Detailed Checklist for Assessing M&A Business Opportunities

The First Pass Checklist is essentially a tickle list to make sure that all high-level areas are covered during an IP due diligence process. For a much more complete guideline of the elements that should be put into a due diligence process, the below, more complete checklist is provided. It has been used by many companies as a tickle list of elements to consider putting into their due diligence process.  Those that aren’t applicable are obviously skipped.

I. Preliminary 

• 1. 1. Identify and describe all products, processes, and services related to the company. (Include the territories were each product is sold.)
     2. Determine the mission and financial goals of the target company.
     3. Obtain copies of any internal or third-party research reports prepared during the past 12 months describing the size or expected growth of markets in which a target company’s products or services are distributed.
     4. Obtain a listing and copy of advertising materials, including work in progress, video and audio tapes, printed material etc.
     5. Interview product managers to obtain an understanding of the products that are sold encompassing each element of technology. (Identify industry trends and areas of product innovation related to the target company’s products and services.) (Identify and define product markets/categories/segments in which the target company competes.)
     6. Ascertain if the target company hopes to penetrate any new markets/category/segments in the near future. If so with what products or services? (What IP does the company plan to utilize and penetrating these new markets?)
     7. Identify plan changes in products (i.e. composition, method of manufacture, etc.) that might require IP review.
     8. Identify plan changes in location or territory where products will be made, used, or sold.
     9. In the case of the unit or division acquisition, are there any IP rights that may be retained by the seller? (If so, a license agreement or other arrangements may be necessary.)

II. R&D Information

• 1. 1. Interview R&D employees to obtain a summary understanding of each research element carried out, including the following: a description of the technology; a description of the development process; the individuals that have worked on the R&D; status of employment for those that have worked on the element.
     2. Establish what the target company believes their key technology areas to be (i.e. what markets/category/segments). (Who are the key inventors for the target company in these key technological market/category/segments?) (Who are the key inventors in the industry in these key technology market/category/segments?)
     3. Identify industry trends and areas of product innovation related to the target company’s products and services from a technological perspective.
     4. Identify and define technological market/category/segments in which the target company has historically concentrated its R&D efforts and investments. (Who are the key inventors for the target company by technological market/category/segment?)  (Who are the key inventors in the industry by technological market/category/segment?)
     5. Identify and define technological market/category/segments in which the target company hopes to penetrate in the near future. (Which inventors, within the target company, are expected to be the lead inventors in these new markets?)  (What companies are currently competing in these markets?)
     6. Determine the extent to which any of the target company’s IP is boxed in by competitor’s patents. Other third-party patents?
     7. Determine the extent to which the target company has boxed in any of its competitors IP. Other third-party IP?
     8. Does a company have procedures in place to ensure that its inventors/engineers are aware of the state of the art developments in the industry?
     9. identify the extent of company resources devoted R&D and patenting activities? (If known, how does this compare to the target companies competition?)

III. Competitive Analysis 

• 1. 1. Obtain copies of any analysis of competitors or competitive products prepared during the last 12 months.
     2. Obtain copies of any internal or third-party market share data prepared in the past 12 months with respect to the target company’s products and services.
     3. Obtain copies of any searches and/or analyses of competitors IP conducted by the target company.

IV. Employees 

• 1. 1. Is there a list of employee confidentiality agreements in place? If no list exists, prepare one.
     2. Is there a list of employment contracts in place? If no list exists, prepare one.
     3. Determine how comprehensive the existing employment contracts are: (1) does a company have employment contracts in place with all employees in technical or other product development positions? (2) do the employment contracts require that all work created by the employees within the scope of their employment be signed to the company? (3) do the employment contracts require that employees sign to the company key technical properties they developed prior to the beginning of employment with the company? (This may be important in the case of a key employer or owner that has let the company use intellectual property royalty-free during the term of his/her employment but may not do so under new ownership.) (4) do the employment contracts require that employee’s keep company sensitive information confidential? (5) do the employment contracts contain non-compete clauses?
     4. Does the company maintain all contracts of former employee/inventors? Have those individuals assigned all of their rights to the company?
     5. Is the compensation structure of the target company strong enough to maintain their key employees?
     6. Does the company have exit interviews or other procedures to collect company sensitive information and remind company employees of their duty to keep confidential company information secret?

