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Using IP Audits to Mitigate Risk

Every business, including yours, has intellectual property (IP) whether it is simply your business name, customer lists, or an extensive patent portfolio. However, some owners of small and medium size businesses take a hands-off approach to their intellectual property until it is too late. For instance, one common mistake is to wait until being in the midst of obtaining venture capital or negotiating the sale of a business to determine what IP the business owns, whether ownership is verifiable, and whether the IP is appropriately protected. These are all questions that investors will ask in the course of performing due diligence, and they will require adequate answers before committing to your business. If due diligence reveals problems then it is unlikely that you will get your asking price, and entirely possible that the deal will not close. The savvy entrepreneur has the answers before being asked.

A proactive approach toward IP management will help you to maximize your company's value and competitiveness. Ask any venture capitalist and he will tell you that he would gladly pay more for a company with its IP "buttoned up" because he has greater confidence in what he is buying. Becoming a more attractive investment begins with an IP audit, which involves inventorying your intellectual property and identifying any issues that may exist. Typically, the audit is carried out by an intellectual property attorney and the results are provided to the client in the form of a written report. The next step is to resolve any issues uncovered by the audit, and finally to maintain a watchful eye over your IP on a continuing basis.

I offer all new clients an intellectual property audit as a free service to help them take stock of their IP holdings and identify potential issues early so they can be solved before they become problems. A sampling of some of the issues that are addressed in an intellectual property audit are set forth in the following paragraphs.

Trade Secrets

Trade secrets encompass things such as customer lists, marketing research and analysis, handbooks, company policies, supplier lists, and confidential contracts. These items pose a unique challenge because you only own a trade secret for as long as you maintain secrecy. Therefore, I assess the sufficiency of any company policies or procedures that are (or should be) used to maintain secrecy. Some of these include:

  • use of non-disclosure agreements;
  • use of non-compete and non-solicitation agreements;
  • employee intake and exit procedures;
  • building and information security; and
  • policies for disseminating trade secret information

Nondisclosure agreements (NDA's) should be entered into as a condition of employment with all employees at the time of hire, and with any non-employee to whom a secret must be disclosed. Notwithstanding an NDA, trade secrets must be disclosed only on a need to know basis even within the company. Furthermore, it is prudent is to use an NDA even when the technology you are disclosing is under patent or patent pending because many patented technologies also relate to trade secrets which may be inadvertently disclosed in the course of disclosing the technology under patent. In this context the NDA serves as a failsafe against accidental disclosures.

In some cases it may also be wise to use non-compete and/or non-solicitation agreements with your employees. If you choose to use them, it should be part of your new employee intake procedure. Like the NDA, new employees should be required to sign as a condition of employment. Trying to obtain a signature after employment has commenced can be difficult. Additionally, employees that leave the company should be given an exit interview where they are reminded of their continuing duties to the employer, e.g. to maintain its trade secrets.

Finally, common sense dictates that you must control access to your facilities. No one should enter or leave the company without signing in or out, and all visitors should be accompanied by an employee escort at all times. Additionally, it may be necessary to have a plurality of restricted access zones within the company so that only certain employees can enter. For instance, a key card system can be used to restrict the marketing and engineering departments to employees of the respective departments.

Trademarks

Trademarks include federally registered, state, and common law marks, as well as trade dress (i.e. look and feel). Several important issues that I address include: (1) identifying all federally registered trademarks, state trademarks, and unregistered common law marks, (2) determining whether a clearance search was ever conducted, (3) determining whether any state or common law marks should be converted to federal registrations, (4) assessing product marking policies, (5) assessing the client's policy for obtaining trademark search reports, (6) establishing clear title, (7) reviewing any license agreements, and (8) determining whether key licenses are transferable.

Patents

If the client is involved in innovation I assess the company's invention reporting system, and make suggestions to streamline the processes of evaluating economic value and patentability. I also identify each patent owned or licensed by the company, and determine the remaining patent life, annuity due dates, and whether any licenses held by the client are transferable. Additionally, I establish chain of title for each patent and assess product marking policies.

Conclusion

The results of the IP audit, including recommendations, are memorialized in a written report with specific action items for resolving any issues that may be uncovered. This enables the client to quickly make intelligent decisions that protect the company's assets while enhancing its value. In this way, the intellectual property audit is an indispensible business tool for maximizing your company's value and competitiveness.

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