Abstract:
This paper explains the importance of due diligence in the field of Intellectual Property Law and why it is necessary. Due diligence or in short “DD” is a tool used by buyers, while purchasing a company. This paper will explore how due diligence impact on Intellectual Property It helps them to know whether the company that they purchase or going to purchase has proper representation relating to its members, sales etc. This paper will explore how failure of proper due diligence can create substantial losses for a company. It will also explain the concept of Intellectual Property and how it is connected with due diligence. Through a review of existing literature, case studies and statistical analysis, this paper aims to provide a comprehensive understanding of how due diligence work in protecting the Intellectual Property. This paper will explore the intricate relationship between due diligence and IPR.
Case studies of famous companies are given in this paper to explain the topic more clearly. It will also explain the long term benefits of having due diligence in buying a company.
This paper will conclude by discussing new ways of implementing due diligence more effectively and in a quicker way, so that many companies can apply it.
Introduction
Due Diligence can be referred as a background check technique to use to know about the pros and cons of a company before purchasing it. From the definition it is understandable that it is conducted by buyer and not a seller, however in some cases the company which is acquired can perform DD on the company which acquired it. Its main objective is to safeguard the transaction made in M & A. This paper tries to explain the relationship.
Objectives
- To identify and assess potential risk and liabilities, business transactions etc.
- To confirm and verify information created during the deal.
- To avoid and reduce bad business transaction by identifying potential defects.
- To ensure compliance with investment and deal criteria.
Literature Review-
Due Diligence definition and Importance-
Due Diligence is a process through which confidential, legal, or financial information as well as necessary information is exchanged, examined and appraised by the interested parties in the business transaction. According to WIPO, If an Intellectual Property owner does not take a due diligence itself upon its own product and submits a due diligence by a prospective licensee, a venture capitalist, then it also submits to the consequence of any due diligence gaps, wrinkles or defects that may emerge from due diligence.
The Importance of Due Diligence is as follows-
- Risk Assessment-Due Diligence helps to identify and assess the risk associated with a potential transaction or investment. It thoroughly analysis the target company’s financial, operational and legal aspects, which allow stakeholders to identify potential pitfalls and make informed decision to mitigate risks.
- Valuation- Due Diligence plays an important role in determining the valuation of the target company. By examining its financial statements, assets, liabilities and growth prospects, stakeholders can arrive at a fair and correct valuation, ensuring that the transactions reflect the true value of company.
- Legal Compliance- Due Diligence ensures that the target company complies with relevant laws and regulations and the updated industry standards. It includes assessing regulatory compliance, licensing agreements, intellectual property rights, environmental regulations and employment laws. Identifying any legal issues or liabilities early in the process helps avoid legal complications and financial penalties in the future.
- Financial Importance- Due Diligence involves a huge and detailed amount of analysis of the target company’s financial statements, cash flows, revenue streams, profitability and financial projections. This assessment provides insights into the company’s financial health, growth potential and future performance enabling stakeholders to make informed investment decision.
Types of Due Diligence–
Due Diligence can be classified into the following main types-
Financial Due Diligence- Analysing financial statements, revenue streams and profitability to assess a company financial asset.
Legal Due Diligence- Ensuring compliance with laws and regulation by reviewing contracts, litigation histories and any legal liabilities.
Operational Due Diligence-Evaluate business process and internal operations to identify efficiencies and potential risks.
Management Due Diligence- It specially focusses on assessing the effectiveness and experience of the company’s senior management team, which is crucial for predicting future success.
Technology Due Diligence- Assesses the technology infrastructure and systems of the company to ensure thy meet industry standards.
Market and Customer Due Diligence- Analyse the market position, competitor strategies, and customer demographics.
Environmental and Social Due Diligence- Evaluate a company performance against sustainability and ethical guidelines, becoming increasingly important for investors.
