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INTRODUCTION TO INTELLECTUAL PROPERTY (IP) DUE DILIGENCE
Conducting an IP due diligence is a detailed assessment of your company’s intellectual property
(IP). It is a critical process when evaluating a business for investment, partnership and acquisi-
tion opportunities. It involves an in-depth examination of patents, trade marks, designs, copy-
rights, trade secrets and other intellectual property assets, providing a reliable assessment of
their ownership, validity, enforceability and potential infringement. In short, IP due diligence is a
thorough assessment of a company’s IP assets to understand their value, risks and potential for
future use. In Nigeria, IP due diligence is an important practice that should be adopted to ensure
that you maximise your IP for monetary value in the course of exploiting your rights or in the
course of acquiring new IP through any form of partnership.
IMPORTANCE OF CONDUCTING IP DUE DILIGENCE IN BUSINESS TRANSACTIONS
a. Risk mitigation: IP due diligence helps to identify any IP-related risks that could aect your
company’s operations or protability in Nigeria, such as: the existence of ownership
disputes, validity, and enforceability concerns, identifying potential infringement of third-
party IP rights or unauthorised use of company-owned IP, discovering valuable IP that may
not have been properly recognised or protected, etc.
Conducting IP due diligence will help to uncover the above issues and ensure that
stakeholders can take steps to mitigate these risks and make informed decisions.
b. Valuation: Understanding the value of intellectual property is crucial in transactions. IP
due diligence can help determine the fair market value of IP assets, which can be critical for
securing nancing, accurately pricing IP assets in M&A transactions, determining appropriate
royalty rates or selling prices for IP assets.
c. Compliance and ownership verication: IP due diligence ensures that the business owns
or has the proper registrations/licences for its intellectual property assets. This helps
prevent ownership disputes and veries that the company complies with relevant laws and
regulations.
d. Strategic planning: Understanding the strengths and limitations of a company’s intellectual
property portfolio can inuence strategic planning in mergers, acquisitions and partnering
transactions. This information is critical to negotiating terms and conditions that are
consistent with the company’s objectives.
NAVIGATING IP DUE DILIGENCE IN NIGERIA
To make the process of navigating IP due diligence in Nigeria easier, we have broken down some
of the key steps into stages. This process can be navigated by:
a) your in-house IP teams.
b) outsourcing to an IP portfolio management company or IP agent.
The latter option, particularly advantageous for SMEs, oers a more streamlined approach and
mitigates the nancial commitment associated with setting up an in-house team.
IDENTIFICATION OF IP ASSETS
Identifying key IP assets during IP due diligence is critical to understanding the true value and
potential risks associated with a company’s intellectual property. First, it is important to establish a
comprehensive inventory of all existing IP assets, including details such as ling dates, registration
numbers, territorial limitations and current status (pending, granted, abandoned). It is also
important to examine unregistered IP such as trade secrets, know-how, proprietary software code
and condential business processes that are valuable to the business.
It is crucial to analyse each IP asset identied above for its strength, novelty, commercial relevance
and competitive advantage. Consider factors such as market competitiveness, enforceability and
remaining lifespan for patents. Assess the potential risks associated with each asset, such as
infringement claims, validity challenges or ease of imitation by competitors. The above information
will help determine which IP should be registered/protected and which should be abandoned.
CONDUCTING CLEARANCE SEARCHES
Conducting availability searches at the Nigerian Intellectual Property Registry (IPO Registry) is also
an important part of IP due diligence. In particular, it is an important preliminary stage in the
registration of trade marks and patents. Clearance searches are crucial in determining whether
a company’s proposed IP is available for registration and to avoid infringement. Analysis of the
search would help to determine whether the IP will be rejected on the basis of confusing similarity,
contrary to public morality, etc.
It also helps to save time and money that would have been spent on an IP that would have been
agged by the IP oce during the examination process, especially in the case of trade mark - for
patents, examination is of form, not substance. However, it is important to note that IP searches
are usually conducted manually at the Nigerian Trademarks, Patents and Designs Registry for a
fee, and the results issued by the oce are based on the records available at the time.
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ANALYSIS OF INTELLECTUAL PROPERTY RIGHTS
This is a crucial stage in IP due diligence, requiring both meticulous investigation and strategic
assessment, especially in business transactions such as mergers and acquisitions (M&A), IP
transfers, licensing, franchising, etc.
It is important to determine whether a chain of title exists by tracing the ownership history of
each asset and verifying registration documents, assignments and licences. The aim is to ensure
that the target company has a clear and legal title to all claimed IP rights. This is very important
in Nigeria where many businesses operate without seeking IP protection or ensuring that the
registration process is completed and certicates or other proper documentation are issued to
them.
It is also important to identify any potential legal claims, liens or mortgages on the IP assets and
assess the impact of these encumbrances on transferability and value. In Nigeria, records of legal
claims, liens or mortgages are not usually recorded at the Trademarks, Patents and Designs Registry,
so it is crucial to conduct a thorough search to determine whether there is any encumbrance on
the other party’s IP rights.
Issues of joint ownership or co-inventorship will also need to be addressed. This involves
determining the rights and obligations of any co-owners or co-inventors, clarifying their control
over the IP and the potential for future disputes. This is an important issue, particularly in relation
to copyrights in Nigeria, where many records are not kept because there is no legal requirement
to register the copyright with the Copyright Registry. It is important to sift through agreements to
identify key information in this regard.
It is also important to examine any relevant licence, collaboration or technology transfer
agreements aecting the IP assets, analysing the rights granted, restrictions imposed and any
termination clauses.
