Introduction
Patent due diligence is a critical element of any business transaction involving intellectual property. It’s essential to make sure you don’t overlook any issues which could reduce the value of the patent portfolio or cause costly and unnecessary post-transaction litigation.
Patent due diligence involves conducting a comprehensive investigation into the legal and technical aspects of a patent portfolio to assess its strength, validity, and potential risks. The purpose of patent due diligence is to identify potential legal, technical, and commercial issues associated with the patent portfolio, allowing investors and acquirers to make informed decisions.
Conducting IP due diligence requires several best practices. Not only will these help save time and money, but they also reduce risks while making the process as efficient as possible. In this article, we will discuss some of the best practices for conducting patent due diligence.
1. Start Early
Patent due diligence should be conducted as early as possible in the investment or acquisition process. This allows for a thorough and complete evaluation of the patent portfolio and reduces the risk of discovering unexpected issues later in the process. Starting early also provides more time to address any identified issues before finalizing the deal.
2. Conduct a Preliminary Search
A preliminary patent search is an essential first step in defining the scope of your investigation. This will help determine how much time and resources are necessary to conduct this work effectively.
Analyzing a portfolio of thousands of patents can seem like an impossible task. Usually, this involves spending hours manually going through each patent in huge folders and complex Excel spreadsheets.
This process can be time-consuming and laborious, which is why it’s wise to hire a certified patent professional who can do the work quickly and efficiently for you.
How to conduct a preliminary search
By performing due diligence on hidden issues, you can uncover potential red flags that might otherwise go undetected. This is especially essential when looking into acquiring or licensing a company or licensee.
You can use the results of this search to identify potential legal issues you should avoid. For instance, if you’re purchasing a software company, it’s essential to determine if its code is subject to any intellectual property rights or patents that can be enforced against third parties.
Another factor to consider is whether there are any other companies with intellectual property rights in the same area or industry as your business. This could hinder competition, particularly if you’re a large firm looking to enter the market or an early-stage startup trying to establish itself in one particular sector.
Before finalizing any business transaction, such as a merger or acquisition, it is important to assess whether another party may attempt to infringe upon your patents. This risk should be taken into account prior to agreeing on any type of venture.
That is why conducting a patent due diligence analysis prior to any business transactions or investments is so essential. This will enable you to decide the most effective management of your IP, minimize infringement risks, and increase the value of your assets.
3. Conduct a Post-Grant Search
Conducting a post-grant search is one of the most essential steps in conducting patent due diligence. This requires an in-depth assessment of a potential licensee’s objectives and any potential intellectual property issues that might arise during negotiation or during the execution of the licensing agreement itself.
What a post-grant search entails
Potential licensees should begin by outlining the product or process they wish to commercialize, along with their intended manufacturing and sales territories. This enables a due diligence analysis to focus on important patents related to the newly acquired technology or process. Furthermore, any patent claims still in the portfolio should be assessed for potential scope extensions.
In conducting a post-grant search, it is recommended to include searches of United States Patent and Trademark Office (USPTO) records, UCC central indexes, and other key patent databases. By performing searches across these areas as well as those related to UCC and other ancillary services such as legal advice and transcription services, you will have an accurate picture of the target company’s intellectual property rights before entering into any contracts or committing to the acquisition.
A licensed patent attorney should conduct the search. They are capable of performing an in-depth analysis of the target company’s patent portfolio and recognizing any infringement or validity issues that could affect the licensee’s business objectives.
A post-grant search can also identify any additional options that a licensee might have in case they face a patent infringement lawsuit, such as inter partes review (IPR) and Covered Business Method (CBM) reviews. These reviews are usually much faster and less costly than traditional litigation proceedings which often take years to resolve.
PGR and IPR petitions can challenge the validity of a patent’s claims on various grounds, such as failure to disclose the best mode requirement, lack of written description or enablement, and subject matter eligibility. These challenges to claims may be especially successful when there is evidence of public use, on-sale activity, or other public disclosures in the prior art.
