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How to improve your chances for successful IP due diligence
By M. Henry Heines, Townsend and Townsend and Crew LLP -- Electronic Business, 5/16/2007
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Contents
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Awareness and preparation will expedite the review, avoid or minimize oversights, omissions, and discoveries that might prompt the other party to devalue the transaction or withdraw from it entirely. The following are some of the most common questions raised in intellectual property due diligence.
Right to Use:1. Have freedom-to-operate searches been performed?2. Have any patents to others been found, in freedom-to-operate searches or otherwise, that appear to cover any part of the technology of interest or similar (and possibly overlapping) technologies? If so, have legal analyses of these patents been obtained and legally supported opinions been rendered to determine whether infringement exists and whether the patents are valid?
3. Have any threats of enforcement of patent rights or suggestions of threats been received from outside patent holders? Suggestions of threats might include seemingly benign notices from patent holders of the existence or imminent issuance of a patent, whether the notice includes an offer for license or sale or a demand for royalties or for cessation of operations or sales. If such threats or suggestions have been received, how have they been resolved?
4. In small-scale transactions, the questions in items 1, 2 and 3 above will be limited to United States patents and commercial operations, whereas in transactions involving operations abroad and multinational corporations, the same questions will apply to patents, operations, and threats in jurisdictions outside the United States.
5. If the right to the use of the technology has been obtained by a license or any other agreement with a patent owner, are there any terms in the agreement that would terminate or otherwise impose a limit on the right as a result of entering into this transaction? For example, is the right under the agreement fully transferable; are there preliminary conditions to be met before transfer; or are any rights altered upon the transfer according to the terms of the agreement? Are there any limitations on the license such as a field-of-use limitation, a geographical limitation, or any clause calling for premature termination of the license upon the occurrence of particular events? Are there any dominating patents held by the patent owner or others, i.e., is the license sufficient to provide a full right to use, or does the practice of the licensed technology require the use of materials, components, methods or processes that are covered by other patents not included in the license?
Ability to Exclude Others:
1. Are the products or technology of interest in the transaction covered by patents to which the target has exclusive rights? If the transaction extends to sales or operations in countries outside the United States, does the patent coverage include patent coverage in these countries as well?2. Are the patents fully owned by the target? To answer this question, the investigator will explore the following:
a. Have all patents been assigned to the target by the inventors?
b. For technology not yet patented, are all the inventors employees of the target, and have all employees executed employment agreements that obligate employees to assign to the target the patent rights to inventions that the employees invent while employed? Do the agreements require the employees who have left the target's employ to continue to assist the target in obtaining patents on inventions that they conceived during their employment?
c. Are any of the patents the result of joint inventions between employees of the target and outside individuals? Have those individuals assigned their rights to the target? Are there any inventorship disputes with outside contractors or other outside parties?
3. Are all patents currently in force and free of any challenges or doubts to their validity? Have all maintenance fees been paid and is there an adequate system for tracking the due dates of future maintenance fees? Have there been any post-issuance matters such as oppositions, reissues, reexaminations? Has anyone expressed the belief that the patents are invalid or more limited in scope than they appear to be?
4. When do the patents expire?
5. Are the claims of the patents broad enough to provide the target with an effective market advantage rather than simply covering the target's own products?
6. Has all information in the possession of the target that is relevant to the validity of a patent been supplied to the U.S. Patent and Trademark Office (PTO)?
7. If patent rights have been obtained from a patentee who is not an employee of the target, were those rights obtained by assignment or license? If by license, is the license exclusive or non-exclusive? Does the license contain any special provisions relating to the assertion of the patent over infringers?
8. Has any other party applied for a patent on an invention for which the target has also applied, or on inventions that are overlapping or highly similar to those of the target? Have there been any interferences or notifications of the possibility of an interference?
9. Has any infringement by outside parties been discovered or suspected?
Continual attention to all of these questions during normal operations is often impractical for a company with more than a few patents, but certain organizational practices can help assure that answers to these questions can be readily obtained when due diligence is initiated. Prominent among these is a patent organizing system including a patent status list, maintained and periodically updated by a responsible staff person, itemizing all patents and patent applications that the company has applied for, both U.S. and abroad, and the current status of each. The list should correlate the patents with the company's products or services so that the coverage for any given product or service can be readily identified.
In addition to the list, a separate file should be maintained for each patent, containing copies of all documents received from or sent to the PTO, assignments of the patent to company, communications with outside counsel regarding the patent, and communications with competitors, licensees, and other outside parties regarding the patent. All investigations, analyses, and opinions relating to nonpatented subject matter should also be stored in an indexed fashion. The same should be true for all employment agreements and copies of company policies relating to intellectual property, as well as signed copies of all licenses, assignments, options, or other agreements with competitors and business partners.
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