Intellectual Property Audits

For technology-based companies the most significant asset is generally their intellectual property rights—patents, copyrights, trade secrets, and trademarks—and there is a real and substantial risk to those companies if they fail to take the necessary steps to preserve the value of these assets. In order to analyze the legal risks in this area, and take appropriate steps to minimize and manage those risks, companies should conduct regular audits that focus upon the creation of the assets and ownership rights therein; the procedures used to perfect and maintain all legal rights in the asset; and the risk that the use of the assets might infringe upon the valid legal claims or the contractual rights of others.  In order to assist you in preparing your clients for an intellectual property audit, this month’s update to Business Transactions Solution on WESTLAW includes an executive summary for clients regarding intellectual property audits (§202:71).

As part of the audit process, the company should provide a list, along with copies, of all agreements to which it may be a party relating to the ownership and use of intellectual property assets which may be material to the conduct of the company’s business. The scope of the inquiry extends beyond intellectual property rights which are owned by the company to include any technology or legal rights which may have licensed from a third party. Examples of some of the technology rights agreements which may be uncovered in the investigation include:

  • Licensing agreements to which the company is a party, either as a licensor or as a licensee. As to licenses given by the company, attention should be given to “cross-referencing” the subject matter to the description of statutory rights and trade secrets provided by the company.
  • Agreements purporting to assign any intellectual property rights to the company, which must be reviewed to ensure that all requirements for a valid transfer have been satisfied.
  • Joint venture and development agreements which involve the use and/or development of technology.
  • Research agreements with government agencies which call for government funding of the company’s research activities. The terms of the grant should be reviewed to see whether or not the government, or some agency thereof, has maintained some form of ownership interest in the products of the funded research activities.

When reviewing the various technology agreements special consideration should be certain provisions and issues.  For example, it is almost certain that some of the agreements will have arbitration clauses or other procedures for alternative dispute resolution (“ADR”) techniques.  While such provisions are commonly used, there is no universal consensus on the desirability of binding arbitration clauses in technology agreements, nor is their agreement on how to conduct ADR short of binding arbitration.  One of the outcomes of the intellectual property rights investigation should be gaining an understanding of the potential impact of ADR on the company’s technology rights portfolio and creating guidelines for future agreements that set out the company’s preferred negotiating position.

Another common topic for technology agreements is the provisions relating to identification and protection of confidential information, an important element of preserving trade secret status.  Not surprisingly, this is a subject that often consumes a good deal of negotiation time and resources, and the company may want to consider something more than just the traditional assortment of forms, such as a somewhat loose form for receiving confidential information; a rather restrictive form for giving out confidential information; and a more reasonable form for exchanges between parties with relatively equal bargaining positions. Some companies have moved away from this approach to the establishment of a single form that is designed to protect minimum interests. These companies maintain that such forms avoid considerable discussion and negotiation. The main thrust in terms of the intellectual property investigation and forms is that, while the company is collecting all the forms in use, it should evaluate whether the forms and the assortment of procedures for their use are optimal.

When the review turns to licensing agreements, consideration must be given to antitrust issues that may be raised regardless of the intellectual property rights that are the primary subject of the agreement.  For purposes of the investigation, senior management of the company certainly needs to be made aware of any provisions in a license that may run afoul of the guidelines for the licensing of intellectual property promulgated by the federal Department of Justice (“DOJ”) and/or the guidelines of the states’ attorneys general or private plaintiffs (or the courts hearing cases brought by them).  Distribution agreements may also raise antitrust issues and should be reviewed to determine how they impact the company’s trademark rights and whether they constitute a “franchise” that will be subject to federal and state regulation.

Written by agutterman

Founding Director of the Sustainable Entrepreneurship Project

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