Is your business anticipating an upcoming merger or acquisition? If so, you will be facing a number of upcoming due diligence responsibilities such as, but not limited to, financial stability, asset valuation, contractual obligations, employee benefits arrangements, ownership rights, licenses, and numerous other matters. However, one incredibly important due diligence item that cannot be forgotten is that involving intellectual property (IP).
IP due diligence generally takes the form of an inventory or audit to assess the quantity and the quality of IP assets owned by, or licensed to, a company, business, or individual. The due diligence process should also include an assessment of how IP is captured, protected, and owned by the business and an analysis of relevant competitors.
Typically, the due diligence process is carried out by a prospective purchaser in relation to the IP assets of a target business. However, IP due diligence can also be carried out by a company on its own IP assets in preparation for a transaction, such as a business sale or a major licensing deal.
Below is a non-exhaustive list of the primary activities that should carried out during the IP due diligence process. As the process unfolds, it may be necessary to drill down into one or more of the assets, especially if the asset is related to a core technology of the business.
Document retention and proactive steps as viewed from the IP owner’s perspective:
- Identify the key personnel and consultants who are in any way involved with the IP.
- Create and maintain a list of all of the patents and patent applications in the U.S. and any foreign country or region.
- Create and maintain a list of all of the trademarks and trademark applications in the U.S. and any foreign country or region.
- Create and maintain a list of all domain names and registrations of the business.
- Create and maintain a list of all copyright registrations and applications and includes a list of copyrightable material that has not yet been registered by the U.S. Copyright Office.
- Create and maintain a list of all contracts and agreements relating to patents, trademarks, trade names, brand names, copyrights, inventions, processes, know-how, trade secrets, or other IP, including licenses, royalty agreements, confidentiality agreements, and other agreements or arrangements to which the business is a party relating to any IP of the business or of any other entity.
- Using proprietary protections, create and maintain a list of all legal opinions and search reports.
- Create and maintain a list of all software products and licenses produced by or acquired by the business, other than software used for word processing and other general office functions and administration. Obtain all public domain, open source, copyright or community source code materials used, or planned to be used.
- Summarize all products and services sold or planned to be sold by the business. Such a summary should include the dates of first commercial sale for all products and services currently being sold as well as any future commercial launch dates.
- Identify and list any security interests taken against any of the IP.
- Identify any pending, threatened, or past challenges to the IP or right to use its IP and/or products and/or services.
- Identify and list the main competitors in the US and elsewhere.
Typical review and analysis steps as viewed from the IP lawyer’s perspective:
- Review any employment or other contracts for the key personnel and consultants to determine ownership, assignment obligations and fiduciary duties. Such a review may include employment and/or consulting agreements, including any agreements with prior employer(s), as applicable. Importantly, this review should also include agreements and communications between founders to ascertain any fiduciary obligations that may impact ownership of the IP.
- For patents and patent applications, review and analyze the scope and strength thereof to include, but not limited to, ownership, licenses, and the prosecution history of each such patent and patent application.
- Review the material trade secrets of the business vis-à-vis the patent portfolio.
- For trademarks and trademark applications, review and analyze the commercial usage, mark strength, coverage and status, licenses, renewal documents, and the prosecution history of each such trademark or trademark application.
- Compare domain names to trademark list to ensure continuity and proper association.
- Perform at least a cursory review of all copyrights and copyright registrations of the business.
- Review all contracts and agreements relating to patents, trademarks, trade names, brand names, copyrights, inventions, processes, know-how, trade secrets, or other IP, including licenses, royalty agreements, and other agreements or arrangements to which the business is a party relating to any IP of the business or of any other entity.
- Review all legal opinions rendered on the IP of the business, such as, but not limited to, all patentability, freedom-to-operate, infringement, validity and registrability matters conducted or commissioned by the business or by another on behalf of the business.
- Look at any software products produced by or acquired by the business, other than software used for word processing and other general office functions and administration. Obtain all public domain, open source, copyright or community source code materials used, or planned to be used, by the business.
- Perform at least a cursory review of all software products and licenses.
- Perform a comparative review of products and services sold or planning to be sold with the IP portfolio and ensure that IP protection adequately precedes commercial launch dates, trade shows, and advertisement campaigns.
- Review any security interests taken against any of the IP.
- Analyze the scope and relevance of any pending, threatened, or past challenges to the IP of or right to use its IP and/or products and/or services.
- Perform a cursory review of the IP owned by the main competitors in the US and elsewhere for potential monetization opportunities and to better asses the valuation of the IP assets.
These issues provide a starting point for any business that is considering a merger or acquisition in the near future and beyond. If you have specific legal questions for your business with regard to the quantity and quality of your IP, we can help. Our attorneys are experienced in all aspects of intellectual property law and business law.
This blog serves solely as a general summary of complex intellectual property issues surrounding mergers and acquisitions. It does not constitute legal guidance. Please contact us with any questions related to your company’s intellectual property or that involving a potential upcoming business sale or purchase.
On Monday, October 30
The IRS has just released its 2018 annual inflation adjustments, in which it announced that the dollar limitation under Code section 125 on voluntary employee salary reductions for contribution to health flexible spending arrangements (health FSAs) is increasing to $2,650. Previously the limitation was $2,600. The authority for this increase can be found in Rev. Proc. 2017-58: 
