IP Due Diligence in M&A: The Complete Technical Guide

Intellectual property due diligence is where M&A deals go to die—or where hidden liabilities emerge post-close. This guide provides a systematic approach to IP diligence that protects your acquisition and uncovers value.

Why IP Diligence Matters

Deal Killers

IP issues that terminate deals:

• **Missing assignments:** Founders or contractors own the code
• **Open source violations:** GPL-licensed code in proprietary products
• **Patent infringement claims:** Existing or imminent litigation
• **Trade secret contamination:** Employees brought competitor IP

Value Destroyers

IP issues that survive closing:

• **Undisclosed licenses:** Revenue-sharing obligations
• **Weak patent portfolio:** Unenforceable or narrow claims
• **Trademark conflicts:** Can't use the brand post-acquisition
• **Data rights issues:** Can't use customer data as planned

Reps and Warranties Claims

IP is the most common source of indemnification claims in tech M&A.

The IP Audit Framework

1. Inventory and Ownership

Patents:

• [ ] Complete list of patents and applications
• [ ] Ownership chain for each (inventor assignments)
• [ ] Prosecution status (pending, issued, abandoned)
• [ ] Maintenance fee status
• [ ] Jurisdictions covered
• [ ] Assignments recorded with USPTO/foreign offices

Trademarks:

• [ ] Registered marks and applications
• [ ] Common law marks in use
• [ ] Domain names
• [ ] Social media handles
• [ ] International registrations
• [ ] Maintenance/renewal status

Copyrights:

• [ ] Registered copyrights
• [ ] Key software and content
• [ ] Work-for-hire documentation
• [ ] Assignment agreements

Trade Secrets:

• [ ] Identification of key trade secrets
• [ ] Protection measures in place
• [ ] Employee/contractor confidentiality agreements
• [ ] Access controls and documentation

2. Software and Technology

Source Code:

• [ ] Complete source code repository access
• [ ] Version control history
• [ ] Contributor analysis (employees vs. contractors)
• [ ] Third-party libraries and dependencies
• [ ] Open source components

Development History:

• [ ] When was code written?
• [ ] By whom? (employment status at time)
• [ ] Were proper assignments in place?
• [ ] Any code from previous employers?

3. Third-Party IP

Inbound Licenses:

• [ ] Software licenses (commercial, open source)
• [ ] Content licenses (images, fonts, data)
• [ ] Technology licenses (patents, know-how)
• [ ] API and service agreements
• [ ] Sublicensability and assignment rights

Outbound Licenses:

• [ ] Customer agreements granting IP rights
• [ ] Open source contributions
• [ ] Standards body contributions
• [ ] Research collaborations

4. Encumbrances

Security Interests:

• [ ] UCC filings against IP
• [ ] Pledges to lenders
• [ ] Restrictions from prior financing

Litigation:

• [ ] Pending IP litigation
• [ ] Threatened claims
• [ ] Prior settlements (ongoing obligations)
• [ ] Patent assertion entity contacts

Government Rights:

• [ ] Government-funded research
• [ ] March-in rights
• [ ] ITAR/export restrictions

Deep Dive: Software Ownership

The Assignment Chain

For every line of code, you need an unbroken chain:

Employee Code:

• Employment agreement with IP assignment

• Agreement signed before code written

• Agreement covers all inventions/works

• State-specific considerations (CA Section 2870)

Contractor Code:

• Work-for-hire agreement (but copyright only)

• Express assignment of all IP rights

• Agreement signed before work begins

• Covers derivatives and improvements

Founder Code:

• Pre-incorporation work assigned to company
• Technology assignment agreement at formation
• Contribution agreement covering prior work

Common Problems

Missing Assignments:

Prior Employer IP:

Red flags:

• Employee worked on similar product at prior employer
• Short gap between employments
• Prior employer has relevant patents
• Non-compete or IP agreements with prior employer

Due diligence steps:

• Review prior employment agreements

• Assess overlap in technology

• Interview employee about development process

• Consider obtaining release from prior employer

Deep Dive: Open Source

Why Open Source Matters

Open source licenses create obligations when you:

• Distribute software containing open source
• Create derivative works of open source
• Link to open source libraries

Obligations can include:

• Source code disclosure
• License notice requirements
• Patent license grants
• Copyleft (viral licensing)

License Categories

Permissive (Low Risk):

