How can you properly evaluate intellectual property during due diligence?

I would say it is an essential step to first Identify and of course categorize the IP assets into; Formal IP: Patents, trademarks, copyrights, trade secrets, design rights. Informal IP: Know-how, proprietary processes, customer data, goodwill. Categorising the business' IP in this manner will allow you to properly value them, determine the current level of protection they enjoy and recommend ways to better protect them. The category of IP they fall into will also determine the best ways for their exploitation. Most of the IP captured under formal IP rights can be exploited via licenses or assignments, but the informal IP rights are exploitable in their rarity and secrecy.

I have seen that Start-up Companies are sometimes unaware of their own IP potential that exists within their Company. Guide them to harvest this potential IP and transform it into valuable IP assets by registration and use. An initial IP Audit is required to frame an IP Policy and allocate budget for creating IP Assets. A good IP Policy creates a smooth IP based environment with SOP for registration, commercial exploitation, action against infringement, employee engagement / contract agreement with focus on IP protection and indemnities, annual IP valuation to add to financial statements of the Company, IP portfolio management, assignment and licensing, and to leverage IP assets to the maximum for the business development of the Company.

La clave radica en una evaluación completa que abarque la fortaleza de la protección legal, la vigencia de los derechos y la posible existencia de conflictos. Este enfoque proactivo no solo protege a la empresa de posibles litigios, sino que también garantiza que la propiedad intelectual sea un activo sólido en términos estratégicos.

IP agreements that are mostly reviewed by an IP Attorney safeguards the target Company from any IP infringement suit. Contract agreement with customers especially those of 'Master Service Agreements' (MSA) needs to be scrutinised with great details. It was observed in my experience that most MSA terms state it is 'work on hire' basis and any IP rights arising out of work on hire accrues to the customer and not to the Company. The MSA will state that both contracting parties are independent and that there is no employee-employer relationship that is created. Further, the customer enforces the Company to indemnify from third party IP litigation arising out of the work on hire, if any.All these contradicting terms to be addressed properly.

To mitigate IP risks, the target Company needs to ensure that they have freedom to operate in that domain especially with respect to inventions/patents and operate in that area to avoid possible action from third parties. When it comes to using open source software, the terms of its use needs to be fully ascertained to avoid any future copyright issues. For Trade Mark use, a thorough search for similar marks to be identified prior to application to protect the target Company from any future disputes. Domain name related disputes can be avoided by searching and selecting non-conflicting domain name. Trade Secrets are best maintained with SOP in place with regard to its handling within and outside target Company.

In estimating the value of the IP, it is important to consider qualitative and quantitative factors by: Assessing the IP's strategic value, competitive advantage, and what its potential revenue generation is. Using valuation methodologies like market comparisons, income approach, or cost approach. This approach allows you to advise on whether the IP of the company will be an albatross around its neck or it will be an asset when properly utilised. You may also advise the IP owner to consider integration of its IP into future strategy by evaluating how the IP aligns with its overall business goals and future plans. In doing this, you may also consider potential synergies with existing IP or future development opportunities.

IP valuation comes into picture during M&A mostly. In India, AS-26 Standards prescribes the treatment for intangible assets under certain criteria. It could be internally generated IP assets or licensing obtained externally to the Company. A regualar annual IP audit conducted and added to the financial statements provides a basic cost valuation of the IP assets. The Accounting Standard requires that IP assets are measured at initial cost. The future valuation is arrived by establishing the future economic benefits from such assets that would flow to the target Company. Such future estimates may be restricted to a period of 10 years to achieve the value. Due to market changes and technology changes, this valuation is a reasonable one.

IP terms to be negotiated includes valuation agreed based upon future benefits generated by the IP Assets, taxes involved in the transaction deal, purchase term is cash or by means of share transfer and capital gains accrued. All these terms and conditions are to be dealt with. Any issue with regard to the future business generation shortfall than projected at the time of the deal, residual value of IP assets and future infringement by 3rd parties are well documented for resolution in any future disputes.

Consider a Landscape Search to: Identify Competitors: Identify existing competitors and their IP holdings. This can help fine-tune strategy and differentiate your offerings. Evaluate Market Potential: Assess the market potential for your innovations. Are there gaps or untapped opportunities? Prioritize IP Protection: Prioritize which aspects of the IP portfolio are most critical to safeguard. Licensing and Collaboration: Discovering complementary IP assets can open doors to licensing agreements or collaborations that can drive revenue and innovation. Market Trends: Can inform product development and marketing strategies. Risk Mitigation: A landscape search can reveal potential infringement risks.