Legal due diligence is the process of investigating and understanding the legal risks and aspects of a transaction. In the context of intellectual property (IP), due diligence involves verifying and confirming the legal status, ownership, and rights associated with the IP owned or used by the Target company. It is also a crucial step in assessing potential disputes and infringements related to IP.
IP due diligence serves several important functions. It involves verifying ownership to confirm that the entities claiming to own the IP genuinely do so and to ensure there are no disputes over ownership. This process also includes identifying and examining rights and licenses associated with the IP, such as copyrights, patents, trademarks, and trade secrets, and ensuring these rights are properly registered and protected under relevant regulations. For example, the Target company shall comply with the recordation of a license agreement to the Minister as stipulated according to Article 42 of Law No. 20 of 2016 regarding Marks and Geographical Indication and Article 79 of Law No. 13 of 2016 regarding Patent.
Additionally, it evaluates potential legal risks, such as possible infringements, ongoing litigation, or future infringement threats. It assesses the economic value of IP assets, which can influence business decisions like valuations in mergers, acquisitions, or investments. Compliance with relevant laws and regulations, including maintenance fees, registrations, and reporting, is also verified.
The objectives of conducting IP due diligence are multi-faceted. Primarily, it aims to minimise risks associated with IP transactions, such as the risk of infringing on third-party rights or becoming involved in legal disputes. It also provides critical information for investors or buyers to make informed decisions about the value and status of a company’s IP assets. Furthermore, due diligence ensures compliance with all relevant IP laws, helping avoid unexpected legal challenges. It also helps assess the potential for further development or expansion of the IP, including opportunities for international expansion or additional commercial exploitation. Finally, it ensures that any transactions involving IP, whether sales, licenses, or mergers and acquisitions, are conducted securely and following applicable laws.
The acquirer may carry out IP Due Diligence covering copyrights, patents, trademarks, and trade secrets.
- Patent Due Diligence shall examine the general documentation of a pre-filed patent, such as whether or not the Target company had signed an assignment agreement from the inventor to the Target company or whether all inventors’ names were listed in the assignment agreement.
The acquirer may also assess the agreement, which may involve the inventor (an employee who works for Target company) or even a subcontractor of Target company in developing a certain invention.
Through Patent Due Diligence, the Acquirer could understand the number of patents the Target company has and its designated countries, the rough value of the patent, and possible legal disputes.
- Copyright Due Diligence is one of the essential matters that shall be carried out by the Acquirer, especially when acquiring a technology company. Ensuring the source code is rightfully owned by the Target company is one of the most important matters to assess as it may harm the value of the Target company. Upon due diligence, the Acquirer shall confirm that the employment agreement and assignment agreement have expressed any source code, technology, invention, or any means of valuable production for the Target company, which shall be retained by and become the possession of the Target company.
The acquirer must be aware of any potential copyright infringement due to open source, or any other source utilised by the Target company without permission.
- Trademark Due Diligence will illustrate the number of trademarks and designated countries registered by the Target company.
Although the Acquirer carries out IP Due Diligence to value a Target company, IP Due Diligence could also be a tool for a company to manage their IP Portfolio for future licensing, internally examine possible disputes against the employee, and create policies to expand the company’s Research and Development.
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This article’s content is intended for informational and educational purposes only and should not be construed as legal advice. The views and opinions expressed are those of the author and do not necessarily reflect any affiliated organisation’s official policy or position. Readers are advised to consult a qualified legal professional for specific legal guidance and advice. The author and publisher disclaim any liability arising directly or indirectly from the use of or reliance on this information.