START-UP ENTITY INTELLECTUAL PROPERTY DUE DILIGENCE CHECKLIST

                                            

The entrepreneurial activities and innovations of start-up entities are the on-going lifeblood of the free enterprise system and our economy. New and innovative business ideas are craving validation, new customers, and valuable resources. Many of the fledgling companies that are experiencing rapid growth are on their way to venture backed funding, or going public, or becoming the technology giants they were designed to be… [1]

A start-up company is a new business organization that has recently launched operations and has not yet built up any degree of measurable history or business volume that allows for comparison over multiple time periods. Businesses that are considered start-ups usually are seen as high-risk ventures, since they do not have any track record of success, and in fact may still be struggling to build a client base and begin to generate some type of revenue. Investors often look closely at the nature of the products and services offered by a start-up company, the expertise of the owners, and the business plan for the operation before making a decision regarding whether to invest in the business, and how much they are willing to risk. [2]

In addition to the entity products and services, business plan, and the expertise of the owners, the intellectual property (IP) of the start-up entity is vital. Its IP is often the start-up entity’s most valuable asset.

IP is knowledge, creative ideas, or expressions of the human mind that have commercial value and are protectable under copyright, patent, service mark, trademark, trade dress, or trade secret laws from imitation, infringement, and dilution. Intellectual property includes brand names, discoveries, formulas, inventions, knowledge, registered designs, software, and works of artistic, literary, or musical nature. It is one of the most readily tradable properties in the digital marketplace. [3]

 

Why is IP important to start-up entities?

 

To protect core idea upon which the start-up is founded

To create and maintain a competitive advantage

To protect R & D investment (both time and money)

To generate revenue

To defend the entity

To protect your brand (once product is sold or service is available)

To attract investors

To use as collateral to secure financing [4]

 

IP due diligence is an audit to assess the quantity and the quality of intellectual property assets owned by, or licensed to, an entity. It should also include an assessment of how intellectual property is captured and protected by the entity. IP due diligence is carried out by a prospective purchaser in relation to the IP assets of the target entity. IP due diligence can also be carried out by an entity on its own IP assets in preparation for a transaction, such as a business sale or a major licensing deal. [5]

It should be noted that the scope of this article is limited to start-up entity IP due diligence. However, when a start-up entity goes through a full due diligence review it also covers: business organization structure and good standing status; financial information; physical assets; real estate; employees and employee benefits; licenses and permits; environmental issues; taxes; material contracts; products and services; customers; litigation; insurance; professional advisers; articles and publicity about the entity; and technologies.

In your contracts management activities it is likely nowadays that you will be asked by your employer to participate on a team to assist in evaluating the IP of your organization’s start-up entity or of another start-up entity. The “Contracts Management Body of Knowledge” states: “Contracting professionals should be aware of the various forms of intellectual property, the need for intellectual property that may be a part of contract requirements, and the limitations on the use of intellectual property imposed by law.” [6]

 In my contracts management career, I have reviewed the IP of many start-up entities. In order to systematically cover the multitude of unique issues in the review of a typical start-up entity IP portfolio, I have developed a practical “Start-Up Entity Intellectual Property Due Diligence Checklist”. Set out below is my due diligence fifty (50) item checklist that I use in reviewing the IP of a start-up entity:

 

FIFTY (50) ITEM CHECKLIST

 

1.      Can a monetary value be placed on each IP asset of the entity? If so, what are the values of each IP asset?

2.      Are there processes and policies in place to adequately capture all IP assets created by the entity? If so, what are they?

3.      Is there a clean chain of title/ownership without encumbrances to all entity IP assets?

4.      Does any other party infringe any entity IP asset?

5.      How does the entity monitor the market for infringing activity of entity IP rights?

6.      Are there any unnecessary costs being incurred in maintaining any non-utilized entity IP assets?

7.      Does the entity have “freedom to operate” in respect to its past, present, or future business activities without infringement of the IP rights of others?

8.      If the entity acquired any IP rights from another party did the other party have full entitlement to them?

9.      Does the entity fully understand the scope and coverage of its IP rights?

10.  Does the entity fully understand the protections and obligations of its IP rights?

11.  Does the entity fully understand the scope and coverage of its licenses-in with respect to IP rights?

12.  Does the entity fully understand the scope and coverage of its licenses-out with respect to IP rights?

13.  Does the entity fully understand its licenses-in warranties and indemnifications with respect to IP rights?

14.  Does the entity fully understand its licenses-out warranties and indemnifications with respect to IP rights?

15.  Does the entity have proper signed written IP assignment agreements with all founders, key contractors, and employees that transfer all IP rights to the entity? [7]

16.  In general, have the entity contracts containing IP related provisions been professionally drafted and negotiated on behalf of the entity by a contracts manager or other contracts professional?

