Intellectual Property Due Dilligence In Acquisition of Technological Companies

INTRODUCTION OF IP DUE DILLIGENCE:-

The purpose of due diligence is to give the acquirer a better understanding of the business of Target (owner of IP) and the commitments and liabilities associated with that business, and to analyze the problem area in more depth.
The review conducted by the acquirer in an acquisition often is compared to the due diligence investigation conducted by an underwriter and its counsel in a securities offering.
An IPR Due Diligence is a valuation of a companys intellectual assets in situations of start-up or merger and acquisition (M&A). The valuation has a qualitative and quantitative nature, where the qualitative part is an assessment
of the strength of the IP rights, and the quantitative part is an estimate of the market value of the IP rights.
PURPOSE OF DUE DILLIGENCE :-
Intellectual property due diligence focuses on the Target intellectual property assets and involves two main inquiries-
1. What is the strength of the Targets intellectual property portfolio?
2. What are the potential liabilities associated with the Targets continued and proposed business.
OBJECTIVES OF INTELLECTUAL PROPERTY DUE DILIGENCE:-
Due diligence has meaning only in the context of a particular transaction. The acquirers objective and sophisticated and the type of transaction, the scope of Targets representations and warranties, and the viability of acquirers remedies for breaches of those representations and warranties will dictate the nature and the extent of the IP due diligence for a particular transaction.

IDENTIFICATION OF INTELLECTUAL PROPERTY ASSETS:-
Acquirer should obtain the following documents and information as a part of its intellectual property due diligence. Intellectual property due diligence will usually begin with a request for documents “
A. Review of limitations on the Targets Intellectual Property Assets.
B. Are any of the intellectual property assets owned jointly with one or more third parties?
C. Are there any royalty obligations associated with any intellectual property licenses?
D. Are the intellectual property licenses assignable by Target?
There are different kind of documents/information are required for the proper due diligence of the Intellectual property for that purpose the IP i.e. Patent, Trademark, Copyright etc. have required different documents/information that is described below:-

PATENTS :-
1. A list of all patents, utility and design, (both India and foreign) which are issued and applied for, together with copies of such patents and patent applications. The list should include the following information for each issued patent or pending patent application:-
a. Patent number
b. Inventors names
c. Date of application:-
d. Date of issue for issued patents. The term of protection for Indian patents generally ends 20 years from the application date.
e. Prior owner, if any, and how the patent was acquired by Target.
f. Have any assignments been properly recorded so that an accurate chain of title exists? Get copies of recorded assignments.
g. Country ( if foreign) .
h. Presence or absence of any security interests.
i. Have all required maintenance fees been paid?
i)Patent rights can lapse if government fees are not paid on a timely basis.
ii) In the U.S. these fees are called maintenance fees and are due 3-1/2, 7-1/2, and 11-1/2 years after the issuance of the patent.
iii) In the most other countries these fees are called annuities and are typically annual fees.
j. Has the Target taken any actions which could have created either a laches or equitable estoppels problem for the Targets in enforcing its own patent against a potential infringer?
k. Is this a Key patent? who was the inventor, and is the investor still employed by Target?
2. Is the Target aware of any potential blocking patents?
3. Has the target received any letters asserting that the Target is infringing any third party patent rights?
– It may be appropriate to obtain a patent infringement analysis or a patent validity analysis for certain important Target products or technologies.
– The fact that a product or process is patented does not mean that it cannot or does not infringe other patents. Patented technologies frequently do infringe other patents. Remember that a patent only gives the right to exclude others from exercising the patented technology.
4. In appropriate circumstances, an opinion letter from Targets patent counsel regarding validity, infringement and other matters should be required.
5. Identify Targets procedures for identifying and protecting inventions including procedures for identifying whether to file for patent protection, and if so in what counties, and for ensuring the timeliness of patent filings.
6. Has the Target enforced its patents in the past and, if so, how?
7. Has Target conducted any searches or analyses of competitors’ patent?
8. Are there any imminent bar dates or disclosures of new products that require new filings to avoid loss of rights?

TRADEMARKS:-
1. A list of all trademarks which are issued and applied for, together with copies any such trademark registrations and applications. The list should include the following information for each registered trademark or trademark applications.
a. Trademark numbers.
b. Class in which the trademark is or will be registered and whether the trademark is registered on the primary or secondary register.
c. Date of application.
d. Date of issue for registered trademark.
e. Prior owner, if any, and how the trademark was acquired by Target.
f. Have any assignments been properly recorded so that an accurate chain of title exists?
– Proper recording of transfers in the title are important because a purchase for value and because subsequent filings with the PTO which may be necessary to preserve the registration will not be accepted from any party which is not the record owner of the trademark.

g. Country (if foreign). Note that in most foreign jurisdiction trademark rights are acquired almost exclusive through local registration rather through use of the mark.
h. Presence or absence of any security interests.
i. Have all the Target conducted any searches of the trademark?
j. Has the Target conducted any searches of the trademark?
k. Is Target (owner of mark) using trademark in the same form and for the same product line as registered?
l. Has the trademark been abandoned?
– The period of non-use (ranging, in various jurisdictions, from three to five years) creates a rebuttable presumption that the trademark has been abandoned.
m. Determine the products on which each trademark is used actual usage with registered marks.

