IP Audits

As per a normal understanding, audit means valuing and conducting inspection of a company’s assets. Similarly, Intellectual Property Audit or IP Audit is the inspection of all the intellectual properties held by a company. An IP Audit consists of a systematic review of the intellectual property assets used or acquired by a business through the course of its operations. The IP audit is usually conducted to identify the intellectual property assets and also to uncover threats, if any, to a company in lieu of the use or association with that particular intellectual property asset.

There are majorly 3 types of IP Audit. They are as follows:

• General Purpose Audit: This is done as a regular practise time and again to review the IP;
• Event Driven Audit: This is mostly done when a company is entering into a financial transaction;
• Limited Purpose Audit: This is done by a company to fulfil a specific purpose and nothing more, this is very limited and restricted to selected intellectual properties.

In order to conduct a comprehensive IP audit, one must analyze each aspect of a company's inputs, resources, processes, outputs and relationships. This will also help in identifying the company's intangible assets. Thereafter, the intangible assets have to be evaluated and classified into one of the protectable intellectual property rights. These include two categories:

• Statutory: patents, Copyright, Designs, trademarks, Plant Varieties, geographical indications;
• Non-statutory/common law: know-how, technical information, confidential information, brands, tradenames, trade dress, secrets, databases, client information, business methods and processes etc.

Following are the few types of agreements through which an entity can lawfully acquire, use, or own intellectual property assets:

• Employment contracts/ NDA's and assignment contracts;
• All in-bound and out-bound IP licenses;
• Joint-ventures, M&A and other corporate transaction documents,
• Distribution agreements;
• Marketing agreements;
• Sales representative agreements;
• Original equipment manufacturer, value added reseller and other reseller agreements;
• Standard form customer agreements;
• Shrink wraps or click wraps;
• Government contracts.

Before embarking on the process of an IP Audit, it is necessary to keep in mind the purpose of the IP Audit and the resources available while making an audit plan. Research plan and checklists are an essential part of IP Audit as they help to understand and keep a track of the audit. The process of IP Audit involves some basic steps, as follows:

• Inventory check where all the IP assets are catalogued, along with a detailed description of each of the given assets.
• Checking if any of the intellectual property rights is capable of infringing the simultaneously existing intellectual property rights.
• Finally, an IP auditor is also required to identify lapses in the legal, regulatory and administrative procedures related to IP management.

The importance of IP audits in mergers acquisitions and assignments have been growing manifold with time. Some of the key points of value are as follows:

• Some entities will have intellectual property rights as a key element and tend to invest capital heavily in the creation of their intellectual property rights.
• A portfolio of the company’s intellectual property rights, if properly managed and maintained can help in the decision making process for the transacting entities.
• An IP Audit provides a basis for assessing the risk and value of the relevant intellectual property assets in a proposed transaction. This allows entities to evaluate their negotiating power and quantify the value of the proposed deal.
• The outcome of an IP Audit could lead to a significant increase or decrease in the value of the acquired company or the resulting merged entity.