Patent Due Diligence is a process of conducting comprehensive audit of a company's entire patent portfolio. The goal of the Patent Due Diligence is to provide the company with an accurate assessment and characterization of its IP holdings, identify risks and opportunities associated with individual patents and their portfolios relative to competitors and others in the market place.

The patent Due Diligence establishes a baseline for conducting ongoing monitoring of both its own and other patent portfolios, determine whether a company has the right to continue to develop specific technologies and potentially engage in litigation related to such patents. The process also involves understanding the potential for obtaining freedom to operate in a competitive marketplace and creates an intellectual property strategy to grow the IP portfolio by focusing on capitalizing upon identified opportunities and eliminating potential risks.

Performing the patent due diligence assists investors to identify the patents that have most value and help them understand the potential pitfalls associated with any patents, including the possibility of finding unexpected pending litigation, ownership challenges and payment of maintenance fees, beforehand. Knowing the potential liability gives investors greater leverage when negotiating the purchase of a patent or if they choose to abandon pursuing a transaction with an unfavorable patent. Due diligence also provides the assurance of the proper protection, assignment and lack of encumbrances of a company’s patent rights.

On top of the transactional work, conducting the patent portfolio due diligence review is an integral part of an organization’s innovation strategy and all organizations should conduct patent portfolio due diligence on regular basis. Companies must routinely perform patent portfolio due diligence reviews, since patents are constantly changing in the dynamic markets in which businesses operate. By performing due diligence recurrently, organizations can protect themselves relative to their innovation strategies, evaluate and consider new opportunities and protect against unanticipated costs.

Legal Fundamentals of Patent Due Diligence

The legal basis of patent due diligence is extremely specific, established through patent law, contract law, and company law, commonly required for any kind of commercial it is involved in, like mergers, acquisitions, licensing, and investment. The goal of patent due diligence is to ensure that patents, as intellectual property assets, are valid (novel, useful, and non-obvious) and enforceable and that the ownership of the patents can be ascertained. Patent due diligence also looks into whether or not patents have contractual encumbrances or litigation risks and whether or not there is freedom of operation in the use of the patent.

• Patent Law and Validity: One of the basis for patent due diligence is making sure that a patent must meet basic requirements set by patenting legislation. These requirements are referred to as statutory requirements and are set forth in the U.S. Patent Act. For example, a patent must have a novelty, a utility, and a non-obviousness. To complete a patent due diligence review, the patent prosecution history and the United States Patent and Trademark Office (USPTO) databases are typically reviewed and assessed. If there is a finding that there was misconduct during the patent prosecution process for example, the patent was procured through misrepresentation or the omission of material facts, then the patent is likely unenforceable and will have a significant effect on its value.
• Title and Ownership Verification: All Legal Verification efforts ensures a clear chain of title and ownership. This includes verification of how rights were transferred from the original creator(s) to present day owner(s), assignment verification, and responsibility of all third parties. Any gaps in ownership, or uncertainties in ownership can result in a purchaser facing legal risk or uncertainty regarding their rights.
• Freedom to Operate and Infringement Risk: Due Diligence allows a client to determine if the client has the ability to operate freely, create, or market a particular product without infringing on any third party patents (Freedom to Operate). This is a critical legal review that is frequently avoided to avoid the risk of infringement lawsuits, and is critical in technology driven industries such as biotechnology and software. Analysis of competing patent landscapes and assessing risk precedes any business strategy development.
• Contractual Obligations & Contracts: Any contract associated with one or more patents (e.g., licensing, joint ventures, research & development contracts) is reviewed to identify any restrictions, exclusivity, or continuing obligations that may exist (e.g., royalties, field-of-use restrictions). These contracts have the potential to materially impact the breadth and economic value of patents after they have been monetized or otherwise utilized.
• Disputes & Litigation: Patent due diligence also include a review of litigation history or current litigation relating to the particular patents. Understanding the historic or current litigation, settlements, or validity challenges is critical to establishing potential risk associated with these assets. The patent's litigation history indicates litigation strategies or weaknesses and influence potential investors or purchasers.

The legal framework for patent due diligence ensures that the subject Patent Assets are enforceable, valid, appropriately owned, free from potential risks of infringement, and free from any ambiguous agreements or litigations. These protections help to minimize the potential for future shocks after a transaction and allow for maximizing the value of any transactions involving significant amounts of intellectual property.

Importance of Patent Due Diligence

When assessing any asset, the need for Patent Due Diligence is essential and is one of the most important processes that can be carried out when evaluating potential acquisitions.

