Intellectual property (“IP”) infringement is a significant challenge facing the United States economy.  According to the U.S.Government:

  • The IP generated by U.S.companies is critical to America’s prosperity and leadership in the global economy.  IP makes up more than half of all U.S. exports, driving 40% of the country’s growth  (U.S. Department of Commerce);
  • IP theft costs the U.S. economy $250 billion per year and has resulted in the loss of 750,000 jobs (FBI and the U.S. Customs and Border Protection Services);
  • Approximately 7-8% of world trade every year is in counterfeit goods. That is the equivalent of as much as $512 billion in global lost sales (International Trade Administration, U.S. Department of Commerce);
  • IP theft poses a risk to all industry sectors.  The industries most commonly affected by IP theft include manufacturing, consumer goods, technology, software, and biotechnology organizations, including pharmaceuticals (International Trade Administration, U.S. Department of Commerce).

Irrespective of the industry or line of business in which a Company operates, determining the magnitude of the risk of IP losses that a company faces is a useful level-setting exercise.

In support of the critical review of IP asset controls, the following is a checklist of some possible management controls over IP assets which have been observed in practice:

  • Are physical security measures taken to limit access to the IP assets?
  • Are key electronic documents protected with passwords and access codes?
  • Are access controls in place not only to limit access, but to record the identity of individuals who are provided viewing and access privileges?
  • Are those who do access the IP assets subject to appropriate Non Disclosure and Confidentiality Agreements?
  • Are employees provided with training concerning the Company’s IP assets?  Does the training include segments about the threats of economic espionage, IP theft, counterfeiting and piracy?  Do such employees have to periodically acknowledge their awareness of the duty to preserve confidentiality?  Are similar procedures used for third party contractors or vendors as well?
  • If IP assets are stored electronically, is access to such assets limited in nature and documented and controlled?  If on a network, are there appropriate network security technologies to prevent hacking (i.e., firewalls, intrusion detection, encryption, authentication devices, etc.)?  Is all access logged?  Are portable storage devices prohibited from premises?
  • Are all documents clearly marked with “Confidential” and “Proprietary” designations?  Are there written document control procedures in place to limit access and to record the true identity, date, time and purpose of individuals who are afforded access?
  • Are new employees subject to a pre-hire background checks?  Is an exit interview conducted upon termination of employment to remind employees of their obligation not to disclose any protected information?
  • Are prospective business partners and third party affiliates subject to background checks and due diligence reviews of their business practices?
  • Do IP licensing agreements contain appropriate restrictions on usage as well as the Non-Disclosure and Confidentiality provisions?  Do they contain a right to surprise audits?
  • Are “work for hire” provisions incorporated into employment agreements and other contracts and are they being followed?  Does the Company obtain assignments of copyrighted works (i.e., blueprints or software) from consultants and independent contractors?
  • Have all copyrights and trademarks been registered with the U.S. Patent and Trademark Office?

Background checks and employment screening are essential steps for companies concerned about the unknown dimensions of a potential acquisition, new hire, business partner, client or other commercial relationship.  While most would agree that these due diligence activities are intended to reveal prior criminal activity, some other findings which may be a precursor to the risk of future IP asset losses include undisclosed related-party transactions, misrepresentations or omissions in pre-employment communications, unreported financial difficulties, illegal or unethical business practices, undisclosed legal proceedings, questionable associations or relationships, trade with controversial entities, embargoed countries and the like.  If it is possible to prevent the formation of a business relationship that may lead to future IP asset misappropriations, the minimal cost of such background checks and employment screening may be the best investment yet.

For further information on a program of management controls over Intellectual Property assets, please contact