Intellectual Property Audit Breakdown
An intellectual property audit breaks down into nine areas that the intellectual property attorney should examine: patents, contracts with independent contractors, employment contracts, trademarks, licenses, trade secrets, copyrights including organization handbooks, training, and inventions. Each area has its own requirements that must be monitored through an audit.
The attorney should first notify everyone who may be involved that the audit is about to take place. She then interviews the technical, legal, managerial, and human resources people to collect information on “…licenses, research and development reports, employee and contractor confidentiality and assignment agreements, and employee invention disclosure statements.” Based on the information thus obtained, she then documents the status of the organization’s intellectual property.
Inventions are the first step in the development of potentially very valuable intellectual property. The attorney performing the audit should determine whether the organization is even aware of all the inventive activity carried out within its walls. Does the organization “harvest” its inventions (i.e., require disclosure of inventions and review disclosed inventions for patentability)? Is there an inventor incentive program in place? Does the organization monitor its employees’ inventive activity in other ways, such as having the in-house counsel “manage by meandering,” that is, walk through the laboratories and other workspaces of the potential inventors and talk with them? The attorney performing the intellectual property audit should identify any weaknesses in the organization’s “harvesting” of inventions and bring them to the attention of management at a level where they can be addressed.
Once an invention is disclosed, the organization must determine whether to obtain a patent on it, and in which country or countries a patent would be most valuable to the organization. Obtaining patent protection requires that the organization be aware of new innovations that occur in the research and development process.
In the United States, the patent law is set forth in Section 35 of the United States Code. That law provides that an invention must be of patentable subject matter, original, novel and nonobvious to be eligible for patent protection. “Patentable subject matter” is defined in the code as “processes, machines, manufactures, and compositions of matter.”
The attorney determines whether the organization’s R&D staff maintains proper records of new developments that are reviewed and witnessed at regular and frequent intervals, thereby providing documentation for patentability determinations, and whether the organization observes the statutory time limits for patenting new inventions. If, for example, the invention is made public more than one year before the organization applies for a patent, the organization is barred from obtaining a patent on the invention.
The attorney also examines the organization’s treatment of others’ patent rights: does the organization monitor itself in the light of others’ patents to reduce the potential for infringing activity? Does the organization routinely seek a patent opinion when there is the potential for infringing another’s patent before they begin any potentially infringing activity?
Contracts in General
Each contract that an organization enters into with regard to its intellectual capital must contain many elements, and parts of each contract must be individually negotiated.
Contracts, however, are expressed in language, and language is inherently prone to uncertainty in its interpretation, especially in cases where the contract’s drafter had little or no part in the negotiation of the agreement. The drafter’s job is to “…record exactly the transaction that the parties wish to undertake.” However, the probability of achieving absolute certainty in drafting any agreement is essentially zero; it cannot be done. Definitions of terms in the contract invariably use undefined terms, and those undefined terms are often not definable. Therefore, even in the best scenario where a contract contains definitions for all its terms, the parties must still look to the judge for the reading of the contract, and then must interpret the judge’s reading, and the judge cannot consider all of the evidence surrounding the contract under the parol evidence rule. Even precise contracts are therefore remarkably imprecise.
However, even under the parol evidence rule, “[a] dispute over [an] alleged conversation that resulted in the oral license [cannot be offered into evidence under the parol evidence rule but] may be resolved by proof of partial performance…. Absent other complicating facts or application of the Statute of Frauds, a court could infer from such partial performance the scope of the license,…the consideration,…and the term….”
The auditing attorney may examine the license agreements and strategic alliances between the client and another organization to be sure that the agreements cover trade secrecy for the client, appropriately license any trademarks or patents, and are to the client’s advantage (or at least not to the client’s disadvantage).
By definition, independent contractors pose a conflict for protecting an organization’s intellectual assets. Independent contractors are generally experts in a particular area, and they market their expertise to many organizations. If one (or more) of those organizations has intellectual capital in something that an independent contractor has provided to them, the contractor should not be able to provide that same intellectual capital to other organizations, especially competing organizations. However, that expert still needs to make a living, and she does so by marketing her expertise.
This conflict is resolved best by having a clear contract with the independent contractor from the outset of the business arrangement, specifying who owns the expert’s work product, and who owns the contractor’s notes and ideas gotten while the contractor works for the organization.
