DUEDILIGENCEINTRANSACTIONS INVOLVINGINTELLECTUALPROPERTY1 EdwardA.Meilman JamesW.Brady,Jr.

JamieRyerson DicksteinShapiroLLP

Theprocessofgatheringinformationandassessingthemerits,issues,and risksassociatedwithabusinesstransactioniscalledduediligence.Itisacritical analysisintheacquisitionandstrategicutilizationofintellectualproperty(IP)assets. Duediligenceisanecessaryprecursortofundinganewventure,anditiscritically importantinmanyotherbusinesstransactions,includingmergers,acquisitions, licenses,initialpublicofferingsand,inmanyinstances,litigation. Overthelastseveraldecades,businesseshaveplacedsignificantlygreater emphasisondevelopingandprotectingtheirintellectualassets.Theresultsofthese effortsispalpable.Ithasbeenreportedthatin2010intangibleassetsaccountedfor80 percentofFortune500companiesmarketvalue.Yet,whenconductingduediligence, businessesrarelydedicateaproportionateamountoftimeandresourcestothe evaluationofintellectualpropertyassets.Giventhecurrenteconomicclimate, businesseshavenoroomforinefficientallocationofresources.Accordingly,the

Copyright2003,2011byDicksteinShapiroLLP.Anearlierversionofthisarticle appearedintheJanuary2003editionofIntellectualPropertyToday.
1

enterprisesthatmakeIPduediligenceaprioritywillbemuchmorelikelytoengagein successfultransactionsand,inturn,reapprofitablereturnsfromtheirinvestment. Thefollowingarticleprovidesanoverviewofthemainprinciplesthatevery businessshouldbeawareofwhenperformingduediligenceintransactionsinvolving intellectualproperty.Eachtransaction,however,presentsauniquesetoffactsandthere isnoonesizefitsallapproachtoduediligence.Assuch,businessesshouldconsult withduediligencecounseltodevelopastrategythatisoptimizedfortheparticular transactionatissue. 1. UnderstandingTheTransactionIdentifyingTheCompaniesShort AndLongTermBusinessGoals

Duediligenceinvolvesaskingquestions,interviewingpeoplewith knowledgeaboutrelevantmatters,obtainingandanalyzingrelevantdocuments,and obtaininginformationfromindependentsources.Beforethiscanbedoneeffectively,it isessentialtounderstandthenatureofthepotentialtransactionandthecompanies involvedfrombothabusinessstrategyandscientifictechnicalpointofview,including anytimeorcostconstraintsimposedontheinformationgatheringprocess.Onlyby understandingthestrategicbusinessobjectivesoftheclientcancounseldirectdue diligenceeffortstoidentifythoseissuesthatmaybematerialtothetransactionand worktoresolvethoseissuesinamannerthathelpstheclientattainitsbusinessgoals. Manytimesweaknessesinacompanysintellectualpropertypositioncanberemedied priortocompletingthetransaction,butonlyiftheseweaknessesareidentifiedbydue 2

diligencecounselwhoiskeenlyawareofhisorherclientsshorttermandlongterm businessgoalsgoingintothetransaction. Thenatureofthetransactionandthecompaniesinvolvedaffectstheamount ofintellectualpropertyduediligencethatisappropriateunderthecircumstances.For example,astartupcomputersoftwarecompanywilltypicallyrequiremoreemphasis onintellectualpropertythanamanufacturerofawellestablishedcommodity. Likewise,theimportanceofthedifferenttypesofintellectualproperty(i.e.,patent, tradesecret,trademark,orcopyright)canvarywidelydependingonthenatureofthe businessorindustry.Ifthetransactionconcernsapublisheroratelevisionnews organization,adetailedinvestigationintoitsproceduresforavoidingcopyright infringementwouldbeinorder.Ontheotherhand,companiesthatmarketconsumer productstypicallyrequireacloselookintotrademarkanddesignpatentissues. Companiesinthechemicalandpharmaceuticalindustriesrequireananalysisoftrade secretandknowhowissues.Inthebiotechnologyandpharmaceuticalindustries,itis likelythatpatentsalsowillbeamajorvaluableassetunderreview.Thenatureofthe transaction,thecompaniesinvolved,andtheirbusinessgoalsgreatlyaffectthescopeof duediligenceandalsothemakeupoftheteamassembledtoconductthestudy. Whetherthetransactioninvolvesinternationalaspectsoronlydomestic aspectsisanotherfactorthatmustbeconsidered.Whileoneofthegoalsoftherecently passedAmericaInventsActistoharmonizeUnitedStatespatentlawwiththelawof 3

