Evaluation and Due Diligence - Intellectual Property

Intellectual Property is an asset: a potentially valuable asset that may in fact be a considerable proportion of the worth of any package the company intends to licence or to acquire. Just as one would not buy a house without a surveyors report, or a car without the assessment of a qualified mechanic, to ensure there are no fundamental flaws in the property to be acquired, a company should not acquire or licence intellectual property assets without an appropriate evaluation by a professional.

This “health check” should include each of the following items to some degree or other:

Identify the intellectual property assets that are the subject-matter of the transaction;
Confirm the status of the intellectual property rights as still in force or pending;
Confirm the right of the licensor or divesting party to enter the transaction;
Check the scope of the intellectual property rights to be sure they do, or will, cover what the company intends to commercialise (and that of the competition if known);
Verify the validity of the assets to determine whether they have a reasonable chance of being upheld if attacked;
Check for the existence of any litigation involving the rights;
Identify the existence of any other licences under the rights or restrictions that might impact on the value of the protection;
Identify any third party rights which may prevent commercialisation.

Even a preliminary assessment by a professional, if it covers each of these items, could improve the chances of identifying any major problems with the intellectual property rights and thereby dramatically reduce the risk that the company acquires worthless assets.

Planning a Due Diligence Exercise on Intellectual Property Rights

In every aspect of business a positive outcome of any project is usually dependent on quality planning. When preparing for a due diligence exercise it will be necessary to consider the following points:

The value of the transaction. This will be key as it will clearly determine the risk to the company and therefore the depth to which the analyses of the various points listed above should be taken.
The nature of the rights to be analysed and their number as this will also impact on the amount of work required.
Timing. In order to complete a very detailed assessment of a granted patent for example, documents may need to be ordered from patent offices possibly from several different countries, searches may be required and each of these activities could take weeks.
Accessibility of the diligence materials . If the licensor or divesting party has the documentation available and is willing to make it readily accessible,the time and cost of the due diligence exercise could be reduced.
Costs . The previous points will dictate to some degree how much the company is willing and will have to spend in evaluating the intellectual property position.
Respective bargaining positions of the parties and their attitudes will impact on how the diligence exercise is planned- a forced sale/hostile takeover will be very different from a collaborative arrangement in terms of the availability of documents and willingness of the other party to co-operate.

However co-operative the diligence exercise, it is still necessary to plan for the unexpected and to assume that weaknesses in the intellectual property rights will be suppressed. Anticipate that the other party may feed your advisors with false leads to appear helpful, but beware that this may be a diversionary tactic. Be a detective; think suspiciously whilst acting professionally.

Principal Sources of Information

The first place to start will always be the licensor/seller who should have comprehensive documentation and almost all that the advisors will need to carry out their analyses. This may involve attendance at the offices of the other party by your advisors. However, there can be problems with this approach especially if copies cannot be made and taken away, subsequent cross-checking can be inhibited and consultation in private between the advisory team members or by telephone can be awkward.

Ideally the documentation held by the licensor or seller should be copied and provided to the company's advisors. This allows a more thorough analysis with the possibility of cross-checking and adequate consultation throughout the process.

It is possible to obtain papers relating to registered rights such as patents, trade marks and designs from the Patent Offices and Registries. Correspondence which may be helpful in assessing scope of the rights and their validity will also be available if the rights are granted and in some cases where rights are still pending. However, at least in the UK copyright is not registered so there is no need to have lodged papers outside the company, third party agreements will be confidential and know-how will be impossible to identify without assistance from the other party.

Status checks on registered rights is readily achieved on-line and from the various Patent Offices and Registries.

Organisations exist which specialise in carrying out novelty and infringement searches. The former will be necessary, if for example the rights are pending and have not yet reached the point where the patent office has carried out a search to identify any literature that may impact on the validity of the rights. Infringement clearance searches are often undertaken separately and focus purely on third party patent rights that might impact on the ability of the company to commercialise the technology. The seller/licensor may have undertaken such searches and may make them available but would be ill-advised to share with the company any opinions provided to them by their advisors in respect of what was identified, as this could break the attorney/client privilege associated with such opinions, and as a result the documents may have to be produced in subsequent litigation.

