IP Due Diligence Considerations in Corporate Transactions
The strength of a company’s intellectual property portfolio often drives the value of corporate transactions. Regardless of whether you are the target company or the buyer in a business transaction involving IP, the due diligence process should be designed to reveal the value of the intangible assets—patents, trademarks, copyrights and trade secrets. IP due diligence should ideally be conducted at the onset of negotiations. This not only allows a more reasoned value of the IP to be determined, but also enables proactive corrective action if any legal concerns are identified that may affect the value of the IP.
IP due diligence typically begins with a fact-based investigation to answer two questions.
1) What are the products or services involved with this transaction?
2) Does the existing IP cover those products or services?
To answer the initial questions, the various products or services must be inventoried and the IP must be carefully reviewed to determine whether it includes those assets. By keeping the investigation focused on the relationship between the products of interest and the relevant IP, the investigation should remain on a path that parallels the goals and objectives of the transaction.
After documenting the IP, the investigation turns to focus on one or a combination of the following legal analyses:
- Freedom-to-operate consideration
- Scope-of-protection, validity and enforceability concerns
- Ownership issues
The substance of each aspect of the legal analysis is briefly discussed below.
Freedom to Operate
A freedom-to-operate analysis evaluates whether or not the buyer will be able to make, use and/or sell the target company’s products or services, if acquired, without infringing the IP rights of a third party. This analysis identifies potential legal obstacles, such as valid patent claims of others that may be infringed and therefore stand in the way of using the target company’s IP. If potential blocking patents are identified, a more detailed analysis will likely be warranted.
Scope, Validity and Enforceability
The scope, validity and enforceability analyses determine the scope of protection and strength of coverage of the target company’s assets. For example, determining the scope and validity of a patent begins with construing the claims. Validity assessments usually include evaluation of the novelty and non-obviousness of a patent’s claims, compliance with formal requirements such as the written-description, enablement, and best-mode requirements, as well as judicially created doctrines like obviousness-type double patenting. Enforceability, centers on inequitable conduct and the compliance by the inventors, assignee and prosecuting counsel with the duty of disclosure. Concerns about the validity of key patents, the narrow scope of important claims, or about possible inequitable conduct, may result in a reduced valuation of the IP in the transaction. These issues may or may not be deal breakers, depending on their significance to the overall objectives of the transaction and their ability to be managed or addressed.
Ownership is often one of the first issues explored in an IP due-diligence investigation since it can be a deal-breaker. A series of questions are often asked about each piece of IP to establish the target company’s rights in it and whether those rights are free of any encumbrances and can be clearly transferred. Initial questions may include:
- Who are the inventors?
- Did those inventors properly assign the IP rights to the target?
- What are the target’s rights to transfer and assign?
- Are there governmental rights from funding?
- Have there been any third-party challenges to those rights?
The answers to these initial questions should help identify those areas of ownership rights requiring further investigation.
No matter what the composition of the IP portfolio (patents, trade marks, copyrights, trade secrets or a combination thereof), no matter what the type of transaction (acquisition, merger, license or joint venture) and no matter what the corporate arena is (domestic or international markets), the approach to IP due diligence must be based on combined business and IP perspectives. This approach enables the involved risks to be identified and mitigated or managed so that expectations and business objectives can be met.
Engaging IP counsel at the outset of a potential corporate transaction is a smart step toward ensuring you have the proper edge at the negotiating table.