Technology companies whose main assets are intellectual property rights (“IPR”) could be a target of acquisitions. It is important to conduct IP due diligence on such companies to ensure no lemon is bought.  What is due diligence? Due diligence is a process of evaluating the feasibility of a prospective business decision, e.g., whether to acquire a target company. Such a process typically involves the gathering of information on the assets and liabilities of the target company to assess the merits and risks associated with the proposed business transaction. IP Due Diligence   Because IPR are intangible rights generated by law, IP due diligence is somewhat different from due diligence on conventional or tangible assets. In particular, IP due diligence is complicated because of the multifaceted nature of IPR.  For example, IPR can be “registered”, “unregistered”, “registrable” and “un-registrable”.   Patents, registered designs and registered trademarks ® are examples of registered IPR that have legal force only upon official registration.  Trade-secret, know-how and business goodwill (which gives rise to a right under the law of passing-off) are un-registrable and unregistered IPR which have legal force without registration.  On the other hand, trademarks, copyrights and designs can be both un-registered but registrable.  Further, the registrability of IPR could be jurisdictional dependent.  For example, copyrights are registrable in the USA and China, but not registrable in Hong Kong or England.  Hence, a basic understanding on the nature of the relevant IPR of a target company is essential before IP due diligence could be meaningfully and effectively conducted.  Another characteristic of IPR is that not all IPR confer an exclusive right to its owner, and exclusivity is clearly an element which will affect the value of a property.  For example, a copyright owner could not prevent other parties from producing an identical piece of work if there is no element of copying.   Information Required   Each due diligence study is dependant on the nature of the transaction, the business objectives of the parties, and the short-term and long-term business goals of the company. However, IP due diligence generally seeks to gather and evaluate the following areas:-   Ownership and control – IP ownership and potential problems. Many IPR turn out to be owned by a company which is no longer in existence, but such an important issue only surfaces late in the due diligence process. Economic and Strategic Value – exclusivity and the value of the company’s IPRs.  The extent of exclusivity of IP is an important element in determining the entry barriers of potential competitors and hence its value.  Liability – infringement and potential infringement of third-party IPRs as well as royalty dues under licensing agreements.   Information or documents that are typically required to conduct an effective IP due diligence include:-   A list of patents, trademarks, and industrial designs and their official register extracts, published and unpublished patents, trademarks and industrial designs applications, unregistered trademarks, and copyrights. A list of trade secrets of the company. All agreements and contracts relating to IPRs. All office policies and agreements relating to IPRs, including non-competition agreements, secrecy policies, copyright assignments, etc. All litigation and potential litigation involving the IPRs of the company.   Professional Evaluation   The above initial due diligence steps would produce a big picture on the IP portfolio of a company, but they are by no means the end of a serious IP due diligence. Where a piece of IP is of particular importance, it may be necessary to conduct more in-depth due diligence to ascertain the strength, scope or validity of an IP. For example, the real scope of a patent has to be determined on the basis of claims with reference to the state-of-the-art and cannot be ascertained from its face.   Conclusion   IP due diligence is a very complicated process and the expertise of an IP professional can make a difference between buying a valuable company and buying a lemon. This article should not be treated as an exhaustive discussion thereof.  IP due diligence should always be conducted by experienced IP lawyers.

IMPORTANT: Without knowledge of the background/facts of the individual matter, we do not intend for the above summary to deal with every important topic or to cover every aspect of the topics with which it deals.  Such summary is for general information purposes only and is not intended to provide legal advice.

For enquiries: Please contact members of our Intellectual Property Practice Group:

Ludwig Ng Senior Partner, Head of Intellectual Property & Technology Practice Group +(852) 2107 0315 ludwig.ng@onc.hk

Hans Lee Partner +(852) 2107 0337 hans.lee@onc.hk

Dr .Toby Mak Patent Attorney +(852) 2107 0351 toby.mak@onc.hk

Published by ONC Lawyers © 2009