Due Diligence Now Can Avoid Trouble Later

By David D. Rodrigues

When acquiring a company or purchasing assets from a company, it is important to conduct extensive due diligence to ensure that the acquisition goes as smoothly as possible. Although financial disclosures and business terms are undoubtedly important aspects of an acquisition or merger, it is also important to conduct due diligence for the intellectual property (“IP”) being acquired.

Frequently, various issues can arise when conducting due diligence on IP. As a first step, it is important to have a full disclosure of what assets, such as patents, copyrights,  trademarks (including unregistered trademarks), domain names and social media accounts are subject to the acquisition. Sometimes IP assets are not publicly accessible – for example, patent applications are generally not publicly available, so it is important that the disclosure of all IP assets subject to the acquisition/deal are listed. Another issue that sometimes comes up is that a company fails to divulge that it owns foreign assets. There should be contractual representations that the target company has fully disclosed all relevant IP to the acquiring company.

There are also subject-specific issues which can arise from time to time. For patents, you want to ensure that any rights in the invention disclosed in the patent and the applications/issued patents have been assigned from the inventor(s) to the listed applicant/patent owner. For trademarks and patents, you should ensure that all maintenance fees have been timely paid.

It’s important to confirm that the entity that is the current registrant of the IP is subject to the acquisition so that the IP can be easily assigned. It’s not uncommon fora subsidiary or older entity to be listed as a registrant of a particular asset, so assignment of the asset to the entity subject to the acquisition should be a topic of conversation in the deal discussion. You always want to ensure chain of title is clear and correct. For example, if the target company is Company A, and the purchasing Company is Company B, you want to ensure that there is no party in between the assignment. If a review shows that an asset subject to deal is owned by Company X, the parties should address this issue during contract negotiations.

There can also be instances where the listed registrant of a trademark or patent is a business entity that is not registered or that the business information of the registrant is incorrect. In those cases, it may be possible to take corrective measures to remedy the trademark or patent so that the correct entity is reflected in the trademark/patent so that assignment is possible.  Again, this is something that the parties should discuss during their negotiations.

Once the deal is signed and all IP subject to the acquisition assigned, the IP diligence aspect of the acquisition is still not complete. In the context of trademarks, a full review of how a trademark is used with goods/services should be completed and compared with what the trademark is registered for. Often, the trademark is used on more goods/services than is covered by the respective registration – in these instances, you should consider filing for the trademark so that it covers the additional goods/services not covered by the original registration.   It may also be necessary to file for trademark registrations in additional jurisdictions.

Failure to conduct proper IP due diligence can lead to issues after the deal has closed.  At that point, the parties may not be feeling as cooperative towards each other as they were while the deal talks were occurring; it is always better to address a point during deal discussions than to let it fester and have to deal with it after the deal has closed.

Sophisticated IP counsel can play a valuable role in identifying potential issues in a deal before the deal closes.  At Gottlieb, Rackman & Reisman, our experience handling complex IP due diligence issues can be an asset to your company in future mergers and acquisitions.