othernations,significantdifferencesstillremain.Forinstance,theUnitedStatesis generallymoreliberalinprotectinginventionsinvolvingbiotechnologyandbusiness methodsthanmanyothercountries.Thediagnosisandtreatmentofhumanbeingsis notconsideredtobepatentableinsomecountries.Licensesthatareenforceableinthe UnitedStatesmayneedtoberecordedtobesimilarlyenforceableandtoprotectthe underlyingintellectualpropertyinothercountries.Forinstance,useofatrademarkby alicensedbutunrecordedlicenseecanleadtothelossofthetrademarkrightinsome countriesbutnotinothercountries.IntheEuropeanUnion(EU),onecannotprohibit atrademarklicenseefromchallengingthevalidityofthelicensedmark,whilethatis generallyprohibitedintheUnitedStates.Whiledatabasesarecopyrightableinmost Europeancountries,copyrightprotectionfordatabasesintheUnitedStatesislimitedto thearrangementofelementswithinthedatabase. Itisimpossibletodefinitivelysetforththeparametersthatwillbeapplicable toeverytypeofduediligencestudy.Checklistsabound.However,nochecklistcanbe reliedonblindlywithoutdueconsiderationofthecompanysbusinessgoalsandhow theyrelatetothetransactionathand.Everytransactionisdifferent.Forsomedue diligencestudies,aparticularchecklistwillbeoverlybroadorwillbedeficient; importantinformationmaybemissedifsuchachecklistisfollowedwithoutthe exerciseofindependentjudgmentbasedontheshortandlongtermbusinessobjectives ofthecompanygoingintothetransaction.Forsometransactions,aparticularchecklist 4

mayalsobetoodetailedandstrictadherencetoitcouldpotentiallygetinthewayof consummatinganotherwiseviableandimportanttransaction.Whileasampledue diligencechecklistisprovidedattheendofthisarticle,itisimportanttokeepthese considerationsinmind. Althoughthereisnodefinitivechecklistforallstudies,intellectualproperty duediligencegenerallyseekstogatherinformationtoshedlighton: Whatintellectualpropertyassetsdoesthecompany have,andarethereanyproblemsrelatingtoownership orcontrolofthoseassets? Whatistheeconomicandstrategicvalueofthetarget intellectualproperty?Towhatextentdoesitprovide effectiveexclusivityinthemarketforthecompanys productsorservices?Whatarethepotentiallicensing orotherstrategicusesoftheintellectualproperty? Doesthecompanyhavepotentialliabilityfor infringingtheintellectualpropertyrightsofothers? Canitmarketitsproductsorserviceswithout infringingtherightsofothers?

Theownershipofintellectualpropertyassetsrequiresaclearchainoftitle fromtheinventor,author,orpreviousowner,andalsotherecordationofassignment documentsintheappropriatepublicrecords.Inmanytransactions,otherwisevaluable intellectualpropertyassetsareweakenedbythelackofanassignmentofallinterests fromallofthecorrectinventors,creators,orauthors,orbytheexistenceofliensor securityintereststhatencumbertheassets.Thesefactorsalsocanaffecttheabilityofa companytocontroltheintellectualproperty.Forexample,evenifthereisavery valuablecopyrightinexistence,itmaybeajointworkwhereeachauthorownsan 5

undividedpartoftheproperty.Acoauthorwhoisnotanemployeeornotunderan obligationtoassignownershipcanpotentiallydiminishthevalueofthecopyrightby grantingrightstoanotherentity.Inaddition,contractsgrantingrightsinintellectual propertymustbereviewedtoidentifygeographicorotherrestrictionsonacompanys abilitytousewhatitbelievestobeitsportfolioofcurrentorpotentialintellectual propertyassets. Theeconomicvalueofintellectualpropertydependsonthetypeof intellectualpropertyanditsscope,includingwhetheritislimitedbygeographical, time,orcontractualrestrictions.Thestrategicvalueofthepropertydependsonhow wellitfitswiththecompanysbusinessobjectivesandwhetheritcanbeeffectively enforcedagainstothersintheindustry.Thebusinessdecisionmakercanevaluatethe strategicvalueafterheorsheisfullyinformedoftheintellectualpropertyscharacter, scope,validity,enforceability,andlimitations.Effectiveduediligenceofintellectual propertyprovidescriticalinformationbasedonthescientificandbusinesspurposeof thetransactionsothatthebusinessdecisionmakercanmakeaninformeddecision aboutthepotentialrisksandmeritsofthetransactionand,ifpossible,sothatany weaknesscanberemediedinordertoguidethetransactiontowardfulfillmentofthe clientsultimatebusinessgoals. Thescopeofintellectualpropertyinvolveswidelydifferentsubstantiveissues dependingonthetypeofproperty.ThescopeofaUnitedStatesutilitypatent,for 6

