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The term “technology audit” is often used to mean a cataloging of a company’s intellectual property assets in contemplation of an acquisition or other asset transfer. It is used here in a materially different sense: to assess a company’s intellectual property goals, and the internal management structures charged with formulating and implementing them, to more sharply focus the former and to align and tune the latter to better achieve their purpose. Audits of this type are not new, but I believe they have taken on particular urgency given three factors: (1) the generally accelerated pace of technological change, including the Internet and other disruptive technologies; (2) the resultant acceleration in the pace of corporate organizations; and (3) recent sea changes in intellectual property protection, particularly those impacting electronic commerce. All three factors tend to bring rapid obsolescence to a company’s Intellectual property strategy and its mechanisms for effecting that strategy. Periodic audits can keep them effective. Exemplary of the third factor is the State Street [FOOTNOTE 1]decision of the Federal Circuit in July 1998, striking down the 100-year-old rule against patents on business methods. It has prompted an explosion of filings for business method patents as well as an outpouring of opinion from economists, lawyers, pundits and leaders of the dot-com world. The U.S. Patent and Trademark Office estimates that 1,300 applications for business method patents were filed in 1998, and 2,600 in 1999. Six hundred of them issued in 1999, reflecting the level of filings about two years earlier. The Internet either has or will force virtually every company to confront profound changes in the ways it does business, and many of those changes will likely run smack into one or more of these business method patents. Thus, while an intellectual property strategy was, in past decades, of interest almost exclusively to technology companies, today it is a must for almost all companies. Some have focussed sharply on intellectual property as the basis for their business strategies. Others have been left behind, without a coherent strategy for responding to, let alone taking advantage of, the new environment. It is these companies that could benefit most from an intellectual property audit, the purpose of which is, in short, to recalibrate a company’s intellectual property strategy and to tune and modify its procedures to best implement that strategy. An audit should include consideration of all types of intellectual property, but this article will focus on patents in order to more simply convey the concepts involved. First to be considered is the adoption of a strategy and the management of its execution, followed by the way in which an audit is conducted. ADOPTING A STRATEGY Developing a strategy is something unique to each company, and a detailed treatment of the process here would not be useful. It should, however, take into account: the company’s business environment; its goals and competition; where both the company and its industry are heading in the next five years; budgetary constraints; and management organization and style. It begins with an assessment of how rights or obligations under intellectual property laws can impact the company. Relevant questions include how building a patent portfolio can improve your competitive position, what defensive measures need to be taken, what are your competitors (present and future) likely to do, and how much the strategy will cost. Start-ups, by way of example, almost always face a shortage of funds and personnel to deal with an intellectual property strategy, but need at least to consider what options they have with respect to one, when they will get around to it, and the consequences of not doing so sooner. Many start-up dot-coms are founded on a business method patent and perhaps could not exist for long without its protection. They thus have some intellectual property strategy, albeit one that likely needs revisiting as the company and its market change. Others are based upon a perceived market opportunity and proceed with no thought to the possible benefit of seeking patents, or the possible detriment if one were to issue to someone else. In addition to the dot-coms, established companies in the financial and media fields are exemplary of those that have had to confront significant changes in the laws as well as in their business environment. Financial companies were alerted directly by State Street, which legitimized patents for financial instruments, and a number of them have since developed strategies to deal with their changed environment. Media companies have been impacted because of the migration of value from content alone, where it used to be, to now include the software needed to reach its audience, for marketing and distribution and for electronic formats for content as well. The basic touchstones for formulating a patent strategy have not changed; patents are desirable (1) to protect your important products and services by keeping others off your turf; (2) as a basis for helping to distinguish your products and services from those of others, in litigation and also competitively; (3) as trading chips, to have something to bargain with when the inevitable accusation is received that you are infringing someone else’s patents; and (4) as a vehicle for licensing or selling valuable technology or ideas that you develop but do not necessarily want to use or keep to yourself. Yet formulating a strategy in light of those touchstones is an exercise