IP Due Diligence in Transactions

What IP due diligence is for

IP due diligence is the review of a target company's intellectual property before an acquisition, investment, financing or licence. Its purpose is to answer four questions: does the target own or validly use the IP its business depends on; is that IP protected and enforceable; is the target free to operate without infringing third-party rights; and are there liabilities attached to the IP — compensation claims, licence restrictions, disputes or open-source obligations?

In German transactions, a few specific features deserve particular attention: the Employee Inventions Act, the rule that copyright cannot be assigned but only licensed, the narrow interpretation of unclear licences, and the treatment of software developed by employees and contractors. A well-scoped IP due diligence feeds directly into valuation, warranties, indemnities and post-closing integration.

For technology and Mittelstand targets, IP often represents a large part of the value. Yet IP issues are frequently discovered late — when an investor asks for evidence of ownership, or when a competitor asserts rights after the deal. A structured IP due diligence, focused on the IP that matters for the business plan, avoids both over-investment in low-value registrations and blind spots in critical assets.

Scoping the review

Not all IP deserves the same depth. A practical scoping exercise, agreed with the deal team and the business experts at the outset, identifies:

• Core IP: the patents, software, know-how, trade marks and data that underpin revenue or the investment thesis;
• Supporting IP: registrations and rights that are useful but replaceable;
• Third-party IP: in-licences, open-source components and technology the target depends on;
• Risk areas: pending disputes, warning letters, oppositions, and products sold in markets with active and litigious competitors.

The scope should reflect the transaction type. A share deal transfers the company with all its contracts and liabilities; an asset deal requires each right to be transferred, often with registrations and consents. Carve-outs raise questions about which IP stays with the seller and which transitional or permanent licences the buyer needs. Financing transactions focus on whether IP can be pledged or assigned as security and whether licences permit this, while licence deals focus narrowly on the licensed rights and their validity.

Chain of title: registered rights

For patents, utility models, trade marks and designs, the review checks register entries against the target's records: owner, status, renewal dates, territorial coverage, security interests and pending proceedings. Discrepancies are common — rights still registered in the name of a founder, a former group company or a dissolved subsidiary. German patents can be transferred without specific form (§ 15 PatG), but registration matters for enforcement and certainty. Licences granted earlier survive later transfers (§ 15(3) PatG), so existing licences must be identified even if not registered.

Employee inventions

German employers acquire employee inventions only through the statutory procedure under the Employee Inventions Act: report, claim (or deemed claim after four months) and filing, followed by compensation. A buyer should confirm that inventions underlying key patents were properly reported and claimed, that compensation has been fixed and paid or reserved, and that no patents were abandoned without offering them to inventors. Unpaid compensation is a liability that continues for as long as the invention is exploited. See our insight on employee inventions under the ArbnErfG.

Software, copyright and contractors

For software created by employees in the performance of their duties, the employer is exclusively entitled to exercise all economic rights unless otherwise agreed (§ 69b UrhG). Freelancers, agencies and contract developers are different: they remain authors, and the target holds only the rights of use granted in the contract. Under the purpose-of-transfer rule (§ 31(5) UrhG), rights not expressly granted may remain with the developer. Due diligence should therefore review contractor agreements for clear and comprehensive grants of exclusive rights, including modification, sublicensing and future types of use, and check whether founders created code before the company was formed.

Licences and restrictions

In-licences determine whether the target can continue to use third-party technology after the transaction. Change-of-control clauses, assignment restrictions, field-of-use or territorial limitations, exclusivity obligations, most-favoured-licensee clauses and termination rights can all affect the buyer's plans. Out-licences may restrict the buyer's freedom to exploit the target's IP, especially exclusive licences and licences to competitors. Licences must also be checked for compliance with competition law, including the Technology Transfer Block Exemption Regulation revised in 2026; see our insight on technology transfer and patent licensing.

Open source

Most software today contains open-source components. Licences such as the GPL impose obligations when the software is distributed, including making source code available under the same licence (copyleft). Non-compliance can lead to injunctions and loss of the licence. Buyers should request a software bill of materials, review independent scanning results, and check processes for licence compliance and vulnerability management. The Cyber Resilience Act adds security obligations for products with digital elements, including due diligence on integrated open-source components. See our insight on open source compliance.

