The importance of due diligence and the consequences of neglecting it.
Proper due diligence of intellectual property assets can make or break a merger or acquisition. A comprehensive plan for intellectual property due diligence is critical as the IP can be the single most important factor affecting the decision to buy or to sell. As in-house counsel, it’s your job to make sure it’s done right.
What is Intellectual Property Due Diligence?
Intellectual property due diligence is the investigation into a company’s intellectual property assets to determine their true value. It will involve assessment of known patents, patent applications, trademarks, copyrights and trade secrets – as well as an audit and review of assets that may have been overlooked. It is critical to the preparations for a merger or acquisition and a company may undertake its own due diligence of its own assets before going very far down the road with a potential suitor. The due diligence itself should be undertake by experienced IP attorneys.
Why Does Intellectual Property Due Diligence Matter?
IP due diligence is to nearly guarantee that a merger or acquisition
goes poorly, or that a party over – or under-pays for an
acquisition, potentially in catastrophic ways. It could be compared
to driving a car and taking it to a mechanic before buying it. How
else can you know the value of what your are getting?
Speaking of cars, the Volkswagen purchase of Rolls Royce is brought up frequently as an example of complications resulting from poor due diligence. Volkswagen bought the Rolls Royce automobile plant, machinery, dies, and automobile designs from Rolls-Royce. But only after the purchase did Volkswagen learn that a sister company owned the actual Rolls Royce trademark, which was later licensed to competitor BMW. Thus, because of a lack of proper due diligence, Volkswagen failed to acquire what was probably the most valuable property owned by Rolls-Royce (the trademark) and could not sell Rolls-Royce branded cars. They didn’t check the trademark.
How is Intellectual Property Due Diligence done?
IP due diligence can be broken down into five steps.
- Staff your due diligence team with right people. Make sure you have the knowledge, experience and expertise appropriate to the task.
- With your team’s help, develop a plan appropriate to the deal and focused on the perceived values at stake. Is the value being acquired in a brand? In a particular technology? Is it know-how? Or, most likely, combinations thereof?
- Negotiate appropriate access to all sources and repositories of potential IP. You need access not only to technologies and sensitive files, but in some cases key individuals. Consult with your due diligence team to make sure you know what they want and need to see.
- Analyze the IP and relevant data to assess risks, values and costs of minimizing risks and maximizing values..
- Determine how the IP affects the deal.
When assessing the value of the IP, companies consider the depth, scope, enforceability, future potential, and ownership. They also decide what is actually being bought and what is not. This helps each company limit risk and get the most upside possible.
To drill down further, IP due diligence will likely be different for a buyer or a seller. This is sometimes described as defensive and offensive due diligence:
Defensive Intellectual Property Due Diligence
A selling company, or a company selling its IP, will consider questions such as the perceived market value of the IP, and what can be done, such as with additional or existing patent applications or trademark registrations to maximize that value.
On the other hand, the company purchasing the assets will look for potential problems. Questions might include what is the scope and enforceability of patents or pending patent applications? Are trademarks and trade secrets being appropriately protected and enforced? Is there pending litigation or threats of litigation? What IP is owned by competitors?
Get The Right Help With Your Due Diligence
Experience and expertise are crucial for evaluating IP and performing intellectual property due diligence. TraskBritt has the experience you’re looking for to help you arrive at the right deal in your merger or acquisition. We are intellectual property law professionals with depth, experience and a proven track record to help you minimize your risks and maximize your returns. Contact us to get the process started.
Author: James Watson