example,dependsonitsclaims,whicharethenumberedsentencesattheendofthe patentdocument.Thenumberofclaimsismuchlessimportantthanthescopeofthe claims.Apatentwithasingleclaimmaybemorevaluablethanapatentwithtwenty claims.Generallyspeaking,thebroadertheclaims,thebroaderthescopeofthepatent. However,breadth,standingalone,canbemisleading.Inamajorityoftodaysdue diligenceanalyses,themostimportantpatentissueiswhethertheclaimsofthepatent provideausefulscopeofprotection,orwhethertheycanbeeasilydesignedaround.A patentwithbroadclaimsmayprohibitcompetitionbysimilarproducts,yetstillnot preventcompetitionbyallalternativeproducts.Ifalternativeproductscancompete effectivelywiththepatentedtechnologywithoutinfringingthepatent,thenthepatent mighthaverelativelylittlevalueeventhoughitcoversalargetechnicalarea.Itis importanttoverifyacompanysexpectationthatitspatentscoverparticularproducts andalsotoconfirmthatalternativesarenotreadilyavailabletocompetewiththese products.Inmanyduediligencestudies,thispartoftheanalysisalsoinvolvesa determinationastothevalidityofkeypatentclaims. WhiletheUnitedSatesSupremeCourthasrecentlyconfirmedthatevery UnitedStatespatentispresumedtobevalid,andcanonlybeinvalidatedincourtby showingclearandconvincingevidence,thefactremainsthatmanypatentsarefound invalidinlitigation.Inaddition,thereisanincreasingtrendforcompetingcompanies tousethePatentandTrademarkOffices(PTO)exparteandinterpartereexamination 7

proceduresasalowercostalternativetolitigationtoinvalidatepatentclaims,oratleast haveacompetitorspatentclaimsamendedtoanarrowerscope.Recentstatisticsshow thatinvalidationoramendmentoccursinuptoabout90percentofinterpartePTO reexaminationproceedings.Moreover,undertheAmericaInventsAct,thePTOwill soonbepromulgatingnewrulesforpostgrantreviewprocedures,providingyet anotheralternativeforinvalidatingissuedUnitedStatespatents.Accordingly,inmost transactions,itisnecessaryforduediligencecounseltoanalyzethetechnology,stateof thepriorart,andpatentdocumentstodeterminethelikelihoodthatacompanyskey patentclaimscanwithstandthesetypesofvaliditychallenges. Patentsobservenationalboundaries.TheEUhasasysteminwhichasingle patentapplicationisprocesseduntilitisallowed,andthenindividualpatentshaving thesametextareregisteredinindividualcountries.Whatiscommonlycalleda EuropeanPatentisnotapatentatall,butratherapublicationofanallowedpatent application.Similarly,whatissometimesreferredtoasanInternationalPatentisalso notapatentatall,butratherapublishedapplicationfiledunderthePatentConvention Treaty(PCT),whichmustthenbefiledasanapplicationineachindividualcountry ortheEUbeforeitcanbeprocessedintoarealpatentthatprovidesameasureof exclusivitytoitsowner.Inadditiontobeingnationallylimited,thetypeofprotection variesfromcountrytocountry.

Thevalueofatrademarkdependsonthestrengthofthemark,onwhethera registrationhasbeenobtained,andonavarietyofotherfactors.Similartopatents, trademarksareessentiallylimitedbynationalborders.IntheUnitedStates,trademark rightscanbeacquiredeitherbyactualuseorbyseekingaregistration,whereasinmany countriesthefirstentitytoregisterthemarkmayhavesuperiorrightstothefirstuser. Copyrights,ontheotherhand,tendtotranscendborders.Acopyright createdin,forinstance,HongKongcanbevalidinNewYorkwithoutanyneedfor registration.However,somecountriesrestricttherighttosueforenforcementofthe copyrightorlimitthedamageswhichcanberecoveredintheabsenceofaregistration. Further,becauseofthewaythatthestatutorycopyrightlawdevelopedintheUnited States,thedateofcreationmayaffectwhetherornottheworkneedsacopyrightnotice whenfirstpublished,whetherthelifeofthecopyrightwasdividedintotwosegments andrequiredarenewalapplication,andtheextenttowhichlicensescanberestricted. Additionally,agrantofexclusiverightsintheUnitedStatesmustbeinwriting, althoughwhatconstitutesawritingisliberallyconstrued.Ingeneral,highlycreative worksmaybegivenabroadercopyrightscopeofprotectionthanworksthatinvolve onlyamodestamountofcreativity. Tradesecretshavebecomeincreasinglyvaluabletomanycompanies,asboth atoolforachievingacompetitiveadvantageaswellasasourceoflicensingincome. Althoughtradesecretsaresometimesgivenlessattentionthanotherformsof 9

intellectualproperty,theirvalueshouldnotbeunderstated.AjuryintheEastern DistrictofVirginiarecentlyawardedDuPontover$900millionforKolonIndustries misappropriationofDuPontsKevlarbodyarmortechnology.Akeyelementin protectingtradesecretsisthattheefforttomaintainsecrecymustrisetoatleastthe levelofreasonableeffortunderthecircumstances(e.g.,markingmaterial confidential,providingphysicalbarriers,providingremindersofsecrecy,and conductingexitinterviewsofdepartingemployees).Theextenttowhichsuchefforts areinplacecanaffectthestatusandvalueofinformationclaimedtobetradesecrets. 2. TheDueDiligenceTeam

