Before You Sign: The IP Due-Diligence Guide For M&A And Private-Equity Deals

A practical primer on the intellectual-property questions that move deal value

In many deals, the intellectual property is the asset. Software, patents, brands, and trade secrets often carry more of the purchase price than the hard assets do. That makes IP due diligence a value question, not a paperwork exercise. This primer walks through what a buyer and a seller should check, why each item matters, and which findings tend to reprice or kill a deal.

Why does IP diligence affect what a deal is worth?

A buyer is paying for rights it can own, enforce, and rely on. If those rights are defective, the buyer is paying for less than it thinks. IP diligence tests whether the target actually owns what it claims, whether anything is attached to those rights, and whether the deal itself might damage them. Sellers benefit from the same review. Finding a gap before the buyer does lets you fix it, price it, or address it in the reps and warranties instead of losing leverage mid-deal.

What does IP due diligence actually check?

IP diligence looks at a defined set of questions:

• Ownership. Does the target hold clean title to each key patent, trademark, copyright, and trade secret? 
• Encumbrances. Are the rights licensed out, pledged as collateral, or subject to consent requirements? 
• Deal triggers. Will the transaction itself terminate or transfer any rights? 
• Exposure. Can the target operate without infringing others, and is anyone asserting claims? 
• Upkeep. Are the registrations current, or are deadlines about to lapse? 
• Software and secrets. Are open-source obligations and trade-secret protections in order?

The rest of this article takes those in turn.

Who really owns the IP — and how do gaps in title happen?

Under U.S. law, patents are personal property and are assignable only “by an instrument in writing.” See 35 U.S.C. § 261. A signed, recorded chain from each inventor to the current owner is what proves title.

Gaps are common. The most frequent problem is a missing employee or contractor assignment. An invention does not automatically belong to the company just because an employee or a paid contractor created it. Ownership starts with the inventor and moves only by assignment. The Supreme Court reaffirmed this in Board of Trustees of the Leland Stanford Junior University v. Roche Molecular Systems, Inc., 563 U.S. 776 (2011), holding that even a university did not own an invention absent an effective assignment from the inventor.

The wording of the assignment matters too. Courts distinguish a present assignment (“hereby assigns”) from a mere promise to assign in the future (“agrees to assign”). A promise can leave title unsettled until a further document is signed. Independent contractors are a recurring blind spot, because without a written assignment the developer or engineer may still own what your client thinks it bought.

Diligence should also confirm assignments were recorded with the USPTO. An unrecorded assignment can be void against a later good-faith purchaser under § 261.

Can inventorship problems really break a patent?

Yes. A U.S. patent must name the correct inventors. See 35 U.S.C. §§ 116, 256. Naming someone who did not contribute to the claims, or leaving off someone who did, can create ownership and enforceability problems. An omitted co-inventor may hold rights no one accounted for. Inventorship can often be corrected under § 256, but the fix takes time and cooperation — both scarce during a deal. This is a place where a portfolio review by patent counsel earns its keep.

What licenses, liens, and change-of-control clauses can bite the buyer?

Ownership is only half the picture. Diligence has to find what is attached to the IP.

Outbound and inbound licenses: A patent the target “owns” may already be licensed to a competitor, or licensed exclusively in a way that limits what the buyer can do. Inbound licenses are just as important, because the target may depend on rights it does not own.

Liens: IP is frequently pledged as collateral. A UCC and USPTO records search shows whether a lender holds a security interest that has to be released at closing.

Change-of-control and anti-assignment clauses: This is where deals get surprised. Many licenses cannot be transferred, and some terminate, when the licensee is acquired or reorganized. In the IP context, a license is presumed non-transferable absent language allowing it. In Cincom Systems, Inc. v. Novelis Corp., 581 F.3d 431 (6th Cir. 2009), a software license that barred transfer without consent was breached when the licensee reorganized into a new entity through a merger — even though the same business kept using the software. A buyer relying on a key inbound license needs to read those clauses before signing. A structure chosen for tax reasons can terminate a license the whole business depends on.

Is the target free to operate — and is anyone suing?

Owning a patent does not mean you are free to practice your own product. Freedom-to-operate is a separate question: does the target’s product risk infringing someone else’s rights? Diligence should surface pending litigation, demand letters, and prior assertions, including from non-practicing entities (NPEs) whose business is licensing and litigation. Past assertions often predict future ones. A product with known third-party patent exposure carries a cost the model may not reflect.

Are the patents and trademarks still in force?

Registered rights lapse if they are not maintained. U.S. patent maintenance fees are due at roughly 3.5, 7.5, and 11.5 years after issuance, with a six-month grace period and surcharge; miss the grace period and the patent expires. See 35 U.S.C. § 41(b). Trademarks require a Section 8 declaration of use between years 5 and 6, and a combined Section 8 and Section 9 renewal between years 9 and 10 and every ten years after. See 15 U.S.C. §§ 1058, 1059. Diligence should build a deadline calendar for the whole portfolio. A crown-jewel patent about to lapse for an unpaid fee is a fixable problem, but only if someone catches it in time.

What about the open-source software in the product?

Almost every modern product includes open-source code. Open-source is not “free of terms.” Many licenses impose conditions, and some copyleft licenses can require disclosing source code for derivative works. Courts treat open-source license conditions as enforceable. See Jacobsen v. Katzer, 535 F.3d 1373 (Fed. Cir. 2008). A buyer should ask for a software bill of materials showing what is included and under which licenses, so a proprietary product is not carrying obligations no one disclosed.

Are the trade secrets actually protected?

Trade secrets get legal protection only if the owner “has taken reasonable measures to keep such information secret.” See 18 U.S.C. § 1839(3); Defend Trade Secrets Act, 18 U.S.C. § 1836. Diligence should confirm the basics: confidentiality agreements, access controls, and clean onboarding and departure practices. Weak hygiene puts the “secret sauce” at risk regardless of what the data room says it is worth.

What kills or reprices a deal?

Certain findings consistently change the price or the terms:

• A key patent with a broken chain of title or a missing inventor assignment. 
• Contractor-developed core technology with no written assignment. 
• A crucial license that terminates or cannot transfer because of the deal. 
• A lien on the IP that no one flagged. 
• Active or threatened infringement litigation, including from NPEs. 
• A crown-jewel registration that has lapsed or is about to. 
• Undisclosed copyleft open-source in a proprietary product. 
• Trade secrets with no meaningful protection.

None of these has to end a deal. Found early, most can be fixed, indemnified, escrowed, or priced. Found late, they cost leverage. The value of diligence is timing. At Harness IP, many of our due diligence projects have uncovered issues that allow our clients to reprise or restructure a deal. Working with counsel on IP diligence
IP diligence spans prosecution, portfolio management, and litigation, and the hard questions usually sit where those areas meet.

At Harness IP I work under a full-service model: patents, trademarks, and disputes run through one relationship, and I bring in Harness subject-matter attorneys as a deal requires — patent prosecution counsel on chain of title, trademark counsel on renewals, litigation counsel on exposure. I have substantial experience as an IP litigator in the district courts, at the U.S. International Trade Commission, and before the PTAB, and served as district-court trial counsel in Octane Fitness. If you are evaluating a target — or preparing to be one — an early IP read gives you more options.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.