What is IP Due Diligence? | Intellectual Property Due Diligence

What is IP Due Diligence?

August 28, 2020

Intellectual property is a valuable resource worth protecting, but it can also be a liability. That’s why Intellectual Property Due Diligence plays such a crucial role in the success of buying and selling a business. But what exactly is involved? Should only technology and manufacturing companies be concerned? While each transaction is unique, we’re pleased to offer some insight into the process.

What is IP Due Diligence?

Due diligence is an audit process that business owners and buyers go through when evaluating a business’ value and its potential problems. IP due diligence is the part of due diligence that concentrates on the business’ intellectual property (IP,) such as trademarks, copyrights, patents and trade secrets. This isn’t limited to the tech or manufacturing industries – every business has some element of IP to look at when performing due diligence.

When you are considering buying a business, you want to make sure you are paying an appropriate price, and are not taking on too much liability - and that’s where IP due diligence comes into play.

IP due diligence is also a protection for the business owner. Whether you want to attach a dollar value to the company as a whole in order to advertise the business for sale, sell some stock, or get a loan, it’s important to know the value of your intellectual property. It is advisable for business owners to require any third party potential buyer to sign a Non-Disclosure Agreement (NDA) before revealing company information during due diligence.  

Proper due diligence means investigating each and every relevant and material detail related to the business. Let’s take a look at the key areas that IP due diligence takes into consideration.

Trademarks

All businesses have some element of trademark – this is the name or logo that identifies your company or product.  Trademarks can be registered or not, and they all have value regardless of registration status.  

The first part of the process involves investigating what names, logos, and phrases are being used by the company to identify the origin of the products or services the company sells.  Then for each of these their strengths and weaknesses are evaluated with such questions as:

  • Is the mark registered with the US, and in other countries?  
  • What goods or services is the mark registered for and does it line up with the reality of how the mark is being used? 
  • Should a mark be registered for more or different goods or services? 
  • Is the mark being used consistently?  
  • Is a TM or ® always included with the mark?  
  • If the mark is registered, are maintenance fees and filings up to date, and has the mark been declared incontestable?  
  • Are all registered trademarks properly owned by the business?  
  • If the mark is not registered, can it be?  
  • Should it be registered in countries outside of the US?
  • Is there a chance any of the company’s marks might be infringing on other trademarks?  

The investigation continues as to whether similar marks exist, registered or not, that are being used by other companies for similar goods or services, and if so, whether the company has been adequately protecting its registered marks, for example by filing oppositions or sending cease and desist letters.  If a trademark owner does not actively protect its mark, it can lose the registration.

Copyrights

Copyright rights can be very important for some businesses, and minimal for others.  Any literary or artistic work such as a song, photograph, essay, or architectural plan automatically has copyright rights, meaning the owner can prevent others from copying it.  Copyrights can be registered or not, and again, they all have value regardless of registration status.

An examination is made as to what kinds of content the company has created or owns that adds value to the company.  The most important items are identified and checked for registration with the US Copyright Office, and if they are registered, whether they have been assigned to the company.  Employment contracts and contractor agreements are checked to make sure the company owns the content which employees and contractors create.  

The copyright investigations go both ways in case the company is using anyone else’s copyrighted material without a license, for example a photo on the company’s web site.  Has the company received any cease and desist letters, and has it responded in a timely manner?  Copyright rights remain in place regardless of whether the owner actively enforces those rights.  

Patents and Trade Secrets

This category is likely the most important for tech firms and manufacturers, but may not apply at all to many companies.  Patent protection is not automatic and only covers new, useful, and non-obvious inventions for a limited time including machines, manufactures, improvements, and some methods.  Trade secret protection can cover valuable things that are patentable or not, and it requires that a process or invention be carefully kept secret. Registration is never involved. A company may have patents, trade secrets, and products or processes that could become patents or trade secrets.

An analysis is made of what patents the company may have, either pending or granted, and whether each patent and patent application has been properly assigned to the company by the inventors, and whether maintenance fees have been paid.  Other factors include:

  • Whether there are any foreign patents.
  • How broad or narrow the claims are, and how enforceable they are.
  • Whether the company is capitalizing on the patents to produce products or licensing the technology to others.
  • Whether or not the patents are obsolete, and if they could be sold or licensed to produce income.
  • If the company licenses and practices technology from other inventors or companies.
  • What technology the company is developing that might be patented in the US or abroad, and whether it has been kept secret.
  • Whether the company has trade secrets, and if they are being adequately protected.
  • How strong the company’s granted patents are, and how likely it is that an infringer could invalidate one of the company’s patents.
  • Whether any of the patents have been challenged.
  • If the company has patented parts or items made in other countries where infringement is rampant.
  • How easy it is to detect infringement and whether any counterfeits exist.

To evaluate risks, careful scrutiny is made as to whether the company may be infringing any valid patents belonging to others.  A Freedom to Operate (FTO) analysis might be considered to better understand whether competitors have conflicting rights to the company’s technology. 

Next Steps After Investigation

Once many details have been gathered, a value can be assigned to the company’s IP.  It may be even more important to set out action items uncovered during investigation which should be taken care of to reinforce the company’s IP rights.

Committed to Genuine Expertise

Calkins Law Firm specializes in representing buyers and sellers in merger and acquisition transactions and privately negotiated investments and we are committed to providing genuine expertise in business law advice, counsel and representation for our clients. We understand the vital role proper due diligence plays in the sale and acquisition of a business. Learn more about the M&A process and contact us today to speak with our team about your unique needs. 

We’re so pleased to have Kathy Perales joining the Calkins team. With over 20 years of experience she knows the importance of weighing costs and benefits, risks and rewards when it comes to intellectual property and she looks forward to diving into the analytical process on behalf of her clients with genuine passion. Get to know a little more about Kathy here. We look forward to working with you.

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