An Overview of Patent Due Diligence

Patent Due Diligence involves a thorough examination of one or more Patents to support the strategic goals of a business or company. The approach to Due Diligence can vary depending on the situation in which it is needed. For example, offensive Due Diligence may involve identifying whether other companies are infringing upon your Patents or determining how your Patents can be monetized through licensing or sales. This often includes analyzing competitors’ products to see if they violate your Patents, which serves as the first step toward enforcing your rights. Additionally, it may involve creating a licensing strategy to generate revenue aligned with your business goals.

On the other hand, defensive Due Diligence assesses whether your business activities are free from Patent infringement risks. It evaluates whether you may be violating others' Patents and identifies steps to mitigate that risk. Whether the focus is offensive or defensive, companies typically rely on experienced IP Counsel to review Patents, understand their legal standing, and devise strategies that align with business objectives, such as assessing the validity and scope of a Patent or creating a monetization strategy to optimize returns on IP investments.

What Does the Process of Patent Due Diligence Require?

The scope and depth of Patent Due Diligence can vary depending on specific needs. The following are key aspects of the Patent Due Diligence process:

1. Assessing Patent Validity and Enforceability: This evaluation involves checking various factors related to the validity of the Patent, such as whether the Patent claims are novel compared to the prior art, whether the invention is adequately described, and if the claims cover patentable subject matter or non-patentable abstract ideas. Additionally, this analysis may include reviewing any challenges to the Patent's validity raised by third parties during previous legal proceedings or litigation.

2. Determining Whether a Product Falls Under the Patent's Claims: This step involves reviewing the Patent's file, specifications, and claims, and interpreting how specific terms of the claims should be applied in a legal context. It also includes comparing the Patent claims to a current or proposed product to assess potential infringement risks associated with ongoing or future business activities.

3. Identifying Ownership, Title Chain, and Maintenance Fee Issues: This review involves verifying the ownership and the chain of title of the Patent, as well as ensuring that all maintenance fees have been paid on time. Patents are initially owned by the inventors and can be transferred through Patent Assignment Agreements. Any issues in the chain of title can significantly reduce the value of the Patent and complicate its enforcement. Additionally, if maintenance fees are not paid on schedule, the Patent may expire early, which could also impact its enforceability.

Uses of Patent Due Diligence

Patent Due Diligence can be conducted at any point during the lifespan of a Patent, depending on the purpose of the review. Below are some key uses of Patent Due Diligence:

1. Receiving a Cease & Desist Letter or Notice: When you receive a cease and desist letter alleging Patent infringement, the first step is to gather information. Patent Due Diligence is critical in helping you and your attorney assess whether the infringement claim has merit and in developing strategies to address it. This is a time-sensitive process, as such letters typically specify a deadline for addressing the alleged infringement.

2. Before Filing a Patent Application: Due Diligence at this stage involves reviewing prior art to assess whether your invention is novel and patentable before filing a Patent application. This process may even begin before the invention is fully designed, ensuring that no similar inventions exist and strengthening the chances of a successful application.

3. Patent Transactions: Due Diligence is essential for any Patent-related transactions, including monetization efforts like licensing, acquisitions, or pledging. It is also important during mergers and acquisitions, raising capital from external investors, or preparing for an Initial Public Offering (IPO). Patent Due Diligence in such transactions is a complex and time-consuming process that often involves experts from various fields and requires significant investment in both time and resources.

Patent Due Diligence Review Process

The Patent Due Diligence review process follows a structured approach, typically consisting of four stages. The depth of the review can vary based on the purpose and complexity of the assessment. Occasionally, it may be necessary to revisit earlier stages if new issues or ambiguities arise. The following outlines the typical Patent Due Diligence process:

Step 1: Preparation Before initiating the review, several key factors need to be defined, including:

• Scope and cost of the review
• Purpose of the Patent Due Diligence
• Clear objectives of the review
• Assembling a team of professionals to handle the process

Step 2: Data Collection The data collection phase focuses on gathering and reviewing critical documents. Key areas to consider include:

• Ownership: Confirm the ownership of the Patent, as joint ownership may lead to complications if the Patent is improperly managed.
• Litigation History: Investigate any prior Patent-related litigation to uncover hidden issues and prevent future legal problems.
• Protection Status: Verify the protection scope of the subject matter to understand the coverage of the Patent.
• Other Documents: Gather related documents such as confidentiality agreements, licensing agreements, employee assignment agreements, publications, and internal correspondence for further review.

Step 3: Examination This phase is often the most time-consuming and thorough, involving:

• Examination of Patents: Assess each Patent’s status, validity, claim scope, and novelty. It may be useful to create a Due Diligence checklist to ensure consistency in evaluating each Patent.
• Freedom to Operate (FTO) Search: If acquiring a Patent portfolio for a new business, an FTO search is crucial to ensure the Patents allow for desired developments or improvements without infringement.
• Identifying Issues: Detect any gaps, such as missing patent filings, unexamined patent families, or patents with unpaid maintenance fees.
• Action Items: Based on findings, draft actionable steps. These might include requesting payment of overdue maintenance fees, gathering additional information, or revisiting business strategies or agreements.

Step 4: Reporting The final step is to compile a detailed report. While the format may vary, it’s advisable to use the Due Diligence checklist as a basis for the report. The report typically includes:

• Findings, analysis, interpretations, and statistical data
• Background and objectives of the review
• A SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis to assess the Patent portfolio’s value and potential risks

By following these steps, businesses can ensure that their Patent portfolios are properly reviewed and that they make informed decisions based on thorough due diligence.

Challenges in Patent Due Diligence

Patent Due Diligence is a time-consuming and complex process, often overwhelmed by the sheer volume of information involved. A single Patent portfolio can consist of thousands of patents, making it a daunting task for Patent professionals. For example, in 2012, the Apple Consortium sold around 4,000 patents to RPX, and in 2016, Microsoft sold 1,500 patents to Xiaomi. This demonstrates the scale of review required for each case.

Given the vast number of patents in a portfolio, conducting a comprehensive analysis can be impractical. Often, the best outcome is a report that summarizes only the basic details of the patents, such as ownership and status, based on the patents that can be feasibly analyzed.

To enhance the Due Diligence process, the following points are crucial:

• Hidden Issues: Certain critical patents or prior art may go unnoticed or be overlooked, potentially concealing underlying problems. These hidden issues often come to light only after thorough, careful review of the entire patent portfolio.

• Quick and Standard Assessment: It's essential to quickly assess the scope of the patent portfolio, including the number of related patents, file wrappers, and prior art. This helps evaluate the portfolio’s strength, related technologies, and other important factors early on.

• Identifying Key Issues: It is vital to quickly pinpoint the central issues by analyzing the key patents. For example, patents with joint ownership or those involved in litigation may need more attention to avoid potential complications.