The dynamic and unpredictable economic climate has accelerated the need for companies to shore up performance by leveraging IP, including the buying and selling of patents. Patents are being purchased to strengthen licensing programs, create counter-claims in litigation, and support strategic business decisions. They are also being sold as a way for companies to gain quick revenue, reduce maintenance fees, and streamline patent portfolios to align with their core business. Depending on the deal value and transaction purpose, investing in legal and technical due diligence helps assess the overall value of the portfolio and minimizes the risk of the transaction. 

This article discusses business considerations in the buying and selling of patents, and provides some perspective on the legal and technical aspects of due diligence that support these transactions. In today's challenging economy, companies need a cohesive approach that controls cost, reduces risk, and maximizes the value of their investment.

Considerations when Acquiring or Selling Patents

            Every company should have an IP strategy aligned with, and driven by, its business strategy. Patent acquisitions are generally made based on their value to strengthen an offensive or defensive IP strategy. As offense, newly acquired patent assets can generate licensing royalty revenue to support operating income. As defense, patent acquisition helps companies establish and strengthen their positions by preventing competitors from freely operating in their market space, or as a counter measure should a competitor or other party target them for patent infringement. 

            When purchasing or selling any asset, some degree of technical and legal due diligence is required. When buying patents, the level of due diligence performed is typically predicated on the deal value and purpose of the transaction. For example, minimal due diligence would be performed on patents being purchased for strategic reasons at a low deal value (see Figure 1). Due diligence in this scenario would likely involve a basic review, to look at claim scope, initial validity, and infringement impressions. As the deal value goes up and/or the patents are required for a specific purpose, such as strengthening a  licensing program or litigation, so does the level of due diligence. This level of due diligence often requires evidence of use analysis and advanced legal research and review.  Sometimes, it is a combination of deal value and purpose that drives the level of due diligence required.

Legal Due Diligence

The initial stages of legal due diligence include reviewing all patent-related information and documentation related to ownership and encumbrance, to ensure that the seller actually has the right to dispose of the patent. This includes:

• Information that will help determine whether any key technical or business personnel have not assigned all rights they may have in the patent. It is critical to establish whether or not the seller actually owns all rights in the patent. This includes existing contracts with every inventor and the assignment documents recorded with the United States Patent and Trademark Office (USPTO). These documents should show the same name and state of incorporation as that of the selling entity, and should show that the chain of title is intact. 
• U.S. and foreign patents, patent applications, trademarks, service marks, trademark/service mark applications, and copyrights. Documentation transferring patent ownership is required for each country. Note that once the deal closes, this documentation may be difficult to get from the assignor so it is important to have it prepared and executed at closing. 
• All agreements in which the selling company has assigned, licensed, or has an obligation to assign or license its patent rights to third parties.
• Information regarding the standards bodies in which the target company is a member. This can help determine whether patent rights became part of a particular technical specification set by a standards body, and if so, whether the rights were transferred to the standards body.   

Once these issues have been resolved, it is important to identify patent families and to determine if the patents have parents (stemmed from other patented IP) or children (spawned new inventions), and whether or not these patents are included in the transaction. The easiest way to determine a U.S. patent’s lineage is to use the USPTO’s Patent Application Information Retrieval (PAIR) service. This system displays issued or published information such as pending application information, prosecution history, application images (if available), continuity data, supplemental content, and status and location of the application. As part of the process, it is essential to check for Terminal Disclaimers, i.e. binding statements made with the USPTO where more than one patent has been obtained by the inventor on the same invention. The disclaimer will state that the later patent will expire at the same time as the former patent, and the later patent will be enforceable only as long as both the patents are commonly owned. PAIR is also useful for checking to ensure that all maintenance fees and annuities have been paid. Finally, when identifying patent families, it is imperative to examine all foreign equivalents as the invention may be protected by patents issued in other countries.  It is also important to obtain the entire patent family as it simplifies the enforcement of patent rights later on.

Due diligence can also help verify that the Inventor Declaration was filed, and if filed, whether it was correct (something the USPTO sometimes misses). This form is signed by the inventor after reviewing the patent application, and states that he/she believes himself/herself to be the first original and sole or joint inventor of the subject matter of the application. In addition, Information Disclosure Statements (IDS) should have been filed. Applicants, their representatives, and any others associated with filing and prosecution of U.S. patent applications have a "duty of disclosure" to the USPTO to provide any information known to the individual to be "material to patentability" of a claimed invention. If due diligence shows that no IDS has been filed, it is a certain warning of potential problems with the acquisition, use, and even the validity of the patent. To be thorough, legal due diligence should include a search for inventors' names for non-patent publications, to see if all citations from their papers were provided to USPTO for consideration.

