IP Due Diligence: Everything You Need to Know

Intellectual property due diligence is the investigation to determine the value of a company's intellectual property. Intellectual property due diligence is also called IP due diligence. IP due diligence is most often completed by intellectual property attorneys.

A company may complete IP due diligence on their own intellectual property or someone else's. IP due diligence is often done to prepare for a merger or acquisition.

What is Intellectual Property?

Intellectual property is an intangible asset. Intangible assets are patents, trademarks, copyrights, and trade secrets.

Intellectual property may not sound like much since it is intangible. This is not the case. Often a company's intellectual property is its most valuable asset.

A company must understand its intellectual property portfolio. A true understanding will provide the knowledge of what to sell and what not to sell. To make money, intellectual property must be understood. This is true whether buying or selling.

What's the Goal of Intellectual Property Due Diligence?

The goal of IP due diligence is to assess the value of a company's intellectual property.

Assess Value

IP due diligence assesses all of a company's intangible assets or intellectual property. The goal is to assess depth, scope, enforceability, ownership, and future potential.

IP due diligence also gives the buying and selling company the chance to assess which intellectual property assets are being sold and which are not.

Avoid Risk

One of the goals of IP due diligence is to avoid risk.

Before purchasing intellectual property, it's important to understand the value and how it can be used. This includes understanding the risks and limitations attached.

Two Types

When selling intellectual property, IP due diligence is completed defensively. This assessment brings understanding to the sale value of the intangible assets. A defensive IP due diligence should ask and answer these questions.

1. What is the value of the intellectual property asset being sold?
2. Is the value of the asset being maximized?
3. How can the value of the asset be maximized?
4. What is the state of the asset's patent?

If purchasing intellectual property, a company will complete an IP due diligence offensively. This type of assessment looks for any problems. An offensive assessment also seeks to value the intangible assets. Offensive IP due diligence should ask and answer these questions.

1. Is the desired intellectual property covered by any patents?
2. Are the patents valid and enforceable?
3. Can the patent's ownership be transferred?
4. Is there pending litigation?
5. Is there potential for future litigation?

Each side of an IP due diligence seeks a different goal. To either sell or buy assets. The breadth and depth of the due diligence are relative to the value or potential value of the intellectual property.

Completion of Intellectual Property Due Diligence

IP due diligence should be done at the beginning of negotiations. Intellectual property sales and negotiations often have a short timeline. This can be a timely process.

Not allowing enough time can be risky. The shorter the time frame, the more likely there are undiscovered issues. This may cause problems after negotiations are done. IP due diligence attorneys have processes in place. They can ensure their investigations are thorough and efficient.

The investigation is more concise when there is enough time allowed. A thorough investigation results in less risk for the buyer and seller.

With more information, companies can make a more educated decision. In the end, a better decision will be made.

The information that is gained can be used during negotiations. The results can set the sale terms, restart a stalled negotiation, or even cancel a negotiation. Everything hinges on what is discovered during IP due diligence.

The Best Time to Complete IP Due Diligence

IP due diligence is often completed as part of an investment, merger, or acquisition. Intellectual property is just an area that might be acquired during a merger or acquisition.

Intellectual property is often an afterthought. Often it is the most valuable aspect of a company's portfolio.

Intellectual Property Attorneys

IP due diligence should be completed by an intellectual property attorney or team of attorneys.

Investigating intellectual property value and risk requires a highly specialized type of knowledge and skill set.

Consider hiring intellectual property lawyers who are not associated with their company. An unbiased opinion is important when preparing for a sale, merger, or acquisition.

Why is Intellectual Property Due Diligence Important?

IP Due diligence offers a company understanding of an intellectual property portfolio. The portfolio might be their own or someone else's.

The strength of an intellectual property portfolio can determine a company's worth. This is becoming more common in the technology age. Some companies deal only in intellectual property and have no physical assets.

Other reasons to investigate the value of an intellectual property are:

• A company is interested in purchasing your intellectual property
• A company is interested in licensing your intellectual property
• A company is interested in an intellectual property trade
• Preparing for initial public offering or IPO listing on a stock exchange

Intellectual Property Due Diligence Procedure

A clear IP due diligence procedure makes for a smooth investigation. There are three steps to complete an investigation.

1. Prioritize goals
2. Investigation
3. Results analysis

Prioritization

Without a goal, the investigation could go on forever. Defining goals allows intellectual property attorneys to do their job well.

After defining goals, prioritize them. Decide what goal is the most important. Time is often limited. Defined and prioritized goals will make the investigation more efficient.

This is also the time to define parameters and guidelines.

Questions to Ask

Buying and selling intellectual property is a business transaction. Just like purchasing a coffee. The questions asked during this stage helps determine the company's goals.