Without conducting Patent Due Diligence on an asset, there is a high possibility of misestimating the true value of the asset, having unsuccessful litigation or potential regulatory actions arise from the use of the patents in the future. Patent Due Diligence provides an opportunity to identify hidden risks associated with a patent and to discover opportunities that were overlooked by others. It also allows the parties involved in the acquisition to negotiate their respective legal positions with respect to the use of the patent.

In the absence of conducting Patent Due Diligence, if there are some legal issues that arise from using the patent(s) in the future, both the financial and legal ramifications are likely to be very severe. Below are some examples of scenarios in which it is important to conduct Patent Due Diligence:

• Infringement Risk: By performing Patent Due Diligence, there is an opportunity to identify possible infringement issues for patent assets and whether products and solutions manufactured by the company may infringe upon another company's patents.
• Validity and Enforceability: Patent Due Diligence is performed to evaluate the validity and enforceability of patents and to ensure that the patents cannot be challenged based upon prior art and other evidence.
• Discovery of the Ownership Issues: By conducting due diligence, it is possible to define the rights and responsibilities of a company pertaining to its patent portfolio; thereby, reducing the likelihood of ownership issues arising that may detract from the value or enforceability of those patents.
• Reducing Legal Risk: Detecting potential legal issues early allows a company to address them prior to being established, therefore limiting a company’s exposure to excessive legal fees and other legal problems.
• Establishing the Value of a Patent Portfolio: Due diligence provides a broad estimate of the worth of the patent portfolio and thus establishes its financial worth for investment or acquisition opportunities.
• Identifying Unused or Underutilized Patents: Due diligence is useful in recognizing unused or underutilized patents in order to identify opportunities for licensing, monetizing, or reducing maintenance costs.
• Evaluating the Real Time Market Potential: Due diligence provides insight on the current market potential of a patented technology and on identifying new products and/or generating additional revenue via new business ventures.
• Supporting Informed Decisions for Investors: Due diligence supplies investors with the information necessary to make sound decisions about whether or not to invest in a company and/or its patents.
• Supporting Strategic Planning Efforts in Research & Development: Due diligence assists businesses with planning their R&D efforts, thereby avoiding unnecessary redundancy and concentrating their efforts on those areas with the greatest likelihood of success.
• Negotiation Advantage: Performing a full patent due diligence examination puts you in position to negotiate better terms for a merger, acquisition, or licensing agreement.
• Freedom to Operate: By performing Patent Due Diligence, an organization confirms that it is able to conduct its business without infringing upon others' intellectual property rights.
• Improved Patent Portfolio: Patent Due Diligence uncovers any gaps (whitespace) in an organization's current patent portfolio so that additional patent applications may be filed that strengthens the organization's overall intellectual property position.
• Preserving IP Rights: Patent Due diligence ensures that all Intellectual Property rights that are necessary for the organization are secured, thus preventing the organization from losing their ownership or facing an infringement claim in the future.

To summarize, Patent Due Diligence is an important step for an organization of any size. It protects organizations from potential liability, establishes the value of an organization's intellectual property, and provides the information necessary for the organization to make sound strategic decisions that may significantly impact their overall success.

Identifying Relevant Patents and Applications

Intellectual property identification is the first step in conducting a patent due diligence process for a potential acquisition, including identification and verification of all granted patents, pending patent applications, and global filings, including for example, continuations, divisionals, or PCT applications that may be associated with the acquired company's patent portfolio. In order to conduct a thorough due diligence analysis of an acquisition, a complete picture of these assets is required.

The following items need to be collected and reviewed during the patent due diligence analysis:

• Patent numbers and jurisdictions where the patent is filed
• Filing and priority dates of each patent and application
• Expiration dates for all patents and applications, including any further action required
• Current status of each patent with respect to maintenance and payment of annuities
• Current status of the prosecution of each patent application (e.g., granted, pending, abandoned)
• Worldwide, e.g., international counterpart(s) to each patent and application filed by the first patent owner and any family members.

Some companies may provide lists of their patent assets for presentations and data rooms. However, such lists may not always be up-to-date, accurate, or complete. Therefore, due diligence groups must cross check patent lists with information available publicly on patent databases, such as the USPTO, EPO, and WIPO and with other sources, such as Orbit, Derwent, or Patseer.

In addition to patents that are owned, or that are acquired by licensing (rather than creating), they must also be viewed with diligence to verify that they do not include limitations based on restrictions, royalties, or fields of use. Knowledge of access terms to 3rd party technologies is critical in determining the value of these licenses when evaluating the business in which they are held.

Recognizing the types of patents owned may only be useful if they are related back to company's most important product lines or technologies. It is possible to have dozens/hundreds of different patents, but only a handful will be ingredient to the overall business strategy. These are called as "crown jewels" within the intellectual property portfolio.

