What is IP Due Diligence, and why is it Useful?

Due diligence is the process of collecting information to identify and assess the applicability and/or value of assets in relation to business transactions. IP due diligence typically refers to the due diligence review performed in relation to merger and acquisition transactions, in which the acquiring/buying party conducts a due diligence review of the acquired/selling party's IP to determine value and assess the risk of, and ability to obtain, an asset's intellectual property portfolio. However, IP due diligence may also refer to assessments performed by sellers to investigate their own IP portfolios to better understand the scope, value, strengths, and weaknesses of the IP they are trying to sell.

In the context of mergers and acquisitions, due diligence inquiries seek to resolve several basic questions:

• What IP is held by the seller?
• What is the value of that IP?
• Are the seller's trademarks, service marks, trade names, copyrights or patents valid?
• Are there infringement issues with any of the IP?
• Does the seller have clear title to their trademarks, service marks, trade names, copyrights or patents?
• Is there litigation surrounding any of the IP?
• Is any of the IP licensed out, and to what entities?
• What licenses does the seller hold?
• What are the costs, payments, responsibilities, operating restrictions, etc. on those licenses?
• Are there any trade secrets, and are they imperative to the business?

Answering these questions will help a seller value the IP and avoid litigation, encumbrances, and future litigation, encumbrances, and unusable IP. Likewise, a buyer can benefit by asking and answering these questions before engaging in a merger or acquisition. The answers to these questions will allow sellers to realistically assess and value their IP portfolio and address any issues identified during the due diligence.

While IP due diligence is performed in connection with mergers and acquisitions, an assessment of a business's IP may also be useful in other contexts. For example, before entering into a joint development agreement, it may be useful to consider issues such as, but not limited to, what IP each party is bringing into the partnership, the scope of coverage provided by the IP, whether the IP has clear title, and whether other parties are licensed to use the IP that is being brought into the partnership.

Another context in which IP assessments are valuable is in the introduction of a new product to the market by a business. Before introduction of the product, the business should ensure that it can make, use, or sell the new product (i.e., that it has freedom-to-operate) in view of IP such as patents held by competitors, to avoid costly litigation in the future.

Practical Tips

Key to an IP due diligence assessment is a checklist of what needs to be investigated. If the primary goal of the transaction is to acquire the seller's IP, the assessment should make sure that IP is actually owned by the seller, is currently valid, and that it is not the subject of litigation. It is important to assess the chain of title of all IP, and to evaluate the terms of any licenses held by the seller, as well as any IP the seller has licensed out. By conducting IP due diligence, a buyer can avoid wasting time and money on resources that it will ultimately be unable to use.

It is also in the best interest of sellers to confirm the ownership of their IP. When the primary goal is to maximize the value of the assets and IP being sold, the seller should establish a chain of title for all their IP, and show that the IP is enforceable. Parties should only discuss trade secrets in general terms, and refrain from disclosing detailed information without a carefully designed non-disclosure agreement. Sellers should require buyers to sign a non-disclosure agreement to protect the seller from disclosure or misappropriation of its trade secrets. Ultimately, sellers should strive to create and maintain an attractive IP portfolio, which is only possible by conducting IP due diligence.

Call us. Howard IP Law Group, P.C. can help you identify when IP due diligence assessments are appropriate to maximize the value of IP you own, are selling, or are thinking of acquiring. We can work through the facts and questions with you and point out pitfalls, saving you time, money and headaches. Together we can craft an approach tailored to your situation and plans.