A. Introduction
Successful commercialization of intellectual property assets often entails a significant change in the nature of the owning organization, such as a transfer of ownership of the enterprise, a conversion to a different form of organization, the financial investment by third parties, or a merger or acquisition. These are the desirable developments, representing a planned “end game” move. In any of these changes, it is likely that outside individuals and their advisors will conduct a “due diligence” evaluation of the IP assets, much as they will critically review financial and other legal issues. In many instances, the IP assets are the enterprise’s most valuable assets.
In the IP asset due diligence review, many issues are investigated, all touched on in earlier portions of this IP Tool Kit. An effective IP asset review can make the difference between the transaction occurring, or significantly affect the value given to the IP assets. In our legal practice, we encounter situations where a party contemplating such an IP asset transaction regrets not addressing the IP due diligence issues sooner. Even though you may not anticipate that your company or business enterprise will be confronted with these matters, be aware that changing circumstances occur and the best approach is to act in a manner that addresses IP asset management matters on an ongoing basis. Acting too late can result in irretrievable losses of opportunity.
B. Common Issues Resulting From Insufficient Attention to IP Asset Management
1. Thorough IP due diligence reviews often uncover the following defects or restrictions:
• Ownership issues – The assignment of ownership in patents or patent applications may not have been attended to. Failure to obtain agreements from consultants or contractors can result in a loss of rights, even where the services were fully paid for.
• Freedom to practice concerns – A valid patent does not confer a right to practice or operate. Implementing a patented technology could result in infringing another’s IP rights. Often attention is paid only to the “strength” of a patent and not to the practical issue of whether or not others hold “blocking” patents.
• Validity Issues – Sometimes prior technology or “prior art” exists that renders a patent, although issued by a governmental patent office, invalid or unenforceable.
Sometimes, information not considered in the process of granting a patent effectively renders it without value. It is also common to encounter a situation where prior art is found in a foreign patent application not considered by the U.S. Examiner which can be devastating to the value of the U.S. patent. This information is easily found but often overlooked.
• Limitations on asset value – It is common for those not trained in the intricacies of patent claim interpretation to overestimate the scope of a patent. What initially appears to be broad protection can, when critically reviewed, be very limited. Valuing or “monetizing” IP assets is inherently difficult and inexact. However, experts can provide essential guidance in transactions worthy of bringing them in.
• The presence of restrictive legal obligations to third parties– License or other agreement terms can include extreme requirements, such as high minimum royalties or a loss of rights if certain contingences are not met; for example, reaching certain sales volumes or obtaining governmental approval.
• Third party claims – In some cases a company is aware of an IP infringement concern that can rear its head again after a transaction is completed.
• Commercial viability of IP assets – The ability to commercialize IP assets needs to be scrutinized. There are millions of valid and apparently valuable patents on products that cannot be made commercially in a profitable manner or do not have an available market. Some inventions are truly before their time.
C. Business Types Involved in IP Due Diligence
Any type of entity having an interest in IP assets can be involved in an IP due diligence review. Various types of enterprises have different needs in this area. Following are examples.
1. Individual IP developers of an IP asset, such as sole inventors, often desire to ultimately license the IP asset to a larger business, or intends to be acquired as a going concern or sell (assign) the assets. In any of these situations, the other side in the transaction will likely conduct an IP due diligence review.
2. Small businesses are often situated much like the sole proprietor IP developer mentioned above, with similar intentions for their IP assets. These enterprises are also more likely to seek outside venture capital. Attracting additional talent to help manage the company or aid in development of products or services is also a frequent plan. While an IP asset due diligence review is common in the cases of a financial investments, savvy potential employees or partners are well advised to make such inquiries when IP assets are important.
3. “Spin-off” companies are often created based on technology from a university, research organization or governmental agency. These developing organizations usually do a good job of undertaking IP protection measures. However, typical IP issues arise where the developing organization matures and seeks to change its form of organization, solicit investors or license its technology or seeks an equity transaction.
4. Mid-sized or large companies are often involved in mergers or acquisitions. Licensing IP into and out of such companies is also common.
5. Investors frequently seek a review of IP assets. Savvy investors want some assurances regarding IP assets before financial investments or equity commitments are made.
6. Licensors or Licensees need to assess IP assets carefully before committing to a license agreement.
D. Due Diligence Checklist
Like any form, a due diligence checklist is a starting point and cannot be truly comprehensive or address nuances of a particular transactions. Capable advisors and counsel will focus in on key points or probe into areas beyond the typical inquiries.
To find out more please access our IP Primer page.
