INFORMATION & TECHNOLOGY LAW

The Intellectual Property Audit:
IP Audits and the Philosopher's Stone

By Jon M. Garon*
As published in Interface Tech News, December, 2001

Last month, my column focused on the need to conduct regular intellectual property audits as part of the organizational management of every modern business. These audits serve two discrete functions. The first is to properly manage the risk associated with creating and using intellectual property assets. This requires the company to determine which of its properties are being used by third parties without authorization.This also requires that the company identify what properties it may be using of third parties without proper authorization.

The second area of the audit sometimes appears more rewarding. Here, the focus is on the property owned by the company that has not been exploited at all, or, at least, not to its full potential. A thorough audit should help corporate managers identify new opportunities to exploit those assets the company already owns.

Through this alchemy, the corporate wizard can turn corporate liabilities into profit centers. Copyright infringers can be transformed into paying licensees, trademark misuse can lead to co-branding opportunities, and patents can be licensed across industrial boundaries. Despite these opportunities, most companies do not consider themselves to be creators of intellectual property. Most sell goods or provide services. Most do not spend ten percent of their budgets on research and development or fund abstract research in hopes of mining future patent rights. As a result, most wish to avoid the admittedly intrusive process of a comprehensive audit.

To overcome any reluctance to participate in a thorough audit, I am invoking the now legendary name of Harry Potter. Harry Potter, the fictional title character in a series of novels by J.K. Rowling and a major commodity of AOL Time/Warner should be familiar to anyone who rears a child over the age of seven, or who was once such a child.

Harry Potter has worked his magic on Warner's corporate strategy. Unlike previous management for assets like Batman, where the choice to create sequels was not negotiated in advance, the company has recognized that it must strategically develop the Potter brand to maintain its allegiance with the millions of fans of the novels while fueling a new fan base from the film and merchandizing rights.

To accomplish this goal, Warner has reduced the number of product licenses available in contrast with most typical family films, limited the number of special events involving the cast, and utilized only those co-branding opportunities that enhance the long-term value of the brand, rather than exploit the greatest short-term revenue. For example, eschewing millions of dollars in revenue and free publicity, Harry Potter will not grace any Happy Meals or other fast-food tie-ins.

The Harry Potter marketing stems from the audit of prior properties and the lessons that have been learned from those opportunities lost. Some lessons are obvious. Given the choice between creating a single film or a franchise of three or more movies, studios want sequels. They recognize that the goodwill of prior films reduce the marketing costs of future product. At Paramount, the Star Trek franchise illustrated the principle that a poor reception of one product will not cripple the entire franchise. Despite the lackluster response to the fourth Batman, Warner will eventually recognize its untapped value by returning to the series. Harry Potter has seven years at Hogwarts School for Witches and Wizards, so Warner purchased the right to develop seven films.

Applying this lesson to the mundane (or muggle) world, the intellectual property audits can be used to identify those goods or services that can be transformed into "tent-poles," the central supports for entire brands or divisions of products or services. The audit should be used to help identify where additional goods or services can be created with higher marginal profit by boot-strapping on existing intellectual property and good will.

A second lesson is the opportunities for expanding corporate boundaries. Software provides a good example. Software may be viewed as either a good or service, depending on whether the primary income is generated from the computer code or the personal services involved in using, updating, and managing that code. A good, low-priced product can generate significantly more revenue by creating add-on modules. Modules may also encourage consumers to purchase product updates, buy upgrades, or otherwise transform a single purchase into a long-term revenue stream.

A third lesson is that goodwill must be managed and developed carefully. Some copyright and trademark infringements are done by individuals and companies intending to enhance the product rather than take advantage of it. The audit should be used to identify these parties and provide a tool to assess when it is appropriate to license the use, and when it is appropriate to take legal action or technological measures to stop the infringement. Additionally, a third party use of the company's intellectual property that suggests that an additional market exists for the intellectual property. If a license cannot be arranged with that infringer, it may be possible to arrange one with a competitor of the infringer, generating new revenue, strengthening the legal action against that infringer, and eliminating the infringement, all at the same time.

The last lesson taught by Harry Potter is to audit not only the internal activities, but also the marketplace. Most U.S. readers know book one as Harry Potter and the Sorcerer's Stone. The British word "Philosopher's" was replaced in the U.S. title, so that the book made a more direct connection with the audience. (Fewer ten-year-olds read books about philosophy than about magic.) The consumer's interest changes over time and geography. Choices for trademarks must be re-evaluated continually against the changing marketplace to keep the trademarks as effective as possible.

Harry Potter serves as a fantastic lesson in the strategic development of intellectual property. Every corporation can follow his lead to identify those secrets where new opportunities may be lurking, and avoid the hidden dangers that might otherwise exist. Enjoy the movie and the audit.

This article is Part II in a series. See Part I: The Intellectual Property Audit: A Treasure Hunt for Hidden Corporate Assets

*Jon M. Garon is admitted in New Hampshire and California.

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