Tips for Structuring the IP Due Diligence Process

Every corporate merger or acquisition requires an examination of the target’s intellectual property.  Items as routine as customer lists and employee records can be covered by copyright and trade secret laws.  Even small companies who don’t have any patents or significant trademarks often develop their own software or customize third party software to help them implement manufacturing or other processes.  It’s important that every due diligence investigation identify and confirm the ownership of all such IP.  Important issues to consider in IP due diligence include:

PATENTS

When requesting information about patents and patent applications, a buyer should request copies of ownership records, fee payment records, files corresponding to pending applications, and an explanation of how each patent relates to the company’s products or services.  The buyer should also independently check ownership records, fee payment records, and status information with the USPTO.  The buyer’s review should ensure that each inventor has assigned his or her entire interest in the patent to the seller because the patent will be jointly owned unless the seller has acquired all such interests.  The buyer should also identify and acquire all of the seller’s patents that expired within the past six years, as the buyer can acquire the right to sue for past infringement of such patents.

TRADEMARKS

When requesting information about trademarks and trademark registrations, the buyer should inquire about and independently check the status of all trademark applications and registrations.  In addition, it is important to correlate the registration with the goods or services that are the subject of the registration, to ensure that the seller is using the mark in connection with the relevant goods or services.  This is because a trademark owner must continuously use the mark with the goods or services in order to keep its trademark rights.

DOMAIN NAMES

The buyer should obtain a list of domain names that are owned and registered by the seller.  Then, the buyer should independently check ownership records for those domain names with a known registrar.  The buyer may also wish to check domain name registrations that correspond to important trademarks of the business.  This independent check can be performed using a database from a commercial domain name registrar.

COPYRIGHTABLE WORKS

The seller should provide a list of registered copyrights, along with a list of unregistered copyrights that are material to the business.  Many times a company will not obtain a copyright registration on software that it owns.  It is important to obtain this software by listing it on a schedule of material unregistered copyrights.  It is also important to determine who created material copyrightable works (i.e., employee or non-employee), to ensure that the seller owns the work.  If a non-employee created the work, then the target should produce an assignment document showing that the target acquired the work from the creator.

LIENS AND LICENSES

The target should provide copies of all licenses, security interests, payment obligations and other documents affecting the company’s intellectual property.

THIRD PARTY IP

The target should identify all third party intellectual property that it uses, and it should also provide copies of all license agreements regarding third party intellectual property, including off-the-shelf software.  If any of the licenses involve patents, the buyer must note that patent licenses are not assignable unless assignment is specifically permitted by the terms of the license agreement.

OPINIONS

A buyer should ask the target whether it has obtained any legal opinions relating to intellectual property.  However, the target may be reluctant to provide copies of the opinions before closing, as disclosure of the opinion may result in loss of attorney-client privilege.

LITIGATION

The buyer should request detailed information about current litigation, past litigation that resulted in a settlement or court order that affects current operations, and any other information suggesting that a potential for litigation involving IP exists.  Litigation matters include not only infringement matters, but also claims that could adversely affect the validity or target’s ownership of IP.  If a potential for litigation exists, the buyer should determine the potential loss of income that may occur if the lawsuit prevailed against the target in order to assess the potential risk that the litigation may pose.

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