Intellectual Property: Definition and Types-
Intellectual Property Rights are the legal privileges granted to the inventor or creator to safeguard their intellectual work for a time period mentioned in the contract. These Intellectual Property Rights are outlined in Article 27 of the Universal Declaration of Human Rights, which grants the rights to gain protection for one’s material and moral interest as a result of the authorship of works of science literature or arts.
Intellectual Property Rights are typically classified under two main categories copyrights and rights associated with industrial properties. Industrial Property comes in the form of trademarks, geographical indications, industrial design and trade secrets.
The promotion of the global protection of Intellectual property rights is the responsibility, undertaken by WIPO, which also supervises treaties like Paris Convention for the protection of Industrial Property (1833), Berne Convention for the protection of Literary and Artistic Works (1866), Budapest Treaty etc.
Impact of Due Diligence on IPR
Due Diligence in IPR helps in potential risk and liabilities, enabling proactive measures to protect IP asset. By assessing IP value and the risks that come along with it, businessman can make informed decision, ensuring that IP asset is well protected, maintained and their value is preserved. It ensures compliance with laws and regulations. In business it also increases the value of IP assets.
Strategies for implementing Due Diligence in IPR-
- Creation of Comprehensive IPR Inventory- Start with a thorough inventory of all IP assets, which includes registered IP such as patents and trademarks as well as unregistered IP like trade secrets and technologies which can’t be disclosed.
- IP Portfolio Mapping- Create an IP portfolio map to visualize and organize the Company’s IP assets. This helps in understanding the strategic value and relationship between different IP assets. Using the mapping technique to identify core IP assets, detect overlaps or gaps and assess the overall strength of the IP portfolio.
- Patent Families- Evaluating the patent families to understand the breadth of protection offered by related patents in different jurisdiction. Assessing of how these patents support and enhance each other, ensuring comprehensive coverage and identifying potential weakness or redundancy.
- Verify ownership and rights- Ensure that the company holds clear and uncontested title to all IP assets. Review assignment records, transfer agreements and employment contracts to confirm the ownership. Verifying that no- third party claims, liens, or disputes exist that could affect the ownership or the use of IP.
Government Policies and Support Mechanism-
Government plays a crucial role in implementing due diligence in Intellectual property Rights. One such policy was introduced in the year 2016, known as the National Intellectual Property Rights and Policy which served as the strategic framework aimed at fostering innovation and creativity in India. It was based on seven key objectives namely-
IPR awareness, Generation of IPR, Legal and legislative frameworks, Administration and Management, Commercialisation of IPR, Enforcement and adjudication, Human Capital Development.
Methodology:
Research Design:
This research adopts a mixed method approach, combining qualitative and quantitative analysis to explore the relationship between due diligence and IPR. The study involves a comprehensive review of existing literature , case studies of business and statistical analysis of implementing due diligence in IPR in the past years.
Data Collection:
- Literature Review: Scholarly articles, industry reports and government publication related to due diligence and IPR.
- Case Studies: In depth analysis of business that successfully implemented due diligence in IPR.
- Statistical Data: Quantitative data of implemented due diligence in IPR.
Data Analysis:
The data involves identifying patterns and trends of the implemented due diligence, examining its effectiveness as a business strategy and assessing the impact of government policies on due diligence effective implementation. Statistical tools and qualitative analysis techniques are used to interpret data and derive meaningful insights.
Findings and Discussion:
Trends in Due Diligence Activity
Due Diligence procedures have changed recently in response to the shifting business environment, new technologies, and increased regulatory scrutiny. Standing in the year 2025, the following trends of due diligence will be there
- Tech Enabled Due Diligence- Modern Due diligence companies rely on artificial intelligence and machine learning together with big data analytics, to process extensive information. Due diligence process becomes quicker and more precise in nature through technology enabled methods. Also Real Time tools process public records together with social media activity and corporate filings to identify potential risks.