4. Conduct a Post-Award Search
A post-award search is an integral component of the due diligence process, identifying and assessing intellectual property assets owned by the target. These may include patents, trademarks, service marks, and copyrights. A comprehensive review should be conducted to establish ownership status as well as the validity of rights.
Prior to the conclusion of negotiations, conducting a comprehensive search can help identify potential issues with the transaction. This should include reviewing all issued and pending patent applications as well as international patents. It also includes researching all trademarks and service marks used by the target, plus any license agreements related to transfers of these rights.
Key aspects of a post-award search
A search should identify any patents or trademarks currently involved in infringement litigation, helping ensure the new product does not infringe upon someone else’s intellectual property. Furthermore, it can identify any potential future litigation that may take place.
As part of the overall investigation, it should be determined if the current owner of any patents or trademarks is a competitor or has plans to compete with the new company. If someone has an intense interest in producing the product or plans on manufacturing it, they could potentially be interested in buying these patents or trademarks. This could present a conflict of interest that should be addressed prior to final deal negotiations.
Another key consideration when conducting IP due diligence is freedom of operation. This principle states that companies should not be prevented from producing or selling a product due to infringing upon third parties’ intellectual property rights. It plays an integral role in understanding how unique a product is and evaluating the extent of protection provided by patent or trademark registrations.
5. Conduct a Post-Acquisition Search
Before an acquisition can be concluded, a comprehensive examination of the target’s intellectual property assets must be conducted. This process, known as patent due diligence, helps identify any potential risks related to the deal.
This step can be one of the most intricate. That is why having a team with expert knowledge of relevant laws is so important.
At this critical juncture, the acquirer must communicate effectively and frequently with employees of the target company to ensure they understand what’s happening and retain their valuable knowledge, skills, and relationships. Furthermore, this is an ideal time for these employees to meet their new colleagues at the acquirer so they can adjust seamlessly to the new organization.
What a post-acquisition search entails
When conducting a post-acquisition search, companies can ensure they are getting the highest value from their investment. These include verifying that IP isn’t already owned by another company, conducting technical due diligence on it, and creating an unambiguous chain of title.
Conduct a comprehensive analysis of any IP that is to be acquired, including its products and any potential legal disputes that might arise. This should include reviewing each patent’s claims and validity in detail.
Additionally, you should confirm the patents have been properly maintained and that their maintenance fees are current. Doing this gives you a better insight into the patents-at-issue and can help avoid future litigation.
The final step in conducting a comprehensive post-acquisition search is to review any licensing agreements entered into with the target. These documents are often of vital importance and must be thoroughly scrutinized.
These agreements will reveal whether the IP is licensed to other entities or has previously been sold. Purchasing IP that has already been licensed can significantly reduce its business value, so verifying these documents for validity and enforceability is essential.
6. Assess Infringement Risk
It is important to assess the risk of infringement for the patents in the portfolio. This involves analyzing the claims of the patents and comparing them to the products or services of potential competitors. Infringement risk assessments can help to identify potential legal challenges and can inform licensing and litigation strategies.
7. Review Licensing Agreements
If the patent portfolio includes licensing agreements, it is important to review these agreements to understand the terms and conditions. This includes understanding any royalty or payment obligations, exclusivity provisions, and termination clauses. These agreements can have a significant impact on the value and potential uses of the patent portfolio.
8. Evaluate Commercial Potential
Finally, it is important to evaluate the commercial potential of the patents in the portfolio. This includes analyzing the market for the technology, potential competitors, and potential licensing opportunities. Understanding the commercial potential of the patents can help to inform investment and acquisition decisions.
Conclusion
Patent due diligence is a critical process for any organization looking to invest in intellectual property or acquire a business. Starting early, conducting a comprehensive search, reviewing patent ownership, evaluating patent validity, assessing infringement risk, reviewing licensing agreements, and evaluating commercial potential are all important best practices for conducting patent due diligence. By following these best practices, investors and acquirers can make informed decisions and reduce the risk of unexpected issues arising later in the process.