One way to resolve the conflict is for the contractor and organization to agree to a shop right for the organization, wherein the contractor owns the intellectual capital, but the organization has a royalty-free license thereupon for the life of the information. This is very contractor-friendly because it allows the contractor to freely market the information to any other organization that she might contract with, but the organization can suffer from this arrangement because it cannot keep the information the contractor developed as trade secret (if the contractor assigns any invention then the organization can of course hold that patent), and therefore cannot properly commercialize any product that is derived from that information.
Another way to resolve the conflict is to “flip the coin” and give the organization full ownership of the intellectual capital that the contractor develops but allow the contractor access to all the non-trade-secret information he developed for the organization. This is excellent for the organization, but may deny to the contractor some or all of his area of expertise to market to other potential clients.
Many ways exist to resolve this apparent conflict between the organization and the independent contractor. Outright purchase of information, royalties for access to information, grantbacks, agreements that change with time, sublicenses, assignments, use licenses can all be used individually or in combination to reach a mutually satisfactory agreement between the parties.
Clearly, each contract with each independent contractor needs to be negotiated individually. The contract will be based on the needs of each party at the time and in the foreseeable future, and these needs change with the parties and over time.
Agreements between an organization and its employees are used routinely to protect an organization’s intellectual property assets. They usually cover an organization’s trade secrets, inventions and works of authorship, and are generally signed both on an employee’s entrance to an organization and exit from the organization.
Employment contracts are part of the intellectual property of the organization; they delineate the protection of the organization’s intellectual assets both during and after the employee’s tenure. Each organization must be careful to ask each employee in an entrance interview whether she signed a non-disclosure agreement with any former employer that would be violated by the current organization’s employment agreement; if she did, the current employer must modify that employee’s agreement so as not to violate the former agreement.
Some employment agreements cover all trade secrets, inventions and works of authorship, whether or not related to the job the employee was hired to perform; others cover only those works created specifically for the organization while employed there; still others cover those works that the employee creates for the organization and those works that would compete directly or indirectly with any goal of the organization.
The last of the above examples may be the most commonly used paradigm. The first (all trade secrets inventions and works of authorship while employed) is too broad; for example, this type of agreement could have given the valuable HARRY POTTER(TM) franchise to an employer had author J.K. Rowling signed it while writing the novels, whether or not the employer contributed anything (such as time, equipment, artistic support, etc.) to the work. This, of course, would have led to the employer’s enrichment at the employee’s expense, which is not a fair outcome for the employee. The second (only those works specifically created for the organization while employed at the organization) is not broad enough to properly protect the organization; an employee who must only protect an organization’s intellectual property while employed by the organization is free to leave and use the intellectual property she developed for the organization for a subsequent employer, possibly a competitor. The last example (works created for the organization and works that would compete with the goals of the organization) generally avoids assigning an employee’s off-hours noncompeting but potentially valuable work to an employer, while protecting the trade secrets and other intellectual capital of the organization. It may therefore be most likely to be advantageous for both the employer and the employee.
The intellectual property audit can ensure that the proper protection for the organization’s intellectual property is in place with the employment and independent contractor agreements. In doing so, the attorney verifies that those agreements are neither overbroad nor too narrow. If the employment agreement or the independent contractor agreement is either too broad or too narrow, the attorney can recommend changes to be made in the contract, and perhaps provide means for employees and independent contractors who signed the insufficient agreement and later left the organization to be brought under the umbrella of the new, more appropriate agreement.
The auditing attorney should examine the contracts for both independent contractors and employees to ensure that the proper protections are in place: trade secrets are not to be revealed to others without authorization, patents and copyrights are to be assigned to the organization,
An organization should record each assignment of a trademark with the US Patent and Trademark Office (USPTO) in language that includes the goodwill and not the trademark alone with the assignment. The attorney performing the intellectual property audit can ensure that the proper assignment is made and recorded for each mark.
It is possible for an organization to lose its rights in a trademark or service mark through abandonment of the mark, or through failure to timely file the proper documentation with the USPTO. The auditing attorney must confirm that the organization filed the required registration and maintenance documents with the USPTO and that it has used the mark continuously in interstate commerce.
