IP Due Diligence Self-Assessment

IP Due Diligence Self-Assessment

How to do a basic check that your intellectual property (IP) will pass due diligence

If intellectual property is important to your company, then potential investors in your company, and in some cases business partners such as licencees or distributors, may carry out due diligence to check the strength of your IP position and identify any weaknesses. At Hindles, we have experience on both sides of due diligence - helping investors to ask questions and helping potential investees to get ready for due diligence and to answer the questions they are asked. In this article, we set out some questions which young companies can ask themselves to assess their readiness for the due diligence process.

There are various types of intellectual property and in this article we will focus on:

  • patents
  • trade marks
  • designs
  • copyright
  • confidential information

1. Does your firm have a basic understanding of key types of intellectual property?

Although you can rely on external service providers and professionals, such as patent attorneys, for in-depth understanding of IP issues, it is important that your key technical staff do understand the basics of patents (and registered designs), that your marketing staff do understand the basics of trade marks, and that your commercial staff understand confidential information and basic principles of contracts. If you are in an IT field you will need an understanding of copyright, database rights and software licensing.

Basic information about intellectual property can be found online, for example there are links to various FAQs which we have written at the bottom of this page. There are some excellent online courses, for example from WIPO and the EPO. However, it is important to ensure that your team know enough to identify issues as they arise and to provide them with appropriate information, support and learning.

2. Is it clear who is in charge of intellectual property management at your company?

In order to effectively pass intellectual property due diligence, and in order to run your business effectively, you will need to manage and provide a certain amount of IP documentation in an organised way. It is important to have a named person in charge of this. The same person may also function as an "IP Champion" who promotes intellectual property internally, liaises with outside advisers and seeks to develop the company IP portfolio. If the founder/CEO is still leading on IP development, they should delegate looking after the documentation aspects.

3. Do you know what intellectual property you have, and is that written down?

It is important that you are able to identify what intellectual property you actually have and that it is catalogued in some way. A catalogue may be as simple as a list of matters in spreadsheet form, such as an up to date schedule of cases from a patent attorney, with some indication of current case status (our clients can obtain such schedules on request, or obtain online access to them through our web portal). The catalogue may be a more complex written document, such as an IP Audit, whether prepared internally or using an external adviser, and ideally IP rights are linked to product and service roadmaps. Preferably, the catalogue should be in some format which is continually updated.

Related to this topic, it is often helpful to be able to demonstrate that you have clear processes for the documentation of intellectual property. This will reassure third parties that lists of IP are complete and that future IP generation and protection will be managed efficiently.

4. Can you prove that you actually own it?

A key question in due diligence is whether the relevant company does actually own the IP. For patents, are there contracts of employment with each inventor predating the making of each relevant invention which will ensure that you can obtain any signatures or other assitance you may require? Are there other kinds of contracts, such as consultancy agreements or confirmatory assignments, with each inventor? For trade mark registrations and domain names, is the correct company named as proprietor? If IP was transferred from a founder, or has been in-licensed (for example from a University in the case of a spin-out company), have you got a suitable agreement to evidence that?

It is often best practice for founders or other directors without contracts of employment to assign ownership of relevant IP into the business. Sometimes companies think that IP from founders is automatically owned by the business but this is not generally the case.

Sometimes there will be other complicating factors relevant to IP ownership, such as an obligation to a third party, a disagreement with a former employee or a lack of clarity of some aspect of ownership.

5. Do you have supporting documentation?

Patent and trade mark applications, searches, audits etc. generate documentation which it is advisable to keep in an organised format. Some of this information will need to be shared with investors, for example in a document room. You will certainly need to safely store grant and registration certificates once obtained - some of these are still in paper rather than electronic form. You may also need copies of applications as filed, official correspondence with Intellectual Property Offices, especially documents relating to IP validity. Many of these can be found in emails from patent and trade mark attorneys but do keep them in an organised format.

6.... especially copies of contracts.

It is especially important to obtain and keep appropriate contracts with all parties who have contributed to the generation of intellectual property. These documents are commonly checked during due diligence. The time to compile documents is as and when intellectual property is developed in the first place. The time to reach any required agreements about IP ownership is before work to generate IP actually begins.

For inventions or other IP rights generated by employees, you should have employment contracts with suitable IP ownership clauses. For rights created by contractors, you should have a written contact, ideally an IP assignment from the relevant party. Keep copies of third parties' terms of business if relevant. Directors should have suitable contracts in place with the company, covering IP matters, especially if any key director is involved in multiple companies. If inventions, or other IP generation predates an individual's contract of employment an additional assignment will be required. If IP was generated before the company was created, or by another company, an assignment will be required. Where there is an agreement that a third party will assign an IP right to your company, do you have a later document actually assigning it? All of these documents should be obtained and stored.

Many companies sign non-disclosure agreements/confidentiality agreements with third parties to protect confidential information and these should also be retained for inspection.

