IP Asset Management , IP Audit

and Due Diligence

By
Prof. A. Damodaran
Indian Institute of Management,
Bangalore
 Why IP Asset Management
Their IP assets are in fact worth more than their physical assets. This is often the case for
companies operating in knowledge intensive and highly innovative sectors, or companies
with a wellknown brand name.
(1) Strong market position and competitive advantage: IP gives enterprises the exclusive
right to prevent others from commercially using a product or service, thereby reducing
competition for their innovative product and enabling the enterprise to establish its position
in the market as a pre-eminent player.
(2) Higher profit or returns on investment : If your enterprise has invested a significant
amount of money and time in R&D, using the tools of the IP system is important to recover
your R&D investments and obtain higher returns on your investments.
(3) Additional income from licensing or selling (assigning) IP - IP owner may chose to license
or sell the rights to other enterprises in exchange for lump sum payments or royalties, in
order to generate additional income for the enterprise.
 Why IP Asset Management
(4) Creating bargaining power
Owning IP assets that are of interest to others may be useful when
you are seeking authorization to use the IP assets of others. In such
cases, enterprises often negotiate cross-licensing agreements,
which are agreements by which each side authorizes the other
enterprise to use its IP assets in the manner specified in the
licensing contract.
(5) Enhanced ability to acquire finance at reasonable rates of interest
In some circumstances, enterprises seeking to commercialize a new
technology may be able to more easily raise capital, based on their
IP assets, for example, by including information about their IP
assets in their business plans while approaching investors, financial
institutions, government agencies, etc.
 Why IP Asset Management
(6) Credibly threaten or take action against imitators and free-riders
To effectively carve out the exclusivity provided by an IP asset, it
may occasionally be necessary to litigate, or at least to threaten to
litigate with enterprises that are infringing on your rights. Owning IP
assets will improve your enterprise's ability to take successful legal
action against imitators and free-riders.
(7) Positive image for your enterprise
Business partners, investors and shareholders may perceive IP
portfolios as a demonstration of the high level of expertise,
specialization and technological capacity within your enterprise.
This may prove useful for raising funds, finding business partners
and raising your enterprise's profile and market value
 Auditing your IP
One way your SME may acquire a better position to
capitalize on the potential benefits of its IP assets and
extract their full value is by conducting an IP audit.
Ideally, this should be done by professional IP auditors,
but often a preliminary IP audit may be done within
your company.
This entails identifying, monitoring, valuing your SMEs
IP assets so as to make sure that you are making the
most out of them. By doing so, your SME would be
able to make informed decisions when it comes to 6
actions
 Auditing IP assets

Acquiring IP
Knowledge of your enterprise's intellectual property and of its value will
assist you in deciding which type of IP rights to acquire and maintain, and
how best to manage the IP assets of your SME.
The value of your enterprise maybe considerably be affected by the
acquisition of key IP rights.
(2) Mergers and acquisitions : An IP audit can identify all the company's IP
portfolio and help to find strengths and weaknesses of IP assets. That
allows the company to obtain potential area and targets to acquire specific
technology.
Once the potential targets are identified, t company can narrow down
the choices and decide which one of the companies is the best acquisition
target in order to strengthen its competitiveness and keep competitors
out of market.
The successful M&A can lead to a significant increase in the value of your
SME.
 IP Audit benefits
(3) Licensing : SME can increase its cash flow (revenue)
and marketing power by licensing out its IP rights to a
third party.
An IP audit will assist your SME in determining the
value of your own IP in order to obtain maximum
benefit from license agreements. The revenue resulting
from there has the potential of increasing the market
value of your SME.
(4) Collateral A well-structured IP portfolio can also be
used as collateral. In such cases lenders will use your IP
assets to determine the credit worthiness of your SME.
 IP Audit benefits
(5) Enforcement
Knowing the value of your IP assets will assist your SME
in taking decisions on whether it is worth while taking
action against infringement and in what way this may
be done.
(6) Cost reduction
A well managed IP register would help you identify
obsolete IP assets (thus enabling you to cut-down IP
assets' maintenance costs), avoid infringing other
people's IP rights, etc.
This would undoubtedly lead to a reduction in costs.
 IP Asset Management : What are the
Benefits
Helps companies to reduce costs and
increase the business impact of their
Intellectual Property.
Flexible solutions result in many users in over
150 countries to manage more than a trillion
dollars in intellectual assets.
 How and what is IP Asset
Management?
By having a secure, enterprise-level intellectual
asset management solution.
Provide efficient, reliable patent payment and
trademark renewal services
Optimize intellectual asset management system,
including IP processes, with our expert support.
A range of training and technical solutions are
devised to meet the companys strategic needs.
 What is IP Asset Management
Make accurate decisions about your IP
portfolio with the industry's most
comprehensive patent and trademark rules.
 Definition of an IP Audit

