IP Due Diligence - Importance and How to Conduct (Checklist)

What is IP Due Diligence?

IP due diligence (IPDD) can be characterized as a methodical examination of the intellectual property (IP) owned and employed by an organization engaged in a transaction. Essentially, it serves as an audit conducted on a target company's IP portfolio, executed either offensively (e.g., to purchase or in-license IP) or defensively (e.g., selling or out-licensing IP). This process aims to unveil the intrinsic value of the target company's IP, encompassing elements such as patents, trademarks, copyrights, and trade secrets.

The main goal is to do a thorough assessment of the robustness, scope, and enforceability of the target company's intellectual property. In doing so, IPDD becomes a pivotal exercise in understanding the strategic position and potential risks associated with the IP assets integral to the transaction.

In the corporate realm, this extends to intellectual property (IP), which, in today's business landscape, stands as one of, if not the most crucial element, in acquisitions and transactions. Consequently, this article delves into the realm of IP due diligence (IPDD), highlighting essential considerations like scope and challenges, further exploring best practices, and providing insight into what an IPDD checklist looks like.

Important Aspects of IP Due Diligence

The necessity of IPDD is to provide a structured approach that allows each of its facets to be addressed comprehensively; this includes questions, information discovery, scope considerations, and challenges. This results in fostering a more effective and insightful due diligence process, which is broken down as follows:

1. Key Questions for Consideration

During an IPDD transaction, it's crucial to address fundamental questions to ensure the buyer maximizes the value of their investment. These include:

• • • Is the buyer maximizing the transaction value?
    • Will the buyer face future issues impacting their purchase, investment, or license value?
    • What pre-transaction work is needed to avert costly fixes later?

2. Information to Discover

IPDD aims to uncover critical details about the intellectual property in question, such as:

• • • Existence of Liens or Other Claims on the IP
    • Confirmation of IP Identity and Ownership
    • Existing Licensing Agreements
    • Third-Party Challenges to the IP

3. Considerations Defining IP Due Diligence Scope

Several factors shape the scope of IPDD, influencing the depth and breadth of the investigation.

• • • Size of the Deal
    • Budget Implications
    • Size of the Seller's IP Portfolio
    • IP's Centrality to the Deal
    • Buyer's Future Plans for the IP
    • Registration and Licensing Status

4. Challenges in IP Due Diligence 

Recognizing potential challenges is vital to conducting a thorough IPDD.

• • • Unfamiliar Security Interests
    • Clarity Issues in Search Processes
    • Budget Adjustments for IPDD
    • Separation of IP Due Diligence Responsibilities
    • Last-Minute Rushes to Address Issues
    • Limited Public Record Information

Intellectual Property Due Diligence in Corporate Transactions

Intellectual property (IP) due diligence is a critical aspect of corporate transactions, including mergers and acquisitions, joint ventures, and licensing agreements. It involves a comprehensive assessment of the target company's IP assets, including patents, trademarks, copyrights, and trade secrets, to identify potential risks and opportunities. A thorough IP due diligence review can help buyers and investors assess the target company's IP portfolio, evaluate its value, and identify potential infringement or misuse issues. Conversely, sellers and owners can use IP due diligence to demonstrate the strength of their IP assets and to identify potential areas for improvement.

Intellectual property due diligence may involve various activities, such as reviewing IP agreements, analyzing the target company's IP filings and registrations, conducting freedom-to-operate and clearance searches, and evaluating the potential for IP litigation. By conducting a thorough IP due diligence review, parties can make informed decisions, mitigate risk, and maximize the value of their IP assets in corporate transactions.

Intellectual Property Due Diligence in Mergers and Acquisitions

Intellectual Property Due Diligence (IPDD) plays a vital role in the success of mergers and acquisitions (M&A) by assessing the value and identifying the risks associated with intangible assets. It is essential to understand the scope and validity of these assets to mitigate risks and ensure a smooth transition post-merger. A successful IP due diligence safeguards the acquiring company against potential legal disputes as well as enables them to make informed decisions regarding vavluation and incorporate strategies.

Picture this: you're gearing up to buy your dream home in the future. Now, consider whether it's more prudent to procrastinate until the eleventh hour to inspect your credit score, run the risk of stumbling into unforeseen issues, or proactively monitor it regularly. This train of thought embodies the essence of due diligence—the sensible measures individuals or companies take to meet legal requirements, especially in transactions. In a broader context, it mirrors the diligence exercised by a business to ensure the assets they're acquiring align with the investment.

IP Due Diligence Checklist

As previously stated, IPDD involves a thorough examination of the target company's IP portfolio, sometimes in the form of a standardized checklist. This checklist functions as a compass, a curated collection of necessary papers that rigorously ensures the presence of all relevant IP assets while identifying any potential gaps or concerns to ensure the completeness of IP portfolios and compliance with legal criteria.

While the specifics of these checklists may fluctuate slightly among countries and jurisdictions, the essential premise remains consistent. What follows is a broad framework that captures the essence of this important checklist.

1. Intellectual Property Rights Held by Licensors/Assignor (Party)

Patents

• • • Obtain a comprehensive list of all patents linked to the Party, ensuring completeness.
    • Confirm the list's completeness and proper assignment and recording of patents.
    • Verify recorded security interests related to identified patents.
    • Ensure payment of annuity or maintenance fees for patent assets.
    • Disclose any patent infringement proceedings or challenges to validity.
    • Confirm employees' obligation to assign IP rights with provided assignment agreements.