Theobjectoftheduediligenceaffectsnotonlythescopeofthestudybutalso theconstitutionoftheteamassembledtoconductthestudy.Duediligenceistypically conductedbyateammadeupofmanagementrepresentatives,companyresearchand developmentorothertechnicalpersonnel,attorneys(bothinsideandoutside), accountants,actuaries,andappraisers.Eachcontributestotheoverallevaluationofthe companyorotherassetsorventurebeingconsidered.Theteamisfrequentlyledbyan experiencedcorporatemanagerorattorney.Attorneyswithexpertiseinspecificareasof thelaw,suchasintellectualpropertyorinternationaltaxation,areengagedasneeded. Membersoftheteamneedtobeabletointeractwithothermembersanddrawontheir expertiseasrequired.

10

Ingeneral,overviewdiscussionsshouldincludeallteammanagement members.Managementstechnicalrepresentativesandcounselshouldhandlethe intellectualpropertydiscussions,particularlyiftheduediligenceinvolvescomplex patentortradesecretissueswithspecializedtrainingandexperiencerequirements.It mayevenbeappropriateforanindependentthirdpartytoberetainedtoperformallor certainportionsofthetechnicalduediligence,forexample,todeterminewhethera patentedbiotechprocesscanrepeatedlyachievethedesiredgoalsorinvivoefficacy. Inquiriesofsuppliersandcustomersshouldinvolvemanagementor investmentbankers,butcontractswiththirdpartiesshouldbereviewedbycounsel. Inspectionofphysicalassetsandfacilitiesshouldbeconductedbymanagementandits technicalstaff,investmentbankersoraccountants,and,whereappropriate,counsel. Examinationofintangibleassetssuchaspatentsandtrademarksshouldbe conductedbycounseland,forvaluationissues,accountants.Reviewofregulatory approvalsandlicensesshouldbeconductedbymanagementandcounsel. Titlesearches,UniformCommercialCode(U.C.C.)filingsofsecurity interestsandotherliens,UnitedStatesPatentandTrademarkOffice(PTO)searches, andUnitedStatesCopyrightOfficesearchesshouldbeconductedthroughcounsel. Majorcontractsshouldbereviewedbycounsel,althoughexpertsmayberetainedto examinecertaintypesofagreements(e.g.,governmentcontractscounselmaybe retainedifgovernmentcontractsareakeypartoftheassetsorbusiness). 11

3.

DueDiligenceProcedureObtainingAndReviewingThe Information

Inthecontextofacorporateacquisition,basicinformationaboutthetarget companyneedstobeobtainedatanearlystage.Agreatdealofsuchinformationis publiclyavailableandcanbeobtainedindependentlythroughvariousonlineservices anddatabasesources.Forinstance,inthecaseofapharmaceuticalcompany,reference towhatisknowninthetradeastheOrangeBook,aFoodandDrugAdministration (FDA)publication,willidentifyacompanyspharmaceuticalproductsapprovedfor marketing,thekeypatentswhichcanbeinfringedbygenericpharmaceuticalandother companieswishingtocompeteinthatmarket,thescopeandtermofanyremaining FDAexclusivityfortheproducts,andalsoidentifycertaincompetitiveproducts,ifany. Basedonthebusinessgoalsandobjectivesofthetransaction,additional informationisrequesteddirectlyfromthecompany.Inpractice,aseparaterequest relatingtointellectualpropertymattersistypical,butthismaybecombinedwith requestsforinformationaboutotheraspectsofthecompany.Itmightalsobe appropriatetoconductinitialinterviewswithappropriatecorporateofficers,inhouse intellectualpropertyand/orFDAregulatorycounsel,keyinventors,engineers,artists, advertisingexecutives,etc.Inmanycases,theindividualsresponsibleforthe companyscoretechnologyareimportant;suchindividualsshouldbeidentifiedandthe arrangementswiththemexplored.Forinstance,dotheyhaveemploymentcontracts; havetheyassignedtheirrightstothecompany;havetheydepartedandjoinedpotential 12

