Acquisition of a company can be driven by many different objectives. Access to tangible property, such as equipment, new facilities, inventory, can all be motivating factors. More often than not, however, the desire to acquire a company is driven by an objective to gain access to intangible property, such as employee expertise and intellectual property (“IP”). As with any transaction, exercise of good due diligence – both technical and legal – is critical, and can be particularly important with respect to acquisition of intangible property.
This article briefly highlights some of the areas important to conducting due diligence for acquisitions involving IP, such as patents, trade secrets, know-how, copyrights and trademarks.
Access to the skills and knowledge of the employees of an acquired company is often of critical importance. To that end, confirm that employees and consultants of the acquired company have executed viable employment agreements and, importantly, agreements that have adequately assigned any rights in ideas and inventions and related intellectual property to the acquired company. Failure to adequately assign can result in loss of ownership of valuable patent rights, greatly affecting the value of the acquisition. Acknowledgement of confidentiality obligations by employees with respect to company proprietary information and trade secrets is also critical.
Ownership of the IP
Confirm that all ownership rights in U.S. and foreign patents, patent applications, as well as trademarks, service marks and copyrights, are held by the acquired company. In addition to establishing proper assignment by the creators, this includes confirmation that assignment documents have been properly recorded with the United States Patent and Trademark Office (USPTO), or similar administrative agency. Importantly, the documents should confirm that the chain of title is intact. Documentation transferring ownership is often required for foreign countries and, once the deal closes, such documentation may be difficult to obtain.
Identify any agreements in which the acquired company has assigned, licensed or has an obligation to assign or license its patent rights to third parties. This includes any obligations to license IP due to the membership of the acquired company in a standards body. Such encumbrances can greatly impact the value of the acquisition. Finally, confirm whether members of a given patent “family” are included in the purchase by identifying whether a given patent has a parent or children (usually in the form of continuation patents or applications). In some circumstances, ownership of related patents is required for them to be enforceable. Also, ownership of an entire patent family, including foreign counterparts, simplifies the enforcement of patent rights later.
Confirm the Quality of the IP
Confirmation of the value of the IP – particularly patents – is of primary importance. Initially, a review of the claim coverage of the patents and whether there is adequate coverage of the acquired company’s products and technology is important. Similarly, correspondence of the patents – particularly in terms of claim coverage – to the applicable industry is an important inquiry. Whether a patented invention is being practiced in the marketplace that aligns with the corporate strategy, or whether it is being practiced by a competitor, can be a key value indicator. If the patent coverage is overly narrow or simply doesn’t translate to the marketplace, the value in the patent portfolio might be significantly reduced.
Due diligence can also help verify that patents being acquired are free of issues that could result in reduced value, or even invalidity. Documents and information concerning past and present litigation, allegations of infringement or invalidity, and challenges to ownership of patents should be reviewed. Existence of properly executed inventor declarations and proper and complete information disclosure statements (citing known prior art) should be confirmed, as issues could give rise to validity or unenforceability of a patent. Similarly, confirmation that appropriate maintenance fees and annuities have been timely paid should be checked. Finally, whether the acquired company has consistently and properly “marked” its products with any corresponding patent numbers can greatly increase a given patent’s later assertion value with respect to potential damages available, and is thus an important due diligence item.
Confirm Best Practices relating to IP
It is also important to assess the existence of best practices of the acquired company with respect to its IP and technology – the absence of which could indicate later problems. For example, if the acquired company is involved in any type of software development, insure that it has policies in place with respect to the use of so-called “open source” or “free software.” If such software is used, it is likely subject to a myriad of open source license terms that often dictate a number of use and/or distribution obligations, and could even result in the inadvertent placement of proprietary technologies in the public domain. Similar inquiries should be made with respect to a company’s practices with respect to its trade secrets (proper and ongoing protection mechanisms), and trademarks (proper use so as to avoid challenges to valid trademark status).
The acquisition of a new company often is driven by the need to access new technologies and valuable IP. Proper due diligence is key to confirming and validating assumptions about the value of that IP.