A challenge for companies with small legal departments is proactively identifying and managing the company's intellectual property ("IP") assets. Oftentimes, this preventative practice is given low priority to immediate issues and requires buy-in from various individuals outside of the legal department. However, having a centralized location and strong policies can greatly reduce the costs required to license or purchase intangible assets, shore up collateral for financing, monitor use, maintain compliance with third party product's licensing requirements and enforce your company's rights. This list provides recommendations for the steps to take when getting a handle on your company's intangible assets.
1. Understand the Protections Available for Your IP Assets
In order to identify whether a particular asset can be protected and how to obtain protection, it is important to understand what constitutes a copyright, trademark, patent and trade secret. The following definitions are provided as guidelines and are not intended as comprehensive lists to identify all IP assets you may own. A copyright is the exclusive control of an original work of authorship fixed in any tangible medium of expression, from which it can be perceived either directly or with the aid of a machine or device (17 U.S.C. § 102(a)). A trademark is any word, name, symbol, device (i.e., slogan, design, sound, color, smell) or combination that identifies and distinguishes the source of goods or services (15 U.S.C. § 1127(a)(1)-(2)). A U.S. patent grants the owner the right to exclude others from making, using, offering for sale, or selling an invention that implements a novel idea or improves an existing process until the patent expires (35 U.S.C. § 154(a)(1)). Lastly, a trade secret is any information (i.e., program, device, method, technique, etc.) with actual or potential economic value, not readily ascertainable, and is the subject of reasonable efforts to maintain its secrecy (Unif. Trade Secrets Act § 1(4)(i)-(ii)). There are common law protections to trademarks, copyrights, and trade secrets, which are inherent to any company. It is recommended to file your eligible copyrights and trademarks with the appropriate U.S. federal government entity for stronger protections, especially if your company has an online presence or does interstate business. You may also wish to consider obtaining international protections in countries you do business with, as a U.S. based trademark registration does not provide international protections (however see The Madrid Protocol for international coverage) while The Berne Convention provides for copyright protection in most international countries. An analysis is required when considering pursuing a patent versus keeping the source information a trade secret. Click here for more information in determining whether you should consider a patent.
2. Establish Goals for the Audit
An essential step in conducting an efficient audit is defining its parameters. Should the focus be on identifying and cataloging all intangible assets (patents, copyrights, trademarks, trade secrets, and domain names) in a centralized location? Or should the focus be reviewing corporate policies and strengthening them? Depending on how your company has organized this information, the time spent on discovery of all the intangible assets owned, used or acquired by the company could be minimal. Standard goals when conducting an IP audit is to uncover under-utilized IP assets, identify threats to the business, and enable development of informed strategies that will maintain and improve your company's market position (IP Audit - A "How to" Guide, Ian Cockburn, WIPO). Reviewing policies can be instrumental in supporting employee awareness and enforcing the company's IP rights.
3. Identify the Stakeholders and Align Yourself with Their Interests
An ancillary benefit of undergoing an IP audit is the opportunity to form beneficial relationships with other departments and educate the employees on the importance of protecting the company's IP assets while maintaining compliance to licensing terms. The departments to quickly align with in this endeavor should be finance/accounting, marketing, advertising, sales, and IT departments. With the aid of your colleagues, you can more quickly identify the intangible assets (mostly found in contracts and on the website), locate records on how the intangible assets are being used, identify who actually owns the intangible assets, prioritize action items, and assign a value to each asset.
4. Discovery
When identifying potential IP through discovery, remember to include all possible sources, such as third parties (i.e., vendors, contractors, key employees, etc.), resources and processes, research and development, marketing, and packaging. In absence of a professional third party service provider, it is crucial to have buy-in from other departments to aid in this effort prior to engaging in discovery. Some companies have hundreds if not thousands of pages on their website, and contracts may not be in a central location. Employees should be provided a checklist (click here for a sample checklist from Foley & Lardner LLP) prior as a tool in identifying potential IP that should be flagged for your review.
5. Select a Program and Create a Centralized Catalog
There are vendors that offer software to help manage your company's IP assets. If you have limited resources, programs like Microsoft Excel, Access, Outlook, or Google Apps can be used to create a centralized catalog of the intangible assets and create reminders to automatically notify the various stakeholders of the required deadlines. Remember to think of how trade secrets are kept and make sure that adequate protections are still in place as you pull information together in one place.
6. Establish or Review the IP Assets' Valuation
A difficult area that is often overlooked when auditing/creating an IP portfolio is valuation. One in-house counsel recommends that to get buy-in from your business counterparts, you should frame it as "budgeting on prevention of the loss of the brand." One cannot simply make a direct comparison of one registered asset to another, since both were granted with acknowledgement from the issuing country that each is unique in their own right. Like property values, the value of a company's intangible assets will fluctuate as a result of multiple factors including the timing and circumstance. According to the International Valuation Standards Council, "Because of the heterogeneous nature of many intangible assets there is often a greater need to consider the use of multiple methods and approaches to derive value..." (International Valuation Standards, International Valuation Standards Council, 2011 at 59). Therefore, there are several recommended factors for you, your company leaders, and your accountant(s) to consider in an effort to objectively articulate the value of an IP asset:
- How much will it cost to replace the asset if it were lost?
- What is the anticipated future income and the present value of those cash flows?
- What was the cost of creating the asset?
- What is the marketplace value of similar assets in transactions?
