Key Considerations for Intellectual Property Due Diligence in Mergers and Acquisitions | Morgan Lewis – Tech & Sourcing

When two parties engage in a merger or acquisition, there are several processes that must take place before the transaction can be completed, including due diligence of the seller’s assets—and particularly the seller’s relevant and material intellectual property (IP).

Buyer’s counsel routinely provides a due diligence request list to the seller’s counsel so that the buyer can better understand what IP the seller owns, confirm seller’s ownership rights, and get a more detailed scope of the type of agreements the seller has entered into relating to such IP. These disclosures and agreements provided by the seller in an IP due diligence request list are then reviewed by buyer’s counsel so that the buyer can fully understand what it’s buying and if there are any issues that need to be remedied pre- or post-closing to solidify buyer’s rights and ability to protect the IP it is purchasing in connection with the transaction.

While useful, this request list often does not paint the full picture, and it is important for buyer’s counsel to first take a step back and develop a plan. Understanding a deal and asking both the seller and buyer to provide more context when necessary—including via follow up comments after receiving initial responses that either aren’t fully responsive or lead to other questions—can be critical to the completion of a merger or acquisition and the value of the IP being purchased.

It is common for due diligence to be separated based on category. For example, those reviewing the accounting and financials of the company are often not those also reviewing the IP of the company. However, since there are many moving parts, it is important to gain a full understanding of the deal no matter which part you are responsible for.

Whether you are an attorney or a businessperson on this type of deal, it is useful to keep in mind the context of the deal and the market standard, as well as what assets are important to the buyer and why. For example, if the buyer is buying a brick-and-mortar operation with limited to no proprietary software (as opposed to a software company where the software is the primary product of the company), it may not be necessary to do an in-depth review of any software the seller uses. In such transactions, the seller provides certain representations and warranties to the buyer and these provisions may be sufficient to cover any concern the buyer may have in a particular area without a more thorough review needed. Ultimately, it is important to develop a good strategy and understand the context of a deal to provide useful and efficient due diligence of a seller’s IP to the buyer in a merger or acquisition scenario.

Some important areas requiring review in this context are as follows:

  • IP ownership, including invention assignment agreements to confirm they contain present-tense assignment language (and/or meet other assignment criteria depending on the jurisdiction where such IP was developed), licensing agreements, service agreements, etc.
  • Confidentiality obligations, use restrictions, and protection of trade secrets
  • Software licenses and use of open-source software

Review of copyrights, trademarks, and patents (whether registered or not)

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