Due Diligence Overview

Due Diligence

  • Don’t ignore it – whether you’re buying, selling or own patents you need to know some basic information about them to protect yourself and your assets.
  • Don’t assume your outside counsel will take care of it – in their minds, they have bigger fish to fry than making sure your patents are active or checking the chain of title. They will most likely rely on the owner’s assertions about status, title, family and other basic facts.
  • Don’t put it off – issues such as patent lapses, gaps in title and outstanding related patents can be costly and difficult to repair, especially if they aren’t caught until long after the deal closes.

Why perform basic due diligence?

Buying

Selling

Owning

Due diligence is a must when buying intellectual property however you plan to use it.  The potential future issues are numerous and will cost you much more time and money to correct if you discover them after purchase.  Do not rely on guarantees from the seller; by the time you discover any issues the seller may no longer be in business, or if they are, they may not be cooperative.  Your only recourse may be to sue the seller, which can take years and will incur costly legal fees.   Do not trust that attorneys handling the transaction are doing thorough due diligence research or even doing it at all.  In my experience even veteran patent attorneys do not know some of the basics of patent due diligence, so if you are using a general transactional/contract attorney to handle your purchase the chances of good due diligence are even less.

If you are selling patents, performing due diligence prior to the sale can save you many headaches.  If the buyers discover problems prior to purchase it can delay or even kill the sale depending on the complexity of the issues.  If discovered afterwards you may be on the hook for fixing the issues or covering the buyers’ cost in fixing the issues themselves.  If you refuse, they may be able to sue you depending on the structure of your purchase agreement.  Make sure your patents are bulletproof by performing a thorough due diligence search in house or hiring a professional due diligence researcher.

If you own patents, performing due diligence can help you keep your patents active and ensure that you have full and complete ownership of your patents. It’s especially important if you plan to assert your patents, as bad title or a surprise terminal disclaimer can result in your case being thrown out. It’s also important if you plan to use your patents as a defense against assertion for the same reasons. Make sure your patents are in order and ready for any situation that might arise.

Areas of Basic Due Diligence

Status/Payment Status

  • A search of the patent database on the patent office website in the country where your patent is filed will usually show you if the patent is active or lapsed due to non payment of fees. Some countries do not show this information, but you may be able to rely on a third party website for this information (see Due Diligence Links page for options).
  • Some, such as the US, will not show if a patent is expired so you may have to estimate based on the filing date of the patent and the term of patent life in that country, or make use of a patent term calculator.
  • The database may also inform you of what fees are due and when, or if a fee is overdue. Again, some countries do not show this information so an estimate based on that countries fee rules is necessary.

Title

Good due diligence includes a review of all documents of record including:

  • Conveyances
    • You will need to make sure that there is an unbroken chain of title starting with the inventor or inventors and leading to the current owner – these can be in the form of assignments or other conveyances such as probate documents or corporate documents such as company name changes, mergers or sales.
    • Check assignments and other conveyances for proper wording, amount of interest/type of interest conveyed and proper execution.
  • Liens/Other Encumbrances
    • Find out if there are any outstanding liens or other encumbrances that may impair ownership
    • Check for releases or discharges of liens and encumbrances
  • Licenses
    • While not always recorded, any licenses of record should be reviewed as they affect property rights and may affect standing in court

Family

Your patent may be related to a number of other patents in various ways that can affect standing and ownership. Find out if there are any unknown patents that are related and who owns them.

Terminal Disclaimers

Find out if your patents are subject to any terminal disclaimers.  A terminal disclaimer means a patent’s expiration date is tied to a second patent. A patent subject to a terminal disclaimer can only be enforced if both patents are owned by the same person or entity.

Litigation/Invalidation Proceedings

Litigation and other invalidation proceedings such as IPRs can affect status, standing, and ownership of patents. It’s not always obvious that a patent has been fully or partially invalidated. A thorough review of the file wrapper as well as court databases is necessary.