IP Audit

Introduction

In the decades prior to the 1990s, intellectual property (IP) was considered intangible and hence insubstantial. As a consequence valuable IP such as trade marks, patents, copyright, trade secrets and know how was often neglected, overlooked or simply ignored. While intellectual property forms part of the intangible assets of a corporate business, they are nevertheless very specific assets, and in many cases the most important and valuable assets a business owns. In essence, in the 1990s intellectual property came of age. This is reflected in the Trade Marks Act 193 of 1994 which has broadened the definition of a mark to include anything that can be depicted visually subject to it possessing a degree of distinctiveness. Accordingly if colours are attracted and distinctive, shapes of containers and even smells and sounds can conceivably be filed as trade marks. A fortiori with the advent of the worldwide web and the dot.com age in the so called "new economy" where on-line purchasing is fast becoming the norm consumers reliance on IP and, in particular, brands (marketing parlance for trade marks hereinafter referred to as trade marks) are soaring. In fact, corporate clients on the whole have now realised the considerable value of their intellectual property often underpinning the foundation of the client's success. Moreover, IP is frequently the target of commercial acquisitions and mergers and these assets often account for a considerable portion of the purchase price in the sale of commercial businesses. Today, notwithstanding the commercial significance of intellectual property it remains of concern that certain corporate clients still tend to neglect their IP portfolios and generally conduct intellectual property audits on a reactive basis. For example if once they are sued for trade mark infringement having omitted to conduct a registrability search prior to launching a new product or if they institute trade mark infringement proceedings only to find that the proprietor of the mark lacks locus standi due to a subsequent sale of the subject mark do the benefits of conducting IP audits become apparent. Such lessons are expensive and painful. The good news is that they can and ought to be avoided. Moreover, due to the fact that intellectual property rights, borne of law, are notoriously fragile they demand meticulous attention and management in order to ensure their existence. This leads us to the rationale behind intellectual property audits. An intellectual property audit may be considered to be the concretised and definitive part of intellectual property management. In fact an IP audit is not dissimilar to a financial audit. Typically, the financial affairs are audited regularly, among other things in order to :

• check that the financial affairs of the business are in good shape;
• identify any problem areas in the financial affairs of the business; and
• focus attention on important financial issues concerning the business.

However, prior to finalising the report there are a number of issues which must be properly and comprehensively addressed :

• checking that the intellectual property of the business is healthy and in good shape;
• identifying any problem areas with regard to the intellectual property of the business and providing appropriate solutions in this respect; and
• focusing attention on seminal intellectual property matters of the business.

Hence, in summary IP audits are conducted in order to identify, protect and cherish these vital assets of clients business. A need to conduct IP audits typically arises as a part of a larger due diligence investigation initiated in order to evaluate the state of the business prior to a merger or acquisition. Further cogent reasons for conducting an IP audit are to ensure that all IP is consolidated and in good shape prior to conducting an IP valuation for balance sheet or tax reasons. However, even outside of the circumstances outlined above we recommend that IP audits are conducted regularly as a precautionary measure in order to assess and identify the "health" of the IP within the business and to correctly diagnose any "illness" whether benign or of a more serious nature. At the conclusion of the audit "appropriate medicine" is dispensed in the form of a written report detailing the way forward coupled with our recommendations. However, prior to finalising this report there are a number of issues which must be properly and comprehensively addressed. We will elucidate some of the more relevant considerations hereunder.

How is an Intellectual Property Audit Conducted ?

Products/services and the portfolio of IP registrations

The kernel aspect of an IP audit consists of a careful review of existing products and services of the client and comparing these with the company's portfolio of existing IP registrations. In due course, it will be necessary to reconcile any discrepancies by "filling the gaps" whilst conversely removing superfluous and commercially redundant IP colloquially referred to as "dead wood". We will address this further below.