Freedom to operate and disputes

A full freedom-to-operate analysis is expensive and rarely possible within a deal timetable, and its conclusions are only as good as the search scope. A targeted approach focuses on core products in key markets, known competitor portfolios, warning letters received and pending litigation, including UPC proceedings. Pending disputes should be assessed for exposure, insurance coverage and settlement prospects, and the buyer should understand who will control them after closing.

Cross-border portfolios

Targets with international operations hold IP in several countries and often in several group companies. The review should map which entity owns which rights in which territory, whether intra-group licences exist and are documented, and whether local requirements — such as recordal of licences or assignments, translation requirements or local employee-invention regimes — have been met.

Rights registered at the EUIPO, the EPO or under the Madrid and Hague systems should be checked for consistency with national registrations. For patents, the review should also confirm the status of each European patent with respect to the Unified Patent Court, including opt-outs and unitary effect, because this affects enforcement options and the risk of central revocation.

Trade secrets, AI and data

Know-how is protected only if the target took reasonable secrecy measures. The review should check confidentiality agreements, access controls and departure procedures. Where AI is part of the product or the development process, it should check rights to training data, compliance with licence terms and copyright opt-outs, ownership of models and outputs, and AI Act classification. Data assets require a review of data protection compliance and contractual rights to use and transfer data. See our insight on AI-generated content and copyright.

Typical red flags in IP due diligence

Experience shows that a limited set of findings recurs across transactions and should be escalated early:

• key patents or trade marks registered in the name of founders, former shareholders or unrelated companies;
• missing or incomplete employee-invention records for core patents;
• software developed by freelancers or offshore teams without written transfer of exclusive rights;
• copyleft components in distributed products without a compliance process;
• in-licences for essential technology with change-of-control termination rights;
• pending oppositions, nullity actions or infringement claims concerning core products;
• trade marks not used for five years for important goods or services;
• know-how without documented secrecy measures or with key engineers recently departed.

None of these is necessarily a deal-breaker, but each needs a clear remedy before signing or closing, or an allocation of risk in the contract.

IP due diligence in venture capital and growth rounds

For start-ups, investors focus on whether the company — rather than the founders — owns the technology. Typical requirements include assignments or exclusive licences from founders for pre-incorporation work, confirmation that university or former employers have no claims, clean contractor agreements and an open-source policy. Because start-ups often lack formal processes, the IP due diligence is usually followed by a list of conditions to be completed before or shortly after closing. Investment agreements contain IP warranties and sometimes founder representations. See our page on venture capital.

Vendor IP due diligence

Sellers benefit from preparing early. A vendor IP review identifies and fixes gaps before buyers find them — recording assignments, completing employee-invention paperwork, renegotiating licences with change-of-control clauses, remediating open-source issues — and allows the seller to present a clean, well-documented IP position in the data room. This reduces the risk of price reductions and lengthy negotiations over specific indemnities.

From findings to the contract

Findings translate into the transaction documents in several ways: price adjustments; conditions precedent, such as assignments from founders or consents from licensors; specific indemnities for known issues, such as unpaid inventor compensation; IP warranties on ownership, validity, non-infringement and open-source compliance; and post-closing covenants, such as remediation of open-source issues. Warranty and indemnity insurance may cover unknown IP risks but typically excludes known issues and certain IP categories; see our insight on warranty and indemnity insurance.

Post-closing integration

After closing, the buyer should implement the remediation plan, update register entries, transfer domain names and accounts, align licence agreements and integrate the target into the group's IP management, including invention reporting, open-source policies and trade secret protection. Where IP is held in a separate entity for tax or financing reasons, intra-group licences need to be put in place and documented at arm's length.

How TRW & Co helps with IP due diligence

We conduct and coordinate IP due diligence for buyers, investors and lenders in German and cross-border transactions: scoping the review, analysing registers, contracts and employee-invention records, assessing software and open-source compliance with technical partners, and translating findings into price, warranties, indemnities and remediation plans. For sellers, we prepare vendor due diligence and data rooms that answer typical IP questions in advance. See our mergers and acquisitions and IP and patents pages, or contact us.