The IP Rights Audit:
Mapping The Intellectual Property Rights Minefield
Your Business Must Navigate.
By
David M. Kleiman
U.S. Patent Attorney

Intellectual property ("IP") is a category of property that includes the human intellect's intangible creations. The most well-known types of intellectual property are patents (for protecting inventions), trademarks (for protecting brands), copyrights (for protecting works of authorship), and trade secrets. Intellectual property rights like patents, trademarks, and copyrights generally give their owner the exclusive right to engage in some type of activity (e.g., selling an invention) in a given jurisdiction (e.g., the USA) for a certain period of time (e.g., 20 years from the date of filing a patent application). A trade secret is any economically valuable information that is the subject of reasonable efforts by its owner to be kept a secret. The law protects trade secrets against misappropriation (i.e., theft) by others.

Whether you are aware of it or not, the environment that your business operates in and must safely navigate through is mined with intellectual property rights. It does not matter what product your business makes or what service it provides. Your business is almost certainly using and creating IP rights regularly. If you are blind to the many IP rights issues surrounding your business, then you could be on a collision course for disaster.

I. THE VERY REAL DANGER TO A BUSINESS OF AN IP RIGHTS LAWSUIT

Most businesses can't readily afford to pay $250,000 - $5,000,000 to defend a lawsuit. Indeed, none want to. Yet that is the range of median costs that a business faces if it must fully litigate a lawsuit for infringement of intellectual property rights:


Do you think such a lawsuit can't or won't happen to your business? Think again.


  • Between March 31, 2019, and March 31, 2020, over 11,000 intellectual property rights lawsuits were filed in the U.S. district courts. Many of those lawsuits were against small and medium-sized businesses who probably didn't know they were doing anything wrong and perhaps weren't.

  • Do you think you don't need to worry about IP lawsuit expenses because you have business insurance? Think again. Because of the very high costs of IP infringement lawsuits, many standard business insurance policies provide no coverage or inadequate limited coverage for such lawsuits.

  • Do you think your business can't be sued for a product it sells that was acquired from somebody else? Think again.Companies can be sued and are held liable for infringement because of products or services that they purchased from someone else (e.g., an original manufacturer of the product) for resale or use. In some cases, the supplier may have an indemnification obligation. But such a duty on paper is only as good as the supplier's willingness and readiness to back it up with real money.

  • Do you think an owner can always just shut down and walk away from the business if sued for IP infringement? Think again. If a small or medium-sized business is a corporation or LLC, then it is not uncommon for the individuals who operate the company to be sued for the IP infringement allegedly done by the business.

So one of the greatest dangers faced by any small or medium-sized business, and its owners and executives who are actively involved in running the company, is an IP infringement lawsuit. Best to avoid a lawsuit or, if not, be in a strong position to end it quickly and cost-effectively.

II. THE DANGER OF LOSING BUSINESS VALUE

Aside from the threats to a business and its owners of IP infringement lawsuits, studies have estimated that today 80% or more of the value of a company is often found in the business's intangible assets such as its patents, trademarks, copyrights, trade secrets, and goodwill. For example, trademarks and copyrights' value can be diminished by failing to register them early. Likewise, a business can lose valuable patent rights if an application is not filed on time. Failing to execute the right agreements at the right time can also result in the business losing valuable IP rights.

Any business concerned with attracting investors, financing, or finding a purchaser needs to be concerned about acquiring and maximizing the value of its intangible assets: This requires the early detection and protection of IP rights.

III. NAVIGATING THE IP RIGHTS MINEFIELD WITH AN IP RIGHTS AUDIT

The best protection against an IP rights lawsuit, and the best way to maximize the value of the IP rights owned or used by the business, is to be proactive in detecting and managing IP rights issues that affect your business. Another way of saying this is that being unaware of the IP rights issues affecting your business is dangerous: You significantly increase the risk of expensive and potentially catastrophic lawsuits. You also increase the risk of substantially reducing the financial value of your business enterprise.

