Posts Tagged: "due diligence"

You are about to strike a deal with an industry partner to develop an exciting new product. Or maybe you have identified the perfect opportunity to acquire an upstart company whose tech would allow you to expand into a lucrative market. Smart companies do their diligence and plan ahead to ensure they maximize the benefits and mitigate the risks of the deal. Fortunately, diligence into technology assets and intellectual property is not that different from the diligence you would do when buying a house. Not everyone is fluent in technology and intellectual property, though—these are complex areas with their own sets of issues. This article lays out five simple questions a company should ask itself throughout the diligence process to help tease out and navigate red flags, with the assistance of an experienced IP transactional attorney.

We all talk about the importance of data as business assets, but when it comes to buying and selling the companies that own them, we seem not to pay much attention. My anecdotal survey reveals that colleagues who focus on mergers and acquisitions  confess to a lack of focus on trade secrets. This may seem odd, even crazy, given the increasing percentage of industrial property represented by intangible assets—up from 17% in 1975 to 84% in 2015. The problem appears to start with the fact that secret information, no matter how central to the success of the business, is mysterious. Unlike the “registered rights” of patent, copyright and trademark, there are no government certificates defining secrets; and valuing them is hard. Add to that the imperative to get deals done faster and cheaper, and it’s easy to see how secrecy may have become the blind spot of transactional IP.

While part one of this two-part series on intellectual property (IP) due diligence focused on a life science company’s own IP portfolio, part two will address a company’s understanding of how it fits into the market by considering its freedom to operate, as well as its competitors’, and the interplay of patent and regulatory exclusivity as it relates to the company’s product. Patent and regulatory exclusivity—two areas that can provide the most value and protection to a life science product—are very interrelated. Simply identifying when a key patent naturally expires is not sufficient, because regulatory exclusivity could possibly extend the company’s ability to keep competitors off the market or allow competitors to speed up entry in certain situations.

A trademark audit is a review of a brand owner’s current trademark portfolio to ensure that the brand owner’s trademark usage and trademark holdings are sufficient, comprehensive, and accurate. Good practices requires that a trademark audit be conducted yearly, or any time an existing trademark portfolio is acquired, even if there has already been IP due diligence. The primary goal of conducting a trademark audit is to ensure that there are no deficiencies in protection.

For IP due diligence for investment in a start-up or young company, the most important conversation is with the key developer(s) of the product(s) or service(s) [the “Conversation”].  Ideally, the Conversation is led by an IP attorney who understands the technology.  The goal is to determine the source of the product design.  Was open source software used?  Is this a variation of something an engineer was working on at a prior company?  Was a published article used?  Perhaps consultants were used?  Was the design changed during development after some dead-ends?  Where there isn’t budget for a full-fledged investigation, this Conversation and follow-up will likely get 80% of the risks identified for 20% of the cost.

In the annals of U.S. innovators, there are many infamous disputes between technology companies from Shockley and Fairchild in semiconductors to Microsoft and Apple in operating systems to today’s high-profile lawsuit of Waymo vs. Uber in driverless car technology. What initially started as a trade secrets litigation has mushroomed into a high stakes game involving patent infringement, unfair competition, private arbitration, unlawful termination and the Fifth Amendment right against self-incrimination. It’s a virtual Gordian Knot of legal entanglements.

The Norwegian fairy tale “Three Billy Goats Gruff” was far ahead of its time and the moral of that story has a very relevant, modern application. In short, the story introduces three goats that want to cross a river to eat some luscious grass. To do so, however, the goats must first cross a bridge; under which lives a fearsome troll, who is so territorial that he eats anyone who dares to cross it. By working together, the goats are able to plot against the troll, and ultimately knock him off of the bridge. After knocking the troll off the bridge, the three goats lived happily ever after. So, if these goats can figure out how to get rid of trolls, why can’t sophisticated companies do the same?

To maximize the return on investment from a patent portfolio, patent owners must determine which is more lucrative: sales or licensing. In general, patent licensing promises the highest total return on monetizing an IP portfolio because the IP owner can license the same asset or (a single patent or portfolio) to a number of different licensees. On the other hand, it may take three to five years to realize significant revenue from licensing. Additionally, licensing comes with a host of potential risks including litigation, invalidity arguments, and more. More and more frequently patent sales/transfers are part of licensing settlements to ensure there is more of a ‘win/win’ result for negotiating parties.

Assignments are the mechanism to transfer title of a patent, just like deeds are used to transfer real estate… For due diligence, the owners of the patents should provide all of the assignments in a chain of title. The chain of title always starts with the inventor and will progress to the current owner. If there are any license agreements relating to the patents, each of the previous owners of the patents should provide copies of the agreements.

Earlier this week a friend posted a magazine article, “The Rise of Fakes and False Attributions in the Art World,” on social media. The article was about art authentication and due diligence. Before I reached the end of the first paragraph, I realized that I was reading a plagiary of my article, “Purchasing Art in a Market Full of Forgeries: Risks and Legal Remedies for Buyers,” published in the International Journal of Cultural Heritage. The author structured her article on my work, a piece that includes extensive research and that is partially based on experience that I cultivated while working with major art collectors. And rather than just using the outline of my article or presenting some of my arguments, she copied entire sentences. In fact, she went as far as copying entire paragraphs. Shockingly, she even kept the same punctuation, quoting words that I had placed in quotations marks in my article.

A patent litigator knows the ultimate truth about patents: their real value is only revealed in the gauntlet of litigation. In a bygone era, patents were reputed to have a statutory presumption of validity, the power to exclude by way of injunction, and the capacity to yield treble damages if an accused infringer were so wanton as to disregard a notice letter and fail to obtain an opinion of counsel. It was often unnecessary for a patent holder to flex its muscle by bringing suit to enforce its intellectual property rights. Instead, the arms-length Georgia-Pacific theoretical license negotiation might well have occurred even before the commencement of any infringement. Those days are over.