(1) IP audit is a systematic review of the IP owned, used or acquired by a business

so as to assess and manage risk, remedy problems and implement best practices in
IP asset management.
(2) IP audit involves undertaking a comprehensive review of a companys IP assets,
related agreements, relevant policies and compliance procedures.
(3) An IP audit helps a business to make an inventory of its IP assets or update it
and analyze:
a. How the IP assets are used or unused.
b. Whether the IP assets used by the business are owned by the company or by
others
 Definition of an IP Audit

. Whether these IP assets are infringing the rights of

others or others are infringing on these rights
d. And determine, in the light of all this information,
what actions are required to be taken with respect to
each IP asset, or a portfolio of such assets, to serve the
relevant business goals of the company.
(4) An IP audit seeks to uncover unused or
underutilized assets, to identify any threats to a
companys bottom line, and to enable business
managers to devise informed business and IP strategies
that help maintain and improve its competitive
position in the relevant market(s).
 Some facts that create value for IP
Audit
In the US, nearly 40% of the market value of an average company is absent from its
balance sheet.
In the EU more than half of all large companies leave IP outside the scope of
internal audits.
. In 2005, Qualcomm generated about 58% of its $5.7 billion in revenue from the
sale of Qualcommdesigned wireless chips, which are manufactured by third
parties under contract.
Since 1993, IBM has been making some US$1 billion per year from licensing
noncore technologies, which otherwise would have remained unused.
In Europe 36% of patents are not used.
Honeywell International uses a separate company Honeywell Intellectual
Properties Inc, to manage its IP portfolio. Recently, it licensed its LCD technology to
competitors such as Sanyo, LGC, Philips, and Chungwa Picture Tubes.
Honeywell, in 2000, received a then record award of damages of US$127 million
from Minolta for technology it hadnt itself commercialized.
 Some facts that create value for IP
Audit
2% of Patents are used as the basis for forming a new company.
In 2002, Korea exported technology worth US$0.6 billion and imported
technology worth US$2.7 billion through licensing, R&D sharing and Joint
Ventures.
Since 2002 Korea has increased its R&D expenditure from 2.6% of GDP in
1998 to 3.4% in 2004.
In New Zealand SMEs account for 37.3% of GDP and have the highest
profits per employee, but most SMEs are unaware of the value of their IP
or the fact that there is a good chance that it is being infringed.
The Cocacola brand is estimated to be worth US$80 billion.
US company Texas Instruments earns more from licensing its unused
patent rights than from its products.
US companies have a fiduciary responsibility to manage IP rights and to
report actual company value rather than just book value under the
Securities Exchange Act 1934.
 Some facts that create value for IP
Audit
In an EU survey 28% of companies had no
provision for IP ownership in their standard
Employment Contract.
16. 50% of EU companies have no strategy for
managing their IP rights beyond mere filing or
renewal payments.
 Type of IP Audit

Generally, there are three types of IP audits: General purpose IP audit, Eventdriven
(1) General purpose IP Audit
A general or broad IP audit is done in the following types of contexts:
- Before establishing a new company it is always important for a start up company to be
aware of intangible assets in owns or needs to protect.
- When a business is considering implementing new policies, standards, or procedures
relating to IP.
- When a business is considering implementing a new marketing
approach or direction, or is planning a major reorganization of the company.
- When a new person becomes responsible for IP management.
Once a comprehensive IP audit has been undertaken, a smaller effort and expense is needed
at regular intervals, such as on an annual basis, so that IP assets are reviewed and
appropriate decisions taken, depending on the current and emerging needs of a company.
(2) Event driven IP Audit
Event driven IP Audit is generally much narrower in scope than a broad or general purpose IP
audit. Further, the nature and scope of such an audit is determined by the event in question,
and the time and resources available for doing it.
 IP Audit and Due Diligence
. What is it?
a

