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IP Cases & Commentary – Details

25 March 2010

What is IP Due Diligence?

Generally, due diligence refers to the care a reasonable person should take before entering into an agreement or transaction with another party.

More specifically, the term "due diligence" is used to refer to the process that potential investors use to establish whether it is worth entering a transaction or business deal. The process enables risks to be identified and analysed so an investor can negotiate the price and terms of a transaction accordingly. For the same reason that you would normally ask, e.g. a surveyor to check a residential property before you buy it, potential investors usually ask an expert to assess intellectual property before entering a transaction. However, information about intellectual property (IP) is mostly provided in the form of numerous documents. So IP due diligence also involves organising these documents and managing potential investors’ access to them.

IP may be the main focus of a transaction, e.g. the sale or licensing of IP rights.  Alternatively, it can also be part of a larger transaction, e.g. the sale of a company.  These business transactions often need to be entered within a short period of time. This means that the IP due diligence process needs to be managed efficiently.  Poor preparation or inadequate review of IP could result in IP hindering a transaction, even if it is only part of a larger transaction.

The extent and depth of investigation into IP issues depends on a number of factors, including the nature of the technology, the budget for due diligence and the size and relative importance of the transaction.  However, in all cases it is essential to ensure that the due diligence is focussed on risks that are important to potential investors.

One of the first steps involves identifying what current and future products and services are important for the transaction.  Only then can one consider whether these products and services are protected by adequate intellectual property rights (IPR).  A potential investor will consider the following two main issues in relation to IP:

  • Proprietary IP
  • Freedom to operate in view of IP belonging to another company (third party).

Potential investors need to be ready to ask for relevant information on these issues (often by providing a list of questions in a questionnaire).  It is just as important for the IPR owner to be prepared to provide this information quickly. In addition, the IPR owner may be asked to provide information on other legal issues that can affect IP transactions. So a considerable amount of document management may be required.  Many of the documents will be confidential, so management of potential investors’ access to the documents needs to be considered carefully.

Proprietary IP:  is your portfolio in good shape?

A potential investor will usually require an IPR owner to identify all forms of intellectual property that it has.   This will include patents, trade marks, copyright, trade secrets/know-how and agreements that affect IP. The information will need to be summarised carefully. In relation to a patent portfolio, a potential investor is likely to ask questions which include:

1. Which patents/patent applications cover the IPR owner’s core technology?

This may only require brief details of all patents/patent applications.  However, sometimes a review of the relevant patent/patent application claims is needed.

2. Are there any issues about who is entitled to rights in the patents/patent applications?

For a transaction to go ahead, the IPR owner needs to be free to transfer rights relating to the patent/patent applications.  Ideally the IPR owner should be able to confirm they are entitled to own the patent/patent applications and that they are the only registered owner.   The investor will also want to check if any third party has rights to the patent/patent applications, e.g. due to a licence agreement.  Information on any other agreements which could prevent the sale or licensing of patents/patent applications will also be needed.  The IPR owner should consider these issues as soon as possible.   Any issues that can be resolved easily should be dealt with before potential investors request information.

3. Are there any issues with the patents/patent applications themselves?

Potential investors will check the status of patent/patent applications. They will want reassurance that relevant fees have been paid and that relevant prosecution deadlines have been met.  Potential prosecution difficulties will also be investigated, e.g. if there is an appeal pending.  They will also ask if the IPR owner has received any third party challenges to the validity or enforceability of patents.

4. Are there any infringement issues?

An investor will ask if the IPR owner is aware of any third parties potentially infringing any patents that they have.  They will ask whether infringement proceedings are likely.

5. Freedom to operate

Investors will also need information to assess whether there is any risk of a third party’s IPR being infringed now or in the future.  The investor’s experts may do this analysis in respect of the investor’s potential commercial products.  However, the IPR owner will need to provide details of any third party IP that they are aware of and what measures have been taken to avoid infringement proceedings.  These measures are particularly important if the transaction involves sale of a whole IPR owner’s company.

An investor will also need to know whether the IPR owner relies on any relevant IP that is licensed to them from third parties.   The investor may need such a licence too.

Once the above issues have been considered, an investor will be aware of the issues that concern them.

It is important that both the investor and the IPR owner are appropriately advised to ensure the due diligence process can be managed as smoothly as possible. It is better for both parties to be aware of the relevant risks as soon as possible so that the transaction can be negotiated without any last minute surprises.

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