Patent Due Diligence

The check list given above broadly covers each of the items necessary to consider in the context of a due diligence exercise on any patent rights to be licensed or acquired. The following is therefore a more detailed assessment of what should or could be undertaken during such an exercise.

The seller or licensor will need to provide a list of patents both pending and granted that form the basis of the transaction. It is wise to carry out inventor and company name searches to check that all the rights the company may require have been identified and to ask for such in warranties in the transaction documents. Another important aspect to consider is whether there are sister or related company's holding relevant intellectual property which could be used subsequently to block commercialisation.

Checking on-line databases and with national and regional patent offices should establish the status of the intellectual property rights as still in force or pending. The exception to this will be unpublished filings namely those which are less than eighteen months old, where reliance will have to be placed on information provided by the seller/licensor.

It is essential to check all documentation relating to ownership, to satisfy the company that the seller/licensor has the necessary rights to transfer. Reviewing assignments from inventors to employer and checking whether these have been recorded in the USA , is important. If the rights were acquired from a third party, it will be necessary not only to check the agreement by which they were acquired, but how that entity acquired its rights in the first place.

The advisor carrying out the diligence exercise will need to know how the company plans to exploit the rights to be able to advise whether the scope of claim will be adequate to protect the intended activities. It will also be important to check geographical cover namely that patents have been filed in all the relevant territories or that there is still time to effect this. Knowledge of any competition and what it might attempt to commercialise will help establish whether the rights will be effective in blocking competitors from the market.

A full validity assessment of the rights can involve independent novelty searches and review of the full file histories of transactions with the various patent offices around the world, to determine whether any prior art has been missed in the granting procedure. If the patents are only applications and have not yet been searched by an independent authority, it may be prudent to do so, as no assessment of validity can be undertaken without reference to the prior art literature. With regard to granted patents or applications in later stages of prosecution, it is important, even if further validity searches are not going to be undertaken, that the file histories are reviewed to determine if statements have been made which could impact on the scope of the claims in subsequent litigation. This is known as estoppel and can adversely affect how broad the claims are deemed to be in litigation. If there has been any litigation it will be important to look at those files too as these may also contain statements which will impact on the scope of the protection available. Knowing about such litigation can be positive as it may be that the validity of the patents has already been upheld in court and if so this will increase certainty of their strength and therefore their value.

The agreement section below deals with due diligence on licences under the rights or restrictions that might impact on the value of the protection.

As important as all the other steps of assessing the status and value of the rights to be acquired, is to identify any third party rights which may prevent commercialisation. To do this, searches will have to be undertaken by skilled information scientists using comprehensive and not merely representative databases. The subsequent assessment of what is found should be undertaken by a patent attorney. The company can then decide whether the rights have the full value originally thought or whether further licences are likely to be required in order to commercialise the technology free from the threat of litigation. The availability of such licences may need to be established as part of the diligence exercise. In any event the potential need for additional licences and the likely royalty burden they will bring will de-value the rights being assessed and account must therefore be taken of the added risk and cost.

Trade Mark and Designs Due Diligence

All of the check list items referred to above and discussed in detail, will apply to other registered rights such as registered trademarks and registered designs. The steps of identifying the assets that are the subject-matter of the transaction, confirming that they are still in force or pending, confirming the right of the licensor or divesting party to transfer the rights, checking the scope of the rights, verifying the validity of the assets, checking for the existence of any litigation, identifying the existence of any other licences that might impact on the value of the protection and identifying any third party rights which may prevent commercialisation will involve similar activities This section will therefore focus on any other points of which to be aware.

Trade marks must be filed for certain classes of goods. When assessing the scope of the rights it is necessary to determine whether all necessary and appropriate classes have in fact been covered.

An added complication with both device marks and designs is that there may underlying copyright. It is essential that this copyright is owned by the proprietor and therefore separate assignments should be in place from the designers if entire title is to have vested appropriately.

It is a useful to determine whether there are or have been any oppositions filed to the trade marks. This will help identify potential competition and will help in the assessment of the value of the rights. In respect of unregistered marks it is important to establish whether there has been any litigation for passing off either by others in respect of the mark to be acquired or by another party in respect of the use of the mark by the seller or licensor.