competitors?Insomecountries,inventorscanhavearighttoreceivecompensation whenapatentisassignedorlicensed. Thekeyproducts,includingdetailedspecifications,chemicalformulas, biologicalactivities,pharmaceuticalindications,manufacturingprocesses,etc.,should beidentifiedsothatadeterminationcanbemadeastowhetheranyexistingthirdparty patentsorpublishedpatentapplicationscovertheseaspectsofthecompanyskey products.Anylicensescoveringanendproductoritsproduction,includingany intermediatesused,shouldbeobtainedandreviewed.Ifanyspecificorunique materialsarenecessarytotheproductionprocess,suchasplasmids,constructs,orcell linesinthebiotechnologyarena,theirsourceandanymaterialtransferagreementsor othercontractualarrangementsinvolvingthemshouldbeexamined.Allsupply agreements,researchcollaborationagreements,distributionagreements,andthelike shouldbereviewedtomakesuretheyareassignableandwillsurvivethetransaction, andalsotodeterminewhethertheyaredependentonthirdpartyrights. Independentcontractors,consultants,andgrantscanbeamajorsourceof potentialconflicts.Outsidecompaniesorindividualsmayhavebeenutilizedin developingaproduct,developingthemethodbywhichitisproduced,orobtaining regulatoryapprovalwhererequired.Thesecompaniesandindividualsareusually independentcontractors.Likewise,consultantsemployedinconnectionwithaproject arealsoindependentcontractors.Thearrangementswithindependentcontractorsmust 13

bereviewedtoensurethatownershipofanyintellectualpropertyresultingfromthe workdone,includingclinicaltrialsandconsultations,vestsinthecompany. Disgruntledformeremployeescanalsobeasourceofconflicts.Itcanbeusefulto reviewanypatentsthathavebeengrantedto,orpatentapplicationsthathavebeen filedby,theseindividualstoensurethatnoneofthesepatentsorapplicationsis directedagainsttheproductsofthecompany.Whendoingso,however,itisimportant tokeepinmindthatwhilemostpatentapplicationspublisheighteenmonthsafterthey arefiled,notallapplicationsaresubjecttobeingpublishedand,evenwhentheyare published,thereisstillatleastaneighteenmonthgapmeasuredfromtheinitial applicationfilingdate. Wherefeasible,personalinspectionsbytechnicalpersonnelshouldbe conductedtorevealaspectsofthefacilities,products,andprocessesthatarenot otherwiseapparenttotheduediligenceteam.Aplantvisitmightalsorevealwhether appropriatephysicalsecurityprecautionsandsafeguardsareinplace,whicharefactors thatcanaffectthevalueandscopeoftradesecretprotection. Athoroughindependentinvestigationshouldbeundertakeninconnection withallkeyassets.ForUnitedStatespatentassets,notonlyshouldatitlesearchbe conducted,butalsotheactualassignmentdocumentsshouldbeobtainedandreviewed sincetheycancontainspecialprovisionsnotfoundinthepublishedabstractsofwhat wasrecorded,andtheappropriatestateandlocalU.C.C.recordsshouldbeobtained 14

andreviewedforrecordedsecurityinterests.Likewise,titlesearchesforregistered UnitedStatestrademarksshouldbeconductedbothatthePTOandintheappropriate U.C.C.records;itisespeciallyimportanttoconfirmthatnomarkwasassignedapart fromitsgoodwill.InformationaboutUnitedStatescopyrightownershipandtitleissues canusuallybeobtainedbysearchingintheUnitedStatesCopyrightOffice.However, indexingisbasedontheinformationprovidedbythesubmittingpartyandiftwo competingcopyrightclaimantsusedifferenttitlesforthesamework,theconflictmay notbeevident.Forcopyrightsofspecialinterest,itisthereforegenerallyadvisableto confirmthatthecopyrightswereproperlyassignedfromtheauthortothecompany, especiallyinworkforhireandjointauthorshipsituations. 4. SafeguardingConfidentialTechnicalAndBusinessInformation

Beforeorconcurrentlywithanyinformationrequest,asuitable confidentialityagreementbetweentheclientandtargetcompaniesshouldbeinplace. Sensitivecommercialandtechnicalinformationislikelytoneedtobedisclosedbetween thecompaniesandcaremustbeexercisedtomaintainitsconfidentiality.Thedisclosing partywillbeconcernedthatthereceivingpartymayimproperlyusetheinformationif thetransactionisnotclosed,andthereceivingpartymaybeconcernedaboutthe difficultyofprovingindependentdevelopmentifthetransactionisnotclosed.Further, competitorsorpotentialcompetitorsareofteninvolvedandthisimplicatestheantitrust laws,namelytheShermanAct1and2,theClaytonAct7,andtheFederalTrade