- What is the market value of the company without the net tangible assets? (Valuation of Intellectual Property Assets; Valuation Techniques: Parameters, Methodologies and Limitations, Dr. John Turner, 2000 at 6)
- What are the economic benefits of the asset?
When possible, do not place one value on a group of assets because they are affiliated to one product. While doing so might help meet your short-term goal of completing the audit, it may prove to be problematic later. For example, you may have to establish damages when there is an infringement of one asset and not the other. Keep in mind that periodic updates will be required, including certain events where a significant transaction occurs such as an IPO, merger, acquisition, or licensing deal. Tax issues can also arise for multinational companies where the foreign government could object to the valuations, in which case a tax professional should be consulted.
7. Review Your Contract Management Process
The key to a successful audit is to create policies that expedite future audits by espousing a process that interacts with other consistent practices. To promote long-term efficiency, review of the contract process is recommended. A strong contract process is supported by a centralized contract management system, which could be created internally by working with the IT department or implementing a contract management vendor's software. The result should be the capability to easily track IP licenses and ownership rights, manage contract deliverables, and identify potential business liabilities. An effective method to ensure that there is cooperation across the company is to create a policy requiring the legal department (or a controlled group of designees) to review all contracts. After review, a code or the reviewer's initials would then be affixed to the contract allowing the contract to be finalized and payment to be processed. If enforced consistently, any potential issues with IP ownership rights that can arise from contracts can be preempted before it becomes an issue.
8. Review Your On-Boarding/Off-Boarding Policy
Another important policy to review is how employees are transitioned in and out of the company. This particular process needs to involve the IT, HR, and the employee's home department. When on-boarding new employees, the employer should define what its data/information is and inform the new employee what constitutes employer property. New employee agreements should include an intellectual property assignment clause, a non-competition clause, and a non-disclosure of confidential information/trade secrets clause, if allowed under state law (Kevin Cranman, John F. Baum and Jason D'Cruz, Employee Agreements, Drafting the New Prenup, ACC Docket, Vol. 31, Number 3, 2013 at 60). Ideally, this should be done in a way that makes the employee take personal accountability in protecting the company's IP. Before a separating employee leaves the organization, it is important to raise the ongoing obligation to protect the employer's confidential information and IP through the non-disclosure agreement or comparable document that the employee signed during the on-boarding process (Id.). One colleague recommended contacting new employee's previous employer to assure them that the company will not tolerate any divulgence of their trade secrets, or contacting a separating employee's new employer to kindly remind them of the employee's obligations under the non-disclosure agreement or non-competition agreement.
9. Create a Training Regime for Your Co-Workers
A particular challenge related to employee training is influencing the company culture to appropriately prioritize and appreciate the ongoing maintenance of IP in the day-to-day operations. To maintain compliance with policies and educate employees of their responsibilities to the company, a mandatory annual training should take place where each employee signs a document acknowledging that they read and understood the company's IP policy. Doing an in-person training can also create an opportunity to further connect with the other departments, answer any questions they may have, and hear about any potential legal concerns or issues of which you were previously unaware. Employees that are familiar with IP will be more likely to recognize the warning signs of infringement early, act as alerts to possible outside infringement, or prevent money from being wasted on creating a subject matter that infringes upon another's work. Educated employees will be more likely to make informed decisions and will know when to bring in their in-house counsel to properly assess the risk involved in a complex transaction involving the company's IP assets.
10. Review Your Insurance Policy
Finally, another policy to review is the company's insurance policies. Insurance companies provide IP infringement and errors and omissions policies that would allow a company to pursue an infringement claim, defend against allegations from a competitor or non-practicing entity, or defensively acquire a patent that could otherwise impede in a company's operations. RPX Corp, for example, pools together member resources to cut a deal during litigation on acquiring a patent and would then buy/license the IP to get rid of the potential legal hurdle for their members. The members share defense costs in the lawsuit and the case (Insuring Products of the Mind, Andrea Wells, 2014). Some insurance companies have even made a significant impact nationally by supporting litigation all the way to the Supreme Court. In Octane Fitness LLC v. Icon Health & Fitness Inc., the Supreme Court broadened the district court's discretion in determining whether cases are "exceptional" when ordering losing parties to pay the prevailing party's attorney fees under 35 U.S.C. Sec. 285. Afterwards, the President of Octane was quoted as saying "Without patent insurance we would have been dead in the water. We did not have $2 million to pay our lawyers to defend us [against the larger company]. We would have had to pay Icon, even though they had no real patent claim..." (Patent Insurance Makes Its Mark, Intellectual Property Insurance Services, 2015) Therefore, it is important to make sure that the company understands that having adequate insurance in place is a sound plan in keeping the doors open when threatened with costly litigation.
Conclusion
Upon conclusion of the audit, the final report should at minimum contain the catalog of IP assets and its owners, a list of actions for maintaining each registered asset, how the assets are used, any weaknesses (i.e., IP assets that you shouldn't be using but are and IP you need to own or license), applications to file for unregistered assets, how third party IP assets are licensed and who controls the use of those assets, and the costs in maintaining your company's assets. Establish a timeline for periodical review and maintenance, and you'll find that preparing for any transactions involving the intangible assets will be much easier.
About the Author:
Victor L. Morales is a Legal Resources Manager at the Association of Corporate Counsel and a 3rd year Law Student at George Mason University School of Law.
The author would like to thank John Bates, General Counsel of Clarity Solution Group and Steven Mashal, Corporate Counsel of the American Council on Exercise for their contributions to this article.