Patent Due Diligence: Strategic Patents & Acquired Liability in M&A

• Are there the Seminal Patents in the Portfolio?  
  Research has shown that highly cited patents are more likely to be valuable and strategic than lesser cited patents. The Acquirer’s Due Diligence Team should identify the most highly cited patents and make an assessment of their relevancy to the various products, services and lines of business of the Target Company. Often this can be done quickly by looking at the Titles and Abstracts of the Seminal Patents.

• What is the Quality of the Portfolio’s Claims?  
  The relative breath and structural integrity of the Seminal Patents in the portfolio should be examined. If the quality of the Claims in the Seminal Patents is low then the overall strategic value of the portfolio might be limited. This can be completed through manual review alone, or with larger portfolios, by leveraging portfolio claims assessments driven by expert systems.

• Is There Evidence that the Target Company’s Portfolio Has Strength?  
  Ultimately the value of a patent portfolio is determined by the ability of the Target Company to exclude others from selling similar products or services. This is a function of the strength of the individual patents (i.e., the “bricks”) and the collective strength of the portfolio (i.e. how the bricks are assembled to create a wall.) A high level view of the “wall” can be had be looking at:

• Self-Citation Clustering.   
  A portfolio where the individual patents cross cite other patents in the portfolio as prior art evidences a cohesive patenting strategy in which new features and extensions to a core invention are protected over time, creating a “patent ticket” against competitors. Patent mapping software can be used to visualize the extent of clustering.
• Patent Family Size   
  Another view of potential strength can be inferred from the Patent Families in the Portfolio. How large is the largest Patent Family and what technologies/products does it cover? What percentage of the Portfolio are in Patent Families that contain more than 2 members. The answers to these and related questions can provide an insight to how well the Portfolio has been structured and managed.

• Expired Patents.  
  Don’t forget the potential residual value in expired patents. A patent that has expired has little going-forward strategic value to a company because it can not be used to exclude others from using the invention(s) disclosed in the patent. However, one can still sue on an expired patent for damages accrued through expiration, subject to the six-year statute of limitations and equitable defenses. So patents that have expired less than six years ago may still have some interest.
  
  

Target Company Exposure to Liability from Intellectual Property of Others

Examining the strategic value of a patent portfolio provides insights into the potential “upside” that the portfolio may provide. Equally, if not more important from a due diligence perspective, is determining the extent to which the Target Company is at risk due to intellectual property rights of third parties – i.e., determining whether there is potential infringement liability in the Target Company’s current activities and in the anticipated post-acquistion activities.

Conducting a full infringement analysis of a Target Company can be a very time consuming activity but it may be warrented in specific circumstances. A more practical approach is for the Acquirer’s Due Diligence Team to investigate any “infringement letters” that the Target Company has received.

Another quick way to prioritize review and identify infringement potential is to find the patents that have been cited by the Target Company’s patents (“Backward Citation Patents”) that have also been highly cited by others – these patents should be investigated as potential “dominating patents” – i.e., a highly cited patent represents important prior patent art that may have relevancy to the business of the Target Company.