IP Due Diligence – Everything You Need to Know

Soniya Khanna

06 Jul, 2023

21^st century is the era of innovation; these innovations are playing an important role in the growth of Indian economy. All these innovations are intangible property or propriety assets which come out from human intellect, which has commercial value.  These new ideas, innovations need to be protected and secured under some law. The law protecting these innovations is Intellectual property law.  These innovations either belong to an individual or become a key asset of a company. If it belongs to a company, it is important for the company to know the quality and quantity of its IP. The process of the audit to assess the worth of assets owned, licensed by the company is called IP Due Diligence. 

What Is Intellectual Property?

Intellectual property law protects one’s legal right in respect to the property created by the human mind- such as inventions, slogan, symbols, any artistic work, design, any software, or any technology, etc. There are three ways to protect your Intellectual property through the use of – Patent- Trademark and Copyright.

These laws not only protect the owner of IP rights from third party infringement but also provide many other exclusive rights to the owner. In the emerging nation like India, where an individual is way heading towards the stimulating emergence in technology and scientific activities. Government from all around the globe put efforts to harmonize the IP laws through many kinds of international treaties such as the world trade organization agreement 1994 (WTO) on top related Intellectual Property Rights (TRIPs). The convention established in the year 1967 by the name of world trade provided the list of subject matter which is protected under Intellectual property rights;

• literary, artistic work, discoveries in the field of science
• Inventions related to the field of human endeavor
• Inventions related to industrial designs
• trademark, service mark, commercial names
• protection against unfair competition
• performances of stage artists, phonograms and broadcast

TRIPs agreement is the most effective and complete multilateral agreement until now, which came into effect on 1^st January 1995. According to which following areas will be covered under intellectual property.

• Trademarks which included services marks as well;
• Industrial designs
• Copyrights and related rights (Which includes producers of the broadcasting organization, the right performance
• Geographical indications which includes appellation of origin
• The layout designs (topographies) of assimilated circuits
• The information which is not closed which includes test data, trade secret
• A patent which includes protection of a new variety of plants

How Is Intellectual Property a business asset?

Any company or business mainly includes two types of major two assets. One is a physical asset – which includes building, machinery, financial assets, and infrastructure. The second main asset of the company is intangible assets- which include ideas, designs, brands, and innovations. In the earlier time, physical assets were responsible for the value of the company, but with time situation have been changed drastically. Revolution in the field of Information technology, for the company’s intangible assets, is becoming more valuable. In simple terms, we can say that now the value of the company is not its factories or large warehouses but now innovative ideas, the software has become the main source of company. SMEs are working over their intangible assets and finding out more ways to make the best use of its intangible asset.

Hence, therefore, it’s important for the company to legally secure its intangible assets. IP rights which may be acquired in particular for the given categories of intangible assets.

• Products and process coming out of innovation (through patent and utility model)
• Computer software and compilation of data(through copyright and related right protection)
• Creative designs, this includes textile designs also (though industrial design right)
• Signs, logo for any product distinction (through trademark)
• Microchips (through the protection of layout design or integrated circuits)
• Trade secrets (through the protection of undisclosed information of commercial value)

What is Due Diligence?

Due diligence is a process of investigation or audit which should be carried before any investment in a business or any merger and acquisition. The main aim of due diligence is the valuation of the company’s assets, liabilities, assess the risk within the business. This process plays an important role for the investor or purchaser to make an adequate and profitable financial decision.   

What is IP Due Diligence?

IP due diligence is the investigation to know the worth of the company’s intellectual property. It is a process of the audit to assess the quality and quantity of intellectual property of a company or business. The audit also includes an assessment to know how intellectual property is secured and captured by any relevant company or business. IP is the essential key assets of any of the company or business. Conversely, if a company can’t use it’s IP due to third party infringement, this may significantly impact on its ability to operate effectively and therefore on its value. Intellectual due diligence is often conducted during the merger and acquisition or can be carried out by a company on its IP assets in preparation for a transaction for sale of a business, or for acquiring any major license.

What is the goal of conducting IP Due Diligence?

• The quality and quantity of the company’s IP asset so that the value of a company’s IP can b carried out by third party and company itself. Which can help a company to segregate the irrelevant IP assets whose maintenance represents an unnecessary cost over the company
• The process can capture all the IP assets the company has created, and at one place these can be used adequately and can be protected at the same time.
• The company can derive the ownership of IP asset to ensure that the company is having all the necessary rights related to that IP.
• The company even can get the information on whether the third party is infringing the IP rights.
• In the condition of merger and acquisition, the buyer can get to know the risks and limitations attached and can value the IP.

What is the importance of IP Due Diligence?

The strength of an IP due diligence can determine the company’s worth. The other reasons to determine the value of a company’s IP are;

• Any other company is interested in buying your company
• Company is interested in licensing your IP.
• Company is interested in an IP trade
• Company is  preparing for initial public offering or IPO listing on a share market

What is the procedure of IP due diligence

For a smooth IP due diligence following step are recommended to be taken;

Defining Goal

Without any set term of goal, the investigation cannot be carried properly. With the set of goals, an attorney can perform its task properly. Following are a few questions that can be asked for a better understanding of business and can get a better understanding of business IP.

• Whether the purchase of IP right is the goal of a business transaction?
• Who will be using the IP which is being sold?
• Whether the IP in question has proper protection right
• What all transaction has been completed
• Define the most relevant objectives of the transaction

Investigation

The investigation is the most important and time-consuming part of due –diligence. Here the search of facts and information are carried out of a company. It’s important to know during the investigation that what all are the products involved in the business transaction and other is whether the IP assets are covered under the IP protections rights.

Results Analysis

Results analysis is the stage where all the information gathered by the attorney will be combined in a cohesive and understandable format. The result analysis will give further advice and guidance for the next step.

Conclusion

IP in now days are the most valuable asset of any company or business. IP Due diligence where it will provide information about the IP of a company, within that the worth of the company’s can be carried. Merger and acquisition or the investment are the main conditions when a company carry out then due diligence process so that the third party interested in a company can make most of the profitable decision by investing or purchasing the business. A proper time taking due diligence process and from the good attorney always gives out the best results, and hence the reason of carrying due diligence process can be fulfilled.

Suggested Reads:

• Legal Due Diligence – Everything You Need to Know
• Financial Due Diligence / Accounting Due Diligence – Everything you Need to Know
• Summarizing the Due Diligence Process in India