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Overview

In today’s business world, there are increasing numbers of mergers and acquisitions happening within large corporations, as well as small businesses.  In some of these transactions, patent rights, which are government granted rights to exclude others from practicing the inventions claimed in the patents,[1] are the most important assets being acquired.[2]  Understanding the risks associated with acquiring patents is an essential part of managing the overall risks in these business transactions. 

Suppose for a moment that you want to acquire a particular company because their technology and products complement your own.  During your initial discussions regarding this acquisition, you hear that they not only sell products of interest to you, but they also have some patents.  If you are like most businesses, you ask your financing team to move forward with due diligence, and as a result, the selling party may provide you with a list of all their patents.  But real IP due diligence, a detailed analysis of the purported intellectual property rights, is often an afterthought.  The first time that you ask what the patents really cover should not be long after the closing, when you want to assert your newly acquired rights.  You need to stop and do some real IP/patent homework before you close the deal. 

If you do not investigate the patent rights purported to be owned by the seller, you risk not knowing what you are purchasing.  It would be beneficial to at least know that the patents have not expired, and that they are indeed owned by the seller.[3] 

First, since patents have a fixed term based on the type of patent,[4] you should identify whether the patents have expired or not.  The term of a utility patent is 20 years from the date the patent application is filed, so long as the required maintenance fees are paid.[5]  A check of the United States Patent and Trademark Office (USPTO) records will confirm whether any applicable maintenance fees have been paid and whether there are maintenance fee payments that are due. 

Second, the ownership of the patents should be confirmed.  This is the best safeguard to ensure that the seller is actually the owner of the patents.  In the United States, patents are granted in the name of the inventors; the people that actually conceived and reduced to practice the invention claimed in the patent.  The inventors have ownership rights in their patent unless they assign those rights to some other party.[6]  Consequently, each named inventor must assign his or her rights to properly effect transfer of title to a subsequent owner.[7]  There should be an unbroken chain of recorded assignments down to the present seller.  The current assignee of record can be confirmed by checking the assignment records at the USPTO.  This simple investigation can identify whether the seller owns the patents they are offering for sale. 

These two preliminary assessment steps are the intellectual property acquisition equivalent of making sure that the car you are buying has what appears to be an engine under the hood.  But is checking under the hood all you do when buying a car?  When you buy a car, don’t you at least start it up and take it for a test drive?  Thus, the next question becomes: Can any of these patents actually stop your competition from practicing the technology or selling the products that makes this acquisition so rewarding?  It could be useful, during acquisition negotiations, to know exactly which patents relate to which particular products, and how valuable each product is to the business.[8]  In this instance, the two-step preliminary assessment may not be sufficient and a detailed technical and legal analysis of both the patents and the products may be warranted. 

When a single patent supports a significant amount, or is critical to the value of the acquisition, this detailed analysis should be conducted.  One should never simply take the word of the entity being acquired that particular patents “cover” particular products.  It is good to obtain the technical definition of the products, as well as samples of the products themselves, and compare these to the particular claims in each of the patents.  An evaluation of the applicable file histories can also be very helpful.  Such an analysis should be prioritized based on product sales or revenue.  When the patents that lend value to the transaction have been identified, and determinations rendered regarding the components that they purport to cover, one can proceed to quantify the business risk. 

This approach to patent acquisition risk management can be implemented in stages, allowing the risks to be sized along with the value of the transaction as it moves forward.  One should not conduct more investigation than the overall value of the transaction.  Nonetheless, if patent rights are a significant part of the transaction, this type of an evaluation can help manage the risks to your business. 

[1] Whoever without authority makes, uses, offers to sell, or sells any patented invention, within the U.S. or imports into the U.S. any patented invention during the term of the patent therefor, infringes the patent. (35 USC 271)

For More Information

Please contact any of our lawyers or any member of our Business Litigation or Intellectual Property practice groups for more information.

Disclosure

This article was featured in the Cincinnati Business Courier. This publication is intended to inform clients about legal matters of current interest. It is not intended as legal advice. Readers should not act upon the information contained in it without professional counsel.

This article reflects the author’s understandings and views of the subject matter and has been written for educational purposes only.  It is not meant to convey any legal opinions or advice of any kind.  The views expressed herein are solely the author’s and should not be attributed, in whole or in part, to Thompson Hine, LLP, any of its other attorneys, or any of its present or future clients.  The firm and author disclaim any liability for any errors or omissions in this article.  This article and its distribution do not establish any form of attorney/client relationship.  For additional information either contact the author or your intellectual property or patent counsel. This document may be considered attorney advertising in some jurisdictions. Some of the design images and photographs in this document may be of actors depicting fictional scenes.