Every company with a business based in whole or in part on important intellectual property should protect that property with regularly scheduled intellectual property “audits.” Failing to do so may not only endanger valuable, company-owned patents and trademarks, but also make the business less profitable than it could be.
An IP audit is especially critical when a business is being sold, when a company is planning to buy another business, when a patent is being challenged by a competitor, when a company is looking for new financing or going public, and when there is a change in top management or employees in critical positions have left. A regularly scheduled IP audit can prevent panic, confusion and unwelcome surprises when these major events occur, because management will already have a good working knowledge of the status of all intellectual property.
To begin with, a thorough audit separates the wheat from the chaff. Which patents are central to the company’s business and must be carefully maintained in force? Are there other patents that are no longer important or have been superseded by newer developments and can safely be ignored and allowed to lapse?
Patents should be filed wherever the company’s products are sold and fees on all important patents must be carefully kept up to date. Fees to maintain international patents are often especially expensive but should be updated when necessary, nonetheless. Sometimes, when a company’s trademarks are reviewed, management learns that they have never been federally registered.
Auditors also may find that existing patents are no longer adequate to protect the products that are actually being sold. The products may have “moved on” through further development or application to new uses, but the relevant patents have not. Those patents should be updated immediately with new filings. It’s also critical to determine whether the products made and sold by the company could possibly infringe patents held by competitors—or whether the reverse is true, that other companies’ products are infringing the patents held by the company being audited.
A careful examination of intellectual property can also result in positive developments: auditors may discover that some patents are more valuable than anyone knew and can be licensed to produce another revenue stream for the company—or licensing can be expanded beyond the present level.
Beyond the focus on patents and trademarks, an IP audit should entail a close examination of all contracts and agreements relating to intellectual property. Pinning down exactly who owns the property is just as important as keeping patents up to date. This entails delving into development agreements, nondisclosure agreements, employment agreements, work-for-hire and sales contracts, to make sure ownership of a company’s intellectual property has not been ceded to, or shared with, a third party.
Software is particularly problematic when it comes to inadvertent infringement of the rights of others. What software is being used internally? Where did it come from and what are the limitations on its use? IT professionals don’t always realize that even open-source code requires a license.
This entire process also needs to be applied to analyzing the intellectual property of a prospective acquisition. Investigators may discover that patents belonging to the acquisition are not all appropriate for the acquiring company’s products, fees are not up to date or there are issues with IP ownership or validity. All of these factors may result in substantial savings on the purchase—or a decision not to purchase at all.
Puja Detjen is an intellectual property attorney and partner in the Houston office of Patterson + Sheridan.