Five Distinct Areas for Copyright Due Diligence

Performing due diligence is a critical part of the IP valuation process. It involves an in-depth review of a company’s intangible assets. Understanding all the aspects of an asset, including administrative aspects, provides the best and most accurate valuations. We discuss  five distinct areas of copyright due diligence next.

Each type of IP involves its own distinct areas of due diligence as they each bring value in different ways. For copyrights, the following areas are paramount when it comes to due diligence.

  1. Verify the nature of the copyrighted material. An IP valuation analyst must learn whether a copyright exists to protect a particular asset. Creators of copyrightable work must satisfy several requirements. If these requirements are not met, then the creator’s asset may have no value. For instance, copyright law excludes ideas, procedures, processes, systems, methods of operation, concepts, principles, or discoveries. However, it protects the expression of such items. Some clients may not always understand the distinction. Therefore, it is important for a valuation analyst to uncover such discrepancies and understand exactly what is being valued. Further, a valuation analyst must understand the strength of the copyright in order to associate an appropriate risk and discount rate.
  2. Verify the nature of the rights to value. Copyrights represent an established bundle of rights. Each right may have its own value proposition. The IP valuation analyst must determine which set of rights is the focus of the engagement. The methods that the analyst uses and the magnitude of the value proposition will generally vary based on the nature of the right under consideration.
  3. Consider administrative issues that can impair copyright value. An analyst must consider various administrative issues such as whether the work is registered, factual, made for hire, or is in the public domain. Further, the analyst must determine whether fair use erodes value, whether the copyright provides notice, and whether it is covered by the Visual Artists Rights Act of 1990. These are just a few of the administrative issues an analyst must consider.
  4. Consider special factors for software. Software presents a unique scenario among IP types in that it may simultaneously receive patent and copyright protection. When determining a software copyright value, an analyst must consider several factors. These include the ease in avoiding infringing activity, the consideration of the Rule of Doubt, and the complete or partial disclosure of the source code.
  5. Consider special factors for semiconductor designs or masks. A number of caveats exist under the Semiconductor Chip Protection Act of 1984. An IP valuation analyst must understand these caveats and whether a semiconductor design or mask meets these caveats. Whether the asset meets these caveats or not can greatly affect an asset’s value. Therefore, an analyst must account for these stipulations or risk providing an improper value conclusion.

As you can see, copyright due diligence is no simple task. It is imperative that an analyst review all aspects, administrative issues, caveats, and more for the most accurate valuation.