The importance of due diligence in any investment, merger, or
acquisition decision cannot be understated. Decisions can no longer be
made based solely upon a good business plan. In today's knowledge
based economy intellectual property (IP) is often a company's single
most valuable asset. However, IP due diligence is typically an
afterthought.
The Goals
The goals of IP due diligence should be collaboratively identified by
the organization leading the general due diligence investigation and
the IP due diligence team. The goals should then be reduced to an IP
due diligence plan.
The IP due diligence team should consist of independent IP counsel.
The target company's IP counsel should not be used as one can never
fully critique their own work, in addition to the potential conflicts
of interest.
Several factors must be considered in identifying the goals of the
plan. First, the team should discuss the nature of the transaction. IP
due diligence goals will differ for investments, mergers, and
acquisitions. Secondly, the financial value of the transaction must be
considered. There is no use in completing $1 million in due diligence
for a $1 million dollar transaction. Third, the risk associated with
the transaction must be analyzed. For instance, a $1 million venture
capital (VC) investment in a high-tech start-up has a much higher
probability of loss than a $100 million merger of established
companies. Fourth, the underlying reason for the transaction should be
discussed. For example, if a company is acquiring a target company for
a particular product line or technology there should be a primary
focus on the IP protecting that interest.
The Scope
The scope of IP due diligence investigations is limited by the goals
identified above. The scope of IP due diligence should include
investigations into the patents, trademarks, copyrights, and trade
secrets of the target company to identify weaknesses, potential
liabilities, and potential opportunities.
There are some general considerations applicable to all forms of IP.
For instance, all of the target company's current IP should be
identified and cataloged, including current patent and trademark
applications. This process should identify the dates of application,
issuance, expiration, required maintenance payments, and whether
foreign IP protection has been obtained. Additionally, the true
ownership of each piece of intellectual property must be identified.
This is particularly true for IP that has been licensed or assigned to
the target company. Ownership verification requires meticulously
analyzing assignments and licensing agreements, as well as
cross-referencing the Patent & Trademark Office files. A golden rule
of IP due diligence is to independently verify everything!
There are several aspects of IP due diligence that are unique to
situations wherein the target company possesses a patent portfolio. A
complete investigation into a company's patent portfolio can be
expensive, yet the cost is typically a drop in the bucket when
compared to the cost of litigating a patent infringement claim.
Carefully identifying the goals of the IP due diligence investigation
will often eliminate the need to completely analyze over half of a
company's patents. After all, there is no need to perform due
diligence on outdated IP that the company no longer uses.
Alternatively, IP that is essential to a company's operations should
be afforded additional scrutiny.
An IP due diligence plan should include an infringement analysis of
the company's key IP assets. Key patents should be analyzed first to
determine if they sufficiently cover the product line of interest. It
is not uncommon to find that a company's patent portfolio does not
adequately protect their main product lines.
The analysis should then turn to competitor's products. It is
essential to identify potential infringement lawsuits during the due
diligence investigation. One must determine both whether competing
products infringe the target company's patents and if the target
company's products infringe patents owned by third parties. During
this investigation the IP due diligence team can also identify whether
the target company's patents are very broad and strong or narrow and
weak. The strength of patents has a direct relationship to their
value.
A target company may be willing to contribute to the cost of the
infringement analysis portion of the IP due diligence. This is because
a non-infringement opinion from counsel can protect a company from
claims of willful patent infringement. When a company relies in good
faith on a competent opinion of an attorney that the company's product
does not infringe a third party's patent, the company will not be held
to be a willful infringer. This is important because actual damages
can be increased threefold in cases of willful infringement.
Comprehensive due diligence investigations into trademark, copyright,
and trade secret matters are not nearly as involved as patent
investigations. However, when mergers or acquisitions involve
ownership transfer of valuable trademarks it is imperative to
investigate the validity, ownership, and potential infringement claims
of the mark.
Conclusion
IP due diligence is necessary to avoid costly mistakes and properly
determine the value of business transactions involving IP. This is
true for both traditional brick and mortar companies and high tech
companies. The specialized nature of IP due diligence requires that an
IP attorney be retained to properly perform the investigations.
printer
friendly version