Patent Baristas

Assets acquired in today’s private equity and venture deals, mergers and acquisitions, strategic alliances and joint ventures are increasingly intellectual property assets such as patents, copyrights and Internet domain names. Because of the value of these assets, intellectual property due diligence has become an important part of the legal work required for these transactions. Such intellectual property assets consist of (1) “content,” which includes text, visual images (both moving and still), sounds, database information, logos, characters and the like, (2) “technology,” which includes biological chemical compositions and methods, electrical and mechanical devices and software and business methods, and (3) combination hardware and software devices.

Due diligence includes a review of not just the listed intangible assets of a company but also the scope of protection, any defects or clouds on the title, and issues surrounding the use of the claimed asstes. If after the deal a party does not own or have an adequate license to the intellectual property acquired in the transaction, then the acquiring company may face liability for infringement when it uses or sells products or services with the assets it acquired. Therefore, one must carefully consider patent, copyright, trademark and domain name due diligence.

In evaluating patent rights, it is important to note that just because a product or process is patented does not mean it cannot infringe another patent owned by a third party. In fact, patented technologies can and often do infringe other patents. For example, a first company can own a patent on a basic material or component sued to make a device or composition that is patented by a second company. In such a case, the second company cannot sell its product unless it first obtains a license from the first company.

A patent does not grant the patent owner the right to the exclusive right to practice his invention, it grants him the right to exclude others from making, using or selling the patented subject matter. As a result, due diligence should investigate whether licenses from third parties are required for the acquiring company or its customers to use the target company’s technology.
The target company’s patent ownership should be verified by review of U.S. and foreign Patent Office records. Often government records will not reflect assignments shown in corporate documents, and this also needs to be investigated. Patents have a limited term, and the target company must be sure that sufficient useful time remains on the patents to be acquired. Patents rights can lapse if period required fees to keep the patent in force have not been paid.

If any allegations of infringement have been made against the target company’s patent in the past, or if for another reason the acquired company retained patent counsel to issue an opinion letter on the validity of the third party’s patent and/or its infringement, those opinion letters should be obtained and reviewed. Any qualifications in the opinions should be carefully analyzed. Moreover, depending on their date and scope, the opinion letters may need to be updated.

If there are any past or pending infringement suits, relevant litigation documents should be reviewed. If the target party is a defendant, then the likelihood of a judgment of infringement should be assessed as well as the scope of a potential damage award and the impact of any temporary or permanent injunction. Treble damages and attorneys’ fees can be awarded in instances of willful infringement, and these issues must also be evaluated. If the target party is a plaintiff, then there is the risk that its patent may be held invalid in the litigation. Accordingly, the impact of the loss of exclusivity and the loss of the revenue from patent royalties must also be assessed.

The importance of intellectual property assets in venture capital deals, private equity investments and mergers and acquisitions, and especially in deals involving high-technology, place great importance on the time allocated to and the quality of the intellectual property due diligence that should be conducted in such transactions.