Why is Diligent Due Diligence Important?


The main value of many technology merger or acquisition deals may not lie in tangible property like buildings or stock inventory. Often the value lies in intellectual property (IP), and patents in particular.

It is common practice for companies to monitor the R&D activities of others, particularly smaller innovators.  This is done with a view to potentially acquiring them, or their IP, when development of the product or process has reached a desired level.  This can provide an exit for the founders of, and investors in, the company being acquired and provides a way of reducing development risk for the acquiring company.  In some instances, acquisition of the IP may not be an option and a license to the IP could be obtained instead.

As the value of these deals is often driven by gaining access to, or control over, third party IP, it is important to understand the nature of that IP to ensure that you are getting value for money and this is where IP Due Diligence is important.

What is IP Due Diligence?

IP Due Diligence is essentially an audit of the IP assets of interest and, depending upon the purpose of the exercise, can include a review of how IP is generated, captured, protected, and reviewed.

IP due diligence is most often carried out by a company considering purchasing or licensing IP assets to allow an accurate deal valuation.  IP due diligence can also be carried out by a company on its own IP assets, for example to ensure that everything is in order in preparation for a deal or potential litigation.  This can allow potential issues to be identified and addressed before the time pressure of a deal or court process.

An IP due diligence can be considered as the IP equivalent of the searches and survey that may be undertaken for a house purchase.  When buying a house searches are typically carried out to check formal issues, for example that the property is owned by the person offering to sell it, or that planning permission or a building permit was obtained where necessary.  A survey can be carried out to look at the substance of the house.  A basic survey might check to ensure that the walls are sturdy and that the roof does not leak.  A more detailed survey might look at particular aspects of the property such as the presence or asbestos, the quality of the plumbing, or age of the wiring.

Formal IP Checks

As with a house purchase, some formal checks can be made by carrying out searches in relation to the IP rights of interest.

IP registers in the relevant territories can be consulted to ensure that the right exists and that any necessary renewal fees have been paid to keep the right in force and that it is not being challenged.  Checks can be made to ensure that the registered owner is as expected and that the chain of ownership from the inventors to the current owner is correct.

The registers can also be consulted to look for transaction records such as licenses or mortgages which might affect the value, and to look for any non-standard modifications, for example alterations to the duration of the right.

Substantive IP Checks

Like a building survey, the substantive checks assess the right itself.  Substantive IP checks typically involve a specialist IP attorney reviewing the rights in detail.  Ideally the review would identify no problems, but there are many issues that might be uncovered that could reduce the value of the IP.

The scope of each right can be analysed to confirm that it will provide the protection expected or desired, and to see whether there are any gaps in that protection.  For example the review might reveal that the right is more limited than expected in one or more territories meaning that a third party could easily work around the protection.

The specification and application history can be reviewed in detail to identify potential internal issues that might affect the scope or validity of the right.  A review of the file history might reveal that a non-allowable amendment was made prior to grant which could render the right invalid, a prior art citation may not have been disclosed where required meaning that the right may be unenforceable, or a statement may have been made during examination that might alter the understanding of a claimed feature.

Searches can be carried out to look for potential external issues that might negatively affect the right and to determine whether making use of the protected subject matter of the right, for example making a product including the patented invention, might infringe the rights of third parties.

IP Process Checks

In some circumstances, particularly if reviewing your own IP, it can be useful to review the processes in place to capture and protect IP that is generated and to identify third party risks.  The review should ensure that the processes remain fit for purpose so that potentially important assets or issues are not overlooked.

Ask Questions and Seek Confirmation

It is common for a prospective purchaser or licensee to provide a questionnaire concerning the IP and to seek warranties regarding certain issues.  The questionnaire and warranties are normally designed to uncover any issues that are already known to the rights holder.


It is not a requirement that due diligence is undertaken as part of a transaction, but completing a diligent due diligence can reduce the risk that the IP rights being purchased or in-licensed are not as valuable as anticipated.

Carrying out a due diligence on your own IP rights and processes can help to ensure that your rights are being appropriately protected.  The process can also facilitate any future review by a third party and reduce the risk that something unexpected is uncovered when a third party does review the portfolio for a transaction or during a litigation.

Attorneys at AA Thornton have undertaken due diligence reviews for Clients in a variety of industries.  The nature of the work is always tailored to the commercial needs and plans of the Client to ensure a cost effective and efficient process.  If you have any queries regarding this topic, or other IP protection or enforcement matters, please contact Alex Bone at amtb@aathornton.com or click here.

Category: News | Author: Alex Bone | Published: | Read more