Due Diligence of Agreements

AuthorTodd Volyn
I. Introduction
The objectives of the intellectual property due diligence process
are remarkably simple. Distilled to its essence, only two ques-
tions are answered. First, will the licensee or acquirer be able to
commercialize or use what is being licensed or acquired? Second,
will the licensee or acquirer be able to do so in a way that deliv-
ers the reward it is planning on? The rst question is answered
by evaluating the freedom to operate. The second is usually
answered by analyzing the scope of exclusivity afforded by the
intellectual property (IP) that is being licensed or acquired. This
chapter considers these two questions from the perspective of
assessing the agreements that the potential licensee or seller has
entered into to determine the extent of the rights they afford and
the restrictions and costs they impose. In this chapter I usually
Due Diligence
By Todd Volyn*
* Mr. Volyn thanks his Johnson & Johnson colleagues for their many collabora-
tions that helped to frame this chapter, and the late Karl Jorda and Dean Robert Viles
for their insights into contracting, licensing, and negotiation. Finally, he thanks his
wife, Vickie Volyn, for her patience and advice.
The views and opinions expressed herein are solely those of Mr. Volyn and are not
to be attributed to Johnson & Johnson or any of its operating companies.
414 CHAPTER 10
refer to the party conducting the diligence as the licensee and the
other party as the target, regardless of the type of deal proposed.
From time to time I refer to a seller or acquiror, but whether
that is the case or not, the basic process does not differ much in
the case of a license, an asset acquisition, or a company acquisi-
tion. Throughout, I highlight instances in which it does make a
The topics discussed here are presented in roughly the order
they present themselves according to the process I prefer in a due
diligence project. Some of the steps are recursive and intertwined
with others, but in general they are:
• Obtain an understanding of the proposed transaction
(diagram it if necessary).
• Prepare a diligence checklist for the proposed transaction.
• Gather agreement-related materials from open sources.
• Provide the target with a diligence request.
• Obtain agreements and related materials from the target
(enter the data room).
• Survey agreements and related materials.
• Prioritize and begin analysis, starting by agreement type
or provision type.
• Conduct a thorough analysis.
• Use tools (checklists and spreadsheets) to summarize con-
clusions and present them to the requester.
• Report out and conduct follow-on analysis as necessary
(e.g., effect of merger statute on assignability).
II. Obtain an Understanding
of the Proposed Transaction
A worthwhile rst step when confronted with a diligence project
is to stand back and consider the complexity and breadth of the
proposed transaction. Is it a simple patent license, a development
agreement, an asset acquisition, a merger, a cross-license, or any
one of a number of variants? In many cases, diagramming the
Obtain an Under standing of the Proposed Transacti on 415
proposed transaction will be helpful as the diligence attorney
seeks to assess the transfer of rights. The diagram can be used as
a reference to help understand which rights are needed by which
party. An example is shown in Figure 10.1.
The complexity of the deal affects the scope of the entire dili-
gence effort, not just intellectual property due diligence. Intellec-
tual property due diligence is almost always important. However,
in complex deals such as pharmaceutical or medical device deals
involving long-term development efforts, there are many other
factors that bear on the licensee’s or acquiror’s ability to have
freedom to operate and exclusivity. For example, signicant
involvement with regulatory regimes can greatly affect both free-
dom to operate and exclusivity. It does not matter whether the
licensee or acquiror has freedom to operate from a patent point
of view if a regulatory body such as the Food and Drug Admin-
istration would not approve the licensed product or a proposed
acquisition would not clear Hart-Scott-Rodino antitrust review.
Likewise, in the case of a pharmaceutical, the period of exclusiv-
ity needed to make a project cash positive can be greatly dimin-
ished if regulatory review is likely to delay entry of the product
into the market. Others outside of the intellectual property eld
Figure 10.1: Deal Diagram
New Company
Collaboration Agreement to
Develop New Products
Commercial Products/IP
Developed Products (not
yet commercialized)/IP

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