Tips On Doing Due Diligence Of Intellectual Property Assets

Wednesday, October 26, 2005

Alec Szibbo and David Spratley, Glasser LegalWorks, http://

Abstracted from: IP Due Diligence In M&A Transactions
By: Alec Szibbo and David Spratley Davis & Co., Vancouver, British Columbia
Cyberspace Lawyer - Vol. 10, No. 2, Pgs. 9-15

Overview:
Explains how an acquiror should perform due diligence on a target's intellectual property. Canvasses trademarks, copyrights, patents, and sometimes-overlooked types of intellectual property.

Do not neglect IP due diligence.
No acquiror would close an M&A transaction without having completed due diligence on the target's tangible assets. Yet all too often, specialists Alec Szibbo and David Spratley caution, the acquiror fails to perform the same level of due diligence on the target's intellectual property. Due diligence is necessary to identify the target's IP assets and their value, establish whether the target owns and can sell them, and uncover hostile third parties' claims or infringements. A stock-purchase deal, in which the acquiror assumes all of the target's liabilities (e.g., as an infringer), frequently requires more intensive due diligence than does an outright purchase of IP assets. If IP is crucial to the deal, the diligence team should contain IP attorneys from the outset.

Scrutinize the assets.
The authors suggest several issues to analyze before starting due diligence. For example, ascertain what data can be obtained from the target­which might have performed an IP audit­and what must come from public sources of information; try to obtain the same data from different resources, since even official records can be faulty; and encourage the target to make disclosures by signing a confidentiality agreement. Have the target list all its registered and unregistered trademarks, patents (plus industrial designs, in jurisdictions that differentiate the two), and copyrights, then independently confirm the ownership and clear title of every registration and application for registration. Determine whether any other IP assets need filings. Identify all security interests and assignments; examine all settlement, co-existence, and license agreements; look for third parties' infringing activities; and ascertain all infringement claims by the target or against it.

Remember other types of IP.
Investigation of the target's trade secrets and confidential information is more dependent on its cooperation than is any other form of IP due diligence, because the figures are not independently verifiable. Due diligence on the target's domain names, which are frequently overlooked, should include confirming ownership and good standing; looking for pending, threatened, and past disputes; and checking for third parties' domain names that resemble or incorporate those of the target. If the jurisdiction of either the target or the acquiror regulates how companies collect, use, and disclose personal information, the authors suggest that IP due diligence also address privacy issues. Consider what types of personal information are involved; whether the target has told the individuals concerned and obtained their consent; if the consent encompasses the target's actual use and disclosure; whether adequate policies to ensure privacy are in place; and whether the target may transfer the personal information to the acquiror, before or after the closing.

Review the contracts.
The target's contracts that could affect IP rights include those dealing with supply, licenses (both to and from the target), collaboration on research, distribution, service, support, and escrow. For the acquiror with limited time or resources, the authors advise a review of at least the principal contracts: those with major customers or licensors or those concerning critical technology or IP. Obvious problem areas in employment and independent-contractor agreements are confidentiality and noncompetition, but ownership of the IP can be equally important. Make sure that all employees and independent contractors have assigned their copyrights and patents to the target and that the target demands assignments from any independent contractors who have not already executed them.

Abstracted from Cyberspace Lawyer, published by Glasser LegalWorks, 150 Clove Road, Little Falls, NJ 07424.

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