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.
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.
Please note that the content of this page should only be used as a general
reference, and is not a substitute for legal advice. It is recommended
that you seek the assistance of legal counsel.