IP Due-Diligence

Technology due diligence (TDD) is one of the main components of the management system of innovations and technologies in today’s manufacturing facility or business entity. Such an audit is an integrated method of legal research of the company’s products of technology, which may contain different forms of intellectual property (IP), targeted to evaluate the commercial potential of both, Tech and IP sources, for their consequent assignment (transfer) or effective marketing (commercialization) for the purposes of generating good finance or extensive business development.

TDD is prima facie the procedure (or process) that helps to form an objective view of the current and actual state of the company’s technology portfolio, which typically includes the following key target audited aspects associated with IP: (1) creation of IP rights, (2) valid possession of IP rights, (3) encumbrances or security interests against IP, (4) legal protection of IP, (5) evaluation of IP rights, (6) recordal of IP into the balance sheet, (7) transfer of IP in favor of a third (other) person.

TDD is conducted by external consultants (lawyers, patent attorneys, appraisers, accountants, etc.) in close cooperation with management and/ or employees of the target business in order to achieve the most objective and plausible results. In 2011–2012 Gorodissky & Partners successfully completed a number of heavy-weight legal TDD projects related to the restructuring of IP rights and formation of joint venture, the sale of ‘intellectual’ assets abroad, and to several corporate/ commercial transactions underlying merger and acquisition (M&A). In so doing, the following sequence of actions of team members who were involved in these projects was laid down at the bottom- line of their work: (1) collecting the necessary information and documentation; (2) analysis of the information and documentation collected; (3) integration and systematization of the ‘right’ information; (4) preparation of TDD report; (5) preparation of ‘matrix’ of IP rights; (6) preparation of ‘catalog’ of technologies. The invited professionals of Gorodissky & Partners were involved in all stages of the whole TDD workflow, which essentially and constantly consisted of: (1) meetings and negotiations; (2) exchange of correspondence and documentation; (3) conference calls and phone calls; (4) workshops and counseling; (5) interviews with key managers/ employees of the target companies; (6) searches in the available databases; (7) presentations and reports. As a result of completion of TDD within the scope of each particular project at hand, the firm’s professionals developed and located the relevant catalogs of products of technology (that are the lists of specific technologies able to any subsequent transfer/ commercialization); the relevant plans of specific actions and recommendations for transfer/ commercialization of technologies; the relevant direct mechanics of transfer/ commercialization of technologies; as well as the relevant associated risks and the potential adverse consequences for the business (if applicable).

Ordinarily, the main goals of TDD are as follow: (1) creation of catalog of high-quality and highly advanced technologies for further ‘legally fresh and clean’ transfer/ commercialization; (2) assessment of the ability of the company to freely transfer/ commercialize such technologies; as well as (3) establishing of the objective understanding with a company’s management what is specifically needed to do in order for transfer/ commercialization of technologies process to be accomplished in the most effective manner from both legal and economic perspectives. In this regard, in order to achieve these particular goals in the course of TDD, the responsible counsels of Gorodissky & Partners were guided by the following basic objectives at work:

• identification of the audited protected and/ or protectable technologies, which were owned or used by the target company
• confirmation of ownership of rights vested in the audited technologies and possibility of disposal of such rights by the target company in favor of third parties
• analysis of the quality of legal protection of the audited technologies by the target company
• securing legal protection and enforcement of the audited protectable technologies
• ascertainment of encumbrances and security interest relating to the audited technologies
• allocation and/ or mitigation of risks associated with challenging and/ or infringement of rights vested in the audited technologies
• evaluation of ‘portfolio’ of the audited technologies
• appraisal and recordal of the audited ‘proper’ technologies into the balance sheet
• making of decision on viability of transfer of rights vested in the audited technologies
• preparation of concrete proposals/ recommendations regarding the appropriate form of the rights transfer.

Also, it should be noted that there are no universal methods for doing TDD up to date. However, Gorodissky & Partners has developed its own general structure of behavior, which includes the following work stages of conducting legal due diligence: A. Preparatory works (i.e. collection of the basic information/ documentation about the target enterprise or company, its business, the relevant industry sector, its relationship or competition with other businesses, potential sources of technology, etc.) B. Drafting request list (i.e. preparation of the corresponding request list and submitting it to the target enterprise/ company to obtain the necessary information/ documentation for the preparation of due diligence report) C. General technical diagnosis (i.e. visiting the target enterprise’s/ company’s proprietary premises and interviewing its employees/ management to gather the general information/ documentation on the basis of the request list; the first analysis of the data received from the target enterprise/ company) D. Presentations on key problematic topics (i.e. conducting series of reports/ presentations on various areas of IP law for the educational purposes and discussion of the first results of the work done as well as discussion of the main issues with the employees/ managers of the respective branches of the target enterprise/ company) E. Drafting executive summary of due diligence report (i.e. analysis, synthesis and systematization of data/ docs gathered from the target enterprise/ company and the development of the first draft of IP matrix) F. Subsequent collection of information/ documentation (i.e. additional interviews with employees/ management of the target enterprise/ company, preparation and submitting the verification request lists for obtaining more accurate data and perusal of additional materials and information received from the target enterprise/ company) G. Drafting due diligence report the (i.e. preparation of the final version of due diligence report, IP matrix and catalog of technologies, presentation of report at the session of Board of Directors of the target enterprise/ company and approva H. Implementation of recommendations and action plan for transfer/ commercialization of technologies (i.e. additional meetings and correspondence with employees/ management of the target enterprise/ company, acquisition of legal protection/ fixation of IP rights, evaluation of IP rights, recordal of IP into the balance sheet, preparation and negotiation of draft IP agreements (e.g., assignments or licenses), recordal of relevant agreements (if applicable), etc.

As a rule, the fundamental TDD products shall be the following documents:

1. due diligence report
2. matrix of IP right
3. catalog of technologies

Depending on the main goals and objectives raised in the course of the implemented TDD projects, the professionals of Gorodissky & Partners indeed encountered all of the above- specified documents. Upon having received (reviewed) the requested information and materials, the team of the assigned experts of the Firm commented in detail in the due diligence report on all the relevant key aspects related to IP and drew up the conclusions about the actual state of portfolio of ‘intellectual’ assets by reciting certain recommendations.

The consultants of Gorodissky & Partners ‘posted’ the overall picture of development, ownership and exploitation of the audited results of intellectual activity and brands (IPRs) in the matrix of IP rights for the purposes of acknowledgment of legitimacy of further transfer of rights in favor of third parties. In so doing, the findings made by the professionals of the Firm in the course of the handled due diligence process did not always meet the expectations of the target enterprise’s/ company’s management as they were significantly different from the main solutions made by the employees/ management of the target enterprise/ company earlier. As for the catalog of technologies, the most ‘legally fresh and clean’ technologies/ IP were properly consolidated in it for subsequent trouble-free transfer/ commercialization.

To sum up, TDD is an integral legal part and phase during the sale by an industrial enterprise/ company of its innovations (technologies), and it can be applied in the course of implementation by such an enterprise/ company of almost any corporate/ commercial transaction involving IP (investment, joint venture, M&A). At that, the depth, thoroughness and quality of such process will mostly depend on the high skills of the invited specialist. In this connection, the professional experience gained within the scope of the referenced TDD projects was very interesting and useful to all the members of the Gorodissky & Partners team, who participated in these projects, and therefore it will undoubtedly be used in its future ‘intellectual’ practice.