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IP Due Diligence Matters

An important due diligence activity when the target company holds intellectual property (IP) assets is researching each asset to determine the asset’s value, ownership and status, and infringement risk exposure.

The first step in the process should be to identify and list all IP assets indicated in documentation provided by the target company, along with any relevant information obtained during the preliminary examination of the target. A thorough effort will also include searching outside the list of disclosed IP asset records to discover undisclosed assets. After the complete set of IP assets related to the target is built, each asset should be priority ranked, based on its relative individual importance to the transaction. The ranked list should include depth of search signal to indicate how deeply the investigation should look for an asset, given its value and priority.

The next step in the process is to investigate each listed asset to determine (1) ownership, control, and current status (2) economic value (3) risk exposure as a result of actual or alleged claims of infringement of third party IP rights. This post will discuss the first investigate topic: ownership, control, and current status of the assets.

Each asset should be reviewed to test whether all entitled registrations have been correctly requested or obtained, and whether the registrations are current with the filing office, whether the title chain from the inventor or previous owner is clear, whether appropriate assignment documents have been publicly recorded, and whether any encumbrances exist.

Use or control rights to the assets granted to third parties by contractual devices should be reviewed as well to identify any restrictions on the asset. All relevant patent, trademark, or copyright files and public records need to be carefully reviewed to verify that the target company has established legal ownership of the applications or registrations. The registrations should all be valid and current on any applicable fees, including maintenance and renewal fees. The chain of title search should reveal that all necessary assignments have been executed and recorded with the applicable government agency. Checking for proper execution and recordation of patents is extremely important because the inventor is assumed to be the original lawful owner of a patent until it is assigned by relationship such as employer-employee or by a valid written assignment.

In case the public records search reveals encumbrances such as security interests or licenses, it becomes necessary to confirm that the target has properly secured and recorded appropriate and complete release. To that end, a search of the relevant Uniform Commercial Code database should be performed to increase certainty that all potential encumbrances have been identified.

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