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A pragmatic approach to intellectual property (IP) audit for start-ups
Dr Qi Zhang
Dr Qi Zhang

It is widely accepted that intellectual property (IP) is one of the core assets of start-up companies. However, the multiplicity of IP rights make it difficult for start-up companies to have a clear idea of what IP rights they do or do not have. For example, patent and designs are different IP rights in Australia and many other jurisdictions, but they are often treated as the same thing by start-up companies. Another common misconception is that a patent will be granted so long as a patent application is filed, which leads to the interchangeable use of two different terms, patent and patent application. These misunderstandings of IP rights might result in misstatements of their IP position in internal and external documents. Therefore, it is necessary to conduct an IP audit to identify existing and potential IP rights and determine their status for IP management and commercialisation purposes.

Unlike established businesses that normally have their IP activities documented in detail by experienced staff, most start-up companies do not have a detailed record of their IP activities. This means the traditional questionnaire-centered IP audit approach will not work because the questions may not be interpreted properly, and the answers may not be accurate due to lack of IP experience and valid IP record. Given the unique status of start-up companies, we have adopted a pragmatic approach (or PDS approach) to IP audit for start-up companies, which involves more interactions between the auditor and the auditee and more proactive efforts from the auditor. This approach includes three major steps: Personnel interview (P), Document review (D), and Search (S).

1. Personnel Interview (P)

The PDS approach starts with a personnel interview in which we interview the key personnel of the auditee, e.g., the founder(s) of the start-up company. The goal of the interview is to have a full understanding of their IP activities. However, we do not ask the questions in a traditional questionnaire full of IP terminology that could confuse the auditee. Instead, we speak their language. We discuss the business activities and core technologies of the start-up company in detail with the interviewee(s) to understand how the business is operated and the role of the core technologies in the business. We also investigate the corporate structure of the start-up company to identify the entities that may contribute to and/or benefit from the business activities.

The business model of a start-up company is usually straightforward with the core technologies focusing on a particular product or service. Corporate structure is also, normally, not as complex as an established business. As a result, the interviewee(s) is able to provide the related information with meaningful accuracy and completeness, which can be enhanced by Step 3. The information gathered from the interview is extremely helpful in (1) identifying and categorising the IP assets generated from the business activities, for example, patent, trade mark, design, copyright, trade secret, etc.; (2) determining the status and ownership of the IP assets; (3) assessing IP-related risks.

2. Document Review (D)

Document review includes a review of official IP documents and commercial IP documents. The official IP documents are documents submitted to official IP authorities, including patent specifications, trade mark specifications, design drawings, written communications with official IP authorities, etc. The commercial IP documents are documents related to IP assets arrangements between parties involved in the business activities and the corporate structure of auditee, including IP assignment/license agreements (including open source licenses), shareholder agreements, employment agreements, contractor agreements, service agreements with members of Board of Directors and/or Advisory Board, program agreements with start-up incubators, business coaches, etc.

We review the official IP documents to preliminarily assess protection scope and robustness of the IP assets, while the review of the commercial IP documents is more focused on the ownership of the IP assets. In practice, it is quite common that the start-up company has self-filed patent, trade mark or design applications to save IP costs. However, these self-filed applications are normally problematic in terms of protection scope and robustness. We will identify the risks associated with the protection scope and robustness of the IP assets and propose an appropriate solution to eliminate or mitigate the risks.

Ownership issues associated with IP assets are often not properly dealt with. Generally speaking, the company can only claim the ownership of IP assets if the IP assets have been properly transferred to the company in writing, which unfortunately is often overlooked. A typical situation is where a start-up claims ownership of a patent or patent application filed by the founder(s) of the company, but the patent or patent application was never transferred to the company from the founder(s). Such ownership risks need to be identified and addressed as soon as possible.

3. Search (S)

We conduct an Internet search and an IP database search to enhance the accuracy and completeness of the information provided by the interviewee(s) in the personnel interview. The Internet search is to identify the auditee’s business activities that might be relevant to their IP position, for example, appointment of Board member or senior management officer, fund-raising events, product launch events, new business partnership. Combined with the information provided by the interviewee(s), we can develop a full picture of how the business is operated and which parties are relevant to the IP assets. We also search official IP databases, e.g., patent databases, trade mark databases, design databases, to locate the official IP records of the IP assets, which is particularly important in determining the status and ownership of the IP assets.

As you can see, our PDS approach to IP Audits, allows us to quickly develop a comprehensive understanding of the IP position of the auditee to clearly and correctly identify and categorise its existing and potential IP assets. We do this without an overly burdensome approach and are able to clarify scopes of protection, robustness, ownership, status and associated risks of the IP assets in the course of the audit. In this way, we are able to deliver an IP audit report with understandable and actionable advice.

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About the author
Dr Qi Zhang
Principal, Patent & Trade Mark Attorney
Dr Qi Zhang is a patent and trade mark attorney specialising in mobile communications, electrical engineering and software. Qi is based at Baxter IP's Sydney Office.

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