Should Your Business Conduct an IP Licensing Audit?

Entrepreneur.com ran an article this month, which advised business owners to practice "preventive lawyering" or "litigation avoidance" by conducting audits in some key areas of the business such as contracts and intellectual property.

I agree with the advice in this article. Regardless of their size, businesses need to conduct a periodic review of their operations to see where they might be at risk for lawsuits, and they need to retain attorneys to assist with that review.

What would you be looking for in such a review?

From an IP licensing perspective, you would first and foremost be concerned about possible infringement of a third party's intellectual property. Are you using a third party's intellectual property, and if so, do you have a license in place that gives you the rights to utilize the third party intellectual property in the manner you are using it for? If you have licenses in place, are you performing according to the terms of those licenses, including paying the correct amount of royalties?

Beyond just looking for potential infringement, however, there are other issues that you will likely want to be look for in a review. First, you will want to confirm that all of your intellectual property has been identified and is adequately protected. Second, you will want to confirm that you actually own all of the intellectual property you think you do and that you have the documentation in place to establish your ownership. Third, you will want to confirm that no third parties are using your intellectual property, and that if they are, that they are using that intellectual property pursuant to a valid license agreement. Finally, you will want to confirm that your license agreements are well-written and that licensees are performing all of the terms as set forth in the agreements.

Then, assuming you do in fact have licenses in place, you may want to take the next step with your audit and actually conduct an audit of your collections of royalty payments. As I wrote in my California Biotech Law Blog, a significant amount of royalties are often left on the table uncollected due to ineffective licensing compliance programs. Thus, you may find it very financially worthwhile to conduct an audit of the licensing compliance program in order to confirm that your program is not leaving significant money on the table, too.

Of course, if your business already has a general counsel or an IP counsel in-house, the chances are good that your legal department already conducts such reviews on a routine basis--this job is a typical function of such legal departments. However, in the event that your business is not yet large enough to have its own legal department, then it makes sense to consider launching such a review and conducting those reviews on a regular basis--regardless of whether your business is a one-person sole proprietorship or a larger company having several hundred employees.

All in all, I definitely agree that a little "preventive lawyering" on IP licensing issues can save easily save you thousands and, in some cases, even millions of dollars. Clearly, it can prove to be an excellent investment in your business.