V. Contractors / Sub-Contractors 

• 1. 1. Is there a list of all contractors that will be working or may work for the company? If no list exists, prepare one.
     2. Are all of the existing agreements with contractors maintained and gathered?
     3. Do the contract agreements require that all of the rights in the works created as part of the contract arrangement be assigned to the company? (This is especially important in the case of software development as the transfer of the related copyrights in most contract arrangements do not automatically transfer rights to the contracting company.)
     4. Does the company maintain all agreements with former contractors? Have those individuals assigned all of their rights to the company?

VI.  Disclosure / IP Protection Procedures 

• 1. 1. Do company policies require that nondisclosure agreement be signed for any meetings that require the disclosure of company confidential information to outsiders?
     2. Does the company have a review policy for technical papers or other disclosures of information to ensure that no proprietary or confidential information is published?
     3. Does the company have a format for invention disclosures that facilitates the disclosure of inventions to the appropriate personnel?
     4. Does the company have a formal procedure for determining the type of intellectual property protection (including publication) that should be sought based on the characteristics of the invention and/or commercial potential?
     5. Does the company have a formal procedure in place for marking its products that are protected by either patents or trademarks?
     6. Does the company require that inventors of product development personnel keep laboratory notebooks?

VII.  Patents 

• 1. 1. Generate a list of all the company patents, both US and foreign and design and utility, with information describing the patent, patent life, counterpart foreign and US patents, last maintenance payment, the next scheduled maintenance payment, available extensions and dates, and origin (e.g. company developed, acquired, licensed etc.)
     2. Generate a list of all patents involved in licensing transactions. Include the following information: provide copies of the agreements; are the rights transferable or assignable? are consents necessary? What are the termination dates? Are improvements included (grant backs)? Are there any restrictions or limitations? Are there any non-compete obligations? What are the revenue streams or license obligations associated with each license?
     3. Generate a list of all filed patent applications with information describing the application scope and status.
     4. What is a target company’s definition of owned versus controlled IP?
     5. Define relationships with any related companies (i.e. owned versus controlled rights).
     6. Does the company have a list relating patents to products sold by the target and vice versa?
     7. Acquire copies of the target companies patent prosecution histories.
     8. How has the company enforced its patents in the past?
     9. Are there any prior art searches, concessions, reports, or opinions, whether internal or external, that the target company possesses concerning the validity of its patents, infringements of its patents by others, infringement of third party patents by its products, or the validity of such third-party patents?
     10. Identify all litigation involving the patents and provide copies of complaints, answers, judgments, and settlement agreements.
     11. Gather correspondence to or from the target company inquiring about a possible license or the status of a patent or patent application.
     12. Is there a formal structure for inventorying and/or managing company patents?
     13. Does the company have procedures in place to ensure that maintenance payments are made on time? (Is the company delinquent on the payment of maintenance fees for any key or important patents?)
     14. What is the company strategy or policy related to the practicing of patenting (i.e. patent everything, only patent non-obvious ideas, etc.)?
     15. Is documentation relating to patents accessible (e.g. date of conception, reduction to practice, date of filing, assignment of rights, etc.)?
     16. For acquired patents, have all the appropriate individuals assigned their rights in the patents to the company?
     17. Does the company’s product development process require a prior art search to be completed at the initiation of a development project?
     18. To what extent is legal counsel, both internal and external, involved in the patenting process?
     19. Has another company contested the validity of any patents? Results?
     20. Have any foreign patent applications been made public even though the corresponding US patent failed to issue?
     21. Are there opportunities to increase patent protection coverage through application for additional patents or by applying for patents in other countries?
     22. Does or has the company sought any software patents?
     23. Have there been any software patents issued recently which may affect the company’s ability to sell products?
     24. Does the company have any security interest in any non-company patents? (Are all the rights and the security interest assigned to the target company? Exclusive rights?)
     25. Does any other company maintain a security interest in any of the target company’s patents? (Are all rights in the security interest assigned to the target company? Exclusive rights?)
     26. Are there any patents that do not provide the company with any benefits or expected benefits in the marketplace?