These questions should deepen the understanding of the business being acquired. The answers will also broaden the understanding of that business's intellectual property.

• Is the purchase of the intellectual property the goal of the business transaction?
• Who is using the intellectual property that's being purchased?
• Does the business have intellectual property protection?
• What type of transactions are completed?
• What are the most important objectives of the transaction?
• How do intellectual property assets fit into the business objective?

The answers to these questions begin to define the scope of the IP due diligence investigation. If only some intellectual property assets are of interest, only those need to be investigated. Other intellectual property assets may be ignored. Understanding the scope allows the due diligence investigation to take place efficiently.

Scope of Intellectual Property Due Diligence

The scope is the depth and breadth of the IP due diligence investigation. The scope defines what intellectual property assets should be investigated. The scope also defines the extent those intellectual property assets should be investigated.

The scope is not unchanging. The scope of the project is constantly changing. As new information is discovered, the scope of investigation changes. Mountains of information are collected and analyzed during the investigation stage. This is when the scope will likely be extended.

Investigation

The investigation is the most time-consuming part of IP due diligence. This is the search for facts and information. During the investigation, it's important to keep in mind the goals and prioritization to maintain focus. These are the first two questions to answer.

1. What products are involved in the business transaction?
2. Does the intellectual property assets cover those products?

Each product's intellectual property must be examined. Focus on the relationship of the intellectual property with the products of interest.

Then it's time to analyze the legality and quality of the intellectual property.

• Operational freedom
• Potential liability and risk
• Validity and enforceability
• Ownership, status, and control
• Strength and economic value

Operational Freedom

The freedom-to-operate assesses the ability of the business to use or sell that intellectual property. This includes examining third-party intellectual property rights. Potential legal issues are identified here.

Potential Liability

Once identified, it's important to investigate any potential legal problems. The goal is to assess risk. The potential liability or risk may include:

• Infringement upon third party rights
• Potential threats of litigation
• Current litigation

Validity and Enforceability

This section analyzes whether intellectual property has value. This includes investigating if the product or intellectual property is unique and novel. If not, the patent may be invalid.

The strength of coverage and protection will also be assessed here. Intellectual property that cannot be protected, isn't worth investment.

Ownership, Status, and Control

Ownership is often the first to be investigated. A problem with ownership can be a deal-breaker. If ownership cannot be established, the intellectual property cannot be bought or sold.

For each asset, the IP due diligence must assess ownership. This includes:

• The intellectual property registrations are up to date. This involves checking with the filing office of that type of intellectual property.
• A clear chain of title can be identified.
  • Who is the creator or author?
  • Who is the previous owner?
  • Are there multiple owners?
  • Are you purchasing it from the only owner?

  For each asset, IP due diligence must assess status and control.

  This includes trade secrets:

  • Investigating any trade secret policies or procedures.
    • How are the physical agreements containing trade secrets handled?
    • Assess whether any of the software's code is open source
    • If some of the code is open-source, the team must investigate
      • Restrictions
      • Terms
      • Conditions

      All of these measures lead to a thorough understanding of the intellectual property being investigation. These measures also look to avoid risk. If any intellectual property has been licensed to a third party, that agreement must be investigated.

      For each asset, the IP due diligence must investigate government approvals, restrictions, and regulations. This will depend upon the intended use of the asset.

      For each asset, the IP due diligence must investigate trademarks and copyrights. There is potential for international trademarks and copyrights. Assets do not have to be trademarked or copyrighted. If they are not, it's important to know, you will want to check for unregistered rights

      Strength and Economic Value

      Once the intellectual property ownership has been established, it's time to determine value. There are two types of value: economic and strategic.

      At this point in the investigation, the priority of assets must be determined. The most important or most valuable assets should be investigated most thoroughly.

      Economic value is dependent upon the strength, scope, and limitations of the intellectual property. Value is also determined by the business plan and the desires of the acquisition. This idea seeks the quality of the asset in combination with the business plan.

      The Results

      Ultimately the IP due diligence investigation provides the results. This stage involves combining the information into a cohesive, understandable format. Reviewing the goals will help. The goals ask questions. The results have the answers.

      From the results, decisions are made. The results offer advice and guidance for the next step.

      Intellectual Property Due Diligence Documentation

      Clear records should be kept throughout the process. Once completed, all documents are reviewed for summary and report. The notes and review should point out any exclusions. It should be clear why the exclusions were made.

      Potential problems with intellectual property assets are very important to note. One of the goals of IP due diligence is to identify potential problems.

      Intellectual Property Due Diligence Checklist

      An IP due diligence checklist is important for keeping track of completed tasks. IP due diligence is a highly specialized field. Organizing paperwork and documenting the process make IP due diligence simpler.

