Understanding Intellectual Property is Critical to Proper Due Diligence
With technology invading almost every aspect of our life, intellectual property rights are valuable and complex. While traditional assets are usually easy to identify, IP assets are not. Successful business owners and managers know that identifying a problem and solving it is at the heart of maintaining profitability and providing a superior service or product. Identifying the problem is easy, while the solution may not be. It's this concept that led me to offer intellectual property due diligence services to my clients. As an IP litigation attorney, I have seen the problem from all perspectives.
Importance of IP Due Diligence
Take, for example, Acme Software. Three talented young software developers leave their corporate jobs and make a go at the American dream. Acme's software is a hit and in a few years, the company's annual income in impressive. Valley Capital Investment hears about the buzz and makes an offer to purchase the assets of Acme. Valley hires good Mergers & Acquisition attorneys and does its due diligence before the sale closes. After the sale, Valley gets hit with a lawsuit from the former employer of the Acme software developers. It turns out that those developers didn't write the code from scratch, but borrowed some lines of code from what they did while still employed at their old job. The M & A attorneys weren't IP experts and missed the issue which resulted in the litigation.
Another recent example was Creative Co, a company whose entire value was based on copyright-protected works. Investors had invested millions of dollars into Creative Co. based on the value of the IP. Unfortunately, one of the principals of the company left after a dispute with the other principals and then took the position that he was never an employee, he had created most of the IP and he had never assigned it to the company. Dozens of sophisticated investors were shocked to learn that the company they invested in did not own the IP they thought they invested in.
Unfortunately, IP does not always behave in the same way that tangible assets do. Chain of title can be very tricky, complicated and exceptionally convoluted. Something as simple as a website is often owned by multiple individuals and entities. When purchasing or investing in a company, you should consider not only ownership and chain of title of its intellectual property, but also who controls passwords to technology and social media accounts, whether any of the technology is infringing on patents, copyrights or trademarks of a third party, and whether proper registrations have been filed to protect valuable IP.
Regardless of how good your attorney is, consulting with an attorney who has in-depth understanding of intellectual property and technology is crucial. It is essential if you are looking to invest in, purchase, or sell a company whose assets include intellectual property.
About the author: Maria Crimi Speth is an attorney and chairs the Intellectual Property team at the Phoenix law firm of Jaburg & Wilk PC and offers IP due diligence services to companies, investors, and buyers. She is also available to consult with M&A attorneys on intellectual property issues.