- Focus on ESG factors-Business decision making now priories Environmental, Social and Governance Issues. Due Diligence service providers also integrate an assessment of corporate performance related to sustainability practice alongside employees rights and government policies. Practising business with responsibility receives increasing investor support
- Enhanced Cybersecurity reviews- Cyber due diligence has risen to the top of corporate priorities because of escalating number of cyberattacks. Companies perform digital hygiene examination of their partners, which assess system security and data privacy adherence,
- Real Time Risk Monitoring-Due Diligence has transformed from a singular one -time evaluation process to an ongoing process. When partners experience rapid legal status changes, credit score fluctuations or market behaviour shifts, the system automatically notifies business through real time monitoring system.
- Adapted Due Diligence Checklists- The standard” one size fits all” methodology no longer delivers the suitable results. Organization are now designing specific due diligence checklists which match the transaction characteristics alongside the industry factors and geographical locations. The methodology enables businesses to better detect potential risk before taking appropriate countermeasures.
Inadequate Due Diligence process
In an inadequate due diligence process, vast amount of information is to be reviewed. The legal due diligence typically analyses all the necessary things like charter documents, material contracts, employment agreements, real estate documents, insurance contracts, labour law compliances, intellectual property rights and any litigation proceedings by and against target company. There are high chances of mistakes being committed if due care is not adopted. The due diligence team may fail to undertake a prior approval of third parties , government authorities to proceed with the transactions, fail to discover non-compliances of the target company and ignore discovered information which is relevant, over look expiry or non-transferability of certain licensee , fail to detect potential liabilities over value or under value assets or securities of the target company; overlook non transferability of intellectual property rights or neglect mismanagement or fraudulent practices undertaken by the target company.
Due Diligence when it should be done
Due Diligence in Intellectual Property should be done before acquiring and licensing to verify ownership, validity and potential infringement risks. Before launching a new product or service, to identify potential infringement risks and freedom to operate issues. During mergers and acquisition, It is done to assess the target company’s IP assets, liabilities and potential risks. Before entering into IP related agreements, it includes licensing, assignment or collaboration agreements. When developing new IP, it is to ensure that the development process does not infringe on existing IP rights. Before investing in a company or project to evaluate the IP assets and potential risks. And finally, to conduct IP audits.
Management Due Diligence
The term Management Due Diligence is defined in Mergers and Acquisition. It focusses on evaluating how each management team member is performing and contributing to company overall success.
A company which will have a proper due diligence management structure, will also have defined roles and effective methods for evaluating success can potentially perform better than a company that does not have the same effectiveness. It can be performed by many people such as investors, private equity performs, lenders partners or any other person. In general, it works in the following ways- Management Structure Review, Competency Assessment, Executive psychometric testing ,360 referencing, Performance gap analysis, Communication skills, Management strengths, Defining and executing company objectives.
Implementing Streamline Due Diligence-
Due Diligence is often a lengthy process and can be detailed in nature, streamlining this due diligence process allow business to make a faster, more informed decision, reducing errors and minimising risks.
Some of the methods which can be used are as follows-
Virtual Data Reforms- A virtual data reform is a secure online repository for storing and sharing sensitive documents during the diligence process. VDRs allows multiple parties to access, review and collaborate on documents in real time. This is particularly valuable when conducting due diligence on larger projects or acquisition, such as the construction industry, where the contracts permit, financial statements and other important documents need to be reviewed.
Due Diligence Management Software- Due Diligence management software is designed to help business manage the entire due diligence process i.e. from document collection and review to risk analysis and reporting. These tools allow users to track progress, assign tasks and automate work flows, making the process much more efficient.
Other methods for streamline-
Artificial Intelligence (AI) for IP search and analysis
Digital platforms for IP portfolio management
Automated Document review and analysis
Block chain technology for IP tracking and verification
For construction purpose, this type of software can be especially helpful in managing the complex data and multiple parties involved in a construction acquisition or partnership. These platforms can help companies to organise everything from contractor evaluations to safety compliance records, ensuring that no critical detail is overlooked.