      You will most certainly need to include a schedule of all trademarks, service marks, trade names, copyrights, and patents. Additionally, include the following for every asset that has or is being marketed or in the process of being developed by your company:

      1. List everyone that worked on the product, including the documentation, as well as changes that were made.
      2. Detail each worker's status while working on the product. For example, if they signed over all rights to the Company for the work that they completed each product.
      3. Detail everything regarding the creation of the product.
      4. Include product reviews.
      5. Date of first use for all unregistered trademarks includes the dates for copyrights that were first publicly released.
      6. Any paperwork related to registrations for patents, patent applications. As well as any patent searches the Company conducted along with the results
      7. Any documentation of agreements with outside contractors that were involved with the creation of any of the products.
      8. Any documentation regarding the assignment, purchase, sale, or license of proprietary rights. This will also include patents, copyrights, trade secrets as well as trademarks.
      9. Anything that was provided to the public over the last two years.
      10. Twelve months' worth of maintenance and error logs.
      11. All agreements with outside parties concerning company products.

      Examples of IP due diligence checklists can be found online. Intellectual property attorneys will have their own due diligence checklists.

      Reasons to Use Intellectual Property Due Diligence

      Completing IP due diligence on your own company can be highly beneficial. IP due diligence provides a company with the value of its intellectual property assets.

      Understanding the value of your company's assets allows you to determine if they are valued at their potential. You might find that the assets are undervalued.

      Even if you're not currently preparing to sell your intellectual property, creating an IP map can be extremely enlightening. You'll want to include every aspect of the Intellectual Property, include each individual that was involved in the development of each asset. Take the time to breakdown each branch, start with the inventor, and verify that all of the documentation is on hand to support each aspect of the process. The documents might include consent forms from a transfer agreement or a waiver from an employee.

      In completing an IP map you will be confident that you have filled all of the gaps and ironed out every wrinkle. Additionally, you will have the necessary documentation on had to provide a prospective buyer. Future due diligence will be completed without issue, therefore allowing for a quick sale.

      If any asset problems are identified, they can be fixed. Fixing problems before someone wants to buy them, simplifies the selling process.

      Common Intellectual Property Due Diligence Mistakes

      There are many potential problems in IP due diligence. With careful planning and knowledge, these mistakes can be avoided.

      Identifying Interest

      It is important that both the buyer and seller of the intellectual property clearly define which assets are of interest. Without a clear list of assets of interest, IP due diligence cannot be completed properly.

      Unbiased Opinion

      If you are interested in the value of your own intellectual property assets, seek an unbiased opinion. In-house attorneys are biased. An unbiased opinion of intellectual property value is more reliable.

      Time Pressure

      It's common that IP due diligence is completed on a tight time schedule. It's important to recognize that time pressure and deadlines open the door to mistakes. Missed information can cost money and time later on.

      Ownership Issues

      When self-evaluating, unknown ownership issues may arise. This should be taken care of as quickly and efficiently as possible. These types of problems should not be ignored.

      Risks of Intellectual Property Due Diligence

      When done properly, there should be a minimal risk from IP due diligence. If any of the above mistakes should happen, there are risks.

      Risk One

      The value of the deal will be reduced. If there is an issue, the terms of the deal may become less favorable.

      Risk Two

      The deal may be put on hold. If problems arise, the deal will be postponed for further investigation. This will happen for ownership issues or patent problems.

      Risk Three

      A second negotiation. If a problem arises during the first negotiation, the negotiation may be canceled. A second negotiation is likely to have less beneficial terms. If a third party owner is found, there may be additional negotiations.

      Risk Four

      The deal is abandoned. If the problems discovered during IP due diligence are significant, the deal might be canceled.

      Intellectual property due diligence is extremely important for any business transaction that entails the purchase or sale of intellectual property. IP due diligence guarantees that you are selling or purchasing the goods you that intend to and want.

      If you're interested in IP due diligence, consider hiring one of UpCounsel's intellectual property attorneys to help. If you have any questions about intellectual property or IP due diligence, UpCounsel is here to help. You can post your question or concern on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.

      Frequently Asked Questions

      • What is IP due diligence?

      IP or intellectual property due diligence is an investigation into the ownership and value of intellectual property.

      IP due diligence is often completed before a sale of intellectual property. It can be completed by the seller and or the buyer.

      • Who should complete IP due diligence?

      IP due diligence takes a specialized set of skills. Intellectual property attorneys should be hired to investigate intellectual property.

      Get Legal Assistance

      If you are looking for help with intellectual property as well as general advice along the way, you can post on UpCounsel to receive free custom quotes from the top 5% of attorneys with experience in your area. Customers have typically saved up to 60% on legal fees in comparison to large law firms. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.