Trade Secret Rights

• • • Acquire the Party's Trade Secret policy and assurance of implementation.
    • Describe all transferred Trade Secret (know-how) assets, ensuring completeness.
    • Obtain communications related to the validity of claims on legally protectable trade secrets.
    • Provide enforceable copies of Confidentiality and Trade Secret agreements.

Copyrights

• • • Compile a list of copyright-protectable subject matter related to the transaction.
    • Confirm completeness and ownership of listed copyright assets.
    • Assure ownership of copyright assets without outstanding payments to third parties.

General IP Ownership Issues

• • • Identify third-party IP rights transfer, reviewing agreements for potential negative effects.
    • Disclose IP created by consultants, their ownership, and any outstanding payments.
    • Check for Uniform Commercial Code (UCC) or other security interest filings on transferred assets.
    • Disclose corporate policies on IP ownership.
    • Provide opinions on the validity or enforceability of transferred IP assets.
    • Conduct a title search on assets with a warranty of ownership.
    • Record security interest transfers and licenses, if applicable.
    • Consult a Corporate Tax Attorney for taxation implications related to asset transfer.

2. IP Rights of Third Parties

Infringement Issues

• • • Disclose charges or notices received regarding third-party intellectual property rights.
    • Provide opinions on the validity of third-party infringement claims.
    • Describe efforts to challenge third-party intellectual property rights.
    • Detail past litigation or settlements related to transferred property and assignability of settlements.

3. IP Transfers

Others

• • • Identify agreements licensing party's IP rights, specifying contract duration.
    • Identify warranties or representations in prior agreements affecting IP rights.
    • Check if a change in ownership affects rights under any agreement.
    • Provide lists and copies of assignment agreements, ensuring proper recording.
    • Share lists and copies of Joint Venture/Joint Development agreements.
    • Confirm the completeness of lists related to the transaction.

4. Equipment and Process Operation

Verify Machinery/Equipment

• • • Ownership, leasing, liens, and assignability of consents required.

Equipment Documentation

• • • Obtain operating manuals and ensure the assignment of proprietary information and IP rights.

Process Documentation

• • • Obtain documentation for each production process, ensuring assigned IP rights.

5. Miscellaneous

• • • Disclose patent agents/attorneys handling transferred patents.
    • Refer the transfer plan to the Corporate Tax Council for review.
    • Assure no special allocations or government programs threaten acquired credits.

Freedom to Operate

In addition to evaluating a company's IP portfolio, IPDD includes the use of Freedom to Operate (FTO). FTO is an analytical procedure that determines whether a product, technology, or innovation is likely to infringe on another party's patent claims.

Depending on the amount of FTO analysis needed, FTO inspection usually entails the following:

• • • Scrutiny of third-party IP rights.
    • Identification of potential obstacles, such as granted patent claims.
    • Analysis of scope, validity, and enforceability of potential blocking patents.
    • Ongoing monitoring and regular updates to FTO search/analysis for relevant published applications.

Because third-party intellectual property rights may inhibit the commercialization of a product or service, it is critical to conduct a thorough Freedom to Operate (FTO) analysis before entering the market to assess the possible risk of infringement.

Conclusion

IPDD arises as a necessary procedure, reflecting the thorough investigation required in business transactions. Whether offensive or defensive, a thorough IPDD, with its thoroughly developed checklist, navigates difficulties and scrutinizes the integrity of the company’s true value. From patent scrutiny to analyzing Freedom to Operate, this systematic approach not only protects against potential hazards but also maximizes the strategic advantage of intellectual assets in company mergers.

Due to the fastidious nature of IPDD in the dynamic corporate environment, it is considered prudent to enlist the assistance of IP specialists. At Abou Naja Intellectual Property, our seasoned experts are adept at guaranteeing that any cracks in both your existing IP assets and those targeted for acquisition in a transaction are identified and filled.

Contact us to find out how we can assist you in galvanizing the integrity of your IP portfolio. Drop us an email at [email protected] for a complimentary consultation.

Frequently Asked Questions

What is IP Due Diligence (IPDD)?

IP Due Diligence is a systematic examination of intellectual property (IP) conducted by organizations involved in transactions. It assesses the value and risks associated with a target company's IP portfolio, covering elements like patents, trademarks, copyrights, and trade secrets.

Why is IP Due Diligence essential in business transactions?

IPDD is crucial to understand the strategic position and potential risks associated with IP assets. It ensures a thorough assessment of the robustness, scope, and enforceability of the target company's IP, providing insights for informed decision-making.

What are the key aspects of IP Due Diligence?

The key aspects include addressing fundamental questions, discovering critical information about the IP, defining the scope, and recognizing potential challenges. It involves a structured approach to ensure a comprehensive due diligence process.

What questions should be considered during IP Due Diligence?

Important questions include maximizing transaction value, anticipating future issues, and identifying pre-transaction work to avoid costly fixes. These questions guide buyers in maximizing the value of their investment.

What is included in the Intellectual Property Due Diligence Checklist?

The checklist covers various aspects, such as patents, trade secret rights, copyrights, general IP ownership issues, IP rights of third parties, equipment and process operation, miscellaneous considerations, and Freedom to Operate (FTO) analysis.

Why is Freedom to Operate (FTO) analysis important in IP Due Diligence?

FTO analysis ensures that a product, technology, or innovation is unlikely to infringe on another party's patent claims. It helps assess the risk of infringement, considering third-party intellectual property rights that may affect commercialization.

How can IP specialists assist in IP Due Diligence?

IP specialists, like those at Abou Naja Intellectual Property, can help identify and address any gaps in existing IP assets and those targeted for acquisition. Their expertise ensures a thorough investigation, protecting against potential hazards and maximizing the strategic advantage of intellectual assets.