Every life scientist practices due diligence. Whenever working with another group, acquiring the rights to a technology, or entering a round of financing, individuals take steps to make sure that interaction goes smoothly – the very premise underlying due diligence. When those interactions involve intellectual property (IP), the standard due diligence procedure is to execute nondisclosure agreements to protect the confidentiality of the information exchanged. But is this sufficient? If someone overhears intellectually protected information during a transaction, they can't "unlearn" what they now know about a competitor.

There are other unforeseen wrinkles that can further complicate the process. Unwary companies or labs may make missteps during IP due diligence that dissolve the cloak of protection for privileged attorney analyses and opinions on their IP, subjecting that work to discovery in lawsuits. Misunderstandings between parties as to the proper scope of due diligence can arise, ultimately threatening the deal. All...


A critical question that often arises is: how to define the area of IP due diligence? Obviously, if one life science company is acquiring another company, the acquiring company will want to conduct a full investigation into all IP issues that could have an impact on the value of the acquisition. This raises uncomfortable issues for the company to be acquired. The life science industry is highly competitive, and often the acquiring company is an actual or potential competitor. If the transaction fails, allowing the acquiring company full access to confidential and privileged IP may simply inform a competitor on weaknesses in a company's IP position.

These issues become even more problematic when the selling or licensing company will still survive, making the transaction less than an outright acquisition. The company in question won't want to inform the other company on IP issues not necessary to the deal. However, what is and is not necessary to the deal is often in the eye of the beholder.

Compounding the problems, participating companies may need to share existing attorney opinions and analyses on certain IP issues. For example, the selling company may have attorney opinion letters regarding inventorship, ownership, patentability, or enforceability of certain patent assets. Other privileged communications may discuss third party patents and whether the product or technology that is the subject of the transaction infringes those patents. Under traditional privilege law, a company will waive its privilege for these attorney IP opinions if these opinions are shared. This waiver could extend not just to the specific opinion, but to the subject matter as well.


The scope of the IP due diligence should be defined in reference to the scope of the asset(s) that are the subject of the sale or license. Properly defining the scope of the assets to be acquired or licensed and then drilling down within that defined scope during due diligence can ensure that due diligence proceeds smoothly. However, while parties in negotiations will often define what the asset is, they will not necessarily define what the scope of the due diligence is corresponding to the asset, leading to problems in completing the deal.

Four Ways to Protect Yourself

Share Confidential Information Only When an Acquisition is Likely to Happen. A common error is to share the information before the business negotiations have matured to such a position that the acquisition is likely to occur. As a result, companies run a greater risk that the interests will not be deemed legal and identical, but rather still commercial and part of the adversarial negotiation process. If the specific attorney IP opinion must be shared prior to execution of the acquisition agreement, at a minimum, some form of memorandum of understanding or letter of intent should be in place to show an intent to complete the transaction.

Execute a Specific Common Interest Confidentiality Agreement. These agreements will often (a) identify with particularity the information to be shared, (b) identify the identical legal interest that is being shared, and (c) agree to keep the information confidential in perpetuity.

Limit Access to the Information. Limit the number of individuals who view the confidential information. Non-attorneys, such as investment bankers or accountants, should not view confidential attorney IP opinions or analyses because it increases the chances that a court will find a waiver. Even within the parties, access should be strictly limited to those who need to review the information.

Treat the Information as Confidential. The information should be stamped confidential. For example, legers such as "Confidential/Subject To Common Interest Agreement" or "Confidential/Attorney-Client Communications" should be used. The information should also be returned to the providing party and no copies kept after due diligence is completed.

For example, a dispute over scope can arise where a life science company has core IP not truly part of the asset being licensed, but the purchasing entity argues that it needs to conduct due diligence into this additional core IP. The licensing company would never have agreed to the business terms of the deal had it known that its core IP asset – and its confidential information – would be subject to due diligence by a potential competitor. Because of the rancor caused by this misunderstanding, the deal ultimately falls apart. This could have been avoided had the parties negotiated up front the proper scope of due diligence. Leaving it until later or for the lawyers to solve can derail the deal.

Similarly, the scope of IP due diligence into third party rights should be set in reference to the asset to be acquired or licensed. The scope of the asset to be acquired will define the commercial markets impacted by the transaction, which will identify the major players that might have an interest in the acquisition. It is the rights of these major players that should be the focus of the due diligence into third party IP rights.


As part of defining the proper scope of due diligence, the parties may wish to discuss whether any attorney opinions or analyses on IP will be the subject of due diligence. The selling company will likely not wish to disclose its attorney opinions because it may waive the attorney-client confidentiality associated with such opinions. This waiver will extend not only to the purchasing entity, but to all third parties in any subsequent litigation. Worse, it could even extend to the subject matter of the opinion, such as infringement, and require disclosure of your communications with litigation counsel on this same subject.

Fortunately, the Common Interest Doctrine provides a mechanism to reduce the risk of waiver. The Common Interest Doctrine provides the legal framework under which the parties should operate to protect to the extent possible their confidential attorney IP opinions and communications. The common interest doctrine is an extension of the existing attorney-client privilege. The common interest of the two parties must be identical, and not similar, and must be legal and not solely commercial. Thus, the parties should discuss what is their identical and legal interest in the attorney IP opinions such that they can be shared.

The courts are not uniform in protecting such information, in some circumstances deeming the interests of the parties during a deal to be commercial rather than legal or similar rather than identical. However, if the parties can identify such identical legal interests, they will have minimized the risk that a waiver of their privileged and confidential IP opinions will have been found.

For example, in one case, it was clear that the purchasing company would be sued for patent infringement by another party if it purchased the asset in question. During due diligence the parties shared confidential attorney IP opinions. Ultimately, the transaction was not completed. A third party sued and argued that the privilege over the attorney opinions had been waived because they had been shared during due diligence. The court disagreed, and said that interests during the due diligence were identical and legal. Therefore, no waiver had occurred and the confidentiality of the attorney opinions was preserved.

In another life science patent infringement case we litigated, the court found that all communications and attorney opinions shared prior to executing a memorandum of understanding and confidentiality agreement were waived. The court reasoned that the interests prior to executing the memorandum of understanding were not sufficiently aligned and were still commercial in nature.

By addressing IP due diligence issues up front, the parties with their counsel can be thoughtful in their approaches and avoid misunderstandings that derail the deal. The above provides some general guidelines. Please consult with your attorney to tailor an approach that best suits your specific needs.

William Gaede (wgaede@mwe.com) is a partner at Palo Alto, Calif.-based McDermott Will & Emery LLP and is co-chair of the Life Sciences & Biotechnology Practice Group. Andrew Kumamoto (right) is a partner at McDermott Will & Emery LLP. He holds a PhD in molecular biology (NIH Fellowship in Genetics).

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