To assess the value of a target company or its intellectual property, the acquiring company will be concerned with the proprietary
nature of the IP, how the IP is protected, and the extent of the target company's rights over the IP. The acquiring company
needs to determine whether it can effectively develop and commercialize the target company's products and technologies going
forward. The IP diligence process also enables the acquirer to better understand the value of the IP assets and this valuation
often has a direct impact on the price of the overall transaction.
IP RISK ASSESSMENT
As part of the IP diligence process, the target generally must provide detailed documentation on the nature and scope of patent
rights and the validity, enforceability, and transferability of such rights.
If the target's technology is not covered by patents, the company should describe how the technology is protected—is it through
trade secret, trademark, copyright, or other protections? It is expected that all registrations protecting the company's proprietary
technology have been adequately documented.
Finally, the target must address any risks to the value of the IP. Is there any pending litigation or risk of future litigation
associated with the use of the technology that can be identified and quantified? Additionally, the target should expect potential
acquirers to undertake a litigation review to assess any potential claims, infringement, or insurance issues.
In addition to addressing the general IP risk issues described above, IP diligence also requires the review of several key
areas, including ownership issues, freedom-to-operate considerations, scope, validity and enforceability concerns, and the
transfer of rights to third parties.
Ownership is one of the most important issues to explore in the IP due diligence investigation. The most critical questions
will focus on the target's rights in the IP and whether those rights are free of any encumbrances and whether the rights may
be cleanly transferred.
Not having clear rights over the IP can be a deal-breaker. To avoid issues that may disrupt the transaction, the target should
be able to explain and document how IP rights have been assigned to the company; the company's rights to transfer and assign
the IP; and whether there have been any third party challenges to the IP rights.
Freedom to Operate
In the past, acquiring companies have focused on ownership issues when valuing a target company and assessing long-term product
or technology viability. However, recent deals demonstrate that acquirers are eager to fully understand freedom to operate
(FTO) issues. In general, an FTO analysis evaluates whether the acquiring company will be able to make, use, or sell products
without infringing on the IP rights of a third party. An FTO analysis fully explores potential legal roadblocks, such as valid
patent claims of third parties. Any potential significant FTO issues often mean further diligence and analysis before the
deal moves to the next stage.
Scope, Validity, and Enforceability
The scope, validity, and enforceability analysis is related to the strength of the company's IP assets. Claims must be evaluated
and validated for compliance with formal requirements (for e.g., the written description, enablement, and best-mode requirements).
Also, the analysis should include an investigation of enforceability issues, particularly under the US patent law, such as
potential inequitable conduct issues.
Transfer of Rights to Third Parties
The company seeking to acquire a biotech firm needs to examine any transactions involving the transfer of rights relating
to intellectual property. Any such analysis includes an examination of licenses, material transfer agreements, collaboration
agreements, or any other transaction that involves a transfer of IP rights. For each of the agreements involving transfer
of IP rights, several issues will have to be examined:
- Patents licensed to a third party, including the specific patents licensed, any exclusivity rights, and specific inclusions
or exclusions related to each party's ability to use the patents.
- Issues related to prosecution and maintenance of the licensed patents, including reimbursement of costs.
- Issues related to enforcement of the patents.
- Commercial diligence obligations and service level commitments.
- Financial terms, including milestones payments and royalty obligations.
- Third party and company termination rights.