15

CommissionAct5intheUnitedStates,ortherelevantprovisionsofEUantitrustlaw (Articles85and86oftheTreatyofRome).ThisconcernisillustratedbytheDepartment ofJusticesantitrustlawsuittoblocktherecentmergerofAT&TandTMobile. Accesstocompetitiveinformationisnecessaryinordertoevaluatethe likelihoodofantitrustconsequences.Atthesametime,appropriatelyrestrictingsuch accesscanavoidproblemsintheeventthatthetransactionisnotcompleted.Tothe extentpractical,informationcanbecompartmentalizedandthusonlyspecified membersoftheduediligenceteamareallowedaccesstoparticularcategoriesof information.Inthisway,thelikelihoodthatsuchproblemswillariseiseliminatedorat leastminimized. Theimportanceofappropriatelyrestrictingaccessalsoarisesinsituations thatimplicateinformationwhichthelawprotectsfromdisclosuretoothersunderthe attorneyclientprivilegedoctrine.Thus,duringpreliminaryorfollowupinterviews, andinconnectionwithrequestsfordocuments,considerationshouldbegivenasto whethertoelicitresponsesthatcouldpotentiallywaivethecompanysattorneyclient privilege. 5. TheAttorneyClientPrivilegeDoctrineInDueDiligence

Bygeneraldefinition,theattorneyclientprivilegeappliestocommunications fromaclientwhereanattorney,actingassuch,isgatheringinformationfromtheclient (withoutthepresenceofthirdparties)forthepurposeofrenderinglegaladviceor

16

servicesorisrenderinglegaladvicetotheclient.Disclosureofopinionsofcounsel,for example,couldbedeemedawaiverofthecompanysprivilegewithrespecttothe subjectmatterofthoseopinions.Awaiverwasfoundtohavetakenplaceinonecase whenthepartiestooknostepstosafeguardtheprivilegeandtheprospectiveseller soughtcommercialgain,notlegaladvantage,throughdisclosureofitslawyers advice.Inothercasesthedisclosureofinformationduringarmslengthnegotiations betweenjointventurerswaivedtheprivilege. Thegeneraldefinitionoftheattorneyclientprivilege(confidential communicationsbetweentheclientandattorneyobtaininginformationforrendering legaladviceorservicesorrenderingsuchlegaladvice)providesguidanceabouthowto proceedsoastomaintaintheprivilege.Theattorneymaywishtoconsiderhavinga writtenrequestforlegaladvicefromtheclient,becausethismaymakeiteasierto establishtheexistenceofanattorneyclientrelationship.Thepresenceofcertainthird partiesduringinterviewscanvitiatetheprivilegeandthiscandictatetheexclusionof somemembersoftheduediligenceteam(memberswhoarenotactingasattorneysor withinthemanagementcontrolgroupoftheclient)fromcertaindiscussionsand informationgathering,ifonlytoavoidraisingaquestionaboutprivilegerelatingto whetherinformationwassharedwithanyoneotherthantheattorneyandtheclient. IntheUnitedStates,sharinginformationbetweenentitiesthathavea communityofinterestisgenerallyprotectedbytheprivilege.Onecourtdefineda 17

communityofinterestassituationsinwhichseparatecorporationshaveidenticallegal interestwithrespecttothesubjectmatterofacommunication[andthe]key considerationisthatthenatureoftheinterestbeidentical,andnotsimilar,andbelegal, notsolelycommercial.Thescopeandeffectofthecommunityinterestdoctrinevaries dependingonjurisdictionandcanworkasanexceptiontothegeneralrulethat disclosureofotherwiseprivilegedinformationtothirdpartiesresultsinawaiverof privilege. Formationofacommunityofinterestmaybeinferredfrommerger acquisitionnegotiations.Inonecase,thedisclosureofapatentopinionofatarget companytoapotentialacquiringcompanywasfoundnottohavewaivedtheprivilege. Bothcompaniesinvolvedinaduediligencesituationhavealegalinterestinensuring thatthereiscleartitletotheintellectualpropertyinvolved,andavoidinginfringement oftheintellectualpropertyofothers.Thisunderstoodcommoninterestshould,inmost circumstances,besufficienttomaintaintheprivilegebasedonthecommunityof interestbetweenthecompanies.Nevertheless,itisbestnottoleaveanythingto inference.Inonecase,acourtfoundtherewasnoprivilegebecauseofafailureto provethatthepartiesto[license]negotiationssharedanidentityofinterestssuchto invokethecommoninterestdoctrine.Itisthereforeprudenttoincludeanappropriate whereasclauseintheconfidentialityagreementorinotherpreliminary communicationsbetweenthecompaniessoastoestablishtheircommunityofinterest. 18

Ifthecontemplatedtransactioniscompleted,theacquiringcompanymayofcourse wishtoasserttheattorneyclientprivilegeforitself,ratherthancausingawaiverofitin thecourseofconductingduediligenceforthepotentialtransaction. Inmattersinvolvingforeigninquiries,caremustbetakentounderstandthe scopeofandlimitationsoftheprivilegeinothercountries.UnitedStatescourtsmay applyforeignlawinaccordancewithconflictoflawconsiderations;thatforeignlaw maynotprovideforanyattorneyclientprivilege.Forinstance,askingBritishcounsel forinformationaboutongoingpatentlitigationwouldlikelynotbeprivileged.British lawprovidesthataninquiryisprivilegediftheinquiryismadeafterlitigationis commencedorincontemplationoflitigation,andalsoisforthepurposeofobtaining legaladviceinthelitigationorobtaininginformationandevidenceforuseinthe litigation.Duediligencedoesnottypicallysatisfythelatterrequirement. 6. Conclusion

