An Introduction to Patent Due Diligence

A patent due diligence analysis can be an important and cost-effective tool for your company. It helps you determine the value of your own patent portfolio, including whether you can monetize your patents through licensing, enforcement or divestment. Conversely, it allows you to assess and mitigate the infringement risks posed by a competitor's patents or the patents of another party, such as a Non-Practicing Entity (NPE). Diligence, for example, can guide your strategy for responding to a cease-and-desist letter from an NPE and can mitigate your damages exposure against a finding of willful infringement.

This post is part of a longer series designed to answer questions related to patent due diligence, when to do the analysis, what forms it may take, and what to look for in each step. Here, we provide a general overview of what patent due diligence is and various practical scenarios where it may be helpful. For the full list of posts see below.

Q1: What is Due Diligence in the Patent Context?

At a high level, patent due diligence is the process of analyzing a patent or set of patents to support your business objectives. Patent due diligence can take many forms, depending upon the circumstances in which the need for diligence arises. For example, diligence can be "offensive" to determine whether others are infringing your patents or whether your patents can be monetized via licensing or divestment. Such an offensive diligence may entail researching other companies' products to determine whether any of their products infringe your patents as a first step towards enforcing your patents. Additionally, it may include tailoring a licensing strategy to generate revenue in line with your business objectives. Patent diligence can also be "defensive" to assess whether you have the freedom to operate your next business venture, including whether you are infringing the patents of others and what steps can be taken to mitigate that risk. Whether engaging in offensive or defensive diligence, companies often rely on qualified IP counsel to analyze patents and identify how they may factor into business objectives because of the legal expertise required to assess factors such as the scope and validity of a patent and develop a monetization strategy to maximize the return on your IP investments.

Q2: What Does a Patent Due Diligence Process Entail?

The scope and depth of the patent due diligence analysis can vary significantly based on your needs. Common components of a diligence analysis include:

• Determining whether a target product falls within the scope of patent claims. This analysis may include a review of patent file histories, specifications, and claims, an assessment of how certain claim terms could or should be interpreted in a patent proceeding, and an application of the patent claims to a target product. The results of this analysis are commonly used to determine the patent infringement risk associated with an existing or planned business activity.
• Determining whether the patent is valid and/or enforceable. This analysis evaluates one or more factors concerning the validity of a patent, such as whether the patent claims are novel over the prior art, whether the patent sufficiently describes the invention, and whether the patent claims are directed to patentable subject matter or a patent-ineligible "abstract idea." This analysis may also include evaluating any challenges to patent validity that were brought by a third-party in a previous litigation or patent proceeding.
• Determining whether there are potential ownership, chain of title or maintenance fee issues. This analysis includes assessing the ownership, chain of title and early expiration issues. Ownership of a patent initially vests in the named inventors and can progress via patent assignment agreements to others. Defects in the chain of a title may substantially devalue the patent and make it more difficult to assert in litigation. Also, generally speaking and subject to certain exceptions, a United States utility patent will expire about 20 years after the earliest application for the patent was filed with the Patent Office. Patent maintenance fees are due to the Patent Office periodically over the course of a patent's lifespan, and if those are not timely paid, a patent can lapse, or expire earlier.

Q3: When Should A Patent Due Diligence Analysis Be Performed?

Patent due diligence may be particularly useful in a number of scenarios:

• After you receive a Notice Letter or Cease and Desist Letter. Generally speaking, Notice and Cease-and-Desist Letters are often designed to alert and warn accused infringers about the existence of the patent rights, initiate licensing discussions, maintain patent enforcement rights, and secure (and sometimes initiate) the opportunity to collect damages. Cease-and-Desist Letters are more aggressive than Notice Letters in that they also demand that the accused infringer immediately stop its potentially-infringing conduct. If you receive such letters you should consider a strategy for responding and mitigating risk as appropriate, including any risk of willful patent infringement. Important considerations here may include the depth and clarity of the infringement analysis, if any, provided by the patent holder, when the patents will expire, applicable state statutes governing bad faith assertions of patent infringement, and whether the patents would likely be found valid, enforceable and infringed by the accused company technology.
• During a merger and acquisition. Patent due diligence considerations during an M&A transaction can include, among other things, assessing whether the parties' patent portfolios cover critical company technology, and confirming that all fees have been paid and no ownership issues or chain of title defects exist. Taking these steps may then permit the parties to the transaction to assign monetary values to these portfolios. The analysis can also include assessing patent infringement risks posed by third-party patents on the to-be-acquired technology and identifying risk mitigation techniques.
• Developing a set of "On the Shelf" patents. Even if your company is not looking to initiate a patent infringement lawsuit, you may still want to have a set of patents "on the shelf" to offensively assert against competitors that may bring a lawsuit against you. Here, patent due diligence allows you to create a cache of "on the shelf" patents that could be asserted against target products of the company's competitors, and in addition to identifying potential areas for additional patent prosecution efforts. A weak portfolio may hinder effective enforcement, whereas a robust portfolio may dissuade others from suing you or your customers.
• Monetization in the form of divestment or licensing. As alluded to earlier, divestment and licensing strategies allow you to determine how your patents will be utilized, especially considering your company's bottom-line. Here, a strong patent portfolio that affords broad patent protection is likely to enhance the value of the technology. Patent valuation can be conducted in a variety of manners, including by using a qualitative and/or quantitative analyses. A qualitative analysis can aid in determining the scope and strength of your patent rights while a quantitative analysis uses those findings to help assign monetary value to those rights. Qualified IP counsel can help ensure that the scope and strength of those patent rights are properly accounted for and monetized.

More questions? Contact the authors or visitFish's Intellectual Property Law Essentials.