highly individual to each business entity. It could be as simple as deciding to publish, as a defensive measure, all of one’s own business methods in order to prevent someone else from monopolizing them based on a subsequent patent application. Or it might be deciding to monitor domain name registrations to be able to contest any that conflict with yours. (Most companies routinely register their trademarks as domain names, but some are unaware of their rights under trademark laws, or the scope of protection they commercially need against similar registrations by others; or even that a domain registration is different from a trademark registration.) MANAGEMENT STRUCTURES A company’s organization for executing its intellectual property strategy must be compatible with its overall management structure and style. While a truism, achieving the necessary compatibility is often a major part of the challenge. For example, when most inventions were generated by corporate engineering groups like G.E.’s in the 1950s, all personnel kept laboratory notebooks to record any novel concepts, and the standard model was for a staff of in-house patent lawyers, who routinely contacted the engineers, often through the intermediary of assistants who functioned as a kind of patent engineer, to process the inventions through to patent. The organizations that spawn patentable developments today tend to be much more diverse, and resist yesterday’s management structures. Even for organizations characterized by a large number of engineers as the source of protectable intellectual property, different models are needed due to technological changes, primarily the ubiquity of computers and the changed work habits of their users. A management structure typically requires, at the very least, one or more people in the role of assistant engineers, to help pry potentially valuable developments out of those likely to come up with them, and an intellectual property committee that meets periodically to make necessary decisions relating to managing the company’s intellectual property. Such decisions may include which inventions to file on (both domestic and international), consistent with the company’s strategy and its budget, what pending or issued patents to abandon, and how to motivate employees to disclose inventions. PERFORMING THE AUDIT The audit should typically include both those parts of the organization generating intellectual property and those managing it. It should be performed by an outside firm, generally a law firm which specializes in the area. Such firms usually have experience with the workings of a variety of research and development facilities and will be familiar with the current legal climate and its likely impact on a particular company. The audit should be conducted by a small team, usually no more than two or three people. This assures that their personal impressions gained in the audit process are carried through to their final conclusions and recommendations and are not attenuated by administrative complexity in the process itself. Written notice of the audit should go to all employees who may be involved in it. The notice should state the purpose of the audit, emphasizing the benefits expected for the company and the employees. This will also allay fears normally attendant to the presence of strangers asking unusual questions. It should also state management’s policy that the views expressed to the auditors will be kept in confidence, thus assuring full and candid disclosure. The auditors should secure a complete understanding at the outset of management’s concerns and questions to be addressed in the audit and of the company’s organizational structure. Interviews should then be conducted with all of the engineering, legal and liaison staffs responsible for securing and processing invention disclosures, key people in management of research and development, and representatives of other management groups dealing with, e.g., technology acquisition, acquisitions generally, licensing, and personnel. The scope, structure and sequence of the interview process necessarily depends upon the particular corporate organization involved. The auditors’ conclusions are then presented to management in writing, the goal being to provide a comprehensive picture of the company’s process of capturing and protecting technology. Several broad aims should be kept in mind. One is to assess the company’s practices with respect to acquiring patents and their effectiveness in supporting its policy. Another is to evaluate the level of professional services rendered by the legal staffs, and the perceived satisfaction of the legal, business and research staffs, each with the services or participation of the others. The benefits of an audit extend far beyond a simple check on the adequacy of legal procedures for processing invention disclosures. Their value can be illustrated by exploring some of the specific inquiries and analyses that it may include. EXEMPLARY AREAS OF INQUIRY One primary focus of the audit, the procedures for collecting and processing invention disclosures, includes the practices for recording the progress of development work, and of reviewing and maintaining those records. They are essential to support the company’s patent portfolio; establishing the dates when an invention was conceived and diligence in reducing it to practice. It is equally important to ascertain the level of awareness by scientists and management of the uses and import of these records, without which they cannot be adequately kept up. Computer records in particular must be tailored so that they can provide