Due diligence is the legal process buyers and sellers undergo to correctly identify, investigate, and evaluate a target company's assets. A key asset that parties must consider before a merger or acquisition is intellectual property. Specifically, buyers and sellers must comply with all federal laws that apply to intellectual property transactions. The process can be time-consuming. However, effective due federal IP due diligence can allow buyers and sellers to identify and resolve risks before closing a transaction.

Why is IP due diligence important?

The strength of a company's intellectual property can influence the value of a corporate deal in today's quick-paced, technologically advanced world. IP due diligence is a legal process in which knowledgeable IP counsel defines, assesses, and analyzes a target company's IP portfolio.

The primary goal of intellectual property (IP) due diligence is to assess the adequacy and value of a company's intellectual property and avoid unnecessary risks. During the investigation process, the value of a company's intellectual property is determined by assessing:

• All of the company's intangible assets
• The scope of the business and the IP's impact on the scope
• Validity of the IP
• Enforceability of the IP
• The future potential of the IP

While general intellectual due diligence is complex and requires keen attention to detail and organization, federal IP due diligence investigations can be even more complicated and thorough. Our experienced due diligence lawyers can help ensure that the is completed smoothly and efficiently.

Federal IP Due Diligence

For years, law firms have searched for Uniform Commercial Code (UCC) financing statements, federal tax liens, state tax liens, judgment liens, litigation, and bankruptcy as part of their public record due diligence for merger transactions. However, today's transactions require a more thorough due diligence investigation.

Using patents, trademarks, and copyrighted material to secure loans has increased the need for federal IP due diligence services. Section 9-102(a)(42) of the UCC defines IP as a “general intangible.” While it is possible to pledge patents and trademarks as collateral, which results in their filing in UCC records across the nation, relying on the state-level UCC main indexes is insufficient for IP due diligence.

Since Article 9 of the UCC does not require precisely naming the IP properties in the collateral description, it is unclear whether or not IP is included in the secured collateral scope of the collateral being secured. Therefore, limiting your IP due diligence, a typical UCC, and a statutory lien search would be insufficient.

More complex and thorough searches are performed during the federal IP due diligence investigation.

USPTO Search

A buyer must ascertain whether the seller (and target company) has legitimate ownership rights when a transaction involves registered intellectual property, such as trademarks and patents registered with the U.S. Patent and Trademark Office ("USPTO") and copyrights registered with the U.S. Copyright Office.

The United States Patent and Trademark Office (USPTO)'s role is to register trademarks and service marks for goods and services, respectively, and to grant patents to protect inventions.

The USPTO provides a federal process to maintain patents and trademarks and issue security interests in those forms. In addition to using the UCC central indexes, you must also search the USPTO for patent and trademark records because if you don't, you risk missing important details that could negatively impact your transaction.

Why should I do a trademark search?

It is crucial to conduct a thorough search of your mark before applying since the findings may reveal potential issues, such as a likelihood of confusion with an already-registered mark or a mark that is the subject of an active application. You can avoid the cost of filing for a mark that may be rejected with a simple search. If you find that another party already has more robust rights in that mark, then you know it is not a company's asset. The search results may also indicate whether your mark or a portion of it is used as a generic or descriptive language in other registrations, making it less intense and challenging to protect.

Where do I search?

The Trademark Electronic Search System (TESS) is a free search tool provided by the USPTO. It is accessible round-the-clock at http://www.uspto.gov/trademarks under "TESS search trademarks." The TESS Help page explains how to search the USPTO's database of registered marks and previous applications to see if any markings could impede your mark's registration because of a probability of confusion. It also contains some sample search tactics.

Please note that any searches you run on TESS are restricted to the USPTO's federal trademark applications and registrations database and do not contain marks belonging to third parties who may have trademark rights but lack federal registration.

USCO Search

Searches for copyrights are also essential and should be conducted at the U.S. Copyright Office (USCO) and Library of Congress. Examining the copyright office should not be disregarded because perfecting a security interest for registered U.S. copyrights requires filing with the USCO.

