The role of lawyers in IP due diligence

Intellectual property due diligence (IPDD) refers to a series of legal activities that investigate, identity and systematically sort out the situation of intellectual property (IP) assets, confirm the status of IP rights, find real problems, assess potential risks, and propose professional solutions.

IP assets include patents, trademarks, copyrights, domain names, trade secrets (including technical know-how and business secrets), rights in new varieties of plants, the exclusive right of layout and design of integrated circuits, etc. The authors can say that as to any disciplinary action involving IP assets, the parties of a transaction will conduct IPDD of varying degrees on related subject matter.

IPDD is indispensable in daily business, various mergers and acquisitions, private equity and venture capital, public offerings and listings, as well as securitization of IP. However, in many transactions, customers often overlook IPDD, and the legal risk arising from doing so is not uncommon. In the well-known iPad trademark dispute, flaws in IPDD caused Apple to pay a price of US$60 million.

The trademark infringement and unfair competition dispute between Dabao Cosmetics and a factory – which this firm advised on – occurred because Johnson & Johnson failed to include Dabao into the renaming list.

With the development of high-tech industries, the internet economy, and film and television industries, IP plays a more and more important role in the overall value of the enterprise, new forms of IP utilization are constantly brought forth through the old, and customers are becoming increasingly demanding on IPDD. In such circumstances, IP lawyers with technical and professional backgrounds could join the IPDD team to provide customers with comprehensive and in-depth services.

Assist customers to determine the target IP for the purpose of an acquisition. For example, the acquirer intends to acquire a series of assets and related business and is most interested in some part of the core technology.

While professional technical personnel will be involved throughout the acquisition process and identify the core IP rights that need to be acquired from technical aspects, the IP lawyers with technical background, with the assistance of technical personnel, can match the requirement of technical personnel with patent documentation and other legal documents, so accurately determining the scope of target IP.

In another example, the acquirer aims to acquire a brand and obtain market share of the brand, but the trademark should be classified into 45 categories under the Classification Table of Similar Goods and Services, based on the actual situation, and the application needs to be made separately. Trademark lawyers can help clients to identify whether the trademark of the core business of the takeover target is registered under relevant categories of goods or services.

Review the stability of a target IP entity. In the past, investigations of IPDD for effectiveness tended to be often superficial. For example, verifying whether the registered trademark had exceeded the five-year limitation of the application for invalidating a trademark, or if any revocation or invalidation had ever been proposed against the registered trademark.

But the investigation seldom involved the stability of the IP entity, which is a major concern of the customers. For example, when a patent is the main asset to be acquired by the acquirer, the IP lawyer with technical background may determine the stability of the IP entity through checking the copy of the patent register and patent examination archives, and by searching and comparing relevant technologies to find flaws in the entity or procedure during the patent application process, and checking whether the claims of target patent are invalidated in whole or part, or narrow the scope of protection.

Again, during the process of transferring trademark rights, whether rights are exposed to the risk of revocation or invalidation of the entity is of great importance to the acquirers, and it would be helpful if the IP lawyers with experience in trademark agency made recommendations to the client.

Assist customers to evaluate risks and opportunities in the target’s IP rights. Legal risks of the target’s IP are an important basis for acquisitions and other business decisions. If the acquirer intends to acquire a company with a number of patents and technical know-how, and needs to continue the operation of the acquired assets, instead of just obtaining the patent, assessment of the legal risks of target IP is particularly important, otherwise if the acquirer is sued for infringement after the acquisition, the acquirer would suffer huge losses.

IP lawyers may assist customers in determining the protection scope of patents and technical know-how, analyzing competitors’ patents and existing technology to determine the leadership and substitutability of the target IP, as well as the degree of difficulty of circumventing the target IP through other patent designs, and the degree of difficulty of legal rights protection, and other major issues.

In another example, an enterprise intends to acquire a brand, but the brand is being sued for trademark infringement. In such circumstances, if IP lawyers with certain litigation experience can make a judgment on the trend of the tort case using the standards of judicial decision, the significance is self-evident.

Monitor the delivery and transfer process of IP assets. The delivery and transfer of IP assets seem to be simple after signing the relevant agreement, however they also involve legal risks. For example, the transfer process of the trademark might take nearly one year to complete, and negligence of a small detail may mean the acquirer cannot obtain the acquired assets smoothly, forcing the acquirer into lengthy litigation. But if the client gets assistance from a lawyer who is familiar with the transfer procedure, the risks in the process of asset delivery and transfer are greatly reduced.

Han Yufeng is an IP counsel and Lu Lei is a partner at Run Ming Law Office