- Event driven IP audit is often called IP due diligence when

done to assess, as objectively as possible, the value and risk of
all or a part of a target companys IP assets.
- IP due diligence is a part of a comprehensive due diligence
audit that is done to assess the financial, commercial and legal
benefits and risks linked to a target companys IP portfolio,
typically before it is bought or invested in.
- Before starting the IP due diligence process, a mutual
nondisclosure agreement should be signed between (a) the
potential acquirer, investor, or creditor and (b) the target
company.
 IP Due Diligence
When done properly, IP due diligence provides detailed information
that may affect the price or other key elements of a proposed
transaction or even aborting the further consideration of the
proposed transaction.

IP due diligence generally seeks to:

- Identify and locate IP assets, and then assess the nature and
scope of the IP to evaluate their benefits and allocate risks
associated with the ownership or use of the relevant IP assets; in
particular, it seeks to determine whether the relevant IP is free of
encumbrances for its intended business use(s).
- Identify problems in and barriers to the transfer, hypothecation or
securitization of the IP assets under consideration.
- Identify and apportion between the two parties the expenses
incident to the transfer of IP assets under consideration.
 Due Diligence: When done?
When is it done?
IP due diligence is done in the following types of contexts:
- Merger & Acquisition or Joint Venture
An IP audit provides a basis for assessing the risk and value of relevant IP
assets in a proposed acquisition or sale of intellectual property, as for
example, prior to entering into any serious negotiations for a possible
merger or acquisition, divestiture, or a joint venture arrangement. It could
lead to a significant increase in the value of the acquired company or the
resulting merged entity.
On the other hand, such an exercise may significantly reduce the
acquisition cost or lead to a cancellation of the acquisition process ifthe
due diligence process reveals major IP risks or IP problems inthe target
company.
 Due Diligence: When done?
- Financial transactions
IP due diligence is important before entering into a financial transaction involving
IP, such as before an initial public offering or private placement of stock, or
significant stock purchase, or before taking of a security interest in IP, as all of
these have an impact on the ownership of IP. Through an IP audit, a potential
lender will be able to more meaningfully assess a structured IP portfolio as part of
its overall analysis of the credit worthiness of a target company.
- Buying or selling a business division or IP transfer
Before a company buys or sells a division or a product line, a seller will generally
make a series of representations and warranties as to the ownership,
noninfringement and marketability of the IPassets linked to the transaction in the
ensuing written agreement.
Before a transfer or assignment of interest in IP, an IP due diligence should be done
separately by both parties to ensure thatthe transfer or assignment meets both
their respective business interests.
- Launching a new product or service
 Due Diligence: When done?
When a significant new product or service is being developed or about to be launched, risk of
infringing IP rights of others might be especially high. An IP audit needs to be taken to
address any possible infringement or freedom to operate issues linked to new product
development and launch of such a product on the market.
- IP licensing
A potential licensor has to ensure, for example, that it actually owns the IP that is sought to
be licensed to others. Also, it has to be sure that there are no existing licenses that would
interfere with the proposed new license. A potential licensee has to ensure, for example, that
the potential licensor has the necessary rights to the IP in question so as to legitimately
transfer the rights and that scope and extent of the proposed license will duly serve its
intended purpose.
- Bankruptcy, layoffs, etc.
An IP audit would also be appropriate as a planning tool in advance of any filings for
bankruptcy, significant plans for employee layoffs, business closure, or elimination of
significant lines of business.
 Limited purpose focused audits

