Many years’ experience as an in-house patent counsel leading IP due diligence for acquisitions of small and large companies in the oil and gas sector has taught me that assiduous IP due diligence may not only affect an acquisition decision, but it may also provide a roadmap for a successful integration of the acquired business and IP after the deal is closed.
IP due diligence involves a thorough investigation regarding the content and quality of the IP assets of a business performed by independent expert IP counsel. Nowadays, IP assets often constitute a major portion of the aggregate assets of a business, especially of a technology-driven business. A purchaser’s decision whether or not to acquire a target business may be resolved upon the valuation of the IP assets of the targeted business. A vendor may also commission due diligence on its own IP assets to better position itself for a business sale.
The scope of the due diligence may vary depending on the type of the IP involved, the importance of the IP in the transaction, and the nature of the transaction. For an acquisition, at a minimum IP assets forming part of the transaction need to be identified and their chain of title investigated to ensure that the vendor truly owns what it purports to sell. Any major issues around IP ownership should be assiduously investigated including those arising out of employment relationships, or contractual agreements such as licensing, collaboration, or non-compete agreements.
Key to any IP due diligence investigation is the identification, at an early stage of negotiations, of existing or threatened IP litigation. What is more, assessment of the likelihood of a potential negative judgment and its impact on the transaction is essential. Often, a purchaser may obtain indemnities from the vendor to cover litigation expenses and/or damages for existing or threatened IP litigation. However, the threat of a possible injunction that might affect freedom to operate for a whole product line may prove more difficult to address and could become a deal breaker.
Detailed IP due diligence investigation can involve specific analysis of a vendor’s freedom to operate, at least for the vendor’s key existing product lines. It may also involve assigning a monetary value to a vendor’s IP, based not only on the content and quality of the IP assets but equally importantly their relevance to existing and future commercial products. Finally, more and more frequently nowadays, IP due diligence investigations may include a review of the targeted company’s IP strategy, including policies and processes that may reveal hidden risks or potential strengths associated with the overall IP position of a targeted company.
Issues need to be identified as early as possible to allow parties to mitigate any risks. For example, appropriate corrective action may be agreed before closing or the transaction document may be drafted to include indemnities or warranties.