As we discussed last week, intellectual property (“IP”) due diligence comes up in many different types of transactions, including licensing transactions, joint development agreements, M&A deals, and venture capital investments. Anytime an acquisition or investment is based, in part, on the target’s or issuer’s IP – and in the San Francisco Bay Area it frequently is – the acquirer or investor must conduct some IP due diligence.
As an acquirer or investor, your company’s investigation should seek to identify those IP problems that are important to your transaction. Software companies may have copyright, patent and trade secret problems. Biotechnology companies may have patent or trade secret problems. A technology company with a substantial portfolio of intellectual property – and any tech company worth its salt will have such a portfolio otherwise it wouldn’t be in business – will have some IP problems, obvious or otherwise, that should be evaluated before the transaction proceeds forward.
What is the best way to approach one of these engagements?
First, develop a good questionnaire for IP due diligence. It is not a one-size fits all document. Each transaction differs in nature and scope. An experienced attorney can advise you on the level of detail needed in the questionnaire in light of the nature and complexity of the transaction or the value and importance of the IP. It is also not unusual for your attorney to identify IP rights the target may not even be aware of, like unregistered IP rights and restrictions on the transfer of certain IP.
Second, focus on the IP rights that are important to your transaction. In addition to unregistered rights – like trademarks, trade secrets, designs and computer software licenses – the following major IP rights you should always consider when assessing a target include: (1) registered trademarks, copyrights, patents and designs; (2) portfolios of business know-how and confidential business information, (3) software licenses and database rights; and (4) provisional patents and applications.
Third, focus on “material” IP rights or due diligence may never end. The concept of “materiality” can be used to limit what may otherwise appear to be a never-ending process. If all parties to the transaction can agree on a definition of what IP rights are material to the target’s business, due diligence can be limited to evaluating the material IP, which will save time and money. Examples of how to determine “materiality” include (1) percentage of profits associated with IP rights, (2) IP rights associated with key products or services, and (3) whether the IP rights can be replaced by purchasing alternative rights from other sources in the marketplace.
Fourth, make sure your attorney reviews and approves any non-disclosure agreement (“NDA”) you enter into before commencing due diligence. When you sign an NDA in the context of due diligence the consequences of the agreement almost always become significant, particularly if the deal fails. Once due diligence begins, your company’s technologists who evaluate the target’s IP become contaminated because they’ve reviewed the target’s most important and confidential proprietary information. The NDA likely states the technologists (and your company) can never use the disclosed information for any purpose other than to evaluate the target for an acquisition or investment. To avoid this problem make sure the NDA contains as many exceptions to confidential information as possible (i.e., independent development, received from a third party, previously known, public domain, etc.). Also, include a residuals clause that states if your technologists retain any memory of the target’s confidential information, and cannot determine how and where they obtained the information, they can use it in their future work, which cannot be restricted.
Only commence due diligence if there is strong interest in the target because the process can be expensive, expose your company to the proprietary rights of the target, and potentially foreclose your company’s ability to undertake a similar transaction with another company or enter into the same technological field on your own without significant legal risks.
Finkel Law Group, with offices in San Francisco and Walnut Creek, has assisted many technology company’s and investors conduct due diligence on the intellectual property assets of a target company in an acquisition or strategic investment transaction. When you need intelligent, insightful, conscientious and cost-effective legal counsel to assist you with an intellectual property transaction or investment you may be contemplating, please contact us at (415) 252-9600, or info@finkellawgroup.com to speak with one of our attorneys about your matter.