What's Due Diligence?
To begin, it is basically common sense coupled with a reasonable degree of skepticism. It does not mean you can not trust anyone or rely on experts. In fact, good due diligence does both to a very great degree. However, it does mean you can not rely on the report of a colleague or an expert if you know, or have reason to believe, it is not accurate or complete in any material respect. Nor is it possible to rely on a report, even if prepared in utter good faith, that is so hastily prepared no reasonable person could have made a satisfactory investigation of the matters reported on. Similarly, you can not rely on the report of a subordinate if it is clearly beyond his or her competence to perform. Thus, due diligence requires a considerable amount of seasoned good judgment and appropriate investigation of the material elements of the transaction.
Due diligence charges the investigator with knowing what a reasonable, good faith investigation would have revealed under the circumstances. If this knowledge would have prompted a reasonable person to take action that was not taken due to a failure of due diligence, the investigator will ordinarily be liable to anyone injured by the failure, provided the investigator owes a legal duty to that person. Sometimes this legal duty comes about by the legal relationship of the parties, such as, an accountant or a lawyer hired specifically to make sure the transaction passes muster. Sometimes, the duty is imposed by law, such as, by the American securities laws or by money laundering laws.
Due Diligence in Corporate Transactions
Investors can't get an accurate picture of a company if there's false information. They can sue certain people for material misstatements or omissions. This includes:
• Anyone who signed the registration statement
• Directors of the company
• Accountants who help prepare the statement
• Security underwriters
These people are held to a due diligence standard. This means that they must reasonably believe that the registration statement is accurate and free of errors. If they don't, they can be found liable to investors.
The due diligence standard can also be used as a defense. If any director or accountant meets the standard, he can't be found liable for any omissions or misstatements. The standard varies by a person's involvement in the company and the registration statement.
What's Fiduciary Responsibility?
Fiduciary is someone who owes a duty of care and loyalty to another. The directors of a company owe a fiduciary duty to both the company and the stockholders. They violate this duty by making decisions for their own benefit. Directors owe you a fiduciary duty if you own stock in their company.
Investment advisers also have fiduciary responsibilities. They owe their clients the duties of good faith, integrity and loyalty. An investment adviser has a special relationship of trust with his clients. He must act in their best interests.
Broker-dealers haven't normally been held to the fiduciary duty standard. They usually have a suitability standard. This means that they're only required to provide suitable investments.
Due Diligency in Intellectual Property Transactions ?
Using due diligence, a standard of care, when researching a trademark helps the purchaser of a trademark, copyright figure out the value of trademark, copyright or invention, whether it is valid, infringed, or infringing on another trademark. All of these are important considerations when purchasing a company or some of its intellectual property assets.
What Types of Things Do I Need to Do when Researching a China Trademark, Copyright, or Invention
■ Verify ownership - One of the first things that need to be done is to check that the "trademark owner" or other intellectual property owner is actually the owner. Title to the trademark, copyright or invention should be verified with the appropriate agencies. Regarding trademark use, a company may have abandoned its ownership rights in a trademark, through nonuse, acceptance of infringement, failing to police its marks, or allowing its mark to become descriptive of its goods. Although usually not a problem a trademark should be verified for use.
■ Verify scope of trademark, copyright or invention - For a company's core products one should confirm that the trademark covers the company's current trademarks, logos, slogans or brands and other information of the intellectual property.
■ Verify any opposition to the trademark and other intellectual property rights - Most importantly the purchasing party should verify that the company and intellectual property they are about to buy is not subject to a dispute. No one wants to dispute their rights to a mark right after they purchase the mark. Finally in the interest of future expansion, one will need to check into possibilities of expanding the use of the trademark, copyright or invention geographically.
Evaluating Intellectual Property
In general, there are three elements involved in reviewing an intellectual property portfolio in mergers and acquisitions:
• Quality of intellectual property portfolio: does it contain meaningful patents that are important to the acquiring company’s business?
• Evaluation of patents filed: if patent applications have been submitted for certain inventions, is it likely that the patents will be granted?
• Patent search: do potential patents for inventions conflict with existing patents?
Avoiding Patent Infringement Litigation
While reviewing intellectual property is important for determining what, if anything, can or should be patented, avoiding accusations of patent or trademark infringement is also important. Our attorneys review existing licensing agreements and franchising relationships that could be the source of potential infringement lawsuits later. We advise clients in how to amend or terminate licensing and franchising agreements in order to ensure their interests are protected in any future business relationships.
Should I Contact a Lawyer Regarding my IP Due Diligence Issues?
A good IP lawyer will understand that using due diligence when researching trademarks, copyright or invention is important, and will help facilitate the process of transferring IP rights. Since purchasing a company, its assets, and its goodwill can be tricky business, it's recommended to always contact a lawyer in these complicated situations.
Using due diligence, a specific standard of care, when buying a copyright can inform the purchaser of a copyright as to the value of that copyright, and whether the copyright is valid, infringed, or infringing on another copyright. Particularly in the software context a great deal of care must be taken when purchasing these types of assets.
Intellectual Property Due Diligence Attorneys
Mergers and acquisitions often involve the transfer of intellectual property rights from the company acquired to a new parent company. In the process, the parent company can be held liable for any unlicensed or unauthorized use of trademarks, copyrights, or patents on the part of the company to be acquired. Additionally, it’s important for a parent company to know what the value of the acquired company’s intellectual property portfolio is and if anything in it needs patenting.
Our attorneys review intellectual property portfolios as part of the due diligence process involved in mergers and acquisitions. We review licensing agreements, patent applications, trademark registrations, and copyrights and take active steps to ensure your company avoids potential legal complications and unwanted litigation.
For more information regarding our due diligence review, contact our China due diligence attorneys today and schedule an appointment to discuss your case.