Finally, a review of all claims in a patent will play a pivotal role in the decision to proceed with the acquisition. In the course of due diligence, all documents and information relating to any past and present litigation, or claims of infringement, invalidity, and/or ownership involving the patent should be acquired and analyzed. Documents and information related to right-to-use studies and patent-related opinions will help ascertain the potential liability of infringement or violation of third parties' IP rights. This information can allow the acquiring company to evaluate the merits of the claims raised in such litigations and arbitration proceedings. 

            Legal due diligence is an integral part of the acquisition process in that it examines all documents relating to ownership and encumbrance.  It helps reduce the investment risk to buyers by ensuring that they will be able to use the patent with the intent for which it is being purchased.  

Technical Due Diligence

            The primary purpose of technical due diligence is to ensure that the patent has value in the industry.  Technical due diligence will determine whether or not the invention is being practiced, and if so, if it is being practiced in a marketplace that aligns with the corporate strategy, or by a particular player in the marketplace that can affect a company’s success. Most important, technical due diligence may provide proof that the invention is being used. 

Technical due diligence can range from a basic and quick patent review to infringement analysis that helps identify and map claim elements to applicable products/devices and may involve reverse engineering (RE).  In the semiconductor and electronics industries, RE includes four basic activities:

• Product teardowns, to identify what devices are used
• System analysis, to identify how devices are used
• Circuit analysis, to identify how devices work
• Process analysis, to identify how devices are built and what they are made of

Deals of high value or those serving a specific licensing or litigation purpose usually require infringement analysis based on RE analysis.

            Technical due diligence can be performed by in-house experts.  Often, however, these experts work with external specialists who provide specific market knowledge or technical capabilities a company may not have internally.

            Consider this example. A global semiconductor company was considering acquiring new patents to strengthen its licensing position. Since the company faced significant time pressure to acquire the patents before being out-bid by another interested party, it initially performed an in-house assessment of the patents. The company then realized that to fully evaluate the strength of the portfolio, it required specific technical expertise combining circuit and systems analyses. Given the potential financial implications of the investment, it also wanted an independent technical evaluation to confirm that the patents would strengthen its licensing position. This client had reached a critical juncture in negotiations, and needed an assessment that could be used to quickly make an informed decision.

A third-party firm[1] completed a full review of more than 20 patents of interest, identifying those which would be of most value, based on the likelihood that the inventions were being used, and on the supportability of the claims. It procured competitive products suspected of infringement, and performed cursory analysis to confirm its initial findings. For a fraction of the deal value, the company completing the review helped the semiconductor company reduce its acquisition risk. 

Technical due diligence is also performed by companies looking to sell patents.  Some companies review their portfolios to find patents that no longer support their IP or business strategy. Rather than incur additional maintenance fees to retain these patents, an increasing number of companies are looking to sell these patents as a way to reduce these costs and generate revenue. While traditionally there has been minimal need for due diligence on the sell side, the economic climate has changed this, creating a buyer’s market. That is, with the supply of patents exceeding demand, buyers are in a position to ask sellers to provide evidence of the portfolio’s value prior to making an investment.  

            As an example, a major industrial conglomerate decided to exit the semiconductor business. This left them with an orphan portfolio – a portfolio of patents no longer required as part of their IP or business strategy. Rather than simply shopping the patents without any indication of value, they decided to investigate whether there might be any infringement of the patents.  An outside firm[2] completed market research across different companies and product lines, identifying some infringing products, purchased the products, performed RE, and in many cases, documented infringement.  With this evidence of infringement, the portfolio now attracted interest from a range of buyers who could easily evaluate the portfolio’s value. The orphan portfolio was sold for more than it would have – and at a significant multiple over the cost of the reverse engineering. The investment in RE produced a positive ROI.

           Buying and selling of patents is a growing phenomenon. The key, of course, is to know what you are buying or selling, and to know its value – objectively. Technical due diligence, ranging from a quick patent review through to infringement analysis based on RE can help evaluate evidence of use and the value of the patent portfolio in the market.  

Conclusion

            Executives in innovation-driven industries are increasingly on the line to consider the value of their IP. In some cases, companies are looking to sell patent assets as a way to raise cash, streamline their businesses, and reduce maintenance fees. In others, companies are looking at targeted patent acquisitions to either accelerate licensing programs or support litigations.

            With the volume and value of deals rising, the risks of making a wrong decision have never been higher. Investment in due diligence reduces this risk, and helps ensure a better overall assessment of patent value.

Author Bios:

Jeff Miller, Partner, Orrick, Herrington & Sutcliffe LLP

Jeffrey Miller, a partner in Orrick’s Silicon Valley office, is a member of the firm's Intellectual Property Group. His practice includes all aspects of patent litigation, strategic patent counseling, licensing and patent prosecution (both foreign and domestic).