Beforeaduediligencestudycanbeconductedeffectively,itisessentialto understandthenatureofthepotentialtransactionandthecompaniesinvolvedfrom bothabusinessstrategyandscientifictechnicalpointofview.Onlybyunderstanding thebusinessobjectivesoftheclientcancounseldirectduediligenceeffortstoidentify thoseissuesthatmaybematerialtothetransaction,andworktoresolvethoseissuesin amannerthathelpstheclientattainitsbusinessgoals.

19

Duediligenceseekstodeterminetheexistence,ownership,andcontrolof intellectualpropertyassets,theeconomicandstrategicvalueoftheintellectual property,andthepotentialforliabilityforinfringingtheintellectualpropertyrightsof others.Theeconomicvalueusuallydependsonthetypeofintellectualpropertyandits scope,includinglimitationsofgeography,time,orpotentialcontractualrestrictions. Thestrategicvalueofthepropertydependsonhowwellitfitswiththebusiness objectivesandwhetheritcanbeeffectivelyenforcedagainstothersintheindustry. Itisimportantthatcounselconductingintellectualpropertyduediligence completenotonlyathoroughinvestigation,butalsoonethatisguidedbyan understandingoftheclientsbusinessgoalsandasensitivitytotheconfidentialand privilegednatureoftheinformationinvolved.Conductingduediligenceasoutlinedin thisarticlewillmaximizethelikelihoodthatmaterialissueswillbeidentifiedand,if possible,remediedbeforeclosingthetransaction,atimewhensuchissuesaretypically mosteasilyremedied.Duediligenceasoutlinedherewillalsominimizethepossibility thattheinvestigationmightundulyinterferewithconsummatinganotherwiseviable transactionorcauseproblemsbasedonalackofsufficientplanningregardingthe disclosureofprivilegedandconfidentialinformation. Suitablearrangementsastoconfidentialityshouldbemadebutevenso,some disclosuresshouldbecompartmentalizedamongtheteammembersandlimitedin ordertoavoidbreachesofconfidentialityandwaivinganyattorneyclientprivilegethat 20

wouldotherwiseexist.Theduediligenceteammaywishtousethefollowingchecklist, modifiedtofitthetransactionunderconsideration,asaguidetotheinquiriestobe made.

21

Checklist Patents Obtaintechnicaldescriptionofproducts,including formulationsandmanufacturingprocesses.Reviewkey FDAorotherregulatorycommunicationspertainingtothe products. Assessthecompanysproceduresforidentifyingpatentable inventionsanddesigns,andforensuringapplicationsare timelyfiled.Determinewhethertheproceduresare followedandareappropriateandeffectiveunderthe circumstances. ObtainacompletelistofthecompanysU.S.,international, andforeignpatentsandpatentapplications,bothutilityand design. Obtainconfirmationthatthecompanyhasrecorded assignments(whereapplicable)forallU.S.andforeign patentsandpatentapplications. Determinewhetherthecompanyhasassignedorgranted securityinterestsagainstanypatentsorpatentapplications. Obtainpatentmaintenanceandannuityfeerecords.Obtain confirmationfromindependentsources.Identifypatents thatareexpiredand/ornolongerenforceable. Forpatentsofspecialinterest,requestallpriorartin companysfiles.Determinewhetherthereareanyvalidity issuesthatwouldjustifyfurtherpriorartsearchesand analysesorotherinvestigation,suchasverifyingdataand testresultsreliedonduringprosecutionbeforePTO. Obtainanycorrespondencefromthecompanyaccusing othersofinfringingitspatentsand/orofferinglicensesunder thetargetcompanyspatents.Considerwhetheranymatters justifyfurthernegotiationsand/orlitigation.