proof of invention under applicable legal standards. At the same time, the engineers’ compliance with their employment contract obligations should be explored. An audit often brings to light facts concerning whether the engineers’ perceptions of whether they are fairly rewarded and motivated to disclose ideas to the company are consistent with those of management. Sometimes the ethic is that if an idea is valuable enough, the employee may avoid disclosure and take the concept elsewhere for his own gain. Perceptions inconsistent with those of management can be better dealt with once their dimensions are known, as can the desires sometimes expressed by engineers for greater recognition or reward for their contributions. Most companies have programs for rewarding inventive contributions, and these can be productively assayed based upon the perceptions of those whom the rewards are intended to motivate. An audit should also probe employees’ practices with respect to identifying and protecting proprietary information, including whether they are adequate and whether employees need education in those practices. A related area of inquiry involves legal clearance procedures for professional papers and publications. These procedures can impact patent, trade secret and personnel issues. A good clearance procedure must balance the engineers’ professional desire to publish and management’s desire to defer or avoid publication in order to protect technology. The audit should give management insight into how well these competing considerations are balanced so that any needed adjustments may be made. The company’s intellectual property committee (or equivalent groups) needs to be examined in terms of its effectiveness from the point of view of the engineering staffs. The resultant information can be useful for increasing the number of inventions captured per unit cost, and better serving and motivating the engineers to disclose them. In some highly creative environments the engineers and programmers are so focussed on getting out new products that they pay little attention to disclosing inventions and even less to writing them up. An audit can address those problems. Internal procedures for prosecuting patent applications must also be carefully assessed to assure disclosure to the U.S. Patent and Trademark Office of all relevant prior art known to the company. Otherwise, a court may hold the patent unenforceable by virtue of such nondisclosure, potentially a very costly error. Employee hire and exit procedures are additional areas of fruitful inquiry, as are the company’s procedures for identifying and controlling access to its trade secrets and related technology. Each state has its own laws affecting employees’ obligations with respect to inventions and trade secrets; questions of which state’s laws are applicable are not always easy to resolve. It is usually better to adopt procedures and practices which satisfy all state laws rather than trying to figure out which are applicable. Programs for ongoing education of scientists and managers in the field of intellectual property can also be evaluated, as well as perceived needs for more or different educational programs. Still another important focus is the possible infringement of adversely held patents by the company’s planned commercial activities. The strengthening of patent rights that has occurred over the last 15 or so years is a two-edged sword; it requires better defensive procedures as well as affording better offensive opportunities. Awareness by the company’s planning, manufacturing and marketing functions of the need for early legal involvement in developing new products and processes can be critical. It usually makes no sense to wait to check on possible adverse rights until after a new product has been cast in stone. If such rights are identified early in the development process, modifications can usually be made so as to avoid exposure to serious liability or high costs of changing a product ready for market. On the other hand, the specific design of programs to clear new products is highly dependant on the company’s business. In the pharmaceutical field, a drug is usually protected by one or at most a few patents, while in software, the other end of the spectrum, each product often has hundreds of features that might possibly infringe someone’s patent. This makes the cost of clearing software much higher. A company’s ability to balance risk against cost in its clearance procedures should be examined in the audit. CONCLUSION It will be apparent that a periodic intellectual property audit can provide valuable feedback to management on innumerable aspects of the functioning of its research and development groups and on the company’s overall effectiveness in identifying, protecting and exploiting technology to maximum advantage. A periodic evaluation is also useful to the specific departments involved, as a tool for self-evaluation and correction. It can be a useful exercise even if the audit report confirms that everything is optimal and no changes need be made. The report may be used as a basis for a departmental seminar devoted to self-evaluation. It may also become a model for a periodic “self-audit” that can be done by the company’s legal department. ::::FOOTNOTES:::: FN1 State Street Bank and Trust Co. v. Signature Financial Group, Inc.(149 F.3d 1368). Barry D. Rein is a partner at Pennie & Edmonds LLP, where his practice focuses on litigating intellectual property matters and counseling clients in the fields of computer technology and electronics.

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