The Importance of IP Audits: Top Five Ways to Lose Investment

Congratulations! You’ve just bought your first Intellectual Property (IP) portfolio – it holds the key to untold possibilities in innovation, value, and growth. It cost a fair bit, so it must be good! Right…? There’s a lot of “stuff” included – do you know what it all is? Do you understand what you’ve acquired and its potential?

Investing in innovation is investing in the core heartbeat of a business, a cornerstone of its valuation. Yet, surprisingly, many investors find themselves navigating uncharted waters, uncertain of what exactly they’ve invested in. With significant sums on the line, blind trust in a business’s claims isn’t an option. It’s imperative to delve deep and scrutinize the promised innovation, ensuring it’s protected by a robust Intellectual Property (IP) strategy, that the business owns its IP assets, and that these align seamlessly with the overarching business objectives.

Time and again, we’ve witnessed investments turn sour or fall short of anticipated value due to flaws within the IP portfolio or mistakes in the IP strategy – an avoidable outcome had these issues been addressed before the investment. As we will see, problems in an IP portfolio can even endanger IP worth hundreds of millions of dollars.

In this article we will explore the Top Five Fails commonly observed in a business’s IP, each flaw impacting the overall investment value, yet all easily discoverable through an IP Audit.

1. The IP is not Relevant to the Core Business Offering

A significant number of granted patents and pending applications might impress, but the true value lies in ensuring every aspect of the IP is serving the business optimally or whether the portfolio needs strengthening – a critical evaluation that shouldn’t be overlooked.

It is not uncommon to find patents providing protection that no longer aligns with the current product being marketed. Technology evolves, and consumer demands drive product alterations over time. Questioning the relevance of such patents becomes crucial. If a patent creates barriers for competitors, keeping the patent alive remains strategic for staying ahead. However, if the patent lacks relevance to the current market or offers no barrier to entry to competitors, its actual value becomes debatable. Redirecting resources towards IP that aligns more closely with the business’s growth trajectory might prove wiser.

Whilst protecting the core product should be the priority, it is important not to lose sight of supplementary components or features of the core product that provide additional sources of revenue. Such components or features typically relate to replaceable components of the core product or accessories to provide additional, complementary functionality alongside the core product. It is often the case that these supplementary components or features of the core product often remain inadequately protected, leaving potential vulnerabilities. For example, a third party may be able to supply replacement components or release their own line of complementary accessories. Not having the patent protection in place to stop said third parties inevitably results in lost revenue streams.

Considering the global scope of operations within the business is also vital. IP rights are territorial meaning that IP rights in one country do not have any effect in another country. Competitors operating in countries not covered by the IP portfolio are therefore unaffected by IP rights making up the portfolio. As an example, having IP rights in the manufacturing country alone may prove insufficient if products are sold elsewhere. A strong IP portfolio spanning crucial territories along the entire supply chain is indispensable for comprehensive protection.

Protecting inventions through patents is a robust form of IP protection, but it is important not to lose sight of other valuable IP rights which can provide protection for the business from different angles. In a world where products are identified by their unique names and captivating designs, trademarks and registered designs must evolve in tandem with the business’s expansion to maintain relevance and safeguard brand identity.

2. The IP is not Enforceable

While IP offers the valuable advantage of enforcement, its practical enforceability often poses challenging. In many instances, the IP might lack enforceability altogether or might inadvertently target unintended parties.

Consider a patent covering both a product and its method of use. Such patents, while intending to protect the product, may inadvertently implicate end consumers who use the product as intended, thus infringing the method. This common oversight often arises due to poor drafting resulting in a patent providing inappropriate protection for the product in question. We see this, for example, in patents for electrical components or chargers. These patents might cover the product when connected to a power supply, and so become non-infringing the moment they are unplugged whilst putting the end user, the intended consumer, inadvertently in the scope of infringement during use.

Similarly, patents related to “vehicle” components, say for aircraft or marine vessels, can present challenges in enforcement. Specifying components based on altitude or specific operational conditions creates difficulties in practical enforcement. For example, a patent providing protection for a component “at altitudes between x ft and y ft” is of little practical use because this can only be infringed in flight, at specific altitudes, and is easily avoidable by flying outside these altitude ranges. Jurisdictional questions arise during transit through different airspaces, complicating the pursuit of infringement cases.

Another common issue is for patents to protect only very specific implementations of an invention, down to the last bell, whistle, and widget. Such patents can be effectively unenforceable because it becomes trivially easy for a competitor to circumvent them.

Ultimately, the value of IP to a business diminishes significantly if it cannot be meaningfully utilized or enforced. Understanding the pitfalls of enforceability is crucial in assessing the true impact and potential of IP assets.

3. No Freedom to Operate

Acknowledging the significance of a company’s IP is imperative. However, it’s equally crucial to recognize the impact of third-party IP on the ability of technology covered by the IP to be commercialized.

It is often forgotten that patents are negative rights – they function as deterrents, permitting the prevention of specific actions by others. Yet, they don’t inherently grant the freedom to undertake those actions oneself. Possessing a patent for a product doesn’t guarantee its sale if it infringes upon third-party IP.

