Due diligence: the importance of the internal IP audit

This is the fourth article of an occasional series on law and intellectual property (IP) as it affects software and systems used in health technology. The topic is the importance on implementing your own audit of your company’s IP and why you should enlist an outside company to do it. More than a list of your copyrights and patents, an independently conducted internal audit will prepare your company for the external due diligence expected when a bank wants to vet a loan or an investor knocks on the door–and it includes things like your website and IT. While Mr. Grossman is writing in the context of US law, our UK and international readers will find his pointers applicable both locally and in dealing with the US. What’s refreshing is his plain writing and lack of ‘legalese’. 

Mark Grossman, JD, has nearly 30 years’ experience in business law and began focusing his practice on technology over 20 years ago. He is an attorney with Tannenbaum Helpern Syracuse & Hirschtritt in New York City and has for ten years been listed in Best Lawyers in America. Mr. Grossman has been Special Counsel for the X-Prize Foundation and SME (subject matter expert) for Florida’s Internet Task Force. More information on Mr. Grossman here and at his blog.

INTELLECTUAL PROPERTY DUE DILIGENCE

Intellectual property may be among the most valuable assets your company owns. The problem with intellectual property (IP) is that by its nature its intangible. You can’t touch it or see it. So how do you know what you have and own?

The starting point is to look to any registrations you may have with the government. For example, you may have registered a copyright or trademark and have paperwork to prove it. However, the registrations are just the starting point. It turns out that getting a handle on your company’s IP assets can be a complex process. 

Why Bother?
Great- so far I’ve told you that it’s complex and we both know that you have a business to run and a to-do list that’s a mile long. So, why would you ever take on this project?

Sometimes outsiders force you to dig into your IP assets as a part of their due diligence on your company. This could come up if somebody is buying shares in your company or acquiring some of your IP assets. A bank may require due diligence on your IP before it accepts IP as collateral.

I advise my clients to allow us to do an IP audit for them before anybody asks. This type of self-audit prepares companies for externally conducted due diligence and can enhance their own IP planning and management.

The first time a lawyer audits your IP, it can be time consuming. Usually, I’ve found that the record keeping is less than pristine and that basic questions lead to lots to head scratching. The time to deal with these issues and get you IP portfolio in order isn’t when you need a loan secured by your IP or you have an investor with a pocket full of money who wants a full accounting of your IP assets. The time to do it is now without a deadline hanging over anyone’s head.

Bear in mind that the nature of IP audits is that it’s often an on and off process that can go on for weeks. This is unavoidable when you need documents from the government or, as is sometimes the case, signatures on agreements to clean up problems that your lawyer finds. The process can seem glacially and unacceptably slow if you need that money, but it all hinges on completing the IP audit.

What You Will Learn from an Audit
A properly conducted IP audit will analyze a textbook set of questions. The most basic is whether your company owns the rights. If your reaction is, “Of course we own it,” guess what, maybe not. There are more ways to screw up ownership to IP than you can imagine.

For example, have you ever hired an independent contractor to create IP for you? It might have been a company to develop your website, an advertising agency or freelance consultant to develop your ad campaign or sales materials. In a great example of one of many ways to screw up in the world of IP, if you don’t have a written agreement that clearly and properly says that you own the IP, then your independent contractor owns it although you paid for it. (Ouch!)

I’d hate to be you when you’re explaining to your Board how you spent $100,000 on a website and don’t own the copyright. Maybe somebody can get Paul Simon to write a song called, “A Hundred Ways to Lose Your IP.”

Then if you own it, the next issue is have you adequately protected it. A part of the audit will also look at whether your right to use the IP is dependent on rights from a third party. For example, you may have custom created software modules that you own, but you may not be able to use them without a license to some underlying software.

Another issue that your audit will explore is whether the scope of your rights is sufficient for you to exploit your IP. Moreover, it you have exploited your rights, have you done so properly. This will look at issues like whether you’ve kept control of your IP through proper license and confidentiality agreements. A case in point would be letting third parties use your trademark without any controls in place. This could cause you to lose a trademark even if you registered it.

The final question I like to answer in my IP audits is whether the IP rights you’re asserting present a risk of litigation. Here, I’ll deal with issues like does anyone else claim overlapping rights?

My suggestion is that you not wait for some third party to force you to get your arms around your IP assets. You should want to do it for your benefit. You need to know what you have and if there are problems with what you think you have, it’s better to deal with it sooner instead of later.

Mark Grossman, JD, Tannenbaum Helpern Syracuse & Hirschtritt

Editor Donna thanks Tate Stickles, JD of Tannenbaum Helpern Syracuse & Hirschtritt’s Florida office for his assistance in securing this article series. She notes that an independent and current audit is also a useful and attractive document to hand to a bank, investor or VC at the start of your negotiation. It is transparent and while they will usually conduct their own, having a road map simplifies the process.

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