• MIT, BSD, Apache 2.0
• Require attribution only
• Can combine with proprietary code
• Can distribute binaries without source

Weak Copyleft (Medium Risk):

• LGPL, MPL
• Modified library code must be disclosed
• Proprietary code can link without disclosure
• Boundary issues can be complex

Strong Copyleft (High Risk):

• GPL, AGPL
• Derivative works must be GPL-licensed
• "Viral" effect on combined code
• AGPL extends to network use (SaaS)

Open Source Diligence Process

1. Generate Software Bill of Materials (SBOM)

Tools: Black Duck, FOSSA, Snyk, WhiteSource

Identify:

• All open source components
• Version numbers
• License types
• Known vulnerabilities

2. License Compliance Analysis

For each component:

• What license governs?
• What obligations does license create?
• Is company currently compliant?
• What remediation is needed?

3. Risk Assessment

4. Remediation

Options for high-risk components:

• Remove component and rewrite
• Replace with permissively-licensed alternative
• Obtain commercial license (if available)
• Restructure to avoid license trigger
• Accept risk with appropriate disclosure

Deep Dive: Patent Analysis

Portfolio Assessment

Claim Analysis:

• What do the claims actually cover?
• Are claims broad or narrow?
• Are claims valid (prior art analysis)?
• Are claims infringed by current products?

Prosecution History:

• What was argued to get claims allowed?
• Any prosecution history estoppel?
• Continuation/divisional strategy?

Commercial Value:

• Do patents cover revenue-generating features?
• Can competitors design around?
• Any licensing revenue?
• Defensive vs. offensive value?

Freedom to Operate

FTO Analysis:

• Search for third-party patents in relevant space
• Analyze claim coverage
• Assess infringement risk
• Identify design-around options

Common Issues:

• Undisclosed patent threats
• Competitors with blocking patents
• Patent assertion entities targeting the space
• Standard-essential patents with FRAND obligations

Patent Quality Indicators

Due Diligence Request List

Documents to Request

Corporate:

• [ ] IP assignment agreements (all employees/contractors)
• [ ] Confidentiality agreements
• [ ] Non-compete agreements
• [ ] Employment agreements
• [ ] Contractor agreements

Patents:

• [ ] Patent and application list
• [ ] Prosecution files
• [ ] Assignment documents
• [ ] License agreements
• [ ] Litigation files
• [ ] Prior art searches

Trademarks:

• [ ] Registration certificates
• [ ] Application files
• [ ] Use specimens
• [ ] Cease and desist correspondence
• [ ] Coexistence agreements

Software:

• [ ] Source code repository access
• [ ] SBOM report
• [ ] Open source policy
• [ ] Development documentation
• [ ] Third-party license agreements

Trade Secrets:

• [ ] Trade secret identification
• [ ] Protection policy
• [ ] Access logs
• [ ] Exit interview records

Key Interviews

CTO/Engineering Leadership:

• Development history and practices
• Third-party technology dependencies
• Open source usage and policies
• Key technical personnel

Legal/Compliance:

• IP strategy and protection
• Litigation history and threats
• License compliance
• Known issues

HR:

• Employee IP agreement compliance
• Contractor management
• New hire screening
• Departing employee process

Risk Allocation in the Deal

Representations and Warranties

Standard IP Reps:

• Company owns all IP necessary for business
• No infringement of third-party IP
• No third-party infringement of company IP
• All necessary licenses in place
• No undisclosed encumbrances

Enhanced Reps (for identified risks):

• Specific reps about open source compliance
• Reps about specific patent non-infringement
• Reps about employee/contractor assignments
• Reps about trade secret protection

Indemnification

Scope:

• Breach of IP reps and warranties
• Third-party IP infringement claims
• Open source license violations

Limitations:

• Baskets and deductibles
• Caps (often higher for IP than other breaches)
• Survival periods (often longer for IP)
• Sandbagging provisions

Escrow and Holdbacks

For significant IP risk:

• Escrow portion of purchase price
• Release tied to resolution of identified issues
• Extended escrow for ongoing litigation

Purchase Price Adjustments

If issues are discovered:

• Reduce purchase price for remediation costs
• Carve out problematic IP from deal
• Require remediation as closing condition

ExecOS Legal Expert can help you structure IP due diligence, assess identified risks, and negotiate appropriate protections in your acquisition agreements.