Yale English literature professor Wm. Phelps was grading student papers over a Christmas break. On one paper was written, “God only knows the answer to this question. Merry Christmas.” Phelps wrote back, “God gets an A; you get an F. Happy New Year.”

IP Audit: Overview

Intellectual property is essential to a business for at least two reasons. First, intellectual property is used to execute the business plan. Capturing a share of the market, for example, will certainly require that the brand (represented by a trademark) be advertised, recognized and protected from infringement. Second, a company's intellectual property often has independent value derived from licensing or sale. In fact, it may be the most valuable asset a company owns. Outside investors or lenders often make funding decisions based on the strength of a company's intellectual property.

A licensor of intellectual property must be able to warrant that it is the sole owner of the property and that it is free from the claims of third parties. Perhaps more important, should an owner wish to sell a company or assets the prospective buyer will determine independently whether the company owns what it says it does. Any questions regarding ownership in or claims of others to, the intellectual property will be resolved in favor of a reduction in purchase price or a dead deal. We've seen this over and over again. Weak intellectual property, not capable of protection, will also diminish value.

The time to remedy any problems associated with intellectual property is long before the company enters into sales or licensing negotiations or before funding or lending is sought. Otherwise, disclosure of problems can kill a sale or dry up a funding opportunity.

A timely audit can avoid problems, or at least make resolution of intellectual property ownership issues easier to resolve. Take, for example, a software developer who recently failed to obtain transfer of ownership agreements from independent contractors who helped write the software. As difficult as this situation may be to rectify, it becomes far harder ten years later when the contractors can't be located, or worse, the company has to negotiate with their estates.

An audit can also disclose to a company forgotten intellectual property assets that may still retain value. For example, a trademark that hasn't been used for a while might still have value if the company knows not to abandon that mark. An audit can also disclose need for certain government filings or registrations before it is too late.

The audit should also disclose whether the company's use of intellectual property infringes the rights of third parties and exposes the company to a crippling lawsuit. Advance knowledge will allow a wise company to establish alternative action plans, including obtaining any necessary licenses or development of its own intellectual property.

The audit should be conducted by an attorney who really understands the intricacies of intellectual property and can read and understand a license agreement. This person must be given complete access to the company's records. Often, the company's financial records provide clues that intellectual property has been created as will discussions with marketing, engineering and other development employees as well as the company's strategic thinkers. Finally, the auditor must understand the company's business and its industry.