Intellectual property due diligence

Intellectual property due diligence is the review of a company’s rights, titles, contracts and risks, carried out before an acquisition, a fundraising, a contribution in kind, a licence or a financing, in order to assess the value and robustness of its intangible assets. It is governed by no specific provision and is linked to the pre-contractual duty of disclosure under Article 1112-1 of the Civil Code and to the acquirer’s duty of care. It shapes the drafting of the representations and warranties in the agreement.

Inventory of assets

The review begins with an inventory of registered titles, namely patents, trade marks, designs and domain names, and of unregistered rights, namely copyright in software and creations, know-how and trade secrets. For each title, it checks ownership in the register, payment of renewal fees or renewals, the territories covered, pending priority periods, pending oppositions, invalidity or revocation actions and any recorded licences or pledges. Analysis of the patent portfolio also looks at whether the claims match the products actually exploited, since a title unrelated to the business has limited value.

Chain of title

The point most often found wanting is the chain of title. The review examines the employment contracts of inventors and creators, assignments of copyright by employees and contractors, research agreements with universities and development agreements, to make sure that the rights have actually passed to the company and that the remuneration owed to employee inventors has been paid. It lists the open source components incorporated into the products and the compatibility of their licences with the business model. Lastly, it identifies change of control, non-assignment and termination clauses in inbound and outbound licences, which may cause an essential right to be lost by the very transaction contemplated.

Litigation risk

The review sets out pending or threatened litigation, formal notices received, oppositions and invalidity actions, and assesses the freedom to operate of the products in light of third-party rights. It checks that trade secrets are protected by reasonable measures, a condition of their legal protection. The findings feed into the price, the conditions precedent, the indemnities and the remedial undertakings imposed on the seller before completion.

Key points

Intellectual property due diligence verifies that the assets exist, belong to the company, are kept in force and can be exploited without hindrance. The chain of title to the creations of employees and contractors is the point most often found wanting. Require up-to-date register extracts, signed assignment agreements and the list of licences containing a change of control clause before setting the price and the warranties.

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This glossary entry is general in scope and does not constitute legal advice.

Dhenne Avocats litigates patent disputes before the Paris Judicial Court, the Paris Court of Appeal and the Unified Patent Court. When the question arises in a real case, the right moment is almost always before proceedings are issued.

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