When it comes to medical health, the importance of being proactive and taking steps for early detection is generally understood and appreciated: The earlier a problem (e.g., cancer) is detected the better the chances for effective treatment. By contrast, the importance of early detection and management of IP rights issues regarding the health of a business is often less appreciated, much to the peril of a company and its owners. The IP rights equivalent of the medical checkup is the IP rights audit. Every modern business should conduct some form of IP rights audit to detect and manage IP rights issues. An IP rights audit is a tool for identifying the potential IP assets and liabilities of a business enterprise. It helps create a map of the particular IP rights minefield that a business must navigate to maximize its value and avoid expensive liabilities. Ideally, such an audit should be carried out by a professional in intellectual property rights. Still, often a preliminary IP rights audit can be done by the in-house personnel of a business who have a basic understanding of IP rights.

There are three basic types of IP rights audits:

General Purpose Audit: This is the broadest type of IP rights audit. It is suitable for startup companies or those businesses considering implementing new IP rights policies, standards, or procedures. It is also suitable for companies implementing new marketing approaches, directions, or significant reorganizations.

Event-Driven Audit: This type of IP rights audit is also known as "IP due diligence." It assesses the value and risk of a company's IP assets. It is often utilized:

  • in the context of mergers/acquisitions and joint ventures;
  • before entering into a transaction involving IP, such as an initial public offering;
  • when launching a new product or service;
  • when considering IP licensing; and
  • cases of bankruptcy and layoffs.

Limited Purpose Audit: This is the IP rights audit with the narrowest scope. It is situational and typically used to justify a legal position or the valuation of a particular IP asset. It can also be applied in the context of:

  • personnel turnover;
  • foreign IP filings;
  • before engaging in e-commerce;
  • changes in IP law and practice;
  • "clean room" procedures (seeking to avoid the infringement of third-party copyright material); and
  • preparing for litigation.

The appropriate IP audit can help add value to a business in the following ways:

  • Cost reduction – A well-managed list of IP assets can help a company identify obsolete assets. Decisions can then be taken to stop paying for obsolete assets, which can result in significant cost reductions.

  • Licensing – An IP rights audit is vital for knowing which IP assets are essential to a business and which are not. With such information, the correct licensing decisions (in and out) can be made.

  • Mergers and acquisitions – Identifying and valuing IP assets is often critical to a prospective business purchaser or investor's decision.

  • Enforcement actions – Knowing the value of the business IP assets is essential when making decisions about how to take the best action against any infringement of the business's IP rights.
IP Rights Audit Preparation:

Before commencing an IP rights audit, it is important to lay the foundation with adequate preparation.

  • Purpose: Specify the purpose of the IP rights audit. Determine the type and scope of the audit and the resources that will be invested (e.g., time and money).

  • Research: Consider the way IP rights may impact your business. Consider your business strategy, other business assets, the current IP rights management situation, any existing IP rights disputes, and possible ties to your company's financing.

  • Plan: Specify the areas of your business to be covered (e.g., product manufacturing, supply chains, marketing, and sales), the scope of the audit (registered IP rights or broader areas such as business trade secrets), the timetable, the budget, roles and responsibilities of team members, and the form of the final report.

  • Contracts: It is critical to identify and collect all business contracts and written policies so that the adequacy of relevant provisions in the agreements and policies can be assessed: These can have a significant impact on IP rights. Examples include agreements concerning shareholder rights, manufacturing, distribution, licensing, assignments, employment, independent contractors, joint ventures, and collaborations.

  • Checklist: Preparing a detailed checklist can reduce the risk of skipping essential steps in the audit process. A checklist should be tailor-made to your business type, size, location, and audit scope. Each member of the team performing the audit should use this checklist.
Performing the IP Rights Audit:

An IP rights audit generally takes place in four steps:

  1. Inventory: The first step is cataloging all of the business's intangible assets, along with a description of each.

  2. Ownership: Identify the owners and nature of ownership for all intangible assets cataloged in the inventory step.

  3. Infringement: Investigate whether others infringe on any IP assets owned by your company. Also, investigate whether any business activities could be infringing upon the rights of others.

  4. Plan: A plan is created to remedy any IP rights deficiencies in business operations related to the management of IP rights and also to identify potential improvements to policies, procedures, and IP rights management.

The result of an IP rights audit should be a map to help you guide your business on a market path that avoids expensive and dangerous claims of IP rights infringement and effectively uses intellectual property laws to protect and increase the business's value.