a. A limited purpose audit is typically much narrower in

scope than the other two types and is performed under
much constrained time schedules. These audits tend to be
situational in nature. They are typically used to justify a
certain legal position or the valuation of a particular IP.
b. A limited purpose focused audit is done in the following
types of contexts:
- Personnel turnover
Before a major personnel turnover of inhouse research
and development or marketing, especially if it involves
disgruntled employees, an IP audit should be done to
secure the status of a companys IP assets.
 When Limited Audit Done?
- Foreign IP filings
Before a company takes up an aggressive program of filing IP applications in other
countries, that is, before entering a new market abroad (by way of, say, exporting,
or expanding overseas through offshoring/outsourcing some of its activities, or by
licensing, franchising or merchandising) an IP audit helps to sensitize the company
to marketspecific IP laws, rules, customs and practicesaffecting IP rights.
- Using the Internet for business purposes
Before having an Internet presence, doing an IP audit helps it to
identify the needs of ecommerce and registration of appropriate
domain names, etc.
 When Limited Audit Done?
- Significant changes in IP law and practice
Where there is a significant change or development in IP case law
or statutory law in a relevant market it may necessitate review of
existing products for possible infringement of the IP rights of others.
- Clean room procedures
The clean room procedure seeks to avoid infringement by ensuring
that there is no access to copyrighted material of unrelated parties
during software development project. Thus, an audit might be
necessary to institute, or to review the adequacy of, clean room
procedures used in the development of software products so as to
reduce the risk of infringing third party copyright.
- Preparing for litigation
When considering or facing litigation, a company is required to show
noninfringement and no access to the work, complete or confirm
the chain of title of the underlying IP rights
 The IP Audit team

(1) Who will conduct an IP Audit?

a. There is no hard and fast rule as to who should conduct such an audit.
However, for an audit to be effective, it is best done by a team that
includes expertise in IP and representatives of the relevant technical
areas of the company as may be appropriate for ensuring maximum
effectiveness.
b. The IP audit team should have a basic understanding of the product
lines, the relevant business environment and the future plans of the
company so that the audit remains focused on IP assets of maximum
business relevance.
(2) External expertise
The audit team may or may not include external expertise. If it does, then before starting an IP audit, all
external members in the audit team as well as all the internal staff members on the audit team should sign
nondisclosure Agreements.
 The IP Audit team

2. Background research for preparing an audit plan

Once the purpose of the audit and the available resources for its
performance
are clear, a major preparatory step for conducting the audit is to
understand the
company, what it does and where it wants to go. It is an essential
precondition
for preparing an audit plan, which will be the basis of the audit.
(1) What is done in a background research?
a. Gathering as much information as possible on the company and its way
of doing business.
b. Background research will be the basis of the audit and will provide the
auditor(s) with the required background information for preparing a plan
for conducting an audit that is comprehensive, focused, timely, and
costeffective.
 The IP Audit team

(2) Major issues in a background research

a. Internal and external relations and interactions
Who does the company regularly interact or intend to interact with: such
as its employees, vendors, customers, consultants, independent
contractors, joint venture partners, competitors, etc., and what role(s)
actually IP assets play or would play in these interactions?
b. Business strategy
- How does the company do its business?
- Does it have written policies in place concerning key aspects of the
business?
- Does it follow a certain business model?
- Does it, for example, engage in ecommerce and, if so, how doest it
fit in with its overall business strategy?
 The IP Audit team

(3) Importance of IP Assets

The overall importance of IP assets to the business will have a bearing on the
audit.
a. Where IP assets are relatively unimportant to the nature of the business
as a whole, it might be sufficient merely to confirm that registered IP rights are in
good standing and are held in the name of the company.
b. On the other hand, where the companys principal assets are IP, it may be
necessary to conduct a more thorough assessment of the companys IP portfolio
and IP based activities.
 The IP Audit team

4) Status of IP management
a. What is the companys overall approach to IP management?
b. Does it have an inhouse intellectual property manager or department
and/or does it rely on outside IP expertise?
c. Does it have an IP policy or strategy?
d. How well informed are its staffs on IP matters?
(5) IP disputes
a. Has the company been involved in infringement suits, whether as
plaintiffs or defendants?
b. Is the company involved in disputes or potential disputes that involve IP
rights?
(6) Financing
Are the IP assets of the company tied to the financing of the company
 The IP Audit Plan
3. Preparing an IP Audit plan
Having done the necessary background research, the next step is to
prepare
the audit plan.
(1) This will set out the purpose, the scope, how long it is expected to
take,
the budget, and who will be responsible for which area of the audit plan.
(2) Generally, it will deal with the following:
a. The specific area(s) of the business to be covered e.g., divisions, lines
of business, affiliated or nonaffiliated agency operations
b. The scope of the audit e.g., only registered assets or a broader scope
c. The time table for the audit
d. The responsible person for each part of the audit
 Conducting an IP Audit

