Intellectual property (IP) due diligence is an assessment of the IP owned or used by a company and third-party IP rights that may impact the company’s business. More often than not, companies do not think about IP due diligence until it is too late — in preparation for an initial public offering or sale of the business — causing many headaches. In particular, companies should periodically conduct defensive IP due diligence on its patent rights to ensure that it has the right to sell its products or services. Although the concepts below can generally apply to all types of IP (patents, trade secrets, trademarks, copyrights), this article is written with an eye toward IP that is protected by patents. 

Most IP due diligence begins with the following two questions: (1) What are the company’s products or services?; and (2) Does existing IP cover those products or services? Once all the IP is cataloged, legal analysis of the following issues must be done: ownership; freedom-to-operate considerations; and scope, validity and enforceability concerns. The scope and purpose of each of these legal issues are described in turn below. 

Ownership is often one of the first issues explored in an IP due diligence investigation, since a negative analysis can mean that the company may not be able to monetize its products or services. Typically, a series of questions are asked about each piece of IP in order to establish the company’s rights in its IP and to determine 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 company?; What are the company’s rights to transfer and assign their IP?; Are there governmental rights from funding?; and, Have there been any third-party challenges to those rights? 

A freedom-to-operate analysis evaluates whether the owner of the IP will be able to make, use and/or sell its products or services without infringing the IP rights of a third party. This analysis identifies potential legal roadblocks, such as valid patent claims of others that may be infringed and thus stand in the way of using the company’s IP. If any potential blocking patents are identified, a more detailed analysis will likely be needed. 

A scope, validity and enforceability analysis assesses the scope of protection and strength of coverage of the company’s IP assets. 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 such as obviousness-type double patenting. Enforceability, particularly in the U.S., 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. 

Receiving an unfavorable analysis in any of these categories does not mean the certain death of the company. However, it does mean that a company must revaluate how it is conducting business.

Washington Bankers magazines.