Due Diligence with a Focus on IP Due Diligence

Due diligence is a critical process in assessing the value, risks, and legal compliance of a company's assets, operations, and agreements. In mergers, acquisitions, or investment scenarios, IP due diligence specifically evaluates the intellectual property portfolio to ensure it is accurately valued, properly protected, and free from encumbrances. Below, we provide an in-depth explanation of the steps in a general due diligence process, with particular emphasis on the unique aspects of IP due diligence.

1. General Steps of Due Diligence

Planning and Scoping

• Define the purpose and scope of the due diligence process.
• Identify the key areas of focus (e.g., IP, financials, operations) and stakeholders involved.
• Develop a checklist tailored to the transaction and the company's industry.

Document Request and Data Collection

• Request all relevant documentation, such as contracts, ownership records, and financial statements.
• Use virtual data rooms to securely collect and share sensitive information.

Analysis and Verification

• Review and verify the accuracy and completeness of the provided documents.
• Identify any inconsistencies, gaps, or potential risks.

Assessment of Liabilities and Risks

• Evaluate risks associated with liabilities, regulatory compliance, and legal disputes.
• Identify "red flags" that could impact the transaction or require further negotiation.

Reporting and Recommendations

• Prepare a comprehensive due diligence report summarizing findings, highlighting risks, and offering actionable recommendations.
• Provide input for deal structuring, including warranties, indemnities, or adjustments to the purchase price.

2. Steps in IP Due Diligence

Intellectual property is a key driver of value in many transactions. IP due diligence ensures the buyer or investor understands the scope, validity, and enforceability of the target company's IP rights. Here are the detailed steps:

IP Portfolio Identification

• Objective: Confirm the existence and scope of all IP assets owned or used by the company.
• Key Actions:
• Review IP registries (e.g., patents, trademarks, designs) for filings and registrations.
• Identify unregistered IP, such as trade secrets, proprietary processes, or copyright-protected works.
• Verify the geographical coverage and expiration dates of registered rights.

Ownership and Title Verification

• Objective: Ensure the target company holds clear and enforceable ownership of its IP.
• Key Actions:
• Review assignment agreements, employment contracts, and work-for-hire agreements.
• Check for liens, encumbrances, or co-ownership issues.
• Confirm ownership of IP created during collaborations, joint ventures, or by third-party contractors.

Validity and Enforceability

• Objective: Assess whether the IP is valid, enforceable, and free from challenges.
• Key Actions:
• Examine renewal and maintenance records for registered IP.
• Analyze prior art for patents to evaluate the risk of invalidation.
• Investigate any ongoing disputes or opposition proceedings involving the IP.

Freedom to Operate (FTO)

• Objective: Determine whether the company’s products or services infringe third-party rights.
• Key Actions:
• Conduct FTO searches to identify potential infringement risks.
• Review relevant licenses or permissions obtained to use third-party IP.

IP Agreements and Contracts

• Objective: Review contracts involving the creation, use, or transfer of IP rights.
• Key Actions:
• Examine licensing agreements for scope, exclusivity, royalties, and terminations.
• Analyze technology transfer agreements, R&D collaborations, and material transfer agreements (MTAs).
• Review non-disclosure agreements (NDAs) and confidentiality provisions to protect trade secrets.
• Evaluate IP-related provisions in supply, distribution, and franchise agreements.

Litigation and Dispute History

• Objective: Identify past or ongoing legal actions involving IP rights.
• Key Actions:
• Review litigation records for infringement or invalidation claims.
• Analyze settlement agreements and their impact on future IP use.
• Evaluate the potential impact of ongoing disputes on the transaction.

Trade Secrets and Confidential Information

• Objective: Assess the protection and management of trade secrets.
• Key Actions:
• Review internal policies for safeguarding trade secrets.
• Verify the existence of NDAs with employees, contractors, and partners.
• Check for any disclosures that may have compromised confidentiality.

Red Flag Identification

• Objective: Highlight significant risks that could impact the transaction.
• Examples of Red Flags:
• Disputes over ownership of core IP.
• Expired or improperly maintained IP registrations.
• Licensing agreements with overly restrictive or unfavorable terms.
• Third-party claims or liens on key IP assets.
• Insufficient protection of trade secrets or proprietary technology.

Valuation of IP

• Objective: Quantify the economic value of the IP assets.
• Key Actions:
• Assess the contribution of IP to revenue generation and competitive positioning.
• Analyze licensing revenue, royalties, and market exclusivity benefits.
• Account for pending patents or trademarks that could add future value.

3. Special Considerations for Different Types of IP

Patents

• Ensure patents cover the intended jurisdictions and applications.
• Check for compliance with deadlines for filing extensions (e.g., supplementary protection certificates for pharmaceuticals).

Trademarks

• Confirm that trademarks are registered in key markets and are in active use.
• Investigate potential conflicts with third-party trademarks.

Copyright

• Verify ownership of software, creative works, and digital content.
• Review licensing terms for open-source software to avoid compliance risks.

Trade Secrets

• Ensure robust measures are in place to protect trade secrets, including contracts and access controls.

Design Rights

• Confirm registration of industrial designs in relevant jurisdictions.
• Check for overlapping rights, such as copyright or patent claims.

4. Reporting and Post-Due Diligence Actions

Comprehensive Due Diligence Report

• Summarize findings, categorize risks (e.g., high, medium, low), and propose risk mitigation strategies.
• Highlight red flags that may affect deal valuation or require further negotiation.

Recommendations

• Negotiate warranties, indemnities, or adjustments to address identified risks.
• Propose steps for securing and strengthening IP protection post-acquisition.

Post-Transaction Integration

• Assist in integrating acquired IP into the buyer’s portfolio.
• Ensure proper maintenance and enforcement of transferred IP rights.

5. Conclusion

IP due diligence is a meticulous and specialized process that ensures the accurate valuation, protection, and transfer of intellectual property assets. By focusing on ownership, validity, enforcement, and contractual relationships, we provide clients with a clear understanding of the risks and opportunities associated with the target company’s IP portfolio. Our expertise ensures that every transaction is built on a solid foundation of legal and strategic clarity.