The Importance of Intellectual Property Audits in Corporate Transactions

Conducting an intellectual property (IP) audit is a critical step in the due diligence process for corporate transactions. Prospective purchasers need to know what they are (and aren’t) purchasing—and they also need to know what legal risks they may be taking if they move forward. By working with a Florida intellectual property attorney to evaluate the seller’s IP portfolio, review relevant contracts, and address other relevant considerations, prospective purchasers can ensure that they price their deals appropriately while avoiding unhappy surprises and mitigating their risk going forward.

On the seller’s side, an internal audit can disclose additional assets that could effectively raise the selling price, and avoid potential future liability if existing obligations, for example, are not disclosed or resolved prior to a sale or transfer.

5 Key Reasons to Conduct an Intellectual Property Audit

Here are five key reasons to perform an intellectual property audit when contemplating a corporate transaction:

Key Reason #1: Identifying All IP Assets Included in the Proposed Transaction

The first reason for conducting an intellectual property audit is to identify all of the IP assets included in the transaction. If you move forward, will you be getting everything you thought you were getting? Will you be getting more? Far too often, companies lack a clear and comprehensive understanding of their IP rights and the scope of their IP portfolios, and this leads to uninformed decision-making.

Intellectual property assets can include registered patents, registered and unregistered trademarks and copyrights, and trade secrets and other confidential information. Pending applications for registration can add value to a deal as well—though there are no guarantees that a pending application will be approved. An experienced Florida intellectual property attorney can assist with evaluating these types of considerations and provide a clear and comprehensive picture of what you will—and won’t—be getting if you move forward.

Key Reason #2: Identifying IP Assets that May Be At Risk

Conducting an intellectual property audit also provides the opportunity to proactively identify any of the seller’s IP assets that may be at risk. Some examples of issues that can put IP assets at risk include:

• Expiring registrations with the U.S. Patent and Trademark Office (USPTO) or U.S. Copyright Office
• Expiring registrations with international patent, trademark or copyright registrars
• Failure to register key intellectual property assets
• Pending USPTO Office Actions (or similar actions from international registrars)
• Pending third-party challenges to USPTO or international registrations or registration applications

Again, these are just examples. As we discuss below, potential IP litigation risks can present concerns with regard to the validity and value of sellers’ intellectual property rights as well. When contemplating a potential acquisition, it is critical to ensure that all pertinent information is on the table—and to ensure that you give due consideration to all pertinent information during the due diligence and deal-making processes.

Key Reason #3: Assessing Third-Party IP Rights

Another key reason to conduct an intellectual property audit when contemplating a corporate transaction is to assess third-party IP rights. Among other things, this will involve reviewing pertinent contracts to determine if the seller has licensed or assigned any of its claimed IP rights and whether consummating the transaction would create exclusivity or other issues with any of the company’s existing commercial agreements. The seller may have undertaken obligations that carry through to successors and assigns. If undiscovered, they could lead to future liability for both buyers and sellers. Contracts that will typically need to be reviewed include:

• License and assignment agreements
• Independent contractor agreements
• Employment agreements
• Outsourcing agreements
• Franchise or distributor agreements
• Joint venture and collaboration agreements
• Royalty agreements
• Technology transfers
• Settlement agreements
• Agreements from prior corporate transactions

Here, too, these are just examples. Numerous types of contracts can have direct or indirect implications for the exclusivity and value of a seller’s claimed intellectual property rights as well as for a prospective purchaser’s post-integration operations. By conducting comprehensive intellectual property audits during the due diligence process, prospective purchasers can ensure that they are making informed decisions with the seller’s and third parties’ IP rights in mind.

Key Reason #4: Assessing Potential IP Litigation Risks

A fourth key reason for conducting a comprehensive intellectual property audit is to assess potential IP litigation risks. Along with the registration-related risks discussed above, pending and potential IP infringement lawsuits can also present legal and financial risks that require careful consideration during the due diligence process.

Just because a seller claims to have exclusive rights, this doesn’t necessarily mean that the seller has exclusive rights. A third party may have prior rights that entitle it to seek an injunction or damages (or both). Even if you negotiate for the seller to retain sole responsibility for any claims arising prior to the date of closing, losing the ability to use one or more of the seller’s claimed IP assets could substantially impair the value of the deal and negatively affect your company’s business plan going forward. 

Key Reason #5: Negotiating and Pricing the Deal

As we have alluded to already, conducting a comprehensive intellectual property audit plays a key role (or should play a key role) in negotiating and pricing any commercial transaction. While intellectual property assets can have enormous value, parties can also overestimate the value of IP or make flawed assumptions about sellers’ exclusive rights. But, these are both critical mistakes that can—and should—be avoided.

Along with affecting the price of the deal, IP-related concerns can impact other aspects of the deal-making process as well. For example, prospective purchasers may need to negotiate additional protections into their acquisition contracts if they have concerns about potential third-party infringement claims, or they may need to make strategic decisions about which third-party contracts they assume. Conducting a comprehensive intellectual property audit is crucial for many reasons, and the first step in the process is to engage an experienced Florida intellectual property attorney who can help guide you forward.

Schedule an Appointment with a Florida Intellectual Property Attorney at Lott & Fischer, PL

If you are in the process of contemplating a corporate transaction and would like to know more about the importance of conducting a comprehensive intellectual property audit, we invite you to get in touch. We work with companies of all sizes to help them evaluate proposed transactions throughout the United States and around the globe. To schedule an appointment with a Florida intellectual property attorney at Lott & Fischer, PL, please call 305-448-7089 or inquire online today.

Leslie Lott and Ury Fischer are both Board Certified in Intellectual Property Law by the Florida Bar—and they have been since the inception of the Florida Bar’s Intellectual Property Law Certification program. Ury has also served as Chair of the Florida Bar’s Intellectual Property Law Certification Committee. As the Florida Bar explains, the purpose of its Intellectual Property Law Certification program is to identify lawyers who “have the special knowledge, skills, and proficiency, as well as the character, ethics, and reputation for professionalism, to be properly identified to the public as certified intellectual property lawyers.”