For some investments, conducting a comprehensive search across key commercial regions may be essential, at least to ensure a smooth market entry for products. Identifying potential clashes between a core product and existing IP rights early on is paramount. This foresight allows time to either adapt infringing products before launch or to secure suitable licenses pre-emptively, mitigating any potential infringement claims.

Consideration must extend beyond primary selling territories to encompass future expansion markets within the upcoming years. Moreover, it’s critical to factor in regions involving manufacturing, storage, and distribution. Neglecting these aspects risks supply chain disruptions at international borders.

Similarly, crafting a business brand, including the name and any accompanying logos, demands substantial time and effort. Encountering a pre-existing trade mark of the same or similar brand is detrimental to building a recognisable brand if rebranding is needed, risking any market share already acquired under the original brand.

Even if an IP portfolio seems to be strong, freedom to operate issues can prevent this IP being effectively monetized. Investors should therefore consider how freedom to operate issues may affect the value of their investments.

An IP portfolio’s true worth lies in its ability to be effectively monetized. IP that remains unexploited commercially significantly depreciates in value compared to IP that’s strategically leveraged for maximum financial gain.

4. Ownership Issues

Understanding the ownership of the IP of a company or business you plan to invest in is a must. Do you know if the IP is solely or jointly owned by the business? Can the business freely license or enforce its IP? These crucial questions demand answers before investing to pre-empt potential pitfalls.

An inventor of patentable technology is by default entitled to the rights in any patent resulting from that technology, and so it may be the case that the business is not actually entitled to the relevant IP rights. During the research and design phase, external contractors or consultants often contribute towards the final product, and so rights may lie with these third parties rather than with the business. It is important to ensure that those rights are assigned to the business in a written assignment agreement so that the business has the right to exploit the IP.  Without formal agreements in place, ownership of the final innovation might not belong entirely to the originating business.

Changes in ownership due to mergers, acquisitions, or agreements also require comprehensive documentation to avoid ownership confusion or disputes that might arise later. In particular, joint ownership of patents can spark conflicts in licensing, commercialization, and decision-making. While each owner can independently sell or license the patent, exclusive licenses require consent from all owners. Similarly, enforcement of a jointly owned patent requires the participation of all owners in a lawsuit. If a co-owner refuses to participate, the lawsuit cannot proceed. In certain scenarios, a co-owner might license the patent to an accused infringer rather than join legal proceedings.

Investing in IP requires clarity on rightful ownership. Failure in properly transferring IP to the business can create uncertainty. Knowing the accurate IP owners becomes vital for sound investment decisions. Establishing ownership is therefore essential before investing in IP.

5. Invalid Priority Claim

The concept of claiming priority – where a second application filed within 12 months of the first may inherit the earlier date for determining prior art – is easily overlooked when valuing an IP portfolio. This mechanism allows a second application to inherit an earlier effective filing date, meaning that intervening disclosures in that 12 month period that would otherwise be used in assessing the patentability of an invention are not taken into account. If that priority claim is later found to be invalid then those intervening disclosures will once again become relevant and could invalidate the patent.

However, relying solely on assumed validity of a priority claim can prove disastrous.

A recent high-profile case at the EPO (related to a CRISPR patent dispute) highlighted the perilous consequences of assumed priority claims. In this case, it was determined that the priority claim wasn’t valid, due to a lack of right to claim priority, shifting the filing date to a later point than the other company. Consequently, intervening prior art became relevant in assessing patentability, leading to the revocation of the patent.

Although in more recent developments the EPO has taken a more lenient approach to acknowledging priority rights, the outcome of this particular dispute had significant implications in who holds the key patents to that technology and therefore significant control over the technology’s commercial and research applications. Given that licenses to CRISPR patents have been valued in the hundreds of millions of dollars, a mistake of this magnitude represents a significant blow to the valuation of the portfolio. Subsequent impacts on licensing and commercialization have the potential to cost millions, even billions, in lost revenue.

Therefore, even seemingly straightforward issues such as patent priority claims are not something that should be considered at the start of the process and then forgotten about. It is essential to check the validity of any priority claim in IP that you are considering investing in.

Summary

Discovering that an IP portfolio requires a little tender loving care isn’t uncommon. It’s not the discovery that’s problematic – it’s neglecting to identify it early enough to take the necessary steps. The crux lies in the failure to assess the present state of your IP and its potential for maximal utilization.

Businesses and investors often stumble when they bypass the crucial step of evaluating their existing IP’s potential. Opportunities to amplify its value can easily be overlooked or left untapped if suitable knowledge of your IP is not obtained.

Remember, IP Audits aren’t just a one-time checkbox at the beginning of an investment journey; they’re a consistent process, an ongoing assurance that your investment is tirelessly working for you.

At GJE, we’ve honed our expertise in conducting IP Audits, ensuring your IP investment is a wise one. Please find my contact details on my web profile here or contact us at gje@gje.com for more information on how to set up an IP Audit, ensuring your investment remains a smart and forward-thinking one. Let us help you avoid your own multi-million-dollar mistake!