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Acquisition Due Diligence: IP Infringement

In another post, the process of identifying and investigating intellectual property (“IP”) assets of a target company was addressed. That process often serves as the first step of an IP due diligence effort and builds a foundation for subsequent stages of IP due diligence. This post will examine a further aspect of IP due diligence in acquisitions: investigation of IP infringement. This is another crucial activity that helps a buyer understand the scope and value of the target’s IP assets relative to any related liabilities, whether actual or potential.

Generally speaking, there are two basic types of intellectual property infringement cases that merit the buyer’s attention when acquiring any company. The first is infringement by the target company of a third party’s intellectual property rights. Litigation involving intellectual property infringement, particularly patent infringement litigation, is notably expensive and can take many years to resolve. While few companies outside of the biotechnology arena regularly conduct extensive patent searches to determine whether they have freedom to operate without fear of infringement suits, the target company should still disclose any potential infringement it knows of. This disclosure would include any inquiry or demand letters the target company has received from potential licensors and any non-infringement opinion letters the target company has obtained from patent attorneys.

The second type that merits attention from the buyer is infringement of the target company’s intellectual property by third parties. While the target company generally retains discretion to bring or withhold infringement claims, knowing whether the target company is aware of third party infringement is useful in determining the value of the target company’s intellectual property assets. Beyond that, a strong patent portfolio serves the additional purpose of acting as a shield against infringement suits brought by third parties against the target company.

In any acquisition, both avenues of infringement should be thoroughly explored before moving forward with the deal to prevent unforeseen liabilities from destroying value.

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