Mr. Miller has extensive experience in many different technological areas.  Examples include integrated circuit design, packaging and fabrication, biometrics, wireless, electronic design automation (e.g., emulation, simulation, place and route, synthesis), image processing, electronics assembly (e.g., pick and place machines), optical display systems (LCOS and screen technology), networking and power tools.

He also has negotiated hundreds of millions of dollars in strategic transactions including the licensing and acquisition of world-wide patent portfolios. In addition, he conducts intellectual property due diligence studies to assist venture capital firms and other parties when making investment decisions.

Mr. Miller has an undergraduate degree in Electrical Engineering and received his J.D., cum laude, from Boston University School of Law.

Sandip (Micky) Minhas, VP, Patent Counsel, Qualcomm Inc.

For the past 10 years, Sandip (Micky) Minhas serves as Vice President and Patent Counsel for QUALCOMM Incorporated in San Diego, California. 

Mr. Minhas is currently a VP of Patent Strategy where he participates in company and patent acqusitions and develops IPR strategies for new projects.  Prior to this role, Mr. Minhas served as Qualcoomm’s patent portfolio manager, which includes directing patent filings, developing foreign filing strategies and conducting third party analysis.  In addition, Mr. Minhas ran QUALCOMM’s European opposition practice.  Prior to these roles, Mr. Minhas was leading QUALCOMM’s Research and Development patent prosecution team.

Prior to joining QUALCOMM, Mr. Minhas was an associate of Michael Best & Friedrich, in Milwaukee, Wisconsin.  Mr. Minhas received a JD and Master of Intellectual Property degree from the Franklin Pierce.  Prior to this, Mr. Minhas received a Master’s degree in Electrical Engineering from George Washington University, and a Bachelor’s degree in Electrical Engineering from Marquette University.

Natasha Radovsky, Senior Manager, Patent and Technology Licensing/Sales, The Boeing Company

Natasha Radovsky has over 15 years of experience in valuating, commercializing, and marketing various Intellectual Property assets. She has done extensive license negotiations, developed business strategies and patent portfolio strategic planning.  Ms. Radovsky is currently responsible for the licensing program of Boeing’s patent, technology, and software portfolio. Additional responsibilities include developing strategies for the monetization of Boeing’s Intellectual Property, such as patent sales and disposition of technology and software assets.  Ms. Radovsky’s business development and licensing experience includes positions at Linksys/Cisco, USWeb, and University of California, Los Angeles. Ms. Radovsky has technical and business background, she holds degrees in Computer Science, Physics and Engineering, and MBA.

Michael Thumm, Vice President, Chipworks Inc.

As Vice President, Patent Intelligence, Michael Thumm leads Chipworks’ services to IP Groups and Law Firms. Mr. Thumm and his team help clients around the world achieve favorable outcomes in licensing negotiation and litigation, grow their licensing programs, and make sound patent acquisition decisions. In this way, his customers get the most value from their patents through increased royalties or reduced cross license payments. Having joined Chipworks in 1997, Mr. Thumm has held numerous senior positions, including the management of the company’s financial assets as Chief Financial Officer for a number of years.

During this time, Mr. Thumm was also a founding member of Patent Solutions, a Chipworks partnership involved in assisting companies in monetizing their IP. In this capacity, he gained significant knowledge of the IP ecosystem/landscape and the details of patent licensing negotiations and litigations. With his long standing tenure, Mr. Thumm has played an instrumental role in building the company, and helping it successfully prosper as an international player. 

Mr. Thumm brings over 20 years of experience in professional services. Prior to joining Chipworks, Mr. Thumm was a partner with Arthur Andersen (now Deloitte), where he was responsible for their audit and business advisory services practice in Ottawa. As partner, he assured that his clients were receiving the highest quality of services and value. He also spent several years at Price Waterhouse.

Highly regarded for his business and technical acumen, Mr. Thumm has been an invited speaker at key industry events, such as the Licensing Executives Society (LES) meetings and Ocean Tomo. He has also authored several articles on patent licensing for print and on-line publications such as Patent World, les Nouvelles, and IP Frontline. Mr. Thumm has been a member of LES for a number of years, and holds memberships with the Institute of Chartered Accountants of Ontario and the Canadian Institute of Chartered Accountants.

Mr. Thumm received his Bachelor of Arts degree in Administration from Brock University in St. Catharines, Ontario. Outside work he enjoys all sports, with distance running his current favourite activity to clear his mind. He also enjoys music, and is rumored to have an extensive collection of hip-hop.

[1] The review company referred to in this paragraph is Chipworks, where author co-author Michael Thumm is employed.

[2] The firm completing the market research in this sentence is Chipworks, where author co-author Michael Thumm is employed.