The IP Risks That Can Derail a Deal

Hello and welcome to Williams Mullen's Trending Now an IP podcast. A legal podcast focused on providing innovative companies and investors with important and timely information concerning intangible assets such as patents, trademarks, copyrights, and trade secrets. I'm your host Anika Rogers and today I'll be joined by Amy Pruett a partner in our intellectual property practice group here at Williams Mullen.

In today's podcast we'll discuss practical IP considerations in deals, vendor agreements, and M&A diligence. IP issues can often surface late in a transaction when the parties have less time and leverage to fix them. Chain of title gaps, missing contractor assignments, broad vendor rights, open source software, unresolved data rights, and license restrictions can affect valuation, indemnities, closing conditions, and post-closing integration. This episode is about spotting those issues earlier and making diligence more practical.

Amy, thanks for joining me today. I know that we have collaborated as specialty counsel on several deals since early 2026 both as buyers and sellers counsel and this topic is always relevant especially with the increased integration of open source content into company IP and AI tools that are designed to streamline the diligence process.

Yes, this is a very important topic. I think that we're seeing a lot of especially on either side of the deal. We get a lot of corporate mergers and acquisitions where there might be some kind of IP assets. It's important to know and understand what issues to spot check before going into the deal and then working through them while you're in the process of getting to closing. I'm looking forward to today's discussion.

When IP comes up in an M&A deal, it's not just about confirming whether the target owns registered IP. The bigger question is often whether the company actually has the rights it needs to run the business after closing and whether a buyer can rely on those rights without unexpected restrictions. That's why diligence should take a closer look at issues like ownership gaps, missing employee or contractor assignments, and license restrictions. These are the kinds of issues that can affect deal value, indemnities, closing conditions, and post-closing integration. Buyers should ask for ownership evidence early, not just registration schedules, and pay close attention to vendor agreements when third parties create software, process data, host systems, or develop marketing assets.

Amy, turning to some topics that commonly arise in our IP diligence on M&A deals, both as buyers and sellers' counsel, how can companies prepare their IP records before going to market?

Companies should definitely maintain organized records of anything that they're doing, especially when it comes to registration certificates and any supplemental filings. That includes name changes, changes of the claimant or owner, and any corrections to those. Additionally, companies should track any licenses that are related to intellectual property. Licenses that company grants IP to others or that they're licensing from a third party.

For inbound licenses, it's critical to know whether the license permits transfer or sublicensing to another buyer, and whether any consent or approvals are required to initiate the process because whoever's involved in the deal might have to do whatever is required under those contracts.

Sellers could benefit from maintaining a documented and sustainable internal record-keeping system with respect to those kinds of documents. That approach would allow them to get ahead of potential issues that could come down the road with diligence process, things like ownership gaps, discrepancies in the named owner or registrant, and any lingering encumbrances or liens associated with their registered IP. That could be security interest, it could be another type of assignment or chain of title issue that could come up at the Patent and Trademark Office or the US Copyright Office.

Interesting. Amy, you raised several common yet avoidable issues that arise in IP diligence. What actions can buyers and sellers take early on to ensure that a deal closes as planned?

There are several things to be thinking about. One that comes up a lot is who owns the rights. Any ownership gaps, any assignments, any works made for hire, which I'll explain in a minute.

To ensure that the chain of title is clear on any IP assets, the best practice is to obtain any individual assignments from anybody that's contributed to the IP. That might be vendors or designers who created a logo or design for the company. Receipts, invoices, and a general assignment of all IP from a seller to a buyer in those purchase agreements might not actually be sufficient to transfer all the rights that are necessary at the federal registration level. Those gaps in assignment can create enforcement issues down the road.

For employee created IP, if an employee is contributing to some of the intellectual property of the company, the default rule is usually that the works and inventions that are created by employees are owned by the company as long as it's within the scope of their employment. However, it's typically recommended that there's some type of written document like an IP policy or that they have some kind of employee creator sign an employment assignment or employment agreement that includes an IP assignment clause. Especially if it's a work made for hire, and that specific language regarding work for hire needs to be in the assignment to ensure that it is covered under copyright laws.

There's also issues that come up with shared IP rights. If you have multiple contributors or collaborators on some type of intellectual property like maybe software development, then it's important to have that all tracked so that the chain of title is clear, so the ownership is correct with the copyright assignments.

We've dealt specifically with dissolved entities and where there was early co-ownership but that dissolved entity can't be found anymore. It's difficult to find to be able to assign from the original co-owners to the new owner or to a buyer of a company.

There's also licensing issues that could come up such as any assignment restrictions on a license. If there's some type of IP like a trademark license where the licensee is not allowed to further assign it to whoever the new owner of the business is, then they would have to reach back out to the licensor to get permission to to assign that trademark.

And then the same thing with sublicensing. If there's any restrictions on sublicensing to another licensee, then that has to all be clear in the due diligence process for a new buyer or new owner of a company.

There could also be discrepancies in the registration records themselves. If the registrant in the US Patent and Trademark Office for a trademark doesn't match who the actual owner is, you need to make sure that all those assignments are filed before they're assigned to the ultimate buyer in the deal. And that can significantly slow down the diligence process, especially if it's not correct information at the time.

There might be some type of supplemental application that's required at the copyright office to show that that asset is being transferred and in the new owner. In our experience, approval of those supplemental applications at the US Copyright Office can take 9 to 12 months. It's a very long process, and the US Patent and Trademark Office might be a little shorter, but it's still a fairly intensive process.

