Donald Verplancken and Bruce Patterson, attorneys at Patterson + Sheridan.

Intellectual property attorneys advocate for routine, periodic, deep-dive IP audits for any company whose business is based on significant intellectual property.  But there are certain times in the life of a company when a meticulous, close-up analysis of the company's IP portfolio is not an optional exercise but is absolutely essential:

• The company, or a portion of it, or a major asset, is being sold.
• The company is seeking new financing or going public.
• The company is buying another business. (In this case, the primary objective will be to audit the intellectual property of the prospective purchase.)
• There has been a major turnover event, such as a change in management or the departure of key staff.
• The company has received a demand letter on behalf of a competitor challenging a key patent or patents.

Obviously, one of the first tasks of the auditing team will be to closely examine all the intellectual property held by the company, including patents, trademarks and trade secrets.  Have maintenance fees—which increase with time–been maintained on all important patents, including international patents, which are often particularly expensive to maintain? Do the patents in place match the products actually being sold?

An examination of third-party patents might be required to make sure that the company's product offerings are not unknowingly infringing on patents of competitors. Are the company's important brands/trademarks protected with a registration in the US and any other important sales territory? Are all of the trademark renewals up-to-date?

Sometimes IP auditors will discover that, in the process of doing business, a successful product has been further developed or put to a new use that is no longer covered by the existing patent.  A patent that doesn't cover the products of the owner is of questionable value. Or perhaps an important patent has been filed but has not yet been published, making it unavailable for examination as part of an audit.

The IP auditor must "get under the hood," in old-style parlance, to fully understand each patent and the technical aspects it protects. If the auditor is dealing with a Fortune 500 company, he or she will probably want to liaison less with the vice-president of engineering, and more with the engineers who work every day directly with the products. A direct knowledge of the nuts and bolts of each patent is more useful than the aerial or panoramic view from the top. Similarly, an in-depth discussion with marketing personnel will expose trademarks that have slipped through the cracks without being protected by a federal registration, thus adequately protecting the goodwill developed in the mark.

But an IP audit entails much, much more than simply examining patents and other intellectual property. The audit team will also spend a lot of time reviewing contracts—identifying, for example, who actually owns what has been developed on behalf of the company by examining nondisclosure agreements, development agreements, and employment, work-made-for-hire and sales contracts. Is the company's ownership of its essential IP assets secure, or have the rights inadvertently been given away or shared with a third party?

In certain countries, like Germany, patent rights entail programs to compensate the inventors.  These programs may not require a large expenditure, but they still need to be kept up-to-date to maintain rights in the patent.

Contracts with vendors also need to be closely reviewed—especially those that pertain to the use of software.  If the company has been using open source code, what licenses apply and do changes or additions to the code made by the company violate any of these licenses?  Sometimes technicians have added code from another source to the existing code. If the technicians have departed, only a close forensic analysis of the software may uncover the problem. What if the company has been selling this revised software without being protected by a tidy trail of the necessary license agreements?

If the company is in the process of making an acquisition, the IP audit of the company being purchased may uncover issues with patents that don't match the technology of the products being sold or patents on which maintenance fees have not been kept current. Some of these problems may be fixable; others may not. The audit may actually save the acquiring company a substantial amount on the cost of the acquisition by forcing a revision in the valuation of the prospective purchase.

Here is one example of an instance in which an IP audit proved its value: an oilfield services company had grown rapidly and acquired many smaller tool companies over a short period of time. The result was the company was now holding a mixed bag of miscellaneous domestic and international patents, and no one knew exactly what they had. Worse still, the ownership of the intellectual property, including the company's important brands, had never been brought up-to-date in the various relevant patent offices.

The essential task was to examine all of these assets and try to determine which ones were relevant and complementary to the acquiring company's product lines and sales goals, and which ones should be allowed to lapse. By streamlining the overall IP portfolio and comparing the rights to current product offerings, the company was able to substantially cut costs, focus on the most promising and protected technology, and more easily identify infringers, as well as the company's possible infringement of the rights of others.

Whatever the cost of the audit—which will vary depending on the complexity of the project—it is likely to more than pay for itself, either in terms of reducing the company's IP costs through increased efficiency, achieving a more accurate valuation of a potential acquisition, or discovering opportunities for lucrative enforcement and/or licensing agreements.

Donald Verplancken is a partner in the Houston office of the IP boutique law firm Patterson + Sheridan, with special expertise in transactional matters and in the areas of manufacturing, technology, semiconductor devices and process equipment, and electronics. Bruce Patterson is also a partner in the Houston office of Patterson + Sheridan, and is head of the firm's trademark section, with deep expertise in consumer products, hand tools, and oilfield services.