Characteristics of Intellectual Property Audits

(excerpted from Louis M. Brown, Anne O. Kandel, and Richard S. Gruner, The Legal Audit (1994 & Annual Supps.))

Intellectual property audits are extraordinary reviews of normal operating procedures. These audits are aimed at identifying the procedures a business or other organization should undertake to best utilize its intellectual property and to minimize its liability for the use of intellectual property of others. In essence, intellectual property audits are the core of a managed approach to determining what operating procedures should be undertaken with respect to intellectual property and when.

In part, intellectual property audits identify when intellectual property evaluations should occur in routine business or organizational activities. The objective is to insure that business or organization managers have information about intellectual property interests at times when such information can shape further actions. Hence, an intellectual property audit focusing on patent issues might examine whether a concern is conducting invention novelty, patent infringement, and patent validity studies at stages in corporate operations when the results of such studies can best be used by corporate managers to promote the interests of the firm involved.

Beyond supporting better decisions and actions by firm managers, intellectual property audits can improve the effectiveness and efficiency of a firm's use of intellectual property specialists. By identifying circumstances in which studies by such specialists are likely to reveal useful intellectual property information, a firm can insure that expert evaluations are used to perfect the widest range of available intellectual property interests and to avoid inadvertent infringement of the rights of others. At the same time, by concentrating the efforts of specialists at stages in processes when useful information is most likely to be revealed, firms can avoid wasting resources on studies that are unlikely to yield useful results.

Overall, intellectual property audits should combat the tendency of firms to address intellectual property concerns through open ended procedures. Absent intellectual property audits, business and organizational managers often address intellectual property issues only as short term problems. Their attention may not extend to long term procedures for identifying intellectual property issues in firm activities and for insuring that those issues are addressed.

For example, in response to a threat of litigation from the patent owner, managers may assign a patent attorney to evaluate a company's potential liability for infringement of a particular patent. The patent attorney completes his analysis of the company's activities relative to the patent at issue, renders an opinion, and closes the file. Assuming that the opinion indicates that present company activities do not appear to entail infringement, management may assume that the problem of infringement has been handled and will remain handled. However, with changes in company activities, new infringement issues may arise. Managers may not appreciate the need to revisit infringement issues. The patent attorney who conducted the original study has no motivation nor instruction to revisit the infringement problem. Hence, the proper systemic means to insure timely reevaluations of infringement may be neglected by everyone in the process.

Similar unaddressed problems may arise in intellectual property licensing processes. While a license to use particular intellectual property is being negotiated, a well run firm may conduct a thorough evaluation of the interests being licensed. However, several years later, no one within the firm may remember that a license is in force nor look to see if agreed upon procedures are still being followed by the licensee. Management often seems to assume that someone will be responsible for ongoing tasks of monitoring compliance with license terms without assigning anyone to do so. An audit will often be the only way to identify tasks like these that are falling through the cracks in management practices.

The process-oriented audits just described contrast with more focused evaluations of intellectual property interests to support particular client transactions. Firms may commission extensive intellectual property studies where a transaction turns on the intellectual property of the client (as when a firm seeks to merge with another based on the value of its intellectual property) or on the intellectual property interests of an outsider (as when the firm is considering whether to acquire rights to a key technology or where another concern has threatened litigation due to asserted infringement of the outside concern's intellectual property rights).