At that level, they would need to file a form called a Section 7 Request for Amendment or Correction, and that can take a while to review.

There's also issues with liens and encumbrances on property. Now, we have AI-powered tools to check these things, and unfortunately, they can sometimes be wrong with respect to clearance searches with the PTO and with the US Copyright Office.

The best practice is just to use those tools as a starting point, but then really check all of the results to make sure that they're accurate. AI tools, while they're increasingly sophisticated, also carry a risk of generating inaccurate or fabricated results. We've seen transactions where buyers and sellers' counsel spent a lot of time with discrepancies and cost disputes that turned out to be errors on AI's part. It's important to double-check that.

Thank you, Amy. There are a lot of issues that can be avoided with proper planning and organization. What key questions should buyers ask early in the diligence process to ensure that the transaction will progress on schedule?

I think there's three threshold IP-related inquiries really early on in diligence.

First, identify all registered IP and the creators and authors of each of those assets, and determine whether those creators were employees of the company or outside vendors.

Second, confirm whether the company has executed assignment agreements, work-for-hire agreements, and confidentiality agreements with each creator, effectively transferring ownership of the intellectual property to the company itself.

And then third, identify any material unregistered IP including trademarks, logos, fictitious names, commercials, video advertisements, and similar assets along with the creators or authors of each of those.

Thank you, Amy. Just pivoting to some topics that keep every buyer, seller, investment banker, and M&A attorney up at night. What IP issues most often surprise deal teams late in diligence?

A lot of hidden issues could come up that you might not expect, especially from a corporate or straightforward M&A deal. If sometimes it might appear that there's not any material IP.

Oh, one issue we face is that the deal assumes that there's no material IP simply because they don't have any registered intellectual property. They don't have any registered patents or trademarks showing up. But, those IP and data privacy risks could arise in every M&A transaction.

A company that owns and uses intellectual property, whether it's registered or not, might own some common law rights to unregistered trademarks and trade names such as logos and DBAs or fictitious names. They could also have domain name registrations, website content such as text, graphic design, and photography, proprietary processes, or software, material social media accounts that are used to advertise and promote the company.

Additionally, every company that maintains a website or stores customer or employee data faces data privacy risks and considerations if there are no documented standards for data processing, storage, and retention. For example, many websites track or collect consumer data, but don't contain active or updated terms of use or privacy policy notices, and that's something that will be reviewed in the diligence process.

Another issue that can be hidden is whether or not there's open source or AI-generated content or code. A growing diligence concern is often mislaid or until later in the transaction, and it involves whether the target company owned any IP that incorporates open-source software or code where there are additional licensing requirements to make available, and there could be content like third-party photographs or licensed content that requires consent from other rights holders before they can be transferred, as well as AI outputs, which is a growing concern with use of ChatGPT and other types of AI tools to generate content, questioning whether who owns that AI-generated content, as well as how it can be transferred to the company effectively.

And then, a third issue that comes up is data retention and use. Companies and M&A counsel often overlook the company's collection, storage, and disposal of customer and employee personally identifiable information or PII. If the target company maintains electronic HR or payroll records containing employees' personally identifiable information, the parties should know early on whether the protective measures safeguarding that data meet industry standards and applicable legal requirements. And these are fast-changing laws, too, so it's important to stay on top of them on what's required in different states and internationally.

For example, if the seller uses platforms like Paychex, Oracle, ADP, Salesforce, Intuit, QuickBooks Payroll, or Gusto that retain any employee data and for a certain period of time, there might be some regulations that apply, and they control the collection, use, and retention of employee personal data. That can be overlooked and create a larger risk for the company if it's not reviewed carefully.

Thank you, Amy. Before we wrap up, can you discuss how the firm has integrated AI into our IP diligence process and its current and anticipated impact on our diligence practice?

We are using AI as a tool to support, but not replace attorney judgment. In practice, that means AI might help with tasks such as legal research, document review, summarizing information, drafting starting points, or organizing large volumes of material. Any work product that's shared with a client remains subject to the attorney review, analysis, and professional responsibility obligations.

AI can help us perform certain tasks more efficiently, and we're focused on using those efficiencies to deliver strong value to clients. It doesn't necessarily mean the legal bills will automatically decrease because many matters still require significant attorney judgment, strategy, review, and client-specific analysis.

Where AI meaningfully affects how work is performed, we want to be transparent and continue having practical conversations about staffing, budget, alternative fee arrangements, and the most efficient way to deliver that work while still delivering great attorney work product.

Thank you, Amy. We've covered a lot of topics in this episode. Just to leave our listeners with key takeaways, here's what you'll want to remember from today's podcast.

IP problems can affect valuation, closing conditions, indemnities, and integration. Buyers should request ownership evidence for each IP asset early on. Vendor, software, data, and license terms can be as important as registered IP.

Thanks again, Amy, for providing this information to our listeners of Trending Now in IP podcast. I believe that will wrap up our discussion on IP in deals, vendor agreements, and M&A diligence.

Listeners, if you have any questions or suggestions for future episodes, please contact us. You can also visit our intellectual property practice group page at williamsmullen.com/ip. There you can find out more about our team as well as past episodes of this podcast and legal alerts.

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This podcast contains general condensed summaries of actual legal matters, statutes, and opinions for information purposes. It is not meant to be and should not be construed as legal advice. Individuals with particular needs on specific issues should retain our services or the services of other competent counsel.