IP Due Diligence

Most companies these days are aware of the importance of intellectual property (IP) particularly if they are operating in the tech sector.

However, the first time that the value of the IP is tested is typically when the company comes to seek investment, or sale of the company, and the IP portfolio is subject to due diligence.

It is at that stage that the investment of time, energy and money to build up the IP portfolio is tested.  In the best cases, the IP portfolio will positively enhance the value of the company.  However, in other cases, problems that come to light during IP due diligence can cause significant reduction in the value of an investment, or even scupper a deal altogether.

We provide an overview of the IP due diligence process, and some tips to ensure that the process runs smoothly and produce the most successful possible outcome for the company.

What, When, Why

Before a significant investment, all investors will wish to conduct due diligence. For tech companies in particular, IP may be their most significant asset and the IP due diligence may be the most important part of the process.

IP due diligence may be thought of as an assessment of a company’s own IP or that of others, and how it affects a deal or other activity.  The IP may include patents, trade marks, designs (both unregistered and registered) and copyright, for example in software code.

It usually involves the asking of awkward questions.

What IP do you have (and do you own it)

No two IP due diligence processes are the same.  However, almost all will involve an assessment of what IP you have and whether you actually own it.

For example, perhaps the inventors on your patents were not actually employees of your company when inventions were created (even if they are now) or perhaps the invention pre-dated your company, with the company being set up in order to exploit the inventions, which were subsequently patented, or perhaps you have used consultants to develop your IP.  In these and other circumstances it may well be the case that ‘your’ IP is not actually owned by you, even though you may have paid the fees and even though the IP may be registered in your name.

Problems with ownership may be addressed by execution of assignment documents ensuring that ownership rights are transferred to your company.  The important thing here is to ensure that any assignment documents are executed at an early stage, well in advance of any due diligence exercise. 

For example, it may be straightforward to have an inventor or contractor execute an assignment when they are still working with your company.  It may be much harder to do so months or years later when, for example, they could be working for a competitor or when relationships may have cooled. 

It may also be necessary to have assignments recorded before national patent offices or other authorities, where necessary

Hopefully, if there has been an awareness of the importance of the ownership of IP throughout the life of a company, and if assignments have been executed at an early stage, this part of the IP due diligence will be a box-ticking exercise.  However, it is not always and any serious problems with IP ownership may, in the worst case, cause a deal to break down.

How strong is your own IP?

Many IP due diligence exercises will go further than asking merely whether you own any IP, and will also assess the strength of the IP portfolio. 

There are many forms that this part of an IP due diligence process can take.  However, the underlying goal will typically be to assess whether your main products, brands, business ideas etc are actually protected by your IP.  There may also be an assessment of how effective your IP may be in restricting your competitors or keeping them out of your market.

Typically, this will involve detailed review of official correspondence such as examination reports and search reports.

The key factor is to have an IP strategy in place, and to revisit the strategy, and review the IP, regularly.  Companies should be asking themselves regularly whether the IP on which they are investing time and money is actually protecting their key products and markets, particularly as products and business objectives change over time.  If a company does this, it should be in good shape for any IP due diligence exercise. 

A good question to ask is how would you strengthen yours if a deal goes ahead and more funds are available?  

Threats

Finally, investors are aware that your competitors will have IP too.  The key issue for the investor is whether your competitors’ IP may be used to stop you or restrict your activities in future, given your business objectives.

Typically, this part of the IP due diligence process will involve conducting freedom-to-operate searches to identify third party patents or other IP that may be of concern.

It is important to be aware that there will always be some risks of IP infringement, and some of these may come to light for the first time during the due diligence process. However, there may also be ways to mitigate such risks once they have come to light, for example by altering the design of a product to reduce the risk, obtaining a licence, or finding evidence that could potentially invalidate the patents or other IP in question.

Conclusion

Regardless of the nature or scope of the IP due diligence process, early preparation on behalf of the company is the key factor in ensuring that the process runs smoothly and has a successful outcome.  In particular, it is important that an IP strategy is in place and that the time and money invested in the IP portfolio is being effectively spent in protecting key products and business areas.  It is also vital that the company is alert to ensuring that it actually owns its IP, and in having assignments executed at an early stage.  Some basic awareness of the key issues, early consultation with professional advisors, and remaining alert to the importance of IP can ensure that a company is in good shape for anything that comes up during IP due diligence.

The key message is - be prepared!

 

Tim Hargreaves

November 2016

 

Marks & Clerk

www.marks-clerk.com

 

 

 

Posted on Tuesday, 20 December 2016 under advisory