IP Due Diligence

IP due diligence examines the quality, ownership, and risk profile of a company's patent assets: WHAT IP DUE DILIGENCE COVERS: (1) ownership and chain of title; (2) maintenance fee status and validity; (3) encumbrances (licenses; security interests; co-ownership); (4) enforceability (prosecution history; inequitable conduct risks); (5) scope (how well patents cover products and competitors); (6) pending applications (what IP pipeline exists); (7) third-party risks (freedom to operate; inbound IP licenses); (8) open-source compliance; WHY IT IS CRITICAL IN M&A: the entire enterprise value of technology companies is often tied to their IP; acquiring a company without verifying IP ownership is a catastrophic risk; STANFORD v. ROCHE RISK: the foundational risk in any IP acquisition; inventors retain title until they execute a valid assignment; a researcher who signed a patent assignment with a third party before signing the employer's IAA may have conveyed title to that third party; buyers must verify every patent was validly assigned from the inventor(s) to the company (and not previously assigned elsewhere); GOVERNMENT IP RIGHTS: federally funded research is subject to Bayh-Dole; the government retains a royalty-free license; march-in rights exist; foreign licensing restrictions may apply; patent-heavy startups from universities must have verified that all IP was properly licensed or assigned from the university under a patent license or IIA; LAPSED PATENTS: patents that lapsed for non-payment of maintenance fees cannot be revived in most cases; a patent portfolio containing lapsed patents has less value than represented; SECURITY INTERESTS: patents may be pledged as collateral for loans; a perfected security interest in patents requires recording at the USPTO; lenders may have prior rights.

Chain of title review is the most important — and most often deficient — part of IP due diligence: CHAIN OF TITLE: every patent must have a complete, unbroken chain of assignment from the inventor(s) to the current owner; STEP 1 — IDENTIFY ALL INVENTORS: review the patent's face for named inventors; confirm inventors were correctly named (incorrect inventorship is an invalidity ground); STEP 2 — VERIFY INVENTION ASSIGNMENT AGREEMENTS: each named inventor must have signed an IAA (invention assignment agreement) assigning rights to the employer; COMMON DEFICIENCIES: inventor never signed the IAA (signed employment contract but not separate IP assignment); IAA is invalid for the specific invention (invention predates employment; invention is outside scope of employment; CA § 2870 carve-out in applicable state); inventor signed IAA with prior employer who also has a potential claim; STEP 3 — TRACE SUBSEQUENT ASSIGNMENTS: if the company was acquired, spun out, or reorganized, verify each subsequent assignment was recorded at the USPTO; gaps in the chain can be exploited by defendants in infringement litigation; STEP 4 — CONFIRM RECORDING AT USPTO: assignments should be recorded with the USPTO within 3 months of execution; if not recorded, a subsequent good-faith purchaser for value without notice may take priority (35 U.S.C. § 261); STEP 5 — VERIFY UNIVERSITY/EMPLOYER RELATIONSHIPS: for founders who were faculty or researchers: confirm the university/prior employer's IP policy; verify what was licensed or assigned to the startup; review the license agreement from the university (typically an exclusive license with field restrictions, not an assignment); JOINT INVENTORS: if joint inventors were not all employees of the same company, each joint inventor owns an undivided interest regardless of any IAA; the non-employee inventor may have rights; must be addressed.

