In my earlier article ‘Analysing IP – put simply’, I introduced the ‘6T’ framework for analysing IP issues. This article uses the same framework to show you how to simply structure an IP due diligence.
Just to remind you, here are the 6 T’s:
1 - Type of IP
2 - Time (until expiry)
3 - Territories (in which IP is held/registered)
4 - Terminated (ie the status of the IP)
5 - Technical Scope of the monopoly
6 - True monopoly? (validity)
Send an email here to receive copies of future Global IP Strategy Updates directly into your inbox.
My two most recent articles were:
- Improper claim dependency invalidates US Lipitor patent (JIPLP, Oxford University Press)
- Global Litigation Strategy and the art of war (IAM Magazine)
IP Due diligence may be done for a wide variety of reasons. For the sake of this article, let’s assume that it is part of an analysis of a potential M&A acquisition or in-licensing deal.
As I said in my earlier article, this is a simple tool and there are many, jurisdiction-specific complexities. It is meant to trigger a useful line of questions and is not the ‘last word’ in any jurisdiction on the applicable law.
Once you understand the value-drivers for the deal, you can then go about assessing the extent to which the IP position supports or detracts from them and refine your deal strategy.
Type of IP
Firstly, understand which types of IP might underpin the various value drivers in the proposed deal so that you can focus on them.
I was recently asked to work through an IP strategy discussion with a reasonably well-known publicly listed company. A senior executive mentioned in passing that recent acquisition targets were asking for a premium for their ‘brand’ in proposed deals. On further discussion, it became apparent that trade mark protection was scant or non-existent in these targets. While this company went on to take up some of those opportunities, they paid only for the common law rights to the brands, and at a serious discount to the figure that would have been paid if trade marks were offered as part of the deal.
Time until expiry
This is pretty simple. IP rights are all about monopolies and some IP rights have a set term – ie Patents, Designs and Copyight. So, clearly the older one of these rights is, the less valuable it is to you.
Trade marks live forever (provided that you keep paying renewals – more on this later). Confidential information is a tough one – it theoretically doesn’t expire, but most confidentiality clauses have time limits (often imposed by local case law). So you should pay careful attention to all non-disclosure agreements and their clauses if confidential information is a substantial value-driver in your deal. (Unfortunately, of course, it is what you’re not told that is most damaging here.)
If the target doesn’t have the relevant IP rights in one of your countries of interest, then there’s no need to pay for them. This is a simple thing to check, which will save e a lot of money or change the course of the negotiation. You may find that there’s no need for a deal at all.
Termination (status of the IP)
If relevant IP rights supporting the value proposition exist in the right countries and with sufficient remaining term, then check that all renewals are paid and up to date. If the IP rights have irretrievably lapsed, then, to be blunt, they are worthless.
As I mentioned in my earlier article, status information needs to be dealt with carefully, and in most countries, may take a while before lapse becomes irretrievable.
So, your target is telling you that they have 15 patent applications, 4 granted patents and a couple of trade marks relating to the product of interest. But, it will all be useless if the technical scope is insufficiently broad (or worse, misdirected).
By ‘misdirected’, I mean the situation where the claims of the relevant patent don’t cover the product you’re acquiring / licensing. Notwithstanding the premium you paid for the patents rights, your competitors will be free to produce exact copies.
By ‘insufficiently broad’, I mean that while the claims cover the product of interest, they are easy to avoid with simple work-arounds so that your competitors can readily compete using a non-infringing product. The same applies to trade marks if for example you have to rely on goods or services being related because the specification of goods and services were drafted too narrowly, or your mark includes an unnecessary limiting aspect (such as a visual device) which narrows its scope.
True monopoly (validity of the IP Right)
To be sure, a broader technical scope is a double-edged sword as along with the increased monopoly comes a greater risk of invalidation. Again, you might find that an IP right performs perfectly on the first 5 T’s, but it will again be worthless if it is in fact invalid.
I realise that most due diligence exercises won’t (and shouldn’t) allow for a full validity assessment, but there are a number of simple things that you can do to at least form a preliminary view about this.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.