Intellectual Property as a Business Asset: Need for IP Audits in Kenyan Enterprises

By Perpetua Mwangi
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Tangible assets have long been used to assess the value and determine the competitiveness of any enterprise in the market place. It is thus inconceivable for any enterprise not to have a list of its tangible assets. Over the years, there has been a paradigm shift as a result of the growing importance of the knowledge economy and dominance of information technologies revolution. This shift has seen intangible assets significantly become more valuable than tangible assets.
According to Forbes 2015, the current leading brand is Apple with an estimated brand value of $145.3 Billion, with brand revenue of $182.3 Billion.
For any going concern today, assets may be broadly divided into two categories; Tangible assets which includes machinery, buildings, land, current assets and intangible assets.

Enterprises are pools of intangible assets including intellectual property (IP) which may be identified through:
• Registered Patents, Trademarks & domain names, Utility models and Industrial designs;
• Copyrights;
• Licensing and franchise agreements;
• Distribution agreements;
• Non-compete/confidential agreements;
• Trade secrets;
• Databases;
• Geographical indicators.
Earlier in the year, it was reported that RadioShack was making plans to close its stores. Radio shack (formerly Tandy Corporation) founded in 1921is an American electronic retail chain. For decades since its formation, it had been the go to place for buyers of electronics making it one of the most successful electronic retail stores in America. It is stated that the advent of on-line commerce eroded this chain store by diminishing its customer base thereby affecting its bottom line. In February 2015, the company sought to liquidate itself by filing for Chapter 11 protection under the United States Bankruptcy law.
The rise and fall of RadioShack saw the bankruptcy court approve a $160 Million base offer by Standard General. Such offer for acquisition however did not include rights to RadioShack’s Intellectual Property. Hilco Streambank an advisory firm that specializes in valuation and sale of intangible assets, monetization, IP management and marketing for businesses announced that it had successfully completed efforts to liquidate certain intangible assets belonging to RadioShack.
A two day auction saw a winning bid of $26.2 Million by General Wireless Operations Inc. The sale that closed on 19 June 2015 and other separate sales of rights to trademarks in Mexico, Latin America, the Middle East and North Africa, RadioShack was able to generated proceeds of approximately $40 Million from the sale of its IP assets. Some of RadioShack’s intangible assets included some U.S and foreign registered Trademarks, 73 active patents and pending patent applications, 295 registered domains among other assets.
RadioShack, once a pioneer in electronic retail, brings to light the need for companies to be aware of the increasing value of their intangible assets. Intangible assets continue to play a vital role in the balance sheets of companies. Thus, there lies a legitimate burden upon companies to value, monetize, and manage IP assets. Such burden can only be fulfilled if companies put in place an IP strategy, have an IP policy and periodically audit and value their IP assets.
The definition offered for an IP Audit varies, nonetheless, it can be said to be; a systematic review of the IP owned, used or acquired by an enterprise with a view to make an assessment, remedy any potential risks, and implement the most suitable IP asset management practices, policies and procedures.
An IP audit can also entail a review of the IP management policies and procedures that are used by an enterprise to identify, acquire, and protect its IP and to protect the enterprise from the IP of others; this is in cases where the enterprise established IP policies and procedures.
It cannot be gainsaid the importance of an IP Audit to any entity. Some benefits of an IP audit include:
1. Aid in making and updating an inventory of IP assets as well as make an analysis of:
a. How IP assets are being used or unused;
b. Whether the enterprise is the owner of any IP assets;
c. Whether others are infringing on the enterprises’ IP rights or the enterprise is in actual infringement of IP rights belonging to others.
2. Modification of existing policies and procedures; an IP audit would review policies and procedures with a bid to input modifications to better identify, protect, retain and manage IP assets;
3. Facilitate effective valuation of IP assets; valuation of IP makes an enterprise more attractive to potential investors particularly if the value is formally accounted for. Other benefits of IP valuation include;
a. Knowing the exact value of the enterprise; Whereas there is no express provision in law that enterprises ought to manage their IP rights, there is nonetheless a fiduciary responsibility to report the true value of a company which is ascertained by the company’s assets; assets which are both tangible and intangible assets.
b. Having a tool to measure and manage the IP assets;
c. Having assets to provide security for funds; IP Assets in developed and other developing countries are pledged as security for loans. Financial institutions in those counties advance loans to entities with IP as the sole or partial security. The enterprise borrower is however expected to effectively maintain its IP. This is an untapped security asset in Kenya currently.
d. Providing tax deductions (especially instances where IP assets are owned by a holding company and licensed to a subsidiary company);
e. Averting the risk of overvaluing or undervaluing assets during mergers and acquisitions;
f. As in the case of RadioShack, IP valuation is important in excluding an enterprises’ net worth when liquidating assets.
It is interesting to note that when companies cease to exist or become defunct copyright protected works risk becoming orphan works especially if successor of any copyright had not been addressed.
IP audit is considered as the primer step in the effective management of IP assets. IP audits are done for enterprises in developed and some developing countries but are hardly if at all done in Kenya. It is thus food for thought as Kenyan enterprises become more knowledge and technology driven to seriously consider auditing their valuable intangible assets.

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