These findings during due diligence warrant careful attention and often price adjustment: RED FLAG 1 — MISSING INVENTOR ASSIGNMENTS: one or more named inventors never signed a valid IAA; the company cannot claim ownership of those patents without the inventor's assignment; requires remediation (tracking down former employees; litigation risk if inventor refuses to assign); RED FLAG 2 — POTENTIAL PRIOR EMPLOYER CLAIMS: a founder or key employee developed the core technology while employed elsewhere; the prior employer may have claims under their IAA; RED FLAG 3 — FEDERALLY FUNDED RESEARCH WITHOUT PROPER DOCUMENTATION: technology developed with NIH, NSF, DARPA, or other federal funding but without proper iEdison disclosure or Bayh-Dole compliance; the government may have rights the company did not acknowledge; RED FLAG 4 — LAPSED OR ABANDONED PATENTS: core patents have lapsed for non-payment; cannot be revived; RED FLAG 5 — ENCUMBERED BY EXCLUSIVE LICENSE TO THIRD PARTY: the company's most valuable patents have already been exclusively licensed out; the acquirer would own patents but cannot practice them in the licensed field; RED FLAG 6 — PLEDGED AS COLLATERAL: patents are subject to a UCC filing or USPTO-recorded security interest; lender has priority rights; RED FLAG 7 — OPEN-SOURCE GPL CONTAMINATION: the company's proprietary software incorporates GPL-licensed code that was not properly handled; the GPL copyleft may require the company's proprietary code to be released as open source; RED FLAG 8 — PROSECUTION HISTORY ESTOPPEL: key claim elements were narrowed during prosecution to overcome prior art; the scope of the claims is far narrower than the product or market seems to warrant; RED FLAG 9 — PENDING CONTINUATIONS AND THEIR CHAIN: multiple continuation applications are pending; verify each continuation has a proper written description basis in the parent and has not introduced new matter; RED FLAG 10 — INTERNATIONAL FILING GAPS: key markets (China; Germany; Japan; Korea) are not covered by any patent; competitors in those countries are free to copy.

Beyond ownership, IP due diligence must assess whether the patents actually protect the business: SCOPE ANALYSIS: for each core patent, analyze: what does the patent actually claim?; does the claim cover the current product?; does the claim cover competitors' products?; how easy is it to design around?; CLAIM MAPPING: the due diligence team should map independent claims against: (1) the company's key products (does it cover what we are buying?); (2) known competitors (can this patent be enforced against them?); SPECIFICATION SUPPORT: is the claim scope supported by the specification?; claims that read on product but are not supported in the specification may be invalid for lack of written description; PROSECUTION HISTORY REVIEW: review each office action and response for the asserted claims; identify any narrowing amendments or arguments that limit scope; identify any arguments that may create prosecution history estoppel; PRIOR ART EXPOSURE: were the patents examined with thorough prior art search?; are there known prior art references that the examiner did not consider?; third-party searches after issuance often reveal prior art missed in examination; perform targeted invalidity search for core patents; CLAIM BREADTH VS. PRODUCT COVERAGE: a common mismatch: the patent has very broad claims that don't actually cover the specific product; or the patent has narrow claims that cover the product exactly but allow design-around; CONTINUATION PIPELINE: are there continuation applications with broader or more strategically positioned claims pending?; pending continuations increase portfolio value if they can issue with claims that cover future products or competitors; FTO FOR THE ACQUIRED BUSINESS: does the acquired company have clear freedom to operate in its own market?; third-party patents may limit what the acquirer can do after closing; this is a risk, not a value component — must be separately analyzed.

The depth and focus of IP due diligence varies by transaction type: VENTURE INVESTMENT (SERIES A/B): typically lighter than M&A; focused on: core technology ownership verification (chain of title for key patents and pending applications); founder and employee IP agreement review (IAA; PIIA); any government funding (NIH; NSF) and Bayh-Dole compliance; key patent pending vs. issued status; open-source compliance; goal: identify deal-breakers and major risks; not a comprehensive enforceability or validity analysis; M&A TRANSACTION: much more comprehensive; detailed chain-of-title review for ALL patents (not just core); maintenance fee verification across entire portfolio; encumbrance search (USPTO; state UCC filings); full prosecution history review for key patents; invalidity risk assessment for core claims; FTO analysis for the acquired business; third-party inbound license review (what IP does the target depend on?); trade secret program assessment; open-source compliance audit; government funding and export control review; LICENSING TRANSACTIONS: scope and enforceability focus; do the patents actually cover what is being licensed?; are the patents valid (defensible if challenged)?; what is the litigation track record of the portfolio?; WHAT EACH TRANSACTION NEEDS: VENTURE: 2-3 days; founder agreements + key patent ownership; IP assignment completeness; LICENSING: 1-2 weeks; scope + enforceability + infringement analysis; M&A: 4-6 weeks; comprehensive across all categories; TYPICAL DUE DILIGENCE TEAM: IP counsel (patent prosecution + litigation); technical experts (understand the technology); financial experts (portfolio valuation); IT/software for open-source audit; human resources for employee agreement review.