Copyright and Database Rights Due Diligence

Due diligence on copyright and database rights should be reasonably straight forward if the rights have been properly managed. When assessing copyright or database rights the main issues to consider are:

Whether there is copyright/database right in any particular work that is being acquired. This will entail verifying that the work falls within the categories of work that are eligible for copyright protection under the Copyright Designs and Patents Act 1988 or the Copyright and Rights in Database Regulations.
Ensuring that the seller/licensor has the appropriate title by checking the names of the authors of the works and any documentation in place such as assignments, which reflect the flow of rights from author to the party being dealt with.
It is important to identify any licences to the works, which may have already been granted and whether these adversely impact on the proposed licence /acquisition being planned.
The duration of the rights should be calculated and checked that it is of sufficient length to enable the company to achieve the necessary return on the acquisition price and any proposed further investment.

An additional point that is worth checking if time and money permit is whether the copyright works or databases have been deposited anywhere for safekeeping and what provisions have been made to clearly establish dates of creation such as clear signing and dating of the work. It is worth noting how the rights have been policed to date - are they always appropriately marked with the © symbol, the name of the author and the year of publication when reproduced, and if an electronic work, is every page so marked? It is useful to ask whether the company is aware of any misappropriation or mis-use of such rights and whether any action has had to be taken in the past to enforce the rights.

Know-How and Confidential Information Due Diligence

The greatest problem in assessing know-how and confidential information is identifying it in the first place. The ability of the company to do this will be entirely dependent on the seller/licensor providing assistance. In an ideal scenario everything will have been documented and will be held in safekeeping marked.

Identifying key employees who may hold valuable know-how in their heads will also be important, as will checking their employment contracts and whether they are aware of their obligations to their employer regarding the information to which they have access. It is useful to ask whether the company is aware of any misappropriation or mis-use of know-how or confidential information in the past, if so establish what action was taken and whether the current employees are aware of it.

If the know-how is tangible, namely in the form of materials such as compounds libraries or cell-lines, looking at how these are maintained, who has access to them, and what if any safeguards or restrictions are in place to help maintain them as proprietary to the company, will be helpful in assessing whether their value has been maintained.

Reviewing agreements can be a useful source of know-how that has transferred into the company or which has been licensed out. Reference in the agreements should be explicit enough to enable it to be identified and the other checks referred to above can then be undertaken

Bear in mind that know-how and confidential information can only be assigned effectively if it is properly documented and if the seller /licensor is meticulous in ensuring that no inappropriate use is made by it thereafter. Clearly stating in the transfer document that the seller must destroy duplicate copies or if licensed must maintaining adequate provisions to safeguard the company's acquired interest will be essential.

Third Party Licences and Agreement Due Diligence

The key items to consider when reviewing licence agreements and collaboration agreements which contain intellectual property provisions in a due diligence context are as follows:

Identify the intellectual property rights that are covered to assess the relevance of the agreement. It is also worth checking the status of those rights in case the licence agreement is null and void by virtue of the rights having expired or lapsed.
Check that the rights can be sub-licensed or assigned. If not then the other party to the licence will need to be contacted and asked to provide consent to the transaction. This can cause delay and can necessitate revealing to another party the transaction intended. There may be many reasons why such a disclosure is undesirable, from confidentiality of the transaction, to concerns if the other party is a competitor.
Review the agreements for any restrictions on exploitation or use that have been imposed and assess how this might impact of the company's intended activities and or the value of the licence.
Verify ownership of rights that might arise and any grant back provisions that will now become obligations on the company itself. Check whether these could impact adversely on any other third party relationships the company already has in place.
Check that the agreements comply with competition laws and any other regulations that might invalidate the agreement.
Consider the term of the agreement to be sure that there will still be adequate time for the company to meet any obligations that will now become its own.
Further aspects worth assessing if time and budget permit are whether the payment provisions are clear and unambiguous, whether the termination provisions are adequate and ask whether the agreement has had to be used in earnest and if so what were the difficulties in interpretation – this exercise can be very revealing.