To those of us who depend on the private equity space for a living, the changes in attitudes of investors during the post meltdown period has been informative and educational. Indeed, what we as professionals are seeing is phenomena one might logically expect from a badly bruised and traumatized universe of private equity investors. charged with obtaining superior returns by investing other people's money. It should be no surprise that one central feature of the landscape is significantly greater attention paid to due diligence on potential investments and acquisitions. The stakes are much higher for the people involved; one major blunder, given the host of legacy issues in a typical private equity fund's portfolio, could be the end of a career or two in this business.
Thus, it should come as no surprise that one of the trickiest (if not the trickiest) due diligence challenges has, more often than not, to do with the state of the intellectual property underlying the deal. According to some estimate, seventy-five percent of the assets of the S&P 500 are made up of intellectual property; and the proportion can only be higher in the venture capital space. The ownership, character and scope of a company's intellectual property is a frequent source of dispute leading to litigation . and the numbers involved are, typically, startling. Again, no surprise: all one has to do is read the financial pages and the trade press to see how much is at stake when the portfolio of intellectual property is challenged . often a "bet your company" event. As one commentator has remarked in a trade periodical:
"'I can't tell you how many financings and M&A deals get delayed or just don't happen because there is a perceived IP risk.'" 
In fact, some technological areas (medical devices, for example) are infected with litigation to the point that it is more probable than not that patents will be challenged in court as a more or less routine matter; patent litigation becomes in effect a cost of doing business for the players in that sector, both large and small.
What may be surprising however, to non-specialists in the intellectual property area is the rigorousness of the diligence process. Perhaps the best illustration of that is a form of case study. a project undertaken by the IP diligence team at Fish & Richardson.
Our client was a large public corporation providing healthcare products and services. The client identified an opportunity to acquire the assets of a small technology-based company, notably its patents and other IP as well as a product line, to complement an existing line of the client's business. The client sought to increase revenue and enhance patent protection of that line. Our charge was to specifically identify and analyze issues that could affect the exclusive rights afforded by the target company's patents. We also identified third-party patents that could compromise the client's ability to engage in revenue-generating activities.
We were engaged to investigate all aspects of the target's IP and the suitability of that IP to meet the client's business plan. We provide a synopsis of the issues we treated in depth.
I. Ownership/ability of target to convey necessary rights and title:
The original inventions were made overseas; foreign law governed inventors' rights. We evaluated the sufficiency of license agreements and assignments from the inventors to the target company. The inventors had entered into prior consulting agreements, and they participated in other activities, including prior and/or current academic employment, requiring investigation of third-party rights in the target IP that might have arisen from the relationships. Documents assigning rights to the target established vague/difficult performance milestones enforced with a significant loss of the rights. We evaluated whether the target company had met milestones. The target company had entered into collaborations and other agreements with other parties affecting title to certain inventions. We assessed inventorship of the IP. The target company entered into bankruptcy during the acquisition process. We investigated security interests in IP and the effect of bankruptcy on the target company's title.
II. Integrity of IP
We performed a standard validity study, beginning with a search of the prior art and the US Patent and Trademark Office file. We investigated the possibility of uncited prior art and advised whether to seek correction of the patent via re-examination or reissue. We studied the scope of the patent to see whether it covered the client's proposed product and products that might compete with it.
III. Freedom to OperateWe conducted an extensive search for third party patents that might cover client's use of the target company's product line, identifying those that were critical freedom to operate. We produced detailed validity and infringement of those patents to determine and quantify risks. We also located pending (not yet issued) patent applications and provided a detailed analysis to predict the scope of claims that might be expected to issue in the US and other countries. This was, in effect, a prospective freedom to operate.
The point of the story is that IP due diligence is, often, a good deal more extensive than many investors (and their counsel) anticipate. The mantra is: Allow plenty of time, and resources.
 "Patently Troublesome: Costly IP lawsuits are beginning to crimp tech M&A," The Deal, May 3, 2004. The article goes on to say:
"For deal advisors and acquisition-minded companies, the increasing vulnerability to IP suits has added another headache to an already tricky part of deal making. Figuring out to transfer patents in an M&A transaction and how to cross-license intellectual property tends to take up a majority of time spend negotiating a deal. A potential legal threat can kill a deal..."