Dissect and protect important labels

We have conducted numerous audits usually for listed companies. Such clients have been in diverse industrial sectors for example, pharmaceuticals, food and beverages, retail and wholesale of bearings, clothing and textiles. engines, circlips, information technology and computers, furniture, tobacco, pulp and paper sectors etc.. Notwithstanding marked differences in the nature of their core businesses they all share a common denominator. Namely that clients focus only on the actual word mark of a label or a trade mark based on the misconception that it is only the actual word mark which can form the subject of a trade mark registration. However, over a long period of time and after substantial use, it may not just be the word mark but rather the entire get-up of the label, which becomes the source of recognition impacting on the minds and psyche's of purchasing customers. Moreover, pirates, parasites, and copy cats are becoming increasingly ingenious in seeking ways to copy and ultimately ride on the back of the goodwill and reputation that client has acquired often at considerable expense and over many years. All too often these unscrupulous traders are able to copy the get-up of a well-known label and avoid trade mark infringement by simply using the get-up on their label but exchanging the word mark which forms part of the label. In such instances, clients recourse lies only on the basis of the common law action of passing-off which is a species of the general delict of unlawful competition. Proceeding under this cause of action is typically expensive, time consuming as well as being administratively unproductive in that sales figures, invoices etc. need to be accumulated in order to prove that a reputation resides in the subject mark. Accordingly, as part of the IP audit, one should scrutinise such labels in order to ascertain whether or not it would be prudent to file separate trade mark applications in respect of individual elements of the get-up of the label.

Ensure proper coverage

In most countries, a trade mark registration is renewable only after a fairly lengthy period of time has expired from the date that the trade mark was first registered, typically this is a ten year period. Moreover, a trade mark is usually registered at the time of a new product launch under a freshly devised trade mark. Accordingly, it is not uncommon for the goods and/or services originally marketed under a particular trade mark to change over a period of time. As a result such goods and services initially covered by an existing trade mark registration, particularly registrations that were filed years ago, often do not adequately cover the goods and services presently used and marketed under the trade mark. Thus, it is important to scrutinise very carefully the particular goods and/or services set out in the registration and compare these with the goods and services which are presently marketed and used by the company under the trade mark. In other words the position in the market place must coincide with the position as depicted ex facie the register pages. If any discrepancies are identified or if there are additional goods and services presently being marketed and used under the trade mark, it is vital that fresh trade mark applications are filed specifically covering the additional goods and services. Conversely, where the goods or services mentioned in the specification are no longer of commercial interest to the proprietor, then consideration should be given to suitably amending the specifications of these registrations as in some countries a defective specification may detrimentally affect the entire registration. In particular, if litigation were to arise the defective components of the goods and/or services of such subject registrations could well be vulnerable to attack on the grounds of non-use. In short therefore, the goods and services of clients existing trade mark registrations should be continually pruned and revised so as to ensure that they are healthy and appropriate.

Consider brand extension

Brand or line extension has become an increasingly common occurrence with regard to well known trade marks. It is a commercially effective way of exploiting the equity or benefits in a well known trade mark to other fields which the business may wish to enter. Consider the Caterpillar trade mark. Caterpillar is one of the world's largest manufacturers of earth moving equipment. The Caterpillar trade mark was first registered in 1910 in respect of such equipment for which it originally became well-known. Approximately 70 years later, the Caterpillar trade mark was registered in respect of a large variety of goods in various countries throughout the world including footwear. It may be argued today that the Caterpillar trade mark is known among more people in respect of its footwear that in respect of its earth moving equipment. Other well known examples of line extensions include Yamaha commencing with outboard motors and musical instruments including electronic keyboards, and even tennis racquets. Daewoo, from electrical appliances and fridge's to cars. Perhaps the best known example being Virgin commencing with and sojourning from records and trains to airlines, soft drinks and now gyms. Accordingly, as part of the IP audit, one must ensure that the trade mark has been registered in all the relevant classes of goods and/or services in respect of which the brand has been extended.

Compatibility

It is crucial to ensure that the trade mark and labels which form the subject of trade mark registrations are in fact the same trade marks and labels that are presently being used and marketed by the business. For example, in instances where a trade mark has been used over many decades, numerous subtle and incremental changes that have been made to the mark could well result in a substantial difference between original mark as registered, and the mark or label presently used and marketed.

Throw out the dead wood

One of the benefits of an IP audit, from a cost point of view, is that trade mark or patent registration/s in respect of marks or inventions which may become obsolete, will no longer be renewed. It is surprising how many trade mark registrations and patent registrations are renewed year after year even though the company has long since ceased using the trade mark or invention. In this regard, one must be careful not to cancel certain trade mark or patent registrations merely because the company is not using the trade mark or invention, as it may be worthwhile to keep such registration alive as a strategic blocking mechanism to competitors or in the event there is a possibility of the company resuscitating the use of such intellectual property at some stage in the future. If the latter is the case, careful note should be made of trade marks or inventions that are not being used and the duration of such non-use as non-use may be a ground for cancelling such registrations in a number of countries.