ENFORCEABILITY EVALUATION
This involves analysing the target company’s products and services against potential infringement
claims by competitors. It would also include considering existing litigation or pre-emptive strategies
to mitigate risk. For IP acquisitions in Nigeria, it is important to assess the likelihood of successfully
defending the target company’s trade marks against infringement or dilution claims and to
evaluate the resources and legal costs associated with enforcement actions. It is also important
to assess the potential copyright infringement issues associated with the target company’s use of
creative content.
ESTABLISH BRAND PROTECTION / ANTI-COUNTERFEITING PREVENTION AND ENFORCEMENT
MEASURES
Brand protection and anti-counterfeiting measures are essential tools for protecting the intellectual
property rights and indeed the reputation of companies anywhere in the world. This is particularly
important for any company doing business in Nigeria because of the prevalence of counterfeiting
in the country.
It is therefore important for businesses operating in Nigeria to engage a team of external counsel to
assist the company in establishing a brand protection/anti-counterfeiting regime for the company.
This is particularly useful if the company does not have a dedicated in-house legal/intellectual
property team.
The external counsel would be responsible for developing a comprehensive legal and administrative
strategy to prevent and detect counterfeit products in the Nigerian market. They would also
provide assistance in drafting and enforcing contracts with distributors and suppliers to ensure
compliance with brand protection policies, running a monitoring service, conducting market
research and taking legal action against counterfeiters.
ASSESSING THE COMMERCIAL VALUE OF THE IP ASSETS
Determining the commercial value of IP assets in IP due diligence is critical to making informed
decision. There are dierent approaches and factors to consider when determining the commercial
value of IP assets. This is usually done by carrying out an IP valuation. The valuation can be based on
current and future revenues. These estimates of present and future revenue streams generated by
the company’s IP would typically apply to patents with strong market potential, established trade
marks or copyrighted works with ongoing royalties. The valuation may also be made by comparing
the target IP with similar assets that have recently been sold or licensed, or by calculating the cost
of creating or acquiring the IP.
The results of the valuation would provide critical insight into the company’s intellectual property
assets and assist the organisation in making informed decisions about monetising its intellectual
property assets through licensing, franchising, collaborations or sale of the intellectual property
rights.
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UNDERSTANDING LOCAL RULES
• Commercialisation rules: In Nigeria, the National Oce for Technology Acquisition and
Promotion (NOTAP) sets maximum royalty rates for services such as trade mark, technical
know-how agreement, franchise, and others.
For trade mark royalties, payment ranges from 0 to 0.5 % of net sales and is strictly permitted if
and only if the trade mark is applied to locally manufactured goods. In the case of a technical know-
how agreement, the technology royalty is often based on a percentage of sales and ranges from
0 to 5 % of net sales, depending on the complexity of the technology. In the case of a franchise,
the following fees are allowed: Initial/basic fee: A at fee (which should be properly specied),
franchise/continuing fee: 0.5 %-2 % of net sales or revenue, and marketing/advertising fee: 1 % of
net sales or revenue.
In addition, any contract or agreement that is not submitted to NOTAP for registration within 30
days of its eective date is subject to a late ling penalty of NGN 100,000.00 (or more depending
on the value of the agreement). Therefore, it would be safe to comply with the threshold already
set by NOTAP licences or franchises.
• Tax rules: In Nigeria, any activity involving the transfer of intangible assets is subject to
Value Added Tax (VAT). This is because intellectual property licensing fees are regarded
as payment for a service. However, whether it falls within the scope of Nigerian VAT depends
on the location of the recipient of the IP service. In addition, under Nigerian tax rules,
income from the assignment of IP assets is subject to capital gains tax, while income from
IP licensing may be subject to corporate income xax. Licence fees and royalties are tax
deductible expenses as determined by the Federal Inland Revenue Service (FIRS).
PROTECT IP THROUGH WATERTIGHT CONTRACT
To eectively protect your intellectual property, it is essential to have a number of key agreements
in place, which should be regularly reviewed and updated as necessary. These agreements include:
• Non-disclosure agreements (NDAs): NDAs are legal contracts that prohibit individuals
or companies from disclosing condential information to third parties. Companies should
have NDAs in place with employees, contractors, suppliers and other parties who have
access to the company’s condential information.
• Employment agreements: Employment agreements should include provisions relating
to intellectual property ownership and condentiality. These agreements should specify
that the company owns all intellectual property created by employees in the course of their
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employment and that employees are prohibited from disclosing condential information.
• Licensing agreements: If a company licences its intellectual property to third parties, it
should have licensing agreements in place that set out the terms and conditions of the
licence, including payment terms, limitations on use and restrictions on sublicensing. In
Nigeria, trademark licences can be registered at the IPO Registry as a registered user.
• Assignment agreements: Assignment agreements are used to transfer ownership of
intellectual property from one party to another. Companies should have assignment
agreements in place with employees and contractors who create intellectual property
on behalf of the company. Assignment recordals can also be done at the Nigerian IPO
registry by ling the assignment agreement and submitting the appropriate form. A
certicate of assignment will then be issued by the Registry.
• Joint Development agreements: When a company collaborates with another company
or individual on the development of intellectual property, it should have a joint development
agreement in place that species the ownership rights and responsibilities of each party.
CONCLUSION
Conducting IP due diligence is essential for any SME or company. This gives the opportunity to
identify the value of the company’s IP and also to know the extent of good will of the acquirer or any
investment. Having a guide to know how IP due diligence works will provide better understanding
on how IP tools can be a veritable tool for business success.