1. Starting with a detailed check list

(1) An IP auditor normally starts works from a detailed checklist, which is
modified for the type and size of the company's business, relevant IP laws
of the relevant countries, desired purpose(s), and the desired outcome(s) of
the audit.
(2) A good checklist minimizes the chances of leaving out one or more relevant
steps from the process. Each member of the audit team should be provided
the relevant part of the detailed checklist.
(3) To produce a comprehensive, companywide IP audit report reflecting the
entire development and decisionmaking process for each of the companys
products and processes, the audit team should collect, review, and organize
not only the IP information but also all the agreements that may affect the
IP portfolio of the company. It may also have to do or get done relevant IP
searches in all key markets.
 Audit and Contracts
Auditing different contracts/agreements
A key part of an IP audit is to identify and assess the adequacy
of relevant provisions in all agreements that concern the
protection of IP. These may include the following agreements:
(1) Licensing agreements
Review all licensing agreements to ensure that the company is
continually
in compliance with the terms of such licenses and whether
they further the
current and future business plans of the company.
 Audit and Contracts
(2) Assignment agreements
a. Review assignments to determine whether the company was granted
an assignment from every inventor or author of a work.
b. Contact all licensors and assignors to determine whether any security
interests or liens have been granted in the IP assets.
(3) Employment and independent contractor agreements
a. Provisions governing the transfer of the IP rights from employees or
contractors to the company
b. Terms and conditions under which an independent contractor is
allowed to use any copyrighted materials or rely on trademarks associated
with the business
c. The scope of the assignment itself
d. Provisions regarding a waiver of moral rights in all copyright works
e. Clauses setting restrictions on the disclosure or use of confidential
information during or after the completion or termination of the
employment/contract
 Audit and Contracts
(4) Joint Venture & Collaboration agreements When a company enters into
various types of arrangements with suppliers, vendors, or customers to jointly
develop or update the companys technology, the following must be kept in mind:
a. Who owns the IP assets predating or created through the joint venture or
collaboration
b. Define a system for identifying protectable intellectual property resulting from
the cooperation
c. Identify who pays for any application for registration of IP rights and any
subsequent defense of the IP rights
d. Determine the scope of IP contributed to the joint venture
e. Determine which IP rights can be used by whom when the joint venture or
collaboration ends.
(5) R&D Grants Often government procurement contracts and government
funded R&D agreements provide for ownership of IP rights in favor of the
government or a government agency. Therefore, all such contracts should be
closely reviewed for such limitations.
 Audit and Contracts
(6) Other agreements
Other kinds of agreements that could have a significant impact on a companys IP will include:
a. Technology transfer, or know how, or technical assistance agreements
b. Design and development agreements
c. Settlement agreements
d. Franchise agreements
e. Royalty agreements
f. Marketing agreements
g. Distribution/Distributorship agreements
h. Sales representative agreements
i. Consulting or management agreements
j. Outsourcing agreements
k. Maintenance and repair agreements
l. Material transfer agreements
m. Programming agreements
n. Source code escrow agreements (in connection with software), any documentation relating to
"clean room" development of software, database licenses listings of computer software used by
the company, including all versions and source and object code, flow charts and other software
development documents
 4 Steps of Auditing IP Assets
Auditing IP assets After auditing agreements, the IP Auditor starts to audit the IP assets of the company.
There are four steps for this stage.
(1) Identifying and recording IP assets
In this step, the assets will be initially catalogued and a description will be provided.
a. It is the basic stock taking exercise that will serve to create or update the intangible asset portfolio of a
company.
b. It will serve to inform the company of its IP assets, which may or may not be used or used differently
depending on the goals of the business.
(2) Determining ownership and legal status of the IP assets The assets will be evaluated as to whether
they are owned by the company and if so, whether they are or should be, protected as IP rights. It will
include assets created by the company itself, and those that are acquired or used with or without the
express consent of third parties.
b. It will enable the company to see where, if any, ownership problems exist, why they exist and what
should be done to prevent or solve such ownership issues.
c. It will also reveal whether adequate systems are in place to protect these assets or, alternatively,
whether and what internal obstacles exist to their protection, and whether and how these may be
overcome.