The Copyright Office maintains an on-site database called COINS, which can be accessed in the Copyright Office Public Records Reading Room. Visitors can use the database to confirm the existence of ownership and await registration documents.

The COINS database can only be searched by title or submission date. The USCO systems are filled with unknowns that have been the leading cause of long waiting periods and complicated searches. However, searching the on-site in-process database can occasionally yield copies of documents before they are returned to the filer and be helpful information for someone conducting due diligence searches.

Searching for UCC Financing Statements

After a UCC financing statement has been completed and filed, it is made public. As a result, users can search the pertinent databases to see whether a UCC lien is held against a specific debtor. For the exact name of the debtor, they can also search the secretary of state's website in the state where they live or where the company is registered. You can find similar search features in commercial UCC search engines.

When searching, it is crucial to emphasize that the debtor's name must be correct. When it comes to an organization, you can verify the name by searching the secretary of state's website for its incorporation documents. It is recommended to attempt multiple name variations for an individual to ensure the search returns all pertinent information, especially in a safe harbor jurisdiction.

Federal Tax Lien Search

The government's legal claim against your property when you disregard or refuse to pay a tax bill is known as a Federal Tax Lien. The lien safeguards the government's interest in everything of your possessions, including real land, personal property, and financial assets.

Depending on the state, the county tax office or the secretary of state is responsible for maintaining public records on tax liens once they have been issued. The name of the individual owing the lien, the lien holder, and the amount owed are all public information that is readily accessible. The only person who can access this information is the party that the lien is against, and it is also reported to credit reporting agencies.

To have a Federal Tax Lien search performed by a law firm or lawyer, a company or individual should provide the following information:

• Company or individual's name;
• State and county where the business was established or state the residence for an individual;
• Any additional states where the company or individual is registered to transact business.

Federal Tax Lien searches are a complex part of any federal IP due diligence process. Contact our lawyers to discuss the best way to structure and perform your searches to provide you with the most comprehensive results.

Federal IP Chain of Title Searches

A “chain of title” is a publicly accessible record that details who has owned a registered IP asset from its first owner to the present. To adequately safeguard and preserve intellectual property rights, these records are used to determine ownership status and must be kept up to date.

Chain of Title searches includes the following information:

• Copy of the current vesting instrument
• A list of ownership transfers with dates and recorded instrument numbers
• Summary report showing the parcel number(s) and brief legal descriptions(s)

Gaps in the chain of title occur when an IP owner does not properly record specific information with federal, state, or foreign IP registries. Inconsistencies in the chain of title raise questions about who has the authority to exercise ownership rights and, if unresolved, may result in the loss of IP rights.

Resolving the chain of title issues can be an expensive and drawn-out process, depending on the jurisdiction and the reachability of former owners (and their authorized signatories). Early in a merger and acquisition deal, the parties should recognize these concerns and give them enough time to be resolved.

Risks of Government Funding

Collaboration with the U.S. government through contracts, grants, and other sorts of partnerships offers commercial businesses access to a new market and the chance to research and create intellectual property (IP) that may be used for government and commercial purposes. However, there are risks associated with these opportunities.

The complicated system of laws and rules that come with doing business with the government can change depending on the kind of intellectual property in question (e.g., software) and the organization that owns the contract or grant (e.g., civilian agencies).

Companies that sell to the U.S. government or work with the U.S. government on research and development projects must be aware of the legal requirements that govern these activities. They must also take the necessary precautions to protect their existing intellectual property and give the government the rights they intend to grant for new intellectual property.

Questions?

If you or someone you know is interested in federal IP due diligence, consider reaching out to one of our lawyers. If you have any questions about intellectual property or IP due diligence, our lawyers are here to help. Avoid costly missteps by discussing your IP due diligence needs with one of our lawyers. Contact us today for a free consultation.