David M. Kleiman
U.S. Patent Attorney

The Dangers of Startups
Partnering With Business Goliaths


According to a July 2020 article in the Wall Street Journal, Amazon has, in recent years, repeatedly met with startups under the auspices of providing funding or strategic partnerships only to use the proprietary information gained from the startups to launch competing products.

Sadly, this type of behavior by a large company like Amazon (if true) is not unprecedented. It highlights the many challenges a startup faces when engaging with a more established company for acquiring funding or other resources while also protecting what is often the startup's most valuable asset - intellectual property rights.

As a patent attorney, I help businesses secure intellectual property rights against theft and misuse by competitors. Of course, when it comes to securing exclusive rights in an invention, patent protection is often essential.

However, relying upon patent protection alone is rarely, if ever, a prudent competitive strategy: This is especially so for any startup or small business enterprise that will be engaging with other companies to seek out funding or a licensing deal to develop and commercialize an invention. Good contracts when dealing with a third party in such situations are critical. To show how true this is, consider the case of Celeritas v. Rockwell (a lawsuit won by my former law firm who represented the plaintiff Celeritas).

Celeritas was a small startup company in the early 1990s co-founded by the inventor of an apparatus for increasing the rate of data transmission over analog cellular telephone networks ("de-emphasis technology"). This de-emphasis technology had particular applications to computer modems widely used at the time. The inventor had filed a U.S. patent application in July of 1993 for his de-emphasis invention. In September of 1993, the inventor and other officials of the small startup Celeritas met with representatives from Rockwell to demonstrate their proprietary and patent-pending de-emphasis technology, hoping to strike a deal. Rockwell was the leading manufacturer of modem chipsets that contained the core functions of commercial modems. Celeritas and Rockwell entered into a non-disclosure agreement (NDA), which covered their meeting's subject matter.

However, In March of 1994, Rockwell informed Celeritas that it would not license Celeritas' proprietary technology, and concurrently began a development project to incorporate de-emphasis technology into its modem chipsets. Significantly, Rockwell did not independently develop its de-emphasis technology but instead assigned the same engineers who had learned of Celeritas' technology under the NDA to work on the de-emphasis development project. In January 1995, Rockwell began shipping its prototype chipsets containing de-emphasis technology and soon experienced sales that surpassed its projections. In September of 1995, after successfully receiving a patent, Celeritas sued Rockwell for breach of contract, misappropriation of trade secrets, and patent infringement.

Unfortunately, the Celeritas patent did not survive the court battle. BUT the court found the signed NDA was a valid contract and that Rockwell had breached its agreement with Celeritas. The result? A nearly $58 million breach of contract win for Celeritas.

The lessons of the Celeritas case are two-fold:

  1. When sharing confidential information with others, don't just rely upon a patent application or a patent. Protect your interests further by making sure the necessary contracts are first in place.

  2. There is always some risk that the other side in a deal won't hold up their end. Consider this risk when considering the potential rewards of any agreement. As shown in the case of Celeritas, a court battle can last years before coming to any resolution, and there is no guarantee of success. A prolonged legal action is financially out of reach for a startup or small business in many cases. Larger competitors often take advantage of the uneven financial playing field.

While Celeritas v. Rockwell happened many years ago, as shown by the recent Wall Street Journal article, the same dangers to startups and small businesses continue to exist today. Ask yourself if your business has the resources (financial and otherwise) to take on a Goliath company like Amazon in court and win?

There are David vs. Goliath success stories out there, like the case of Celeritas v. Rockwell. Just remember that David beat Goliath because he was smart enough to have a sling he knew how to use. Celeritas beat Rockwell because it knew how to use the law and had a contract claim to fall back on when its patent didn't survive.

Minimize your risk when dealing with other companies by:

  1. Filing all relevant government applications (e.g., patent, trademark, and copyright) to protect intellectual property rights; AND

  2. Having strong contract protections in place.

Hopefully, you will only deal with those who stay true to their word and compete fairly. But if not, you will at least be well-armed legally to protect what is rightfully yours. Often a deciding factor in whether a small business without the financial means to pay for prosecuting an intellectual property theft lawsuit can obtain legal representation on a contingency fee basis.