7....especially licences

It is an obvious enough point but you should be careful to keep signed versions of any licences you have signed to in-licence or out-licence any IP or to transfer any IP. A draft Word document in an old email is not sufficient! Spin-out companies should be sure to keep signed copies of agreements and to have carried out due diligence on them (did the company or University from which the IP is licenced actually own it in the first place? Do you have evidence of that?)

8. Check for obvious errors in contracts

Furthermore, it is important to check that each document has been completed in a legally binding way. You will need to instruct a lawyer to check this properly for you but you can check for basic problems. We frequently see problems with signatures and you should check you have copies of actual signed documents, not drafts or copies with only your own signature(s), and that these are signed by authorised signatories of the correct companies. An authorised signatory is a person who is legally able to bind a company. Signatures from other employees are not legally binding. We do also see problems with contracts not being between the right parties. Check with lawyers what the correct signature requirements are for documents. Some documents can be signed electronically. Some documents can be signed in separate parts (without each party signing the same document). Some documents cannot! Be careful with agreements with parties in other territories, for example China has strict formalities for the execution of contracts.

9. Other basic paperwork

You should also check that you can evidence that IP rights are in force, for example that you have paid relevant grant fees or renewal fees.

10. Relate your IP to your business

Can you explain in succinct terms how your IP is relevant to your business? For example, are your patents, or patent applications, relevant to specific current or future products, or to other business opportunities such as possible out-licences. How do your trade marks fit with the branding which you are currently using? Have you registered the trade mark(s) you use, and do you use the trade mark(s) that you have registered? It is always useful to document these relationships between IP rights and products.

11. Consider geographic scope

IP rights are territorial. Again, can you explain how the geographic scope of your rights relates to your current and future business? The geographical scope of patents is relevant to your ability to restrict the activities of third parties and can be relevant to your ability to collect royalties. How does patent scope fit with your business opportunity and the location of competitors and collaborators? If you are within the first year of the patent application process (or first 30 months if you have filed a PCT application) then you will have choice as to the geographical scope of future protection. If you are past that stage, you will usually not have choice and need to be able to explain your decision.

With trade marks, it is again reassuring to investors and third parties if you have appropriate trade mark registrations in the most important territories in which you trade or intend to trade shortly. Trade mark registrations can be important to control the activities of distributors and licencees and if you are discussing a business relationship in which a third party will act for you in another territory it is well worth having appropriate trade mark registrations for reasons of your own, as well as for reasons of due diligence.

12. What do you know about your freedom to operate?

You will frequently find that you are asked to provide information about what you are aware of concerning your freedom to operate during due diligence, for example whether you are aware of risks that your current or proposed activities will infringe patents, trade marks, designs or other IP rights of third parties?

Here, you need to reflect whether you know and can demonstrate the right amount of risk assessment for the current stage of your business. It is in principal useful to understand your freedom to operate and to be able to provide evidence of that. However, thorough freedom to operate analysis can be very expensive. It is also not possible to carry out thorough freedom to operate analysis until a product is actually finalised. A cursory freedom to operate analysis may lead to false reassurance. If you start freedom to operate investigations you may find it difficult to stop them because you may well identify potential problems requiring further investigations that take time and money, potentially a lot of time and money, to resolve.

There are circumstances where requirements to assess freedom to operate can be reasonably pushed back to the potential investor or partner to do their own independent due diligence of the issue - and times when that just won't be accepted at all! Accordingly, you do have to think carefully and take advice on the right scope of freedom to operate analysis to carry out, and when to have it carried out.

You will likely be asked to provide information about any current or threatened dispute, or agreements reached with third parties (for example trade mark coexistence agreements) and you should ensure you can summarise these.

13. Are you ready for questions about the value and strength of your IP?

It is worth rehearsing answers to likely questions and preparing any supporting information that you may require. Why are your patents/patent applications valuable? This depends on what they actually cover. Do they provide you with a commercial advantage? Why couldn't or won't others simply work around them? Will they withstand challenges to validity and do you have replies to outstanding objections from Intellectual Property/Patent Offices? Have you sought to protect everything which you should?

14. Miscellaneous Issues and Conclusion

There are many more topics which can become relevant during due diligence and you will likely have an idea of key issues that could be raised by investors and others. There are also a number of topics which are frequently important in specific industries. For example, software businesses which use open source code should be able to explain and evidence what licences they require to operate and which they are using.

There are also limits to what it is advisable to reveal to others and what you will actually have to reveal. Deals don't always go through and you may wish to remain cautious what information you pass on. For example, you might try to avoid providing details of unpublished IP, depending on the context.

In any event, it is best to reflect on whether you can prove the ownership and scope of your IP and it is easier to compile relevant documents as you go rather than in a scramble during due diligence. If you have not had an IP Audit carried out recently it can be advisable to have one done, in order to check that your IP is "investor ready" and to flag any issues which will come up in due diligence so that you can address them sooner rather than later.

If you would like help in conducting or responding to due diligence, or advice on the protection of your IP, please do not hesitate to contact us.

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