Navigating an IP Due Diligence

  • May 9, 2016

By: David M. Roccio

The value of a merger or acquisition often depends on the potential value and risks associated with the target company’s intellectual property. In today’s global marketplace, understanding the target’s IP is often a critical part of the due diligence process. Timely and focused IP diligence is essential to key decision makers and imperative to get the deal done right. Louis Myers and Craig R. Smith of L&A recently presented on this topic at an Association of Corporate Counsel’s IP Transactions Master Class. Below are ten points to consider when commencing a diligence based on this presentation, which may be found here.

Define your goals

It is imperative to expressly define the goals for the deal and the due diligence up front. What do you hope to accomplish with this M&A transaction? What is driving the deal? Where is the value? What information is needed to proceed? Clearly defined goals will help focus the diligence process on the IP rights that matter most and help avoid unnecessary forays into less critical aspects of the deal.

Know the target company

It is also important to gain an understanding of the target company. A good understanding of the target company may help speed up the deal or let you know early on in the process that the deal should be stopped. An accurate understanding of the target company’s products, goals, and desire to complete the deal will also help focus diligence efforts. An early assessment of whether an NDA or CDA is required, desired, and/or actually workable will also streamline the process. Finally, an early planning call with all parties can help define the goals of the deal, identify the critical IP rights, and can serve as a threshold assessment of the overall organization and health of the target company.

Know who you are talking to

Always consider ethical obligations when communicating with a person represented by counsel. Although the parties and their attorney’s may wish to speak directly with one another for the sake of expedience, it is important to get permission to do so first – preferably at the outset of the diligence process. Also remind members of your own company about any non-disclosure or confidentiality agreements that may be in force.

Identify and understand the IP issues, IP rights and IP assets

To help identify all the IP assets (including patents, trademarks, copyrights, and trade secrets), we counsel our clients to utilize an IP Checklist, available here. Employing a systematic process, such as a checklist, can help thoroughly determine who has ownership of the IP, what the status of the IP is, who controls the IP, and what IP assets are related to the target’s revenue streams. It is critical to independently determine whether the target’s IP actually covers the products and services that are essential to the deal. An independent determination may reveal that the contemplated transaction may not be necessary in the first place.

Identify “hot-button” issues

It is also important to gain an early understanding of how strong the target’s IP is and how effectively it will block competitors. At the same time, be careful to consider all applicable license agreements (both license-in and license-out). If the target has already shared its rights with others, then there may be less control over the relevant rights. In the life sciences space, it is also critical to assess regulatory exclusivity early, which may sometimes shorten or lengthen the relevant IP rights in unexpected ways.

Investigate the findings

Once the relevant IP has been identified and analyzed, there are several areas that need to be investigated, including the target company’s freedom-to-operate, the scope of the IP, validity, and ownership. A freedom-to-operate analysis evaluates whether or not the buyer will be able to make, use and/or sell the target company’s products without infringing the IP rights of a third party. The scope and validity analysis assesses the scope of protection and strength of the target’s IP coverage.


Ownership is often a key question that arises in the investigation of the finding. Claims of potential joint inventorship, joint development, and the chain of title for each IP asset should be thoroughly investigated. Many times, if ownership isn’t clear and unambiguous, the deal may not move forward.

Litigation Concerns

It is key to evaluate risks of pending litigation as well as risks of future litigations. Litigation threats by third parties, ongoing litigations, and contemplated litigation should all be identified and considered. The costs, merits, and potential downsides of any litigation issues should be fully understood before a deal is finalized.

IP may not be biggest concern

There may be more important aspects of the deal that outweigh any IP concerns. Listen to all parties involved to identify such a situation. If IP is not the critical focus of the contemplated deal, then resources should be focused on the critical aspects of the transaction, while remaining informed of material issues relating to IP.

Exit Strategy

Based on the diligence, a thorough review of the IP Checklist, and the identified goals behind the deal, a decision will be made as to whether to execute the deal or exit. If a definitive agreement cannot be reached, be sure to consider your potential “design-around” to make sure you have a viable “Plan B.”



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