Review the IP background: due diligence

Last updated: 
3 April 2017

If a person or organisation (a business ‘entity’) believes they own IP or have an opportunity to source IP from others, a comprehensive appraisal of the viability of commercialising that IP should be made before committing to its commercialisation.

Many companies seek to secure their freedom to operate (FTO) at an early stage of their activity. This ensures that you don’t infringe the IP rights of others through the commercial production, marketing or use of your new product, process or service. This is also known as ‘due diligence’. Legal, technical, commercial and personal issues should also be considered through this phase. An IP professional can assist you through this process.

If several entities are considering sharing the risks of the venture, each should ensure the due diligence is completed to their individual satisfaction. Information provided to a potential venture participant by an IP owner usually is required to be legally warranted by the IP owner as being reasonably accurate.

Due diligence precedes the creation of a business plan. If the venture proceeds, much of the work conducted during due diligence may contribute to the plan.

The following issues should be resolved:

  • IP definition: Exactly what is the IP? How does it differ from, or improve upon, what’s come before?
  • IP ownership: Who really has rights to use the IP?
  • IP preliminary valuation (‘validation’ or ‘risk validation’): Does the IP have sufficient commercial usefulness to warrant reasonable expenditure on its commercialisation?

IP definition

Defining your IP often receives attention too late, in particular if you wish to file for patent or design protection for your idea. In these cases, a detailed search of the prior art should be conducted to determine how likely it is that the idea is novel.

Because there may be millions of relevant articles published anywhere in the world over many decades, realistically no prior-art search can establish definitely that novelty (and inventiveness) exists, but a search may show that novelty definitely doesn’t exist.

Defining your IP also helps to determine what type(s) of IP protection are suitable.

Good practice is to proceed as if an application for an appropriate type of legal IP protection is being made even if subsequently a decision is made not to file it. The form and content of such applications are mandated in a manner designed in part to make the IP clear.

Proper documentation of IP includes creating a summary, or IP register, in which the commercialisation entity records all of its IP. For each relevant country, the recording includes how each IP item is protected, the date an application for each protection was filed, the date that protection was granted, and prior-art information.

In Australia, patents are published 18 months after the applicant’s earliest priority date, trade marks are published within a few days of filing and designs are published generally around two to three months after filing provided they are eligible for registration.

Our registers may not necessarily suit all of the requirements of the IP venture as we don’t register information filed in another country.

IP ownership

Most venture financers prefer not to participate in a commercialisation venture unless ownership of the relevant IP is ‘clean’, or uncomplicated. If more than one entity is responsible for the creation of the IP, that IP is usually jointly owned initially.

Establishing and operating an IP venture can be difficult if there are more than two IP owners. Use of legal assignments or similar agreements can reduce the number of owners or clarify ownership.  

IP sourced from publicly funded R&D organisations may have particularly complex ownership issues. Even if there is a sole IP creator, the relevant R&D is often funded by several organisations having various IP ownership arrangements. In addition, the IP may be difficult to separate from closely-related IP created under different funding arrangements.

For IP rights in Australia, the online Personal Property Securities Register should be checked in order to ensure that any rights being acquired by the commercialisation entity is not likely to be repossessed by a third party.

IP preliminary validation

Commercialisation should always involve a business plan, and one of the first steps towards developing a detailed plan should be to ‘validate’ the venture by establishing that it’s worthwhile.

This involves valuing the IP assuming a reasonably appropriate business scenario, for example, by estimating the likely financial profit made by the venture over the first seven years of operation assuming specific financial investments in the first three years.

These preliminary validations tend to be of dubious accuracy, being heavily dependent on critical assumptions, but they can still provide significant information for the potential venture participants.

A critically important issue is to determine if any legal restrictions exist that may prevent the venture from operating effectively. Such restrictions include a vast range of regulatory hurdles (e.g. safety regulations) and ethical restrictions.

A venture has restricted FTO  when an entity not associated with the venture has rights (such as a granted patent) to IP that the venture requires. A search of the patent register may discover if a restriction to FTO exists. If so, it may be possible for the venture to negotiate FTO with the other entity.

IP protection does not address any of these potential legal restrictions on the venture.

Because IP involves novel concepts, the legal restrictions on IP ventures may not be as obvious as the restrictions on more routine ventures.

Next step to consider: choose your commercialisation vehicle.