Role of Legal and IP Professionals
Legal professionals need to perform the following role to do due diligence-
Legal Document Review- Lawyers review all relevant contracts, agreements and legal documentation to ensure they are valid, enforceable and in compliance with the applicable laws and regulations of the country. This also includes assessing compliance with corporate governance principles and regulatory requirements.
Risk Assessment: They identify potential legal risks and liabilities that may impact the transaction. This includes evaluating the target company’s litigation history, compliance with labour laws and any outstanding debts.
Compliance Verification- Lawyers need to ensure that the target entity is in compliance with all relevant laws and regulations, which is crucial for mitigating risks and protecting interest of parties involved in it.
Negotiating and Drafting- Lawyers assist in negotiating terms and drafting necessary documentation that reflects the agreed upon terms. They tend to ensure that the contracts are fair and protect the interest of their clients.
Case Studies:
- Google’s acquisition of Motorola Mobility (2012)- Google acquired Motorola Mobility for a whooping amount of 12.5 billion dollars. Its IP focus was its deal driven by Motorola’s portfolio of over 17000 patents and 7500 patent applications.
The Due Diligence was conducted by Google through IP due diligence to assess the value and strategic importance of these patents, particularly for protecting its android eco system. The Outcome was that this acquisition strengthened Google’s Patent portfolio, providing valuable defence against litigation and enhancing its market position.
- Facebook Acquisition of Instagram (2012)- Facebook in the year 2012 acquired Instagram for 1 billion dollars. Its IP focus was on Instagram’s trademark, copyrights and innovative technology were crucial for acquisition. Due Diligence was conducted on part of Facebook to evaluate the ownership and validity of Instagram’s IP assets and to identify any potential infringement risks. Outcome was that the acquisition helped Facebook to expand its social media dominance and integrate Instagram’s unique features, contributing to significant user growth.
Consequences of Not conducting Due Diligence in IPR-
It covers the following consequences
- Infringement of claims and law suits
- Loss of IP rights and value
- Damage to reputation and brand
- Financial losses and penalties
- Mised business opportunities
Challenges-
Some challenges faced to implement due diligence in IPR-
Complexity of IP Laws and Regulation- Navigating complex and evolving IP laws and regulation can be challenged.
Limited Resources- Small and medium sized enterprises may lack the resources and expertise to conduct through IP due diligence.
Time Constraints- Conducting due diligence within tight deadlines can be challenging particularly in fast paced business transactions
Access to Information – Obtaining access to necessary information and documents from the target companies or IP owner can be difficult,
Conclusion:
Due Diligence in Intellectual Property Rights (IPR) is a crucial process that enables the organisation to identify potential risks and opportunities, make informed decision and protect their IP assets. By conducting through due diligence, companies can ensure that there is compliance with laws and regulations and mitigation of potential losses and maximising value of assets.
The importance of due diligence in IPR is evident in various business transactions including mergers and acquisition, licensing agreements and new product launches. By adopting a comprehensive approach to due diligence, organisation can safeguard their intellectual property, maintain a competitive edge and drive business growth.
Moreover, Government policies and support mechanism play a significant role in promoting due diligence in IPR. By leveraging these initiatives, companies can enhance their IP management practices and stay ahead in the competitive market.
In today’s fast paced business environment, due diligence in IPR is no longer luxury but a necessity. By peritonising due -diligence, organisation can unlock their full potential of their intellectual property and achieve long term success.
Key Takeaways-
Due Diligence is essential for protecting IP asset and mitigating potential risks
A comprehensive approach to due diligence includes IP inventory mapping, patent family evaluation and verification of ownerships and rights
Government policies and support mechanism promote due diligence in IPR.
Due Diligence is crucial in various business transactions, including merger and acquisition, licensing agreements and new product launches
By understanding the importance of due diligence in IPR and implementing effective strategies, organisation cans safeguard their intellectual property.
Name- Pushparna DAS
Stream- BBA LLB
College Name- University of Engineering and Management , Kolkata
Mobile Number- 8910797438
Email ID- daspushparna@gmail.com