IP Due Diligence: Issues in M&A Transactions

All types of companies, whether small, mid-size, or enterprise, are likely to explore a potential merger and acquisition (M&A) transaction at some point in their lifespans.  This could be a potential buyer or a potential seller.  A main focus in most M&A transactions involves conducting intellectual property (IP) due diligence, including patent due diligence in order to properly assess the risk involved in the potential transaction.

From the perspective of a potential buyer, some important considerations when reviewing a target’s intellectual property portfolio include the following:

1. How well do the target’s intellectual property assets (e.g. issued patents, pending patent applications, registered trademarks, pending trademark applications, copyrights, trade secrets, etc.) correspond to the most important products/services of the target and to those of the potential buyer?
2. Have all conveyances, including assignments, been properly recorded for the IP assets with the respective IP offices?  Are there any gaps in the assignment records or chain of title?
3. Are there any security interests or liens on that need to be released or recorded for the IP assets?
4. The status of each of the target’s IP assets should be confirmed.  For example, is a particular patent pending or issued?  If it is issued, have the patent maintenance/renewal fees been paid to keep it active or is this patent now dead?  Also, it is important to pay attention to upcoming maintenance/renewal fees for a particular IP asset prior to entering into a transaction.  Missing a maintenance/renewal fee may cause that IP asset to no longer be active and enforceable.
5. Are there any active litigation and/or administrative proceedings (e.g. post-grant review, oppositions, etc.) concerning the target’s IP assets or the target?
6. What kind of process does the target have for protecting its invention?  For example, does the target have an invention disclosure process in place?
7. How does the target protect its trade secrets and other proprietary information and data?  What security measures does the target take to make sure that its trade secrets remain confidential?
8. The use of unregistered and registered marks should be assessed.
9. Are there any restrictions on a potential buyer’s ability to receive, transfer, or assign the IP rights that it may obtain from the target?  For example, are there any relevant anti-assignment or change of control provisions in any agreements for which the target is a party?
10. Are there any restrictions on a potential buyer’s ability to use the IP rights that it may obtain from the target?  It is important to review license agreements identifying the target and its IP asserts in order to determine if there are any restrictions, such as field of use, exclusivity, geography, etc., that may affect the potential buyer.

It is very important to thoroughly and carefully review each of the above-mentioned considerations during the due diligence stage in order to develop a comprehensive and accurate risk assessment strategy.  In some cases, the target may be able to remedy some issues that have been identified during the IP due diligence prior to the transaction.  In other cases, these issues may directly affect the valuation or terms of the potential deal.  In yet other cases, these issues may simply be deal breakers.

All too often these issues come up for the first time in due diligence.  However, deal-breaker scenarios based upon issues related to the above can be mitigated with proper intellectual property counsel to the company, which can come in the form of outside counsel, in-house counsel, or fractional counsel.