Michael D. Moberly March 9, 2012
Conventional IP Audits Are No Longer Sufficient
In today’s knowledge (intangible asset) based economy, conventional snap-shots-in-time, one-size-fits-all, check-the-box types of IP – intangible asset audits, assessments, and/or due diligence are no longer sufficient to provide company management teams and boards with the necessary strategic information and business insight necessary to meet the needs of the increasingly aggressive, competitive, and predatorial global business transaction environment.
Before proceeding further though, I want to respectfully advise the reader this is certainly not a circumstance in which I am ‘mixing apples and oranges’. Rather, I am suggesting there are indeed commonalities of purpose, overlap, and even duplication whether a task is referred to as an IP audit, assessment, or due diligence. A primary distinguishing factor however is the context or circumstance in which one or the other is being applied, i.e., a merger, acquisition, liquidation, strategic alliance, partnership, etc. For simplicity, I will use the term audit as encompassing assessments and due diligence unless otherwise specified.
Intellectual property (IP) audits were initially designed to ascertain, often through hand-me-down templates or check-lists, the (legal) status and defensibility of a company’s IP. And, if an auditor, usually an attorney, is sufficiently experienced and so inclined, their work may also include looking for evidence of misappropriation, infringement, compromise, de-valuation or undermining-erosion of asset value and competitive advantages.
Most conventional approaches to conducting IP audits tend to be, in my view, snap-shots-in-time descriptions of a specific IP’s status. But, in today’s increasingly competitive, predatorial, legacy free, and ‘winner-take-all’ global business transaction environment, the status (stability, value, defensibility, competitive advantage) of certain IP and its contributory intangible assets can fluctuate or erode often very rapidly.
This means the conventional time bound approaches to IP audits (assessments, due diligence) tend not to reflect or project the assets’ vulnerability and increasingly real possibility they will experience adverse changes in their:
- value, stability, and sustainability at some point during the life, value, and functionality cycle of the asset, and/or
- economic – competitive advantage contributions to other (current, future) projects, R&D, or relevance to a company’s strategic planning, and supply chain, etc.,
It’s important to recognize anyone of the above may occur in either pre or post transaction contexts.
IP Audits – Rationale and Methodology
I frame the rationale and methodology for conducting IP audits through a somewhat different lens, and often with different objectives. I want IP audits (assessments, due diligence) to be relevant, actionable, and bring strategic insights to management teams, boards, and other business decision makers about their intangible (IP) assets. This higher level of insight, that includes risks, value, and due diligence brings absolutely essential information to business decision makers. Information and insight of this caliber should be readily available in board rooms, particularly in companies that are increasingly dominated by intangible (IP) assets.
Key objectives of the information brought to light by an audit, is for companies to be better:
- positioned to utilize their IP (and other intangible assets) as effectively, efficiently, and profitably as possible.
- informed about current and horizonal risks specific to their business environment and types of transactions their company routinely engages in which intangibles and IP are almost in play.
- better informed not just about its registered IP, but the intangible assets that contributed to cultivating the IP.
In short, the conventional snap-shot-in-time and IP only audits (assessments, due diligence) are, in most instances, ill-suited for today’s increasingly hyper business climate.
Too, the notion that one can sustain control, use, ownership, and value of their IP with absolute certainty as if it were a bank ‘certificate of deposit’ may be a business reality, but only for the naïve and high risk takers.
Sustaining Control Of IP Not For The Lifetime Of A Company, Rather For The Value And Functionality Cycle Of The Asset
Some would correctly argue, as I, that trying to sustain control, use, ownership, and value of IP for the lifetime of the company vs. the life (value, functionality) cycle of the asset may actually increase its vulnerability to compromise, infringement, circumvention, becoming ‘boxed in’, being at the mercy of ‘trolls’, or simply becoming irrelevant. Any one of these calamities, should they materialize, can significantly undermine-erode the value, demand, and attractivity of IP, particularly in the eyes of would-be investors, buyers, and/or strategic alliance partners.
Too, it is an extraordinarily costly and lengthy undertaking to initiate legal action to defend one’s IP. IP holders would be well advised to ensure their ‘house is in good order’ with respect to having IP protection practices and procedures firmly in place in advance before initiating legal action. Otherwise, the odds of being on the losing end of any litigation are not favorable.
As a holder of IP, it will always serve a company’s interests to demonstrate that an assets (IP) value and demand in the marketplace remains consistent and sustainable. It’s makes good business sense to re-frame conventional IP audits (assessments, due diligence) to:
- focus more on sustaining control, use, ownership, value and materiality
- identify key intangible assets that underlie the IP
- provide all parties with a more objective and strategic perspective regarding the sustainability of the IP and its contributory (attendant) intangible assets.
A key benefit of this approach is that management teams and boards would achieve a higher level of confidence about the status of the intangible (IP) assets their company produces and possesses which would facilitate better strategic planning and significantly mitigate risk. .
This comprehensive approach to conducting IP – intangible asset audits merged with attributes of assessments and due diligence is necessary. Otherwise, an un-initiated practitioner can literally jeopardize a transaction’s potentially favorable outcome in which IP and intangible assets are in play.
Need For Speed
I respect the need for speed in executing business transactions in which intangible assets and IP are in play. However, the time has come for parties to be less concerned about speed and more concerned with ensuring the IP and contributory intangible assets are intact, have not been compromised, and remain sustainable relative to their value and revenue producing capabilities.
To achieve this, I advocate the inclusion of routine – on-going IP and intangible asset audits (assessments, due diligence). This includes inserting practices/procedures to monitor fluctuations in asset value and materiality. By doing this, prospective investors, buyers, and alliance partners would have available timely insight about the assets being considered for purchase or investment and adjust (leverage) their decisions accordingly, should it become necessary. Such limited transparency would also deliver very favorable goodwill, reputation, and trust, and quite possible higher values of the IP and intangibles.
Too, today’s aggressive, globally competitive, and predatorial business environment should prompt audit (assessment, due diligence) teams to literally re-phrase key questions posed in conventional audit approaches. For example, precede the proverbial ‘is the intellectual property protected’ question with the question ‘has the know how and intellectual capital on which the IP value and use is premised, been adequately safeguarded and managed from its inception’? Not only is the answer subject to verification, the answer will provide the team with sound clues to pursue further insofar as assessing the IP’s real status, value, and usefulness.
To fully appreciate the relevance of re-phrasing some of the key and traditional ’IP audit questions’, it’s important to recognize that holders of patents, trademarks, and copyrights should not assume such protections carry any viable deterrent effect to would-be infringers and/or those inclined to engage in misappropriation. Experience clearly suggests that in most instances today, conventional IP protections are routinely disregarded, outpaced, and/or circumvented by a growing global body of sophisticated entities, some of whom are state sponsored while others are independent and legacy free players which I call economic and competitive advantage adversaries.