VIII. Trademarks (includes trademark, service marks, trade names, and trade dress) >

• 1. 1. Generate a list of all the company trademarks, both US and foreign, with information describing the trademark, where it is registered, when it was first used in interstate commerce, how long is it been in use, is a currently in use? When was the last maintenance payment made, when is the next scheduled maintenance payment due, in what products are each of the trademarks used, what is the origin of each mark (company developed, acquired, license, etc.), are there counterpart foreign and US trademarks, what are the available extensions and dates, any other relevant information.
     2. Identify any marks with pending application/registrations.
     3. For those trademarks not in use, if any, identify those marks that are in jeopardy of challenge due to lack of use.
     4. Generate a list of all trademarks that are involved in licensing transactions. Include the following information: provide copies of the agreements, are the rights transferable or assignable? Are consents necessary? What are the termination dates? How is quality controlled? Are there any restrictions or limitations? Are there any non-compete obligations? What are the revenue streams or license obligations associated with each license?
     5. Define relationships with any related companies (i.e. owned versus controlled rights)
     6. Develop a list relating trademarks to products sold by the target and vice versa.
     7. Is there a formal structure for inventorying and/or managing company trademarks?
     8. Identify the company’s procedures for selecting, clearing, using, and protecting trademarks, including the procedure for deciding whether or not to seek registrations.
     9. Does the company have procedures in place to ensure the trademark maintenance payments are made on time? (Is the company delinquent on the payment of maintenance fees for any key or important trademarks?)
     10. How has the company enforced its trademarks in the past? What is there trademark notice policy?
     11. Are there opportunities to increase the trademark portfolio protection by seeking additional trademark protection?
     12. For acquired trademarks, have all the appropriate individuals assigned their rights in the trademarks to the company?
     13. Does the target company have any security interest in any non-company trademarks? (Are all rights in the security interest assigned to the target company? Exclusive rights?)
     14. Does any other company maintain a security interest in any of the target company’s trademarks? (Are all rights in the security interest assigned to the target company? Exclusive rights?)
     15. Has any other company contested the validity of any trademark? Results?
     16. Are there any searches, conclusions, reports, or opinions, whether internal or external, that the target company possesses concerning the validity of its trademark registrations, the scope of rights, geographic limitations, expansion restrictions, infringements of its trademarks by others, or the infringement of third party trademarks by its activities?
     17. Identify all litigation involving the trademarks and provide copies of complaints, answers, judgments, and settlement agreements.
     18. Gather correspondence to or from the target company inquiring about a possible license or the status of a trademark registration or application.
     19. Have searches of domain names been completed to determine whether the domain name containing all or part of each trademark is available?
     20. For those trademarks that have not been registered, what is the likelihood of a successful registration? Consider the marks distinctiveness, similar uses of the mark, and the extent to which the mark distinguishes goods.
     21. Has the company in any way caused any of its marks to lose their significance?

IX.  Trade Secrets 

• 1. 1. What is the target company’s definition of a trade secret or know-how?
     2. How is it protected as a trade secret or know-how?
     3. List company trade secrets in as much detail as possible, including the following: computer software, customer lists, proprietary technologies, processes, others.
     4. Is the trade secret or know-how tangible or intangible?
     5. Generate a list of any trade secrets that are part of the licensing transaction, including the following: provide copies of the agreements, are they assignable or transferable? Are consents necessary? What are the termination dates of the licenses? Are there any other restrictions or limitations?
     6. How has the company enforced its trade secrets in the past?
     7. Identify all litigation involving trade secret disputes and provide copies of complaints, answers, judgments, and settlement agreements.
     8. Identify the target company’s document retention policy.
     9. For each type category of trade secret, describe the steps taken to preserve and protect company trade secrets (consider employment agreements, exit interviews, faculty security, etc.)
     10. Identify the target company’s procedures for approving release of information in marketing materials, technical publications, at seminars, etc.
     11. Does the company have policy or system in place for marking confidential or proprietary information as such
     12. Is company software identified as a trade secret? If not why not?

