Due Diligence: Part Six, Intellectual Property

By Jeff Wolfe

At the Forrest Firm, we often represent clients as they negotiate and enter into strategic transactions with other companies, such as mergers and acquisitions, strategic alliances, and joint ventures and licensing. One of our most important jobs as corporate attorneys is guiding our clients through the process of due diligence associated with these types of transactions, especially regarding the mergers and acquisitions that occur between companies on a regular basis.

Our series of articles focusing on due diligence first discussed the big picture, taking an overall view of the process and its proper execution in the context of a strategic transaction. Next, we looked at due diligence with specific regard to assignment and change of control provisions, corporate records, and commercial contracts. Most recently, we discussed the importance of financing documents. This week, let’s take a look at the due diligence process as it relates to intellectual property.

Intellectual property due diligence covers patents, trademarks, trade secrets, copyrights, know-how, and other intellectual property, such as domain names for websites. Intellectual property may be registered, but an intellectual property due diligence investigation will also cover unregistered intellectual property (such as trade names that do not have a registered trademark), license agreements, and employee and independent contractor proprietary information agreements. In fact, intellectual property is often the longest section of a due diligence request list, but it is important that these requests are customized depending on the business of the target company. A tech company with a large patent portfolio is a good example of a type of target company that requires more specialized scrutiny.

The basic questions for intellectual property are ownership/status (e.g., registered in company name, assigned by inventors), length of protection remaining (if registered), and assignability. Besides these basic questions, the buyer also needs a grasp on any licensing arrangements for intellectual property, as well as security interests or other liens or encumbrances on the intellectual property. Lastly, the buyer will need to know of any claims of infringement by third parties or other challenges, claims, or allegations related to the intellectual property.

The buyer should also consider obtaining enforceability opinions for significant intellectual property assets. In addition to being very expensive, one downside to intellectual property legal opinions is that they can open a buyer to potential liability if the opinion creates a record that the buyer knew about potential infringement. The upside, however, is that it may prevent the buyer from doing a bad deal.

If you’re looking for help with due diligence on your next strategic transition, please feel free to contact me at the Forrest Firm. If your transaction has an intellectual property component, as many do, we can put together a due diligence team that includes a patent-focused attorney, Josh Price, as well as our in-house trademarks and copyrights specialist, Ed Timberlake.

Look for our next installment of the series coming soon, where we’ll discuss due diligence regarding litigation.