Avoiding Pitfalls and Related Traps in Intellectual Property Transactions
By Kim Nobles, Irell & Manella, LLP

Companies may extract value from their ideas or technology by initially identifying, protecting and managing their Intellectual Property (IP). Thereafter, IP may be licensed, sold or bartered for even greater value. With the current downturn in the technology-sector market, it is critical to avoid the common pitfalls and traps in IP transactions.

In particular, although the protection of IP through filing of patents, trademarks and copyrights is important, companies should be aware that many transactions involving technology may prompt a review of the company’s IP portfolio and related policies. Accordingly, companies should understand what such an investigation, called due diligence, entails.

Due diligence can best be described as taking all reasonable steps to investigate potential problems in the business, legal and financial affairs of a company in connection with securities offerings or other corporate transactions. This process typically involves, among other things, a thorough examination of records related to the IP assets in question.

Due diligence IP issues typically arise during the formation of technology-based joint ventures or alliances, mergers and acquisitions of technology companies, technology-company private placements, public offerings and company valuations.

Due diligence, when conducted properly, greatly reduces the risk of IP-related "surprises" and helps clarify the scope of the IP assets and the value they present. In particular, effective due diligence enables one to evaluate the transaction in light of the strength of the IP assets and ensure that a fair price is paid. It helps an entity identify any problem areas, obstacles or deal breakers so that informed decisions can be made and negotiations properly prepared for. Remember, it is your IP that often determines your company’s value to your customers, shareholders, potential partners, and of course, the financial world as a whole.

Due diligence also ensures that accurate and complete disclosure is made in the relevant documents, including securities offering documents. In addition, it provides support for legal opinions that are given at the conclusion of the transaction.

• When performing due diligence, one should:

• Understand the scope of the investigation. In short, understand what will and will not be investigated. In addition, in determining the scope of the investigation, one should determine the cost/benefit versus the risk of excluding certain tasks from the investigation.

• In the case of a transaction involving IP, determine the nature of the IP assets owned or to be acquired. This involves an uncovering of any problems of ownership, title or validity of IP assets, an assessment of any limitations in the value or enforceability of the IP assets and an assessment of any IP related problems in the proposed transaction. It also involves a determination of the IP rights necessary to the underlying business. For example, one should identify any IP rights retained by the seller that must be licensed to the buyer; identify and evaluate key licenses with third parties; and consider the effect of unlicensed third party IP rights.

• Determine if key or current technology is covered by patents, trademarks and/or copyrights. The claims in existing patents may not cover the current technology that is being practiced, as the company may have evolved beyond the original patented subject matter. In addition, U.S. and foreign patents on key technology may not have been filed.

• Assess how much of the IP is in the form of trade secrets. One should review employee/consulting agreements, NDAs, entrance and exit interviews, and the company’s security procedures to determine if trade secrets are properly protected. One should also identify if there are open trade secret issues in the proposed transaction, and take steps to resolve the issues through assignments, changes of procedures or other measures prior to the closing of the transaction.

• Identify key employees and interview them regarding products and IP protection for key technologies. One should also determine if all employees have signed an agreement to assign all IP rights.

As an emerging growth technology organization, it is imperative to value your IP and its critical worth to your business’ existence. Besides obtaining protection of your IP, you should be aware of and be prepared for the due diligence process, so as to minimize transaction uncertainty and risk, as well as to set meaningful parameters for your IP transactions.

(Kim Nobles is an intellectual property attorney in the Newport Beach office of the law firm of Irell and Manella, LLP. She specializes in representing high tech companies in legal, technical, strategic planning, licensing and intellectual property matters, including patents, trademarks and related litigation. Irell and Manella, LLP, is a full-service firm with a worldwide base of clients.) Kim can be reached at knobles@irell.com

DISCLAIMER: This discussion is general in nature and is not intended to and does not create a lawyer/client relationship. This discussion should in no way be relied upon or construed as legal advice, particularly since most legal outcomes are highly dependent on the facts of a particular case or situation.