By Steve Thomas
Many executives believe that intellectual property assets are like any other asset. They have value, there is a well-developed system for recording transfers of title (except for trade secrets, they add to the total asset portfolio of the enterprise, and so on. In many respects, intellectual property is similar to real property. Real property is subject to tax, maintenance and title recording fees, costs for preventing trespass and misuse while intellectual property is subject to maintenance or renewal fees, changes in the law, costs of misuse by infringers, and the like. Each type of intellectual property is subject to losing its value, or even becoming completely unenforceable, if not properly maintained. Here are some things to consider:
Valuation in support of securing investment, debt financing, merger or acquisition. If properly maintained through regular audits, intellectual property may be an important element of valuation in support of merger or acquisition negotiations, or securing debt financing or equity investment. The first question an investor is likely to ask, after questions about earnings, is to inquire about the enterprises’ intellectual property assets. If the answer is weak, investors will often move on.
Why do IP audits matter? Often, during an IP audit, we will discover that there are patentable products or methods, brand names, important copyrighted materials and trade secrets that have not been specifically identified and protected. For this reason we always ask to meet with the internal R&D or product development team leaders. Importantly, some of the intellectual property assets that could be developed and secured from these activities are subject to time bars. For example, in the United States, any invention which is publicly disclosed is subject to a twelve month time bar – which means that if a US patent application is not filed within that time, a US patent can not be obtained on that invention.
One of the most disappointing moments in a patent practitioner’s practice is to relay this information to an executive who was simply too busy chasing sales to worry about an internal IP audit. The same is true for verification that patent maintenance fees, trademark renewal fees, and other periodic fees have been paid. Also the quality of the IP filings should be reviewed. Does the patent holder actually understand what the patent claims cover? Do the trademarks properly describe the goods or services? Has there been any substantive changes in the law that renders the IP unenforceable or subject to certain limitations? Are assignments property recorded?
Delay can be catastrophic. Put simply, some defects uncovered during an IP audit can be corrected if timely discovered. Other defects cannot. In non-US jurisdiction, a timely petition and fee may revive a patent that has lapsed for failure to pay the annual fee, if filed with a short period of time after the withdrawal of the patent. In the US, the twelve month deadline for claiming the benefit of a provisional patent application cannot be extended. And on and on.
Managing executive risk. The last thing any CXO wants to tell their equity stakeholders is that some significant IP assets have been permanently lost due to failure to maintain or prosecute them. This could lead to charges of dereliction of duty and could even result in claims brought by disgruntled shareholders. IP audits can be viewed as a form of insurance when viewed in this light.
We will continue to write about other reasons IP audits should be conducted. Stay tuned!