IP Due Diligence Checklist: What To Address Before Executing A Transaction

By Eric Brusca

Life sciences companies considering a merger or acquisition, or buying, selling and/or licensing IP, need to have a full understanding as to which IP assets are part of the deal and the value and risks attached to those assets.

One of the most time-consuming aspects during a due-diligence project is sorting out a company’s IP portfolio and freedom-to-operate status. IP due diligence is a legal exercise where an IP portfolio (e.g., patents, copyrights, trademarks, trade secrets) of a target company is defined and analyzed. Among other considerations, the strength, scope, and enforceability of the IP and the ownership rights surrounding the IP must be carefully examined.

Initially, the parties involved in the potential transaction must identify the relevant products, methods, or services and establish whether the existing IP covers those products or services. Once a comprehensive list of IP assets has been established, IP counsel may begin digging deeper into the IP portfolio. Among the unique considerations in the pharmaceutical and biotech world, the life cycle of a product is often considered – i.e., where is the biologic/drug/medical device in terms of development? Is the product covered by multiple patent portfolios, and when will the patents expire? Aside from patent protection, what is the expectation in terms of market exclusivity for the product once it is approved? Are there any post-approval commitments to a third party? What is the likelihood/potential that a competitor’s generic or biosimilar will impact the value of the product in the future?

In addition to the above considerations, more general considerations such as the status and enforceability of IP, ownership, inventorship, freedom to operate, pending or potential litigation(s) or third-party challenges, and licensee/licensor relationships should be thoroughly investigated. The following list provides some key questions a party, in this case a potential acquiring company, should ask early in the due diligence process. If the company in question is one whose IP assets will be acquired or licensed, the items in the list are also applicable. Some of the entries below are directed to the acquisition of IP via merger, purchase, or license, and others are suited to license activities.

IP DUE DILIGENCE CHECKLIST

• Provide a schedule of all of a COMPANY’s IP. Identify those patents and applications that relate to technologies that are currently commercialized and licensed and for which regulatory approval is being sought.
• Does COMPANY own all rights necessary to make, use, sell, or offer for sale its actual and proposed products?
• Does COMPANY license any IP rights necessary to make, use, sell, or offer for sale its actual and proposed products?
• Are all patents licensed to or owned by COMPANY in force, and are all applications licensed to or owned by COMPANY pending? Are all annuities and maintenance fees fully paid up?
• What in-licensed IP does COMPANY have? What other parties have a license to or right to use this IP? What is the field? What out-licenses has COMPANY made?
• Are there any defects or significant gaps in patent coverage for any COMPANY products?
• Has inventorship been determined and have assignments been filed in each of COMPANY’s owned or licensed patents and pending applications? Has COMPANY filed assignments to each of its registered trademarks and copyrights? Provide copies of all patent, trademark, and copyright assignment documents. Has there been any dispute regarding inventorship or ownership of COMPANY’s owned or licensed IP?
• Have any inventors left COMPANY, did they leave COMPANY voluntarily, and are they on good terms with COMPANY? Do all of COMPANY’s employees sign employment agreements assigning their IP; does each such agreement include provisions requiring the employee not to disclose COMPANY’s trade secrets and confidential information? Indicate whether all COMPANY employee, consultant, contractor, and officer agreements include an obligation to assign all rights, title, and interest in any discoveries and inventions to COMPANY; for any patents and applications on which no assignment has been executed, provide employment or consultant agreement of each inventor.
• Is any IP jointly owned with another entity? Identify the IP and the other party and provide a copy of the agreement, if possible.
• Has COMPANY done a freedom-to-operate search, and are there any patents or pending applications that COMPANY has asked in-house or outside counsel to review further? Has a freedom-to-operate opinion on each such patent and application been received by the COMPANY?
• Has COMPANY received any letter suggesting that licenses from any third-party IP should be taken? Has COMPANY received any correspondence threatening an IP dispute, involving patents, trademarks, copyrights, or trade secrets and provided a copy of all such correspondence?
• Is COMPANY aware of any information that could render any of COMPANY’s patents unpatentable, invalid, or unenforceable?
• Provide a summary of each lawsuit filed by or against COMPANY since [insert date; should be at least six years from the date of this request] and the result of each suit.
• Provide a summary of each lawsuit filed by or against COMPANY that is currently active and describe the nature of the suit, the court in which it is pending, and its current status.
• Is COMPANY planning to challenge, or has it challenged, any third party’s IP rights?
• Have any of COMPANY’s owned or licensed patents been challenged in litigation or in adversarial patent office proceedings, such as interference, opposition, inter partes review, or reexamination?
• Does COMPANY have any trade secrets covering COMPANY’s actual or proposed products? Provide a list describing the general nature of all such trade secrets. What measures are in place for maintaining the secrecy of such trade secrets?
• Do the COMPANY’s standard vendor/material transfer agreements include provisions for IP ownership by COMPANY?
• Are all U.S. trademarks owned or controlled by COMPANY currently in commercial use in connection with the goods, methods, and services identified in their respective registrations? Has COMPANY registered its trademarks in all countries where its products branded with such marks are sold? Are any of COMPANY’s trademarks being threatened or opposed in any legal or administrative proceeding, and/or are there any threatened or actual claims of trademark infringement being made against the COMPANY?
• Provide a table of the royalties you have received annually for the last 10 years from licensing your IP to a third party and identify the IP so licensed and the licensee who paid royalties.
• Provide a table of the royalties you have paid annually for the last 10 years for licensing IP from a third party and identify the IP so licensed and the licensor to whom such royalties were paid.
• Identify each commercially available (by purchase or license) software program used in COMPANY’s day-to-day business and provide proof of your ownership or license for each.
• Identify all software COMPANY uses on a day-to-day basis that is subject to open-source agreements or restrictions.
• Describe the manner in which COMPANY’s patenting activity and strategy is coordinated with COMPANY’s regulatory activity and strategy.

M&As are booming in life sciences. IP due diligence should be designed to provide a clear understanding of the assets and liabilities involved and, as a result, enable the acquirer to negotiate, make an offer, or back away from a transaction.

DISCLAIMER: The information contained in this article is for informational purposes only and is not legal advice or a substitute for obtaining legal advice from an attorney. Views expressed are those of the author and are not to be attributed to Marshall, Gerstein & Borun LLP or any of its former, present, or future clients.

ERIC M. BRUSCA is a partner at Marshall, Gerstein & Borun LLP.