Intellectual property (IP) encompasses a broad range of human creations, such as inventions, literary and artistic works, industrial models, and trade-related trademarks. Essentially, IP safeguards the fruits of intellectual endeavors, which hold significant commercial and moral worth. Within the realm of IP, we find three key categories: patents, copyrights, and trademarks. These intellectual property rights (IPR) grant creators or owners of such intangible creations the privilege to reap the rewards derived from their intellectual contributions.
What is IP due diligence?
In the fiercely competitive landscape of various industries, businesses have recognized the significance of intellectual property (IP) assets as a means to expand their operations, generate capital, and achieve financial gains. Consequently, companies regularly engage in IP audits to ascertain the complete value of these intangible assets and capitalize on their potential advantages. IP due diligence, in essence, involves the assessment of a business's IP portfolio, encompassing the validation of existing intellectual property rights, evaluating the extent of their protection, analyzing associated risks, and ultimately, determining their prospective value.
IP due diligence is a wide approach that proposes an in-depth knowledge of a business's ethereal assets, including their worth and related risks. Whenever a company transaction concerns IP, due diligence is conducted to monitor and assess the potency, scope, and forthcoming prospects emanating from these intangible assets, such as patents, copyrights, or brands.
How to Conduct IP Due diligence?
Conducting meticulous IP due diligence requires the expertise of professionals and demands a thorough approach. Ideally, it is recommended to initiate the process of IP due diligence at the outset of negotiations, as this enables the early identification of any legal issues that might impact the value of the intellectual property (IP). Allowing sufficient time for a comprehensive due diligence investigation not only facilitates a more accurate assessment of the IP's value but also enables proactive measures to address any identified legal concerns.
While each business transaction is unique and may entail specific requirements for conducting IP due diligence, several general prerequisites should be considered, including:
Identify IP assets
Within every business, there exist intangible assets in the form of patents, domain names, trademarks, and brand names. These intangible elements serve as crucial subjects that require thorough identification and understanding.
Verify Ownership and existence of IP
During the process of conducting IP due diligence, one of the initial matters that is commonly examined is ownership. A detailed analysis takes place wherein a sequence of questions is posed concerning IP assets to specify the extent of the target business's ownership and ensure the absence of any hurdles that might interfere with a smooth transfer. In cases where the ownership of an IP asset is in conflict, the seller is unable to transfer the title and privileges of the asset to another party. If it is discovered that the seller does not own appropriate ownership of the intangible asset, an evaluation is conducted to evaluate whether appropriate measures were taken to obtain the privileges from the authentic owner.
Check for applicable territory and terms
Verifying the validity of each IP asset is of utmost importance, including considerations of their duration and territorial coverage. It is crucial to recognize that most IP rights are limited to specific territories. Hence, it becomes essential to establish the jurisdictions where IP rights are safeguarded. Operating across multiple countries without adequate IP coverage in all relevant territories can potentially lead to complications in the future.
IP assets such as patents and copyrights possess time-limited validity, while copyrights, in some cases, enjoy perpetual protection. To accurately determine the duration of various IP assets, it is necessary to examine the applicable local IP laws in each jurisdiction carefully.
Check for any Third-party claims
In addition to verifying ownership, it is prudent to thoroughly investigate any potential third-party claims or interests related to the seller's IP assets. There are instances where rights may have been unknowingly acquired by a third party. Therefore, a meticulous examination of all license and franchise agreements, joint venture agreements, and memorandum of understanding is essential to identify whether any exclusive rights have been granted concerning the relevant IP. Additionally, scrutinizing the records of the IP office about the specific IP asset can help uncover any discrepancies that may exist.
Evaluate potential IP infringements
Likewise, during the methodology of IP due diligence, it is paramount to assess whether a third party is intruding upon the business's IP rights or if the firm itself might infringe upon the ownership of a third party. In either scenario, if the appropriate IP rights are burdened with hurdles, it is likely to lead to conflicts that can disrupt company functions. To mitigate such risks, conducting a freedom-to-operate (FTO) search becomes imperative. This search aims to determine whether the investor can utilize, manufacture, or sell IP assets without infringing upon any rights held by third parties. By executing an FTO search, a more exhaustive interpretation of others' patent rights can be acquired, and possible roadblocks can be recognized. If any lawful barriers are specified, bold actions can be taken to address them, thereby mitigating possible matters that may emerge in the future.
Regardless of the composition of the IP portfolio or the essence of the transaction, conducting IP due diligence serves the aim of recognizing and mitigating risks, thus allowing the realization of anticipations and pursuits. A convenient and exhaustive due diligence analysis not solely helps the parties concerned but likewise has the prospect to nurture long-term connections and encourage worthwhile business partnerships.