Intellectual Property Due Diligence
This article is meant to be a brief overview of performing due diligence when dealing with venture capital, acquisitions, and mergers. This is an important tool for protecting your capital investment.
Q: Is intellectual property due diligence necessary and beneficial?
What are the benefits of IP due diligence?
A technology companies main asset is their intellectual property: ideas, processes, and the people they employ. Before investing in a company, acquiring, or merging with a company, you want to know what they are worth. The overall benefit of intellectual property due diligence is to determine the intellectual assets of the company: whether they own the assets, are infringing others, have appropriate licenses etc.
Companies may also wish to have intellectual property audits performed to determine if they have properly protected their property. Turning ideas into assets adds value to a company.
The specifics are discussed below.
IP Due Diligence.
Most everyone is familiar with corporate due diligence; however, intellectual property due diligence is becoming more of a necessity. Technology companies live and die on their intellectual property and whether or not it can be protected. Is it possible for an employee to walk out the door today, move across the street, buy a $1000 computer and instantly become a direct competitor? Do you know what needs to be evaluated to determine the companies level of intellectual property protection?
- Has the company adequately protected their processes and other patentable subject matter by obtaining patent protection?
- If patents are owned, are the appropriate fees being paid to keep the patent in force?
- Is the company infringing anothers patent?
This can occur in two ways. First, a patent is being infringed outright, or second, one companies patent infringes anothers. A patent is a negative right, not a positive right. Patent holders have the ability to keep others from making, using, selling, offering for sale, and importing. This does not mean that a patent holder has the right to make, use, sell, offer for sale, or import.
- Is a license needed from another patent holder? Does the company have the necessary licenses?
- Who owns the copyright in the company’s work?
- Does the company have outside contractors or only in house employees?
- Is the “work for hire” doctrine adequate?
- Do you have the appropriate assignments?
- Is the company infringing others copyrights?
- Are licenses needed?
- If licenses have been acquired, does the company have the appropriate rights?
A copyright is a bundle of rights, each right can be licensed seperately. Therefore, it is possible to have licensed one right but not the ones needed for current or future projects.
Trademarks / Servicemarks
- Have the company’s trademarks and servicemarks been registered federally?
- Can the company federally register their domain name?
- Is the company infringing others trademarks?
- Are licenses needed?
Tradesecrets / Confidentiality / Nondisclosure / Employee Agreements
- Have the appropriate legal measures been taken to protect trade secrets of the company?
- Do employees and others know what the company considers to be confidential and a tradesecret?
- Have the appropriate confidentiality and nondisclosure agreements been signed?
- Is it possible for an employee to walk out the door with your intellectual property?
Intellectual property due diligence audits should be performed when initially evaluating a company, performing corporate due diligence, and at regular intervals as the company progresses.
Most importantly, you need someone who not only has the appropriate legal training but also the technical background to understand, comprehend, and identify the technology issues.