d. The main subjects the auditor should note with respect to each asset.
- Ownership: The nature of the companys ownership interests (e.g., sole or joint ownership,
exclusive or nonexclusive license, the royalty or other costs associated with the license and the estimated
legal duration and period of technological usefulness of the asset) and whether the nature of the interest
is in doubt.
 4 Steps of Auditing IP Assets
- Restrictions on use: Any restrictions on the use of the asset (e.g., product or agencyrelated
restrictions, territorial restrictions, assignment or transfer restrictions, time restrictions,
noncompete clauses)
- Relevance to business: The relevance of the asset to the core business of the company (e.g.,
whether the asset is a critical asset or an ancillary asset) and any connection with other key
nonIPassets of the company, such as key staff members
- Encumbrances: Whether the asset has been pledged, or in any other way legally encumbered.
- Infringement: The potential for a third party claim of infringement or damages due to the
companys use of the asset.
(3) Detecting infringement of IP rights
Review companys policies with respect to the enforcement of its IP rights as well as its own
systems for respecting the legal rights of others.
If the assets are owned by the company then an audit may provide information as to whether they
are infringed by others.
The IP audit may provide information as to assets that the company thinks it owns but in reality it
does not and could give rise to problems of third party infringement.
(4) Taking necessary steps for creating and maintaining IP assets
a. An IP audit will reveal where there have been lapses in the administrative, legal and regulatory
procedures necessary for creating and maintaining IP assets.
b. An IP audit will provide the necessary impetus to take care of such requirements by creating or
improving the relevant inhouse policies procedures and management practices.
 After completing an IP Audit: Using
Audit Results
1. Using the results of an IP Audit
(1) IP analysis
a. Evaluate and analyze whether the IP assets are serving the strategic
objectives of the company and, if not, what should be done to change
that.
b. One technique that would help at this stage is to divide the results of
the IP inventory into three groups:
- Group 1: Techniques, innovations, and ideas that are essential to your
products and services, and to the markets your company has decided to
serve
 After completing an IP Audit: Using
Audit Results
- Group 2: Intellectual assets of real potential but not necessary to your
company
- Group 3: Assets that seem, on balance, to have no great value to your
company or to anyone else.
(2) Evaluating IP assets
a. The results of IP audit will be the basis for evaluation of IP assets.
b. Properly valuing the benefits that may accrue from any IP asset requires
an assessment of:
- Speed with which a particular market values and devalues that type
of asset
- The cost of developing alternative IP assets to fulfill the same or
comparable market needs
- Royalties being paid for similar assets
- Market recognition of the asset
- The cost of developing such recognition if it is deficient
 After completing an IP Audit: Using
Audit Results
(3) Overall review on IP assets and IP policy
An IP audit will provide the management of the company with the basic
information as to whether its IP assets are being used to attain the
companys strategic objectives.
a. The management has to check if its business objectives, business model
and its IP management policies are in alignment with each other.
b. This can be identified by evaluating the relevance and tangible benefits
obtained by using or leveraging IP assets that a company owns or has
access to.
 From IP Audit to IP asset management

(1) Formation of IP asset management team

a. An IP asset management team is charged with managing the knowledge
portfolio and is overseen by a senior executive.
b. The team is composed of managers from various disciplines who
collectively understand the firms intellectual assets and have had a
hand in developing them.
(2) Creating an IP culture
For creating an IP culture, proper training on IP best practices should be
provided to all the staffs. All training programs should be reviewed, to verify
if they include anything or enough on IP asset management.
(3) IP policy monitoring
The existence and adequacy of IP asset management policies, procedures
and practices within a company should be continuously reviewed and
monitored. And it should be verified that they are effectively communicated
to all the employees.
 From IP Audit to IP asset
management
(4) Preventing or being prepared for litigation
a. A carefully conducted audit may result in a determination that the
companys use of its IP violates the rights of a third party.
b. Advance warning of infringement allows the company to cease infringing
activities, obtain a license or at the least, evaluate its liabilities and
defenses.
(5) Business strategy formulation
a. At this stage of an IP audit the management matches its newly
established inventory of IP assets to its strategic business objectives.
b. The objectives include:
- The types of products or services on which the company intends to
focus its resources
- The markets it intends to serve
- The return on investment it requires in order to satisfy its owner or
shareholders.
Thank You