Exploiting intellectual property: new profits at low costs. (An Advertising Supplement to the Los Angeles Business Journal).

Today's marketplace places a high priority on intellectual property rights. Companies of all sizes know that innovative ideas, inventions and trade secrets are among their most valuable assets. Yet surprisingly few fully exploit their trademarks, copyrights and patents, or do everything necessary to maximize the financial returns on their intellectual property investment.

Executives are under intense pressure to make more of what they already have, by leveraging existing intellectual property rights, improving current sales and distribution channels and creating new opportunities. To do so effectively, it is more important than ever to conduct a coordinated, strategic analysis of all of the company's valuable intellectual property, from its proprietary business methods to its very name. Despite the critical importance of intangible assets like intellectual property to overall shareholder value, many companies do not appreciate and take inventory of the intellectual property they have created. As a result, they fail to adequately protect and realize the full potential of these assets.

To ensure that a company's intellectual property is being properly protected and leveraged, it may be advisable to implement a legal and strategic review process, often referred to as an "IP audit." IP audits provide substantial benefits to intellectual property owners by enabling them to realistically and creatively assess what intangible assets they have, the strength of these assets and, importantly, what opportunities exist for leveraging these assets into new markets and revenue streams. There are several key points for companies to consider during an IP audit:

Brands, that could be exploited through brand-extension licensing and co-branding relationships.

Technologies, that have non-competing applications which could be licensed to others.

Patents, including business methods that have broader applications which could be licensed to other industries.

Distribution channels, that could be expanded if the owner exercised greater control over product quality, brand perception, and exclusivity.

Products, whose value could be enhanced, by blocking competitors and discouraging copies and knockoffs.

Strategic partnerships, that could be strengthened and expanded if the owner had stronger protections in place.

Growth strategies, that could be adopted or expanded, including those being used successfully by competitors or in other industries.

One of the key benefits of an IP audit is tremendous potential for increased revenues, by converting unexploited intellectual property to a profit center. Production or technical people may have already created techniques or processes which are extremely valuable, without even realizing they are legally protectible inventions. Many people simply do not know what they have.

For example, Image Entertainment has long been one of the leading independent distributors of urban and music-related DVD programming, but has only recently begun exploiting the inherent value of their name's credibility by using their "Urban Images" label for exclusive programming in that area.

Periodic inventories of intellectual property assets can reflect added value directly to a company's bottom line, in the form of either increased valuation of the asset side of the balance sheet or increased revenues on the income statement, or both. Such reviews can substantially increase shareholder value, particularly in the public markets or a sale context where capitalization is often determined by a multiple of such measures.

The reverse is also true. The lack of an intellectual property protection program can have disastrous consequences on the bottom line. For example, failing to conduct a trademark search when naming a new product or reserving a domain name, may result in having to rename the product or change the URL after market success. Likewise, the failure to conduct an infringement study at the earliest possible time may allow a competitor to block a company's technology from entering the market, or force its withdrawal from the market after significant investment in marketing, manufacturing advertising and product placement.

In many merger and acquisition, financing and joint venture transactions, intellectual property assets can be particularly significant. It is critical to determine with confidence the extent to which a company's intellectual property rights can be exploited commercially through marketing, distribution, technology transfer and licensing agreements.

Financial institutions now routinely require detailed audit of a company's intellectual property, as they always have done for hard assets, before making or extending loans or lines of credit. Venture capital firms and investment banks often insist on such a review before investing, or may later suggest such a review to assist the company in reaching or accelerating profitability. The driving force behind the need for an IP audit may be outside directors or advisors who are more familiar with the crucial importance of a strategic review and analysis of the company's intellectual property assets.

Conducting a strategic process such as an IP audit is key in today's economy, because companies of all sizes and in all industries are under pressure to create new opportunities, new revenue streams, and increased profits from existing technologies, systems, products, brands and relationships. Companies need to stop spending money on research that is not likely to result in either short-term profits or long-term shareholder value, invest in technology that does have realistic potential, and most importantly monetize the value of the assets they already have. Advise from competent and experienced professionals can often assist in achieving those goals.

John C. Kirkland is a shareholder practicing corporate/securities and entertainment/intellectual property law in the Los Angeles office of Greenberg Traurig, LLP.