counsel of the target, to clarify any uncertainties. Conducting an IP Audit Questions for your adviser How comprehensive does an audit really have to be? What is the difference between owning IP and having an agreement to use it in relation to infringement? Is word of mouth enough to constitute an agreement to use someone else's IP? When conducting an audit in preparation for say, ASX listing, should I include all my IP or only those items/ideas that can be assigned a true value. For example, what happens if I have an idea that has not been fully developed, do I still include it? What happens if I do not include an item of IP in my audit: does this mean I lose the right to protect myself against infringement of this idea? If I conduct a due diligence in relation to IP, do I include other business assets (as per a pre-sale inventory) or is this separate? How do I use the results of an audit to market my product or generate interest in licencing my IP? Find out what type of adviser you need. Conducting an IP Audit Summary of key concepts Nearly all companies have some form of IP that is valuable to its ongoing success. An IP audit is a systematic review of the IP created, owned, used or acquired by a company. There are two types of IP audits, a preliminary audit and a comprehensive audit. When undertaking an audit a number of issues should be addressed including identifying your IP, understanding the ownership and licencing arrangements you have in place. This will enable you to make an assessment of the type of IP education your staff require. Audits are undertaken as a part of general IP management, a precursor to an acquisition, to prepare for ASX listing, in preparation for a joint venture and in order to defend IP infringement. Start with a preliminary audit. The scope of an Audit is outlined in The Scope of the Audit. Conducting an IP Audit Proforma Asset Register Click here to download a Proforma Asset Register in PDF format. Print the pages out and stick them together to create a comprehensive chart to assist you with your audit.