Intellectual Property Due Diligence
“Due diligence” in corporate transactions simply means the careful attention and analysis necessary to accurately investigate and determine the value of intellectual property assets, liabilities, the integrity and vulnerability of those assets, and potential exposure to risks of infringing third party rights and/or the erosion of a company’s trade secrets.
For any company whose success and competitive advantage relies upon intellectual property rights or when considering a transaction touching upon intellectual property rights (whether they are owned or licensed) due diligence should always be conducted. While the dollar amount involved in the transaction may dictate the depth or level of review conducted, due diligence may result in an adjustment of the value of a transaction and thus appropriate investigations should be conducted as early as possible in order to allow for follow up investigations and adjustments to the agreement.
When reviewing intellectual property rights it will be necessary to review, at a minimum, the subject company’s records and publicly available records to assess the following:
- The subject company’s systems for protecting intellectual property generally including patents, trademarks, copyright, designs, trade secrets, etc. including contracts with third parties (i.e. license agreements), independent contractors and employees to review the sufficiency and enforceability of confidentiality and non-compete commitments;
- The intellectual property owned, used, licensed and/or being developed by the subject company to determine validity, exposure to infringement and other potential problems, potential liability for infringing a third party’s rights, accuracy of chains of title, pending and/or existing litigation, etc.; and
- Contractual arrangements to utilize the intellectual property rights of third parties to assess the grant of rights, limitations on use, the exclusivity of such rights, and most importantly in this context, the transferability of such rights
While conducting such strategic reviews may appear intimidating, the results of due diligence have the potential of providing valuable insight into the scope of rights, limitations on those rights, gaps in protection, the enforceability of such rights and, ultimately, the value of the intellectual property assets to be acquired. Indeed, without appropriate investigation a target for acquisition may be greatly overvalued by the vending party so it is essential to receive the vendor’s claims with scepticism and proceed with your own independent due diligence investigations prior to finalizing the financial terms of a transaction.