X.  Copyrights 

• 1. 1. Generate a list of all copyrights owned by the company, including the following: description of the copyright, registration status, maintenance fee status, counterpart foreign and US copyrights, available extensions and dates, origin, other.
     2. Generate a list of all copyrights are involved in licensing transactions, including the following: provide copies of the agreements, are they assignable or transferable? Are consents necessary? When are the termination dates? Are there any other restrictions or limitations? Identify any revenue streams repayment obligations associated with each license.
     3. Identify any agreements with copyright “blanket permission” organizations (i.e. ASCAP, BMI, CCC, etc.)
     4. Define relationships with any related companies (i.e. owned versus controlled rights).
     5. Generate a list relating copyrights to products sold by seller and vice versa.
     6. Gather copies of all corporate policies on use of copyrights.
     7. Identify the company’s procedures for identifying copyrightable material, clearing, using, and protecting copyrights, including procedures for deciding whether to mark materials and/or filing registrations.
     8. Have there been any modifications of any original registered copyrighted work? Explain.
     9. Develop a list of all copyrighted work that was developed in a clean room environment and gather the documentation related to the clean room effort.
     10. For all copyrights generated through work for contractor was involved, has the contracted assigned their rights to the copyrights to the company (especially important in software development efforts).
     11. Is all company software copyright protected? If not, why not?
     12. Does the company have any security interest in any non-company copyrights? (Are all the rights in the security interest assigned to the target company? Exclusive rights?)
     13. Does any other company maintain a security interest in any of the target company’s copyrights? (Are all the rights in the security interest assigned to the target company? Exclusive rights?)
     14. Are there any searches, conclusions, reports, or opinions, whether internal or external that the target company possesses concerning the validity of its copyright registrations, the scope of rights, the infringement of its copyrights by others, or the infringement of third party copyrights by its activities?
     15. Identify all litigation involving the copyrights and provide copies of complaints, answers, judgments, and settlement agreements.
     16. Gather correspondence to her from the target company inquiring about a possible license or the status of a copyright registration or application.
     17. How has a target company enforced its copyrights in the past? What is the company’s copyright notice policy?

XI. Other Forms of Intellectual Property 

• 1. 1. Important in certain other industries may be mask works, genome sequences, and right of publicity.

XII. Licensing Transactions 

• 1. 1. Identify any licenses that may affect key products and/or services.
     2. Do any of the target company’s licenses (licensed in or cross licensed) maintain clauses that would prevent the transfer of IP rights in the case of a buyout, merger, partnership etc. (identify any agreements were rights may change or terminate as a result of sale of the business.)
     3. Are agreements assignable? Freely? On notice? With consent? Not at all?
     4. Are there agreements whose very existence cannot be disclosed? How to handle?
     5. Are there existing payment requirements to individual inventors (existing royalties)?
     6. Are their existing limits on plants, capacity, or territory?
     7. Do any license out transactions allow the licensee to sublicense without restriction?
     8. Obtain copies of all correspondence to or from the target company inquiring about a possible license or the status of a patent, patent application, trademark, trade secret, etc.

XIII. Other Agreements 

• 1. 1. Gather copies of all agreements dealing with IP rights, such as: research university agreements (rights in inventions, secrecy), consulting agreements (rights in invention, secrecy, non-compete), joint venture agreements (rights in invention, secrecy, non-compete), joint development agreements (rights in invention, secrecy, non-compete), sales or distributor agreements (general or special warranties and/or indemnification against patent infringement), indemnification agreements, tolling agreements (technical information restrictions, and immunity), government contracts (property or data rights clauses).

XIV. Legal Opinions Obtained by the Seller  

• 1. 1. Gather all IP legal opinions, both in-house and outside counsel. (Include opinions of both sellers own IP in IP rights of third parties) (opinions may include: validity, enforceability, infringement, interpretation of contract rights, or product clearance.)
     2. Issue of waiver, community of interest?

XV.  Claims Threats and Suits 

• 1. 1. List all matters which a claim, threat, or suit is been made by either: a third party against the target, the target against any third parties, inquire about claims and threats that are or were not in writing, include both US and foreign lawsuits, include any settlement agreements, judgments, injunctions, or other judicial determinations.
     2. Is the target company currently in litigation related to any IP matters?
     3. Is the target company contemplating litigation related IP matters against any other companies?
     4. Is the target company aware of any other companies contemplating litigation related IP matters against them?

XVI.  Other  

• 1. 1. Does the target company have IP legal function and staff currently in place? (How much experience do they have? What type of organizational structure does this department maintained? How heavy is a workload in this department? Are they knowledgeable to handle international IP disputes?)
     2. Does the target company have a program in place to monitor for infringers?
     3. Does the target company monitor its licenses for compliance?
     4. Are there any company prospectuses or business plans available (frequently smaller high technology companies disclose information that otherwise may be confidential and/or a trade secret)?