White: Say ‘I do’ to IP due diligence in business transactions

White

By Ryan O. White

Intellectual property is one of the most valuable and important assets of any consumer products, life sciences or technology driven company. Despite the inherent value associated with these intangible assets, IP rights are often overlooked or are only cursorily evaluated when a company is embroiled in a business transaction (such as a merger or an acquisition). However, when a careful due diligence investigation of a company’s IP assets is carried out as part of a business transaction, many times the perceived value that was originally placed on the deal begins to change.

An IP due diligence investigation essentially serves as an audit process that helps place value on a company’s intellectual property. The due diligence process also serves as a mechanism for identifying how and/or whether the business is effectively protecting its intellectual property rights, and whether it is protecting those rights directly associated with the company’s commercial products, operations and/or services. For example, a company having substantial IP assets may have third-party licensing opportunities that remain untapped, yet if pursued, could provide a significant incoming royalty stream to the company going forward. On the other hand, the investigation may uncover that the company has significant outgoing royalty streams or indemnification obligations that may negatively impact the company’s bottom line for several years to come. Identifying these hidden treasures and red flags early on in the business transaction can help the investigating party more effectively weigh the predicted value and risks associated with these assets and obligations.

There are several factors that should be considered when performing an IP due diligence investigation. One of the first factors that must be considered is who actually owns the intellectual property asset in question. In the patent context, if multiple inventors are involved, it must be determined if the inventors have each assigned their individual rights in the invention to the company, and if no assignment has been made, it must be determined if the inventors are contractually obligated to assign their rights in the invention to the company. To this end, if rights in the invention have been assigned to the company, it is also important to confirm whether these assignments have been recorded with the U.S. Patent and Trademark Office. As part of this review, it should also be determined whether any encumbrances from loans secured against the assets exist, and if they do, steps should be taken to remove them before the transaction is closed.

When studying the ownership and assignability of IP assets, a careful review of the company’s employment contracts is also essential to understand what obligations (if any) the employees are under when developing or contributing to the development of intellectual property. As part of this review, it is also crucial to determine whether the correct individuals have been named as inventors on the company’s patents, as well as whether any of these individuals are third-party consultants or collaborators that may have certain rights in the invention outside of the company. When third parties are involved, a thorough review of any associated joint development agreements that may exist with these individuals is also warranted.

Beyond ownership, understanding the enforceability of the company’s intellectual property assets and the company’s ability to practice its technology without infringing third-party IP rights are important. These efforts may include determining if the business has “freedom to operate” with respect to the products or services covered by the intellectual property being sold, purchased or transferred as part of the transaction. In other words, before the receiving party can appreciate the asset’s true value, it is important to first determine whether that asset may potentially infringe the IP rights of any other third parties. If performed sufficiently, a freedom to operate analysis can help prevent the receiving party from exploiting a potentially infringing asset, and as a result, help them avoid wasting resources by unnecessarily defending an infringement action that could have been avoided.

Determining whether any third parties are infringing the company’s IP rights is also an important part of the due diligence process. This effort requires a careful assessment of the company’s internal IP protection practices, and particularly whether it is implementing a strategy that sufficiently covers its commercial products and processes, as well as any potential “design arounds” that its competitors may pursue in an attempt to circumvent the company’s IP rights. It is also necessary to establish a system for monitoring competitors’ products and practices to thereby identify any infringing, or potentially infringing, activities as soon as they emerge.

While each business transaction takes on a life of its own, the ultimate direction that the transaction takes is often influenced by the IP due diligence process. Moreover, while it is impossible to create a universal due diligence checklist that can be used for each business transaction, some of the general concepts discussed here can be investigated at the onset of a business transaction to minimize future risks and to maximize the value of the deal. In the end, understanding the importance of sufficiently evaluating and leveraging IP assets as part of the due diligence process is of utmost importance to any business transaction and should not be overlooked.•

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Ryan O. White is a partner in Taft Stettinius & Hollister LLP’s Indianapolis office and a member of its intellectual property group. Contact him at [email protected]. The opinions expressed are those of the author.