22

Identifyanyactualorthreatenedlitigation/claimsagainstthe company,suchasceaseanddesistletters.Assessthemerits ofallsuchallegationsagainstthecompany.Identifyall licenseoffersmadetothecompany.Identifythecurrent statusofanyongoingproceedingsornegotiations.Obtain copiesofsettlementagreementsandreleases. Identifyandreviewalllicenseagreements,covenantsnotto sue,supply,andindemnificationagreements. Reviewtheresultsofpatentabilityandrighttousesearches conductedorcommissionedbythecompany.Consider whethertorequestcorrespondinglegalopinions,keepingin mindthatdisclosureofsuchopinionsmaypotentiallywaive theattorneyclientprivilege. Reviewallrecordsofauditsconductedbyoragainstthe companypursuanttoanytypeofintellectualproperty licenseagreementsand/orresearchanddevelopment agreements. ForU.S.patentsofspecialinterest,obtainassignment recordsfromPTOandconductU.C.C.searches.Engage foreigncounseltoconfirmownershipandcleartitleto foreignpatentsofspecialinterest. Searchforpatentsandpatentapplicationsinthenamesof keypersonnel,consultants,andprincipalclinicaltrial investigatorstoensurethattheywereassignedorlicensedto thecompany. Forpatentsofspecialinterest,wherefurtherinvestigationis justified,obtainprosecutionhistoriesfromPTO(engagethe assistanceofforeigncounselforforeignpatents)andanalyze claimscopeinlightofclaimterms,patentspecification, prosecutionhistoryremarks,andpotentialavenuesfor competingdesignaroundstrategies. Checkemployee,consultant,clinicaltrialinvestigator,and officeragreementstoconfirmobligationstoassignU.S.and foreignrights. 23

Conductfreedomtooperatesearchesforcompanys productsandprocesses,includinguseofmanufacturing intermediatesandcontemplatedfutureproductsand processes.Assesstheresultsofthesearches.

Trademarks Reviewallproducts,marketing,promotional,andpackaging materialsofthecompanytodeterminetrademarkusage. ObtaincopiesofallU.S.andforeigntrademarkregistrations andregistrationapplications. Identifyallassertionsoftrademarkinfringement,tradedress infringement,dilution,orunfaircompetitionmadebyor againstthecompany. Determinewhetheranytrademarkshavebeenrecordedby theU.S.CustomsServicebyoragainstthecompany. ObtainrecordsofanyU.S.oppositionorcancellation proceedingsandequivalentforeignproceedings. Reviewallmaterialtrademarkrenewalrecords. Obtainresultsoftrademarksearchesconductedbythe company. Confirmownershipandcleartitletocompanytrademarks, tradenames,anddomainnames.Conductindependenttitle searchesatPTOandinappropriateU.C.C.records. Identifyandresolveanypotentialdomainnamedisputes. Reviewassignments,licenses,covenantsnottosue,and securitydocuments,whereappropriate. Identifyanymarksofthecompanythatmayhavebeen abandoned.

24

Identifyproceduresemployedbythecompanyforquality controlmonitoringoflicenseeuseoftrademarks. Conductindependentsearchesfortrademarksofspecial interest.

Copyrights Identifyallcopyrightsofinterest. Reviewallmaterialworkforhireagreementsand consultantcontracts. Evaluatethecompanyspolicyforidentifyingandprotecting itsowncopyrights. Evaluatethecompanyspolicyforavoidinginfringement andobtainingcopyrightclearancetoprotectagainst infringementclaims. Identifyallassertionsofcopyrightinfringementbyor againstthecompany. Reviewallcopyrightassignments,licenses,andother transfers.ReviewrecordsatU.S.CopyrightOfficefor copyrightsofspecialinterest. Foralltransfersofmaterialcopyrights,determinewhich individualaspectsofthecopyrightweretransferred. Checkemployee,consultant,andofficeragreementsfor acknowledgementofemployeestatusforcopyright purposes,etc. Identifyanymoralrightsissues,particularlywithrespectto foreignoperations. IdentifyallrelevantrecordationsofcopyrightsbyU.S. CustomsService.

25

 TradeSecrets

Assessadequacyoflicensesforallsoftwareloadedonthe companyscomputers.

Obtainlistofmaterialtradesecrets. Determinewhetherappropriateconfidentialityandnon competeagreementsareinplace,especiallywithrespectto keypersonnel. Evaluateadequacyofhiringandexitinterviewsprocedures. Reviewrecordsforkeypersonnel. Evaluatesecrecypolicies,includingphysicalsecurity, employedbythecompany. Evaluatesecuritypoliciesforcomputersoftwareand electronicdata. Considertheimpactofrecentarrivalsordeparturesofkey personnel. Reviewknowhowlicensesandothertechnicalassistance agreements,indemnificationagreements,andconfidentiality agreements.

Miscellaneous Consideranypotentialimproperanticompetitiveeffector antitrustscrutinyunderthecircumstances. Reviewpress,SEC,andannualreports. Determinewhetherkeytechnologiesandotherintellectual propertyrightshavebeentransferredtooneormore governmentagencies,e.g.,viaU.S.governmentpurpose rightsprovisions.

26

Considerapplicabilityofothertypesofintellectualproperty, includingsemiconductorchipprotection,rightofpublicity, plantpatents,domainnameregistrations,etc. Assessadequacyofinsurancecoverageagainstintellectual propertyinfringementclaims. Considerthecharacterofkeylicensedrightswithrespectto, e.g.,exclusivity,fieldofuserestrictions,geographic restrictions,androyaltyratestructures,etc. Considerappropriatelanguageforpublicannouncements relatingtothetransaction.

27