17.  Do any founders or former employers of the founders have any ownership rights in entity IP?

18.  Does the entity understand the rules of inventorship? [8]

19.  Does the entity understand when it is important to obtain a patent and when it is unfavorable to obtain a patent? [9]

20.  Are the entity business plans, goals, assets, and organizational structure compatible with the entity’s IP assets?

21.  Are the entity products and services adequately protected by the entity IP?

22.  Regarding patents, IP due diligence should address: laboratory notebooks; invention disclosure documents; prior art; patent searches; freedom to operate opinions; patentability opinions; other patent attorney opinions; regular and provisional patent applications; office actions; agreements between inventors and the entity; patent issuances; maintenance fees; infringement claims; and incoming and outgoing patent licenses and patent sales.

23.  Regarding trademarks/ service marks, IP due diligence should address: trademark and service mark written opinions on ability to use trademarks and service marks;  trademark and service mark applications; ” intent to use” filings; registered and common law trademarks and service marks; products and services not covered by trademarks and service marks; manner in which trademarks and service marks are used, marked, and footnoted; trademark and service mark manuals and guidelines; infringement claims; and incoming and outgoing trademark and service mark licenses and mark sales.

24.  Regarding copyrights, IP due diligence should address: identity of copyrighted works created; copyright registrations; review of “work for hire” agreements; infringement claims; copyright licenses and copyright sales; and any encumbrances or security interests on copyrights.

25.  Regarding trade secrets, IP due diligence should address: inventory of all trade secret items; who knows the trade secrets; how trade secrets are kept secret; infringement claims; trade secret licenses and trade secret sales; and trade secret policies and guidelines.

26.  Regarding URLs, domain names, and web sites, IP due diligence should address: identity of URLs, domain names, and web sites; maintenance of URLs, domain names, and web sites; protection of URLs, domain names, and web sites; and licenses and sales of URLs, domain names, and web sites.

27.  Has the entity missed opportunities for patent protection by not meeting deadlines, patent application requirements; or otherwise?

28.  Has the entity been engaged in poor trademark/service mark selection by being too descriptive, generic, or otherwise?

29.  Have there been “field of use”, assignability, exclusivity, or other errors in IP licensing?

30.  Has there been use of open source software in product development?

31.  What is the entity domestic patent strategy?

32.  What is the entity foreign patent strategy?

33.  What is the entity copyright strategy?

34.  What is the entity domestic trademark/service mark strategy?

35.  What is the entity foreign trademark/service mark strategy?

36.  What is the entity trade secret strategy?

37.  What is the entity IP in-licensing strategy?

38.  What is the entity IP out-licensing strategy?

39.  Provide a list and summary of all entity one-way and multi-party confidentiality agreements?

40.  Do any of the entity confidentiality agreements compromise any entity IP rights?

41.  Does the entity have all the rights to databases that handle raw data for entity technologies?

42.  Do the entity employees have post-termination IP obligations to assist the entity in various matters like registration of IP or assisting with litigation?

43.  Has the entity intentionally disclosed/published any of its inventions so that another party could not patent it?

44.  Does the entity have any software patents?

45.  Does the entity have any business process patents?

46.  Does the entity have an incentive program to encourage creation of inventions and patents?

47.  Is there a centralization of authority within the entity on who can engage outside IP legal counsel?

48.  Provide a summary of all IP related charges and IP expenses since the beginning of the start-up entity.     

49.  Has the start-up entity entered into any government contracts that have rights in data, patent, copyright, or other IP provisions? If so, what is the effect of such government contract provisions on entity IP?

50.  Has the entity had the on-going assistance of competent seasoned IP legal counsel on all material IP matters?

 

Upon completion of the start-up entity IP due diligence review, it is customary to address any outstanding issues with the entity, both to provide the entity an opportunity to rebut any negative conclusions and to agree upon remedial actions. In summary, an IP due diligence review focuses upon two distinct topics: freedom to operate and exclusivity. Both are necessary to establish the intellectual property foundation required to make the start-up entity and its technologies attractive to investors and others. [10]

 

This checklist certainly helps in doing a due diligence review of a start-up entity’s IP. However, this checklist is not exhaustive.  Every entity’s IP status and portfolio has some unique aspects that may not be addressed in this checklist.  However, if you routinely use this checklist as one of several resources when you do a due diligence review of a start-up entity’s IP, you will be pleasantly surprised with the large number of substantive, material, risk reduction, liability, freedom of operate, exclusivity, process enhancement, performance  improvement, and cost-savings IP related issues that will be surfaced for proper resolution.

 

About The Author

 

JOHN (“JOHNNY”) E. MILLER, a Texas and Missouri attorney, is a contracts management consultant who has worked in contracts management for many companies in the last 30 years. He is a Certified Professional Contracts Manager (CPCM).  His web site is: http://www.con-tracts.com/ . He is a member of the Greater San Antonio Chapter of NCMA. Send comments about this article to cm@ncmahq.org.

 

 

 

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