As in any business transaction, “value” in software is being sought and paid for. A due diligence investigation will provide an assessment of the value in terms of the risk being assumed, which in turn can be reflected in the price. For example, a non-trivial legal weakness can compel a discount of the asking price whereas a fine paper trail can enhance the asking price.

Check Public Records for IP Protection

At Patent Office

• obtain list of patents and applications
• investigate licences, assignments, liens and similar documents registered

At Copyright Office

• obtain list of registrations
• investigate licences, assignments, liens and similar documents registered

At Trade-Marks Office

• obtain list of registrations
• investigate licences, assignments, liens and similar documents registered

At government offices which accept registration of security interests

• in BC, at the Personal Property Registry for filings under the Personal Property Security Act; or in Washington State, at the Department of Licensing for registrations under the Uniform Commercial Code

Consider Validity, Unenforceability, Scope of IP Protection

Patents

• Search Patent Office and other technical libraries, in particular, and conduct a literature search, generally, for invalidating prior art or prior use of a third party
• Scrutinize developer’s own activities which may invalidate because of non-confidential disclosures more than one year before the filing of the application. For example, the beta testing of the software was conducted by whom, when, where, and under what conditions?
• Scrutinize the patent itself for possible weaknesses and invalidity (for example, was the best mode disclosed?)
• Scrutinize the prosecution history of the patent (possible fraud on the Patent Office by not disclosing relevant prior art known to the applicant? arguments made which limit the scope of the claims?)

Copyright

• Marking? For example, if the work was distributed in the US before March 1, 1989, has copyright been forfeited in the US because of failure to mark with the appropriate copyright symbol?

Trade-Marks and Domain Names

• What trade-marks (word marks, logos and other indicia of “branding”) are used in association with the wares and services? Are these marks registered and if so in what countries?
• What domain names are registered, and are they protected or protectible as trade-marks?

Trade secrets

• Identify the trade secrets (especially beyond that which is insubstantial or possibly public domain know-how)
• Is there a rigorous and documented program to create and maintain trade secrets?
• Investigate disclosures/disclosees (Freedom of Information Act, for example?)

Consider Possible Third Party Claims of Infringement

• Identify competitors and their patents, copyrights, trade-marks and domain names.
• Have any adverse claims by third parties been made about the software? Are there any legal opinions?
• Was the software designed around (or designed to compete against) a third party’s particular product or patent?
• Investigate employees/contractors who previously worked for a competitor to consider breach of confidentiality of a competitor’s trade secrets

Investigate Development Process to Consider Possible Adverse Claims of Ownership

Authorship

• Identify all developers and authors and obtain waivers of moral rights, warranty that there are no others, etc.
• Determine the relationship of each developer (review employment contract? consulting contract?) to verify that the contemplated rights to the software are transmissible

Presence of third parties

Investigate and obtain appropriate warranties, licences, indemnities and waivers, as the case may be:

• if third party software (including audio-visual works) or trade secret are present in (or was used in the development of) the software
• if third party money was used in the development of the software (for example, government funded projects?)
• if there is a third party with whom there was a nexus which makes independent development of the software difficult to prove (for example, through negotiations for a VAR relationship which ultimately broke off, has a third party. s ideas found their way into the software?)

Liability and IP Litigation Insurance

Obtain and analyze

• Commercial General liability (occurrence or claims-made?)
• Product liability (occurrence or claims-made?)
• Electronic errors and omissions liability
• Patent infringement liability
• Infringement abatement
• Customer waivers
• Advertising endorsements

Legal Contracting Points

Obtain appropriate warranties, representations and indemnities regarding

• title
• non-infringement of third party rights
• validity/enforceability of IP rights
• inventorship/independent creation
• disabling software (for example, viruses, time bombs, Trojan horses, etc.)
• will work during and beyond year 2000
• accuracy of documentation
• performance in accordance with specifications

Manage risk/incentive by paying by milestones

(including one milestone based on acceptance testing)

Consider escrow of source code

Practical Due Diligence

• Evaluate development team’s (current and past) “to do” lists
• Evaluate tech support’s records of customer complaints, questions, etc.
• Evaluate stability and strength of development team, management team, etc. ISO 9000?
• Review all versions of the documentation (flow charts, source code, documentation) of the development of the software
• Have the necessary export permits and standards approvals been obtained?
• Avoid tainting future independent development (for example, in case the contemplated transaction for the software is ultimately not consummated, by retaining and interposing an intermediary for negotiations)

The Intellectual Property Group of Clark Wilson LLP advises clients on the complete range of Intellectual Property issues for software businesses, including the procurement, commercialization and enforcement of trade-marks, patents, designs, copyright and trade secrets, domain name disputes, internet law, e-commerce, international taxation, cross-border immigration, and private and public financing for hi-tech businesses. Members of the IP Group are variously licensed to advise on legal matters in BC, Ontario, England, and Washington State, and also to represent at the Canadian and US Patent and Trademark Offices.

For assistance, please contact Neil Melliship or Brock Smith.