We are often asked to represent clients seeking to buy or sell an Internet-based business. Our role typically is not as corporate counsel but as intellectual property counsel for either the buyer or the seller. In this role, our function is to perform due diligence (if representing the buyer) or to respond to due diligence inquiries (if representing the seller). We also work with companies well in advance of any contemplated sale—sometimes years in advance—to ensure that they are well positioned from an intellectual property standpoint for a potential sale down the road.
Much of the due diligence that is conducted in these situations is no different than the due diligence that would be performed for a brick-and-mortar business, but there are some considerations that are unique to Internet-based businesses. Set forth below is a due diligence checklist that is not intended to be comprehensive but that is intended to highlight some of the recurring due diligence issues that typically arise in the context of the purchase or sale of a Web-based business:
1. Does the company own any issued patents or pending patent applications? If the former, have maintenance fees been paid? If the latter, what is the status of the application(s)?
2. Has the company licensed any intellectual property (patents, trademarks and/or copyrighted materials) from a third party? If so, request copies of the agreements. Look at the terms of the agreements and whether they are assignable.
3. Has the company licensed any third party software? If so, review the terms of those licenses to ensure that they are both current (not expired) and assignable.
4. If the sale involves the acquisition of proprietary software, has the company protected its code base by registering it with the U.S. Copyright Office?
5. Does the company have written agreements in place with each of its employees and independent contractors? If so, request copies of all such agreements. Do those agreements adequately cover intellectual property rights?
6. Does the company have any state or federal trademark registrations? Are those registrations live?
7. Is the company currently using any unregistered trademarks? Has any kind of a search been done to ensure that those marks are not infringing the trademark rights of third parties?
8. Does the company own any domain names? Check the registrant status to ensure that the appropriate entity is listed as the registrant. When do those domain name registrations expire?
9. Has the company received any cease and desist letters concerning third party intellectual property? If so, request copies of such letters and information concerning the status each matter. Request indemnification if any matter is still open or unresolved.
10. With respect to the website itself, who has access to the code (source code and executable), and will it be transferred to you? Find out who developed the content for and wrote the code for the website and ascertain whether appropriate agreements are in place transferring the intellectual property rights to the entity whose assets are being sold. Find out who is currently hosting the site and ask to see a copy of the website hosting agreement.