2. Has the Target taken any actins to monitor and enforce its trademarks and to prevent misuse of its trademarks by others?
– Trade mark protection can be lost if the trademark becomes general. Trademark protection can be lost if the trademark owner fails to file an affidavit of continued use between the fifth and sixth years after registration in the US, of fails to renew the trademark registration.
4. Has the target granted any licenses to its trademarks?
-All trademarks must be under the control of a single entity which supervises the quality of all products using the trademark. If Target granted a naked license to the trademark (one in which there is no provision of quality control), the Targets ownership of the trademark may be at risk.
5. Identify any products that are not covered by registered trademarks.

6. Has there been any non use of any Target trademarks? If so, which marks and for what periods of time?

7. Identify any products that are not covered by registered trademarks.

8. Has Target enforced its trademarks in the past?

9. What is Target policy for applying trademark notices to its products?

10. Does Target conducted trademark clearance? Does Target have any clearance procedures an any results or opinions?

11. Has Target registered any Internet domain names? If so, please list.

COPYRIGHTS:-
Because a copyright exits in all original works of authorship as soon as they are reduced to a tangible medium of expression, it will typically be impossible for a Target to list all of its copyrights. The Target should list all registered copyrights (but registration is not a prerequisite to protection any many companies do not register copyrights until there is litigation), copyrights in any of its products, an any other significant copyrighted works.

1. As to each such copyright, the Target should provide the following information:

a. Registration number, if copyright is registered.
b. Date of issue , if copyright is registered.
c. Due date of first publication, or if the work has not been published , date of creation.
d. Each author of a work may be a joint owner of work of the copy right.
e. Prior owner, if any and how the copyright was acquired by Target?
f. Have any assignments been properly recorded so that an accurate chain of title exits?
g. Most foreign countries do not require registration of copyrights.
h. For older copyright registrations, determine whether renewals have been obtained.
i. Presence or absence of any security interest.
j. Has the target included a copyright notice on each copy of the copyrighted work which it has distributed?
2. Has the Target granted any licenses to its copyrights?

3. Has the Target received any letters asserting the Target is infringing any third party copyright rights?

TRADE SECRETS:-

1. The continued value of trade secret information will depend on hw well the Target and its employees have protected the information. As a result, an investigation must be conducted as to the practices and procedures used by the Target to protect its own trade secrets and the trade secrets received from third parties in confidence.

2. Steps to maintain secrecy include:-
a. Internal security procedure
b. Disclosure to employees.
c. Disclosure to outsiders.
3. Determine whether the Target has granted any licenses to its trade secrets.
4. Identify Target documents retention policies and procedures.
5. What is the Target email policy?

REVIEW OF AGREEMENTS:-
Documents which are customarily reviewed as a pat of intellectual property due diligence includes such as all license in agreements for technology which is used by the Target in the course of its business, Distribution and sales representative agreement, any agreements with third party contractors etc. can be reviewed by council.

REVIEW OF INTELLECTUAL PROPERTY LITIGATION:-
Acquirer will want the Target to identify all litigation brought by or against Target during the past five years, whether currently pending or previously disposed of, in addition to any outstanding claims related to Target IP assets or any of the IP agreements identified by Target. Therefore Target should identify the IP litigations to know the nature of claim, Money value of the claim, any likelihood of an injunction preventing use of equipment etc.
The acquirer should take proper care while taking IP assets he can also get copies of any outstanding judgment, decrees or settlement agreements to which the Target is party.
In addition to requesting information form Target related to security interests, Acquirer should order UCC(Uniform Commercial Code) and federal searches to ascertain whether there are any mortgages or liens on the Target intellectual property.
INTERRELATIONSHIP WITH OTHER ASPECTS OF THE TRANSACTIONS:-
As result of the IP due diligence, Acquirer may ask the Target to make additional representations and warranties concerning certain matters such as list of all patents (jurisdiction in which issued), list of all application™s , list of registered copyrights etc. However, certain misrepresentations, such as lack of valid title to a key intellectual property asset, cannot be cured by money. Conversely, certain problems may never be discovered during due diligence and can only be addressed through adequate representation and warranties (eg. A claim of patent infringement that is brought six months after the closing). Intellectual property representation and warranties frequently survive for a longer periods than other representation and warranties.

HOW CAN ASTREA LEGAL HELPS:-
Astrea Legal Associates has the necessary expertise in-house to solve IPR due diligence on start-up companies, Mergers and acquisition, technological companies, public research institution, but since IPR Due diligence on exit-companies is very complex and work-intensive, it is performed together with M&A “specialist with other areas of expertise. (like C.S. etc.)
For further information please contact our Associate K.narayan of our firm by email knarayan@astrealegal.com to receive more information about this subject.
CONCLUSION :-
Intellectual Property due diligence generally provides vital information specific to future benefits, economic life and ownership rights and the limitations of the assets all of which affects final value. Therefore due diligence is prerequisite to the valuation process, regardless of the methodology used.
The increased profile, frequency, and value of intellectual property related transactions have elevated the need for all legal and financial professionals and IP owner to have thorough understanding of the assessment and the valuation of these assets, and their role in commercial transaction.

This publication is provided for general information and does not constitute any legal opinion.This publication is protected by copyright.  2022 Astrea Legal Associates LLP