Hiler: Conducting patent due diligence in corporate acquisitions

By Ryan Hiler

A company considering acquiring a target company having patent assets should evaluate such patent assets by having its lawyer gather information, verify facts, and assess risks associated with acquisition of the target company. This patent due diligence is performed by the lawyer to advise their client regarding issues impacting the potential acquisition, including, for example, acquisition price and structure. There are three primary stages of a patent due diligence investigation, including evaluating (1) ownership/control and legal status of the patent assets, (2) strength of the patent assets, and (3) potential patent infringement risks. A patent due diligence investigation should consider each of these stages in relation to the target company’s patent assets.

Ownership/control and legal status of patents

This stage investigates whether there are any issues concerning ownership/control of the patents, including, for example, establishing valid ownership and/or control and clear chain of title. A comprehensive list of U.S. and foreign patents and patent applications alleged to be owned/controlled by the target company should be obtained from the target company. The applicable patent offices should also be searched by owner name to confirm that no patents or patent applications were omitted from the patent list provided by the target company. For example, the target company’s list of patent properties should be cross-referenced with a search of the patent offices in which the target company has obtained patents or has pending patent applications. Maintenance and annuity fee records should be evaluated at the relevant patent offices to ensure that the patents are not expired and the patent applications are not abandoned due to nonpayment of such fees.

Each assignment associated with each patent and patent application must be evaluated to ensure that such assignments are completed and recorded at the relevant patent offices. Employee and independent contractor agreements should be evaluated to verify obligations to assign patent rights. A search for patents and patent applications listing essential employees and/or independent contractors should also be performed to confirm that all material patents and patent applications have been assigned to the target company. A search should be conducted to determine whether the target company has assigned or granted security interests against any patents or patent applications (e.g., a Uniform Commercial Code search or a patent office recordation database search). All license agreements and other contracts involving patents and/or technology should be requested from the target company and evaluated to identify any restrictions on the patent rights.

Patent strength

This stage investigates whether there are any patent assets that will be especially important to a client’s business goals after the potential acquisition of the target company. For example, the exclusive practice of a certain patent may be envisioned to protect a new product, and the strength of that patent and its ability to carve out a strong exclusive market for a client’s new product will be critical to the success of the potential acquisition. The more important patent assets should be evaluated in depth. The prosecution histories of the relevant patent assets should be obtained from the U.S. Patent and Trademark Office, and, if applicable, any foreign patent offices. For those not publicly available, the target company’s patent file histories and prior art for such patent assets should be requested from the target company. If warranted based on a review of the prosecution file histories and prior art, additional prior art searches and validity analyses should be performed. The patent asset should be analyzed to determine whether it will provide exclusivity in the marketplace and the possibility of a competitor designing around the patent asset.

The target company’s patentability and validity searches should be requested to be reviewed. If necessary based on a review of the requested searches, it should be determined whether to request the legal opinions associated with such searches; however, a disclosure of such legal opinions may cause a waiver of the attorney-client privilege (although beyond the scope of this article, issues regarding the sharing of legal opinions under the common interest doctrine in patent due diligence investigations should also be evaluated).

Potential patent infringement risks

This final stage investigates the risk that the target company is infringing the patent rights of a third party and whether a third party is infringing the target company’s patent rights. All threatened and/or actual litigation or claims against the target company by a third party should be determined. Similarly, all threatened and/or actual litigation or claims by the target company alleging patent infringement against a third party should be established. Copies of all pertinent notices and case files should be obtained along with any settlement agreements and releases. The status of any proceedings and negotiations should be determined, and the strength of the allegations in the proceedings should be analyzed.

It is also important to evaluate the target company’s past practices and processes for procuring freedom to operate searches. While keeping in mind the concern regarding waiver of the attorney-client privilege, it should be considered whether to request the target company’s freedom to operate opinions. If a client intends to make and/or sell a particular product after the potential acquisition, an independent freedom to operate search should be conducted to establish whether the client will have freedom to make and/or sell the product without infringing the patent rights of a third party. The target company’s processes for enforcing its patent rights against third parties for alleged infringement should also be evaluated. Furthermore, any license agreements and other contracts involving patents and/or technology that grant patent rights to or from the target company should be evaluated to verify compliance and to determine whether there are any potential patent infringement claims.

A comprehensive patent due diligence investigation can allow a lawyer to thoroughly evaluate the risk of a potential acquisition and advise their client on issues impacting the potential acquisition, including, for example, acquisition price and structure.•

• Ryan Hiler — [email protected] — is an attorney in Taft’s intellectual property group. Opinions expressed are those of the author.