What is Due Diligence?

Of course, your commercial partner will need some reassurance about the quality of the offer you are making to them. If you are involved in licensing technology or seeking commercial support for your research you are likely to hear of due diligence. When a future partner is considering whether or not to license technology, to buy a share of patent rights, or to support your research, they will need to satisfy themselves that it is a viable proposition. The process of assessing the viability, risk, potential liabilities and commercial prospects of a project is known as due diligence. Indeed, if a potential partner seems not to be interested in this kind of issues, it may actually raise questions about their commitment to the project or the credibility of their business plan, particularly if the relationship assumes some degree of risk and investment on their part.

Due Diligence

Generally, due diligence will involve assessing the overall commercial operations, cash flow, assets and liabilities of a business that is being purchased or otherwise financially supported. You would think twice about purchasing a business if you found that it was burdened with debts, or was about to be involved in difficult litigation, or if there were doubts about whether it really owned its assets. The same applies to a potential investment involving intellectual property. For instance, a potential commercial partner would not want to invest in patented technology only to find out that patent renewal fees have not been paid and the patent has lapsed, or to find out that the patent was being opposed by another company, or to find that there is prior art available that calls into question its validity. It may transpire that a student, a contractor or a visiting researcher could actually be legally entitled to some or all of the patent rights. Even a serious level of uncertainty or doubt could be enough to deter a potential partner, especially if they have run into this kind of difficulty before.

Due diligence may also involve searching for information about the full range of IP rights that might impact on the relevant technology – for instance, to check whether you have later filed patent applications on improvements to the original patented technology, that may limit the value of their investment in the original technology. Other intellectual property rights – such as related trade mark or design registrations, or key trade secrets or copyright material (such as manuals or software) – may also need to be identified or located, as these may also affect the commercial partner’s interests in the technology. For example, they may be unwilling to take out a licence for your patent without getting access to the software you have developed for a related process. They may want the right to use your trade mark in association with the patented technology.

So in a due diligence process, your commercial partner may undertake a range of checks and need various forms of information. These may include:

  • Checks on external records, such as patent registers and patent databases, including foreign patents;
  • Searches of patent databases for conflicting technology;
  • Independent advice from patent attorneys on issues such as patent ownership, patent validity and scope of patent claims;
  • Checks on employment contracts, confidentiality arrangements, and contracts with other parties that may interfere with the exercise of IP rights;
  • Details of the patent prosecution such as examiners’ reports and other opinions;
  • Details of any legal challenges to the patent, and the way the proceedings were resolved;
  • Checks on laboratory notebooks in the event that the validity of US patents is of concern to the commercial partner (this also provides reassurance as to claims of ownership of the patent);
  • Surveys of the activity of competitors and owners of competing technology, and possibilities of conflict; and
  • Analysis of freedom to operate issues.

In preparing to licence your technology, you should consider in advance these kind of due diligence issues. If you can anticipate and provide comprehensive answers to these questions, you will be able more effectively to reassure your commercial partner, and you will be in a stronger negotiating position in negotiating licence terms. It should also speed up the licensing negotiations, and ultimately the commercialization of your intellectual property.