Look for other aspects of IP protection

When analysing each of the products of the company, apart from checking to see whether existing IP registrations adequately cover the product, one must also investigate the possibility of other types of IP registration which would provide optimum protection in respect of their product. While the word mark or label may well be the seminal aspect of trade mark protection, one should ascertain see whether there are any additional forms of trademark or other protection for the product. In addition, one should investigate whether or not there is a possibility of filing a container mark application, or a design registration, or perhaps a trade mark application in respect of the shape. Moreover, if the colours used are attractive and distinctive consideration ought to be given to filing (in addition to black and white) such applications in colour. When doing an international audit, careful note should be taken of new developments in the legislation of foreign countries. For example, in terms of our trade mark legislation, it is possible to file trade mark applications in respect of the shape of products. For example, the shape of the famous Weber Stephens grill now forms the subject of trade mark applications in South Africa. Computer software protection also forms the subject of a substantial amount of new legislation around the world and protection in this regard should be carefully investigated by software companies.

Review license and registered user agreements

Where a company licenses out its intellectual property it is of vital importance to ensure that the license agreement should be reviewed at the time of the IP audit in order to ensure that all the parties are correct that the termination and renewal dates have not expired and of course that royalty payments have been paid.

• The parties to the licence agreements must be reviewed to ensure that they are correct. All too often, in the course of corporate restructuring, important licence agreements are simply forgotten, meaning that an organisation finds that the parties who were the original signatories to the agreement are no longer the actual licensees or licensors.

• Termination dates and renewal dates in licence agreements should be reviewed so that the consideration to signing the new agreements can be undertaken.

• Annexures to licence agreements setting out the IP registrations which are licensed should be checked at the time of an IP audit so as to ensure that any new IP registrations that are licensed in fact form the subject of the actual licence agreement.

• Check to see whether or not royalty payments from all licensees are being paid. In international licensing arrangements which involve parties based in many countries, it is surprising how often a licensor is unaware that there are unpaid royalties emanating from some if its smaller licensees in more obscure countries.

• In international licensing arrangements, the requirement of registered user recordals should be carefully checked. In some countries, the omission of a registered user may well be fatal to a trade mark registration. Moreover, in certain countries like South Africa there are advantages if the licensee is recorded as a registered user.

Consider other forms of exploitation

It is often a convenient time for considering other forms of exploitation of your intellectual property at the time of an IP audit as the entire IP portfolio is fresh in the minds of the decision makers. This involves giving consideration to licensing opportunities locally and internationally. In addition, it should be borne in mind that intellectual property registrations are separable and transferable assets and it may be worthwhile selling such registrations in certain circumstances. Similarly, consideration could be given to purchasing IP registrations of other companies if they are commercially beneficial.

Consider plans for new product launches

Intellectual property audits should not be restricted to existing products. Careful consideration should also be given to future product launches both locally and abroad. As mentioned above we reiterate that it is an ideal time to consider, initiate and co-ordinate new trade marks and product launches at the audit stage since the entire IP portfolio is in the minds of the marketing division of the company and other relevant decision makers. Accordingly at this juncture searches should be initiated to ascertain whether the chosen trade marks are in fact available for use and registration prior to launch. Insofar as new inventions are concerned, inter-departmental mechanisms must be established so that new patent applications can be filed at the appropriate time so as to avoid the risk of destroying the novelty of any potential commercially important invention.

Establishing lines of communication

It has been our observation that perhaps the main benefit of regularly conducting IP audits, is that it establishes and solidifies lines of communication between the marketing departments and product development departments of a company on the one hand and the in-house or outside legal counsel of a company on the other hand. It is also imperative for all divisions to agree on the establishment of a "nerve centre" or focal point from where all IP will be consolidated and controlled from. As alluded to earlier in this article the IP audit should be concluded with a written report. The report should state clearly all the steps taken, the recommended future steps to be taken and all other observations mentioned above. The report can then be reviewed and assessed in the course of subsequent IP audits.

Conclusion

In summary we are of the view that attorneys with IP intensive clients should be fully familiar with the above mentioned benefits in order to ensure that their client's IP is effectively and comprehensively managed. In addition, there is of course a duty for them to inform clients of such benefits. In fact, without the proactive and concerted implementation of an IP management program, the risks of uncovering potential problems such as defects in ownership, title or discovering that IP rights are invalid and/or unenforceable are greatly increased. Without taking reasonable steps to minimise such oversights and serious mistakes the commercial success of your clients business could be torpedoed if the IP underpinning it proves to be fatally flawed and consequently of no value. Accordingly, we are of the view that the IP audit is a necessity and serves as an ideal tool to conduct, define and concretise intellectual property management in IP intensive business's.