By Jakob Bookspan and Garrett Janney
Conducting an IP Due Diligence investigation is important in circumstances where an organization is considering investing into, entering into a licensing agreement, or carrying out a business deal with a company which has IP assets. In today’s world, there are few companies which do not have IP assets. Determining whether a company’s IP has value, and determining what that value is, requires one to look into whether the IP of said company will yield a profit while also effectively keeping competitors out of the respective market. These investigations not only allow for the value of IP to be ascertained, but also ensure the owner of the IP has freedom to operate without infringing on the IP rights of others. This decreases the likelihood of a company facing future legal action such as litigation for selling a product which incorporates features or components covered by a patent granted to another entity.
How a Due Diligence Search is Conducted
An IP due diligence search is a straightforward process, however the search must be performed thoroughly in order to better protect the interests of both a startup company and potential investors.
Evaluating the Startup
At the outset of an IP due diligence search, there are several pieces of information that investors and their counsel will require. First, it is important to identify what kind of business the company is engaged in, as well as what products and services they currently or plan to provide.
Next, the significant current and anticipated competitors of the company should be identified.
After the relevant markets and products are defined, the investors will need a record of all IP owned by the company including patents, trademarks, copyrights, and trade secrets. For each product or service provided by the startup the relevant IP protections should be identified.
Patents are particularly important in IP due diligence searches, especially where the startup and its competitors provide similar services. A startup should provide the party conducting the search all of its patents and the relevant file histories. This includes all current patents, current applications, and information about inventions where the company has decided to not seek patent protection. In addition to this, any IP licenses either to or from the startup will be analyzed in order to determine the scope of the patent rights the startup possesses.
Evaluating the Startup’s Competitors
After reviewing the IP portfolio of the startup, the party conducting the due diligence search will look into the patent rights and portfolios owned by competitors to determine if they impact the startups legal standing or have the potential to do so. In the event a startup has weaker IP including limited patent claims, or a high potential to infringe upon competitors patents, an investor is likely to be less inclined to get involved. On the other hand, if the startup has a robust patent portfolio that covers its products and services, and has a low potential of infringing on its competitors, then an investor will likely view investment more favorably. Of course, there is some gray area where the IP of the startup is neither particularly strong nor weak, where more investigation will be necessary to determine the risks presented by the aforementioned issues.
Following a review of the patent portfolio of the startup and its competitors to identify any potential issues, the investor will also inquire into any past, current, or expected IP related enforcement actions related to the IP at issue brought by either the startup or its competitors. Any past or current actions will be investigated to determine the startups past success and future probability of success. This investigation is closely tied to the startup’s potential to infringe upon its competitors IP and vice versa. If there is a low likelihood of infringement, then there is a lower potential for IP enforcement issues to arise. On the contrary, if there is a high likelihood of infringement, then the potential of IP enforcement actions may deter one from investing.
Quick Tips for Efficient IP Due Diligence
- Prior to conducting an IP Due Diligence, determine the overall goal of your IP strategy. Are you trying to buy or obtain a license to use another’s IP? Are you investing into a company which has IP assets?
- Assess the likelihood of pending claims being approved. This can include analyzing pending patents of competitors which were filed prior to your patent to determine the likelihood of pending claims being granted or rejected.
- Investigate any previous or ongoing legal action to determine whether there is an impact on the company’s freedom to operate.
- Determine whether any IP assets have been granted to other parties. This involves contacting licensors who have the power to assign assets in the form of liens of licenses.
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