Historically, in mergers and acquisitions, parties to the transaction engaged the services of general-service or specialty M&A firms to perform due diligence analysis before the acquisition closed. The idea was that transactions can close more quickly if all attorneys performing the due-diligence analysis are in a single firm. However, as intellectual property issues (e.g., patent litigation, nonproducing entities) become more paramount, the IP portfolios of the target entities become far more valuable than in years past.
Twenty years ago, an acquirer might have relegated evaluation of a target’s patent and trade-secret portfolio to a lower priority than examination of other, more tangible, assets. But in today’s highly technical and competitive economy, evaluating a target’s inventiveness, whether in terms of the patent portfolio or the employees themselves, can be one of the most important tasks performed when acquiring startup or established technical entities.
Now more than ever, clients often retain one firm to oversee the entire review process and sub-engage a specialty firm to perform due diligence review of the target’s IP portfolio. In such an arrangement, the specialist IP counsel typically works hand-in-hand with in-house and retained corporate counsel, to inform M&A counsel of any discoveries, which then are included in M&A counsel’s final report on the diligence.
In some cases, the division of labor results because the M&A firm is conflicted or disqualified from the IP review because a patent group within the M&A firm handles patent or trademark matters for another client in the same or related space.
In addition to conflicts, speed is another reason to bring on an additional specialty firm. Some acquirers will engage an IP firm to accelerate completion of the review so that the corporate firm may focus on more traditional M&A due diligence tasks, enabling the transaction to close by an imposed deadline. In today’s technology-acquisition climate, diligence periods can be as short as 30 days from beginning to closure, even for transactions of several hundred million dollars. For large reviews, specialty IP firms may be able to supply more resources to the IP portfolio review than corporate counsel could provide, enabling the more thorough review of the portfolio than otherwise possible, given the time constraints.
However, in most cases, in-house counsel’s decision to subcontract out portions or all of the IP due diligence review is driven by a desire to ensure that the target’s IP assets are reviewed by those with the most expertise in the identification, evaluation and prosecution/procurement of those assets, particularly when owning the target’s portfolio is a substantial motivation for the acquisition.
Engaging the services of counsel focused primarily on patent and trademark prosecution often results in more detail-oriented and thorough review of the portfolio to be acquired. As an added bonus, an established and diverse IP specialty practice is likely to include several professionals with expertise in the particular technological field of the target’s portfolio, whereas the typical M&A lawyer comes from a more business-centric background. Moreover, as legal fees have skyrocketed in recent years, work performed by the IP specialty firm may be at a lower hourly rate than would otherwise have been billed by M&A counsel.
When selecting IP counsel to assist in diligence review, look for a firm with a solid foundation in patent prosecution. Most members of IP specialty firms having a prosecution focus will have devoted much (if not all) of their careers to mastering the tedious and detail-oriented practice of patent prosecution.
However, it is remains wise to pick IP counsel with a diverse skill set. Well-rounded IP counsel will have a solid foundation in patent prosecution, but also be experienced at writing opinions of counsel and assisting in litigation matters. Overly specialized counsel might not be aware of all IP-related issues and pitfalls that may arise after the deal has closed.
General counsel who are unsure where to turn can consider the team of professionals who already are engaged in preparing and prosecuting the company’s existing patent portfolio. The GC would not have retained existing prosecution counsel if they had not demonstrated sufficient skill and delivered a quality product. Further, the acquiring entity’s outside IP counsel already will be intimately familiar with the company’s product line and current IP portfolio, avoiding the need to spend time learning that technology.
Additionally, depending on the geographic diversity of the portfolio under review, it may be advantageous to select IP counsel with experience in jurisdictions where the target is located or where the portfolio may be in force. For example, in most technology sectors, the Asian market is critical to consider. Thus, IP counsel having familiarity directing prosecution within the jurisdictions of interest (e.g., Japan, China, Korea) will have a support network already in place for efficient review of documents and regulations in those jurisdictions.
Finally, many United States-based IP prosecution firms have local offices and/or native speakers of foreign languages that are relevant to the diligence. For example, an entity seeking to acquire a target with a technology center in Germany may want IP counsel with native language ability and knowledge of European IP regulations. Such skills would save costs of translation and consultation in review of German-language employment agreements and invention assignments.