M&A Patent Due Diligence: Ownership and Control of Patent Assets

In an earlier post we discussed the top level patent due diligence issues that should be considered in the acquisition of a “Target Company”.   We emphasized the importance of assembling a multi-function Due Diligence Team, including financial, marketing and technical experts in addition to legal experts, in order to achieve the goal of Identifying and Allocating the IP-Related Risks.

We identified four major areas of patent due diligence:

• Ownership and Control of Target Company Intellectual Property
• The Structure of the Proposed Transaction
• Identification of Strategic Value of the Target Company’s IP
• Target (and Acquiring) Company Exposure to Liability from Intellectual Property of Others

In this article we dig into the details of how to assess the first of these areas:

Ownership And Control Of Intellectual Property

What intellectual property assets does the Target Company own and what is its ability to control those assets?   To answer these questions the Due Diligence team should take the following steps:

• Assemble the Patent Portfolio
• Examine the Record Ownership of the Portfolio
• Review Chain of Title
• Consider Patent Licenses

Assemble the Patent Portfolio

• Obtain Patent Inventory  Ask the Target Company for a listing of all patent applications (including those in the process of being drafted), published applications and issued patents that the Target Company considers part of its portfolio.   This could include patents assigned to the Target Company, a subsidiary of the Target Company or an affiliated IP Holding Company.
• Build Your Own Patent Inventory   The Due Diligence Team should conduct its own searches of public or commercial databases as a cross check on the Target Company list. 
• Understand the Full Corporate Tree.  A full search will consider all members of the Target Company’s corporate ownership tree.
• Document and Map Patent Families.  Verify that all members of the patent families in the Portfolio are included in the Portfolio listing.   
• Patent Process.  Ask the Target Company to describe its patent decision making and management process and to provide copies of any invention disclosures that have been submitted, but not yet filed.

Examine the Record Ownership of the Portfolio

The current ownership of each of the patent properties identified should be checked.   The following situations may be encountered:

• Unspecified Owners.  Patent properties with no assignment shown in the USPTO Assignment database should be manually reviewed to determine whether there are errors at the USPTO or whether there was never an assignment of the rights from the inventor(s) to the Target Company or others.
• Other Owners.  If the current ownership of patents in the Portfolio includes entities other than the Target Company, this could mean one of many things; for example: 
  • Subsidiary or Holding Company:  The patent asset(s) may be owned by a subsidiary or holding company that is part of the corporate family of the Target Company.
  • Joint Ownership:   The patent asset(s) may be jointly owned.  In this case, the circumstances of the joint ownership should be reviewed with the Target Company and the scope of the jointly owned rights should be ascertained.
  • Security Interests:  Often security interest filings are made with the U.S. Patent and Trademark Office and appear in the Assignment Database.  The existence of such filings can often be determined by looking at the Current Assignee listing on the Portfolio – if a bank or financial institution is listed that is a likely sign of a security interest or encumbrance.

Review Chain of Title

Ideally the Chain of Title on all patent asset(s) should be confirmed as complete such that ownership is clearly with the Target Company. This is a time consuming process especially where the number of patents involved is large. As an alternative the Due Diligence team should consider confirming the Chain of Title on the “most valuable” patents such as those with that are broad in scope with high claims ratings, are in core portfolio clusters or seminal patents in the field.

Consider Licensed Rights

Any intellectual property licenses either granted by or granted to the Target Company should be investigated.   Close consideration should be given to:

• the scope of the licensed rights: are they exclusive or non-exclusive?
• territorial and field of use restrictions and expansion ability of the licensee
• transferability of the licence to new owners
• the ability to grant sub-licences
• duration of the licensed rights
• Economic and non-economic obligations of licensee and licensor 

Where the Target Company has disclosed an in-bound license, the Due Diligence Team should compile a listing of the patent family members related to the license and identify those patent properties, if any, that were not listed by the Target Company but are in the relevant patent family.   The inclusion or exclusion of these additional properties should be investigated by the Due Diligence Team.

Next Time: Identifying Strategic Value

In our next article we will discuss how to assess the strategic value of the patent portfolio to the Target Company’s business, including the extent of the exclusivity in the marketplace that these patent assets provide.