When it comes to the need for intellectual property due diligence, Ronald Schutz is a believer. He’s seen what can happen when due diligence fails.
“A few years ago, a major medical products company bought another company in order to acquire that company’s one critical product,” recalls Schutz, who is head of the intellectual property practice at Minneapolis law firm Robins, Kaplan, Miller & Ciresi, LLP. “They saw a rapidly growing market around this product, and they figured the fastest way to get into that market was to make this purchase.”
Unfortunately, it didn’t work out that way. “After the acquisition, the company was hit with patent-infringement lawsuits, ended up with large legal judgments against them, and had to pull the product from the market,” Schutz says. “The product was worse than useless to them; it was a liability. And it all could have been avoided by looking into the patent claims of the product’s competitors. In hindsight, they should have never done this deal, and if they had done proper due diligence, the hindsight would have been foresight.”
Consider any pending patents and their likelihood of success.
Success doesn’t always hinge so completely on one piece of intellectual property. Even so, the value of a company’s patents, copyrights, trademarks, and trade secrets is often a substantial part of its market value, particularly if the buyer wants to make use of those pieces of intellectual property in future business ventures. Performing careful due diligence on intellectual property can be complicated and time consuming, but it’s the only way an acquiring company can be sure of what it’s buying—and what it may, and may not, be able to do with the assets.
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For one company about to purchase another, the first step in performing due diligence on intellectual property is to find out what such assets the target company has. That sounds obvious, but it’s often easier said than done.
“You run into a wide variety of abilities to deliver that list,” says Stuart Hemphill, a partner at Dorsey & Whitney, LLP in Minneapolis. “Some companies are very well organized, and a savvy seller will have done some advance work on preparing a ready and attractive answer to the question of what intellectual property the company has. But that isn’t always the case.”
