- Patent Baristas - https://patentbaristas.com -

Due Diligence Monday: Basic IP Due Diligence

Conducting a thorough IP due diligence review is a critical aspect of successful tech deals – especially in the bioscience industry. The intellectual property at issue can make or break a deal. It is imperative that you know what you have (or are getting) is the real deal.

When undertaking a due diligence review during a company merger or acquisition, negotiating a license or joint venture agreement, purchasing patent other intellectual property rights, there are some basic steps to go through in order to cover the important issues of the transaction.

Some of the steps in due diligence procedures designed to flush out the needed information include:

What IP Rights?

The identification of all intellectual property rights is very useful in predicting future value of a business. The best approach, then, is to simply list (with a detailed description) all intellectual property rights. In addition to exploring the right-to-use, it is also important to determine what intellectual property assets are held by the business itself. For example, while it is not always guaranteed that a holder of a patent has the right to make, use or sell its own patented product or service, it is important to develop a position of strength for its products and services.

The procurement of a set of intellectual property rights may not guarantee immunity from a competitor’s pressure but a business which is active in procurement of rights is often much more aware of other’s rights. It also may be able to bargain (i.e., cross-license) with a competitor over certain rights to avoid a costly settlement or to be blocked in the marketplace all together.

Prioritize Your Rights

Not all intellectual property rights may be of significant value to a business. Therefore, it is necessary to review all aspects of the company and assign priorities to the rights according to their value. The more important the rights are to the future vitality of a business, the more due diligence that will be necessary. Mature products and services often are the most important source of the current financial state of a business. However, a changing market demands that much more due diligence be performed in order to understand any future product changes or improvements that are being implemented or planned.

While some businesses may choose to compete in the market without obtaining patents or aggressively protecting trademark rights, a competitor in a market may be working toward reducing the competitive advantage of a business by securing substantial patents, trademarks or other intellectual property rights. It is quite common for at least one player in a multi-firm market to follow such a strategy in an attempt to force competitors to either take licenses or stop making or using the proprietary technology. Such tactics are frequently successful in securing a superior competitive position.

Can You Use It?

It is one thing to own IP rights; it is another thing to be able to conduct a business without infringing third party IP rights. Thus, the fact that a company has a patent for a product does not give it the right to make the product. The unfettered right to use, make or sell certain technology, or to use trademarks or material subject to copyrights, is often crucial to the health of any business. If a competitor holds patents, trademarks, copyrights or other related rights that dominate a successful product or service of a business, the profitability of a business, and even the ability to survive, may be at stake.

In addition, if patent, trademark, and trade secret rights, for example, have been licensed in from another company, it will be important to look to the license agreement to determine whether the scope of the license is sufficient in relation to the company’s business activities. One should not stop at the license agreement, however, because it is also possible that the licensor company obtained additional IP, such as patents, not in the license agreement, that may affect freedom to operate.

Thus it is often important to conduct independent IP searches in areas of relevance to the company’s business to identify third party patents, trademarks, or copyrights that may be of importance. Additionally, it is important to scrutinize any demand letters, litigation history, and other relationships with competitors to identify potential third party IP risks. Preferably, a company will periodically monitor the intellectual property rights held by competitors.

Check Under the Hood

Title to recordable IP rights (e.g., patents, trademarks and copyrights) should be verified by doing the appropriate searches. Any licenses, assignments, government rights, and liens (secured or unsecured) also should be verified by searches. In addition, any new intellectual property interests arising from an investment, acquisition or sale should be recorded in appropriate state and federal offices. Ownership interests in foreign countries require separate title searches, as well as separate assignments or other legal instruments for perfecting rights in those foreign countries.

For intellectual property rights not identifiable as an issued patent, a registered trademark or a registered copyright, detailed listings and explanations also should be provided. Such rights may include trade secrets, know-how, common law trade names, trade dress (unique appearance), trademarks and unregistered copyrights. For each of these, the inventors, authors and uses of the rights should be identified and the dates of first use recorded. In some businesses, these rights can be at the heart of a business and never should be ignored. Often, the dates of creation of first use are critical in protecting and preserving the rights. For example, dates and evidence of use of common law trademarks are important to preserve superior rights over a later user.