It is also possible for an organization to lose its rights in a trademark or service mark through improper licensing and improper policing of its mark. If a mark has, through improper policing, become a generic descriptor for the goods, the mark is lost. “Escalator” and “cellophane” are two examples of marks that became generic and therefore lost to their owners; more current examples of marks that remain marks but are endangered are Kleenex® (how often do we grab a “kleenex” from the box of another brand of tissue?) and Xerox® (have you ever “xeroxed” a page?). The auditing attorney must ensure that any danger of becoming generic is addressed promptly and vigorously. Xerox Corp. and Kimberly-Clark (the makers of Xerox-brand photocopiers and Kleenex-brand tissues, respectively) spend millions of dollars annually to protect their marks.
The current registrations must cover the organization’s current trademarks, logos, slogans, and brands. By examining the packaging of the goods, the attorney can determine whether the currently registered marks match the currently used marks. The attorney should bring any discrepancy to the attention of the client.
Licensing of intellectual property is one of the most efficient ways to capitalize on an intellectual asset. This means that the intellectual asset must be well protected by a license agreement. The full extent of a licensing agreement is beyond the scope of this work; it is a complex contract that should be negotiated on an individual basis.
The intellectual property attorney should make to make the following determinations with respect to the license contract.
Is this an express license? Licenses may be express or implied. An express license is a statement by the licensor that the licensee has certain rights to use intellectual property owned by the licensor. If the statement is written down and signed by both parties, then that writing provides strong evidence of the existence of a contract. An implied license may arise from any one of a number of situations. They may be imposed by the courts based on the actions of the parties, or the parties may create the implied license without taking the matter to court by simply continuing to act as though a license exists. The intellectual property attorney might find an implied license by interviewing research personnel to see if they use technology from any source other than from within the organization, then tracing the ownership of any intellectual property that they use. The attorney might also find an implied license through a court’s ruling in litigation involving the technology in question.
Is there a writing? As with all contracts, a writing is not absolutely required for a valid, enforceable bargain. In the knowledge-driven economy today, of course, most contracts are reduced to writing and signed, but an oral contract can be equally binding as a written one. Clearly a writing is far preferred in any contract situation, including an intellectual property audit, because the attorney conducting the intellectual property audit has the words of the agreement before her on the printed page.
Is a license exclusive? Is the organization that is undergoing the intellectual property audit the licensor or licensee? A license can be exclusive (perhaps even denying the intellectual property owner the right to use the property) or non-exclusive. An exclusive license must be careful to look to the future and leave an opening in case the license proves unsatisfactory for any reason to either party.
Does each license contain a granting clause? Each license must contain a granting clause specifying the scope of the license and the licensee’s powers with the license.
Has the owner of the property reserved any rights? An intellectual property owner may choose to reserve, or keep back, some of the rights to the property (an example of this is the granting of a non-exclusive license).
Does the license agreement specify who owns technology improvements? A license should specify who owns any improvements that the licensee makes in the licensed technology.
Does the license specify royalties, payment schedules and accompanying reports? A license should specify all royalties and payment schedules, and the accompanying reports.
Does the license agreement contain the standard contract clauses? A license agreement should contain the standard contract clauses, such as term of the agreement, how the agreement can be terminated or modified, who defends the licensed technology in the event of litigation, whether the parties agree to arbitration before or instead of litigation, an integration clause, and so forth as needed.
Any valuable patent is contained in an envelope of undisclosed information. This envelope is the trade secret know-how that an organization develops around the use of its patented technology. It is not described in the specification of the patent because the knowledge was developed after the patent application was filed, and the patent law requires only that the best mode as of the date of filing be disclosed.
Trade secrets are protected by contracts between the organization and its employees, between the organization and its independent contractors, between the organization and its business or technology partners. The intellectual property attorney who performs the intellectual property audit should evaluate how well these agreements protect the valuable trade secrets.
Copyrights, Including Organization Handbooks
An organization’s copyrights may be its most valuable asset. If the organization is based in the arts, then copyright becomes the foremost protection for its intellectual property.
Any material that is fixed and perceivable, directly or indirectly, in a tangible medium is copyrighted under the current U.S. copyright law. It is copyrighted from the moment of creation, but full protection is not available unless the work is registered in the Copyright Office at the Library of Congress. The intellectual property attorney must check the status of the registration of the organization’s written materials to ensure that the courts can enforce the copyright laws of the United States if those written materials are infringed.
Once the intellectual property audit is complete and the recommendations made, the organization should implement a training program for all employees to ensure that the recommendations that emerged from the audit are followed. Training should take place for all levels of the organization. The organization must identify those areas in which employees need training, and the level at which they need it. It then must design and deliver the appropriate training courses and materials, and design and deliver the appropriate follow-up ongoing support.