An additional trick is to evaluate how the intellectual property portfolio(s), are built and grow alongside the company's research and development growth and to determine where the two fit into overall future growth strategy. This process includes evaluation of the following:

1. The range of claim coverage
2. The extent of technical novelty or uniqueness, directly related to the covered patent
3. The extent of the patents' applicability to future innovation

Abandoned or lapsed patents applications may provide indirect insights regarding strategies as well as financial problems and/or weaknesses that exist within your industry. One way this can occur is when a patent holder inadvertently loses their patent rights if they do not continue to pay maintenance fees on their patents, this situation can arise, however, in specific instances the patent rights associated with a missed payment are recovered.

Essentially, adequate identification of all patents or patent applications is necessary for conducting proper due diligence. Missing either a patent application or an expired patent results in applicable value fluctuations and/or lost opportunities, particularly within industries impacted by intellectual property.           

Evaluating Patent Validity and Enforceability

Assessing the validity and enforceability of patents is one of the most important things done in the due diligence process associated to patents. If a patent cannot survive judicial scrutiny or cannot be enforced against an infringer, then it is worthless. Just because a patent has been granted does not mean that it is good. The validity of the patent is dependent upon whether it has been prosecuted properly, is new, is non-obvious and is supported by the specification.

The validity analysis considers if the patent satisfies all of the requirements to be patentable under law:

• Novelty: Is the claimed invention already known from the prior art?
• Non-obviousness: Is the claimed invention obvious to someone with ordinary skill in the art as of the date of filing?
• Enablement and written disclosure: Does the patent describe how to make the invention and how to use it?

In a typical due diligence process, a prior art search is conducted and the file history is also analyzed to see how the patent examiner assessed these factors. If the examiner did not consider any prior art, the patent may be subject to invalidation in future litigation or administrative proceedings.

The litigation history of a patent also plays a role in assessing the credibility of a patent. The passage of time since the grant of a patent has established a history of successful defenses or appeals through various regulatory channels. A patent that has been challenged and survived through opposition proceedings, inter partes review (IPR), or district court litigation is viewed as more credible. Conversely, if a patent is currently in litigation or has had an adverse ruling at the district court level, it would be a potential red flag.

In conclusion, the overall purpose is to determine the likelihood of a patent standing up against a challenge, and to what extent it can be used as a tool for competitive positioning or for monetizing value.

Freedom to Operate (FTO) and Infringement Risks

FTO (Freedom to Operate) refers to the user's right to sell, make or use a product or technology without infringing a valid and enforceable patent owned by a third party. Unlike patent validity, which focuses on the owner's intellectual property (IP) rights, an FTO analysis looks at how other companies' patents may create an obstacle to making, using and/ or selling a company's product(s).

Companies should conduct an FTO search prior to:

• Launching a new product
• Entering a new market
• Increasing production
• Licensing technology to third parties
• Raising funds for companies based on their IP assets

Just because a company holds patents does not provide them the authority to operate as they please. This is because patents grant the owner the right to prevent others from utilizing that patent, not the ability to actually carry out an act related to that patent's invention or utility. Additionally, when a company creates an improvement for a more significant, foundational patent, it can still infringe that foundational patent despite holding their patent for the improvement.

To determine whether your product is free to operate, you must conduct multiple steps:

• Identify the product features and compare them to known patent claims
• Conduct patent landscape searches to find all possible patents that may be relevant to your product
• Analyze the scope of the claim (the claim language) of the patent to determine whether your product features are included in the patent's claim(s).
• Check to find out expiration dates, pending litigation status and/or licensure preferences.

Finally, many times, products are free to operate in one country yet not elsewhere. Therefore, when companies intend to sell or launch products globally, a search is conducted across multi-jurisdictions of FTO.

The outcome of a freedom to operate analysis can yield strategic choices that involve:

• a redesign of features to avoid patent infringement
• negotiation of licenses with patent owners
• challenges to the validity of patents owned by third parties
• taking on risk if the potential reward for developing a product outweighs the liability associated with it

In addition to these strategies, a freedom to operate analysis may also be used proactively to generate defensive publications strategies through the early disclosure of technology to prevent others from being able to obtain blocking patents on the technology.

Failure to conduct a freedom to operate analysis can result in:

• an injunction being placed against by either a patent holder and/or court or other government agency
• the payment of back damages for past use
• a loss of the opportunity to enter into a specific market
• a reluctance of investors to back either financially or otherwise

Having a freedom to operate analysis is a necessity for those that are in high risk industries and not a “nice to have” item.

Types of Patent Due Diligence Assessment

Strategic Patent Due Diligence

This assessment examines the manner in which the desired patent assets can be tailored to fit into the current strategy of the acquirer.

The situation discussed earlier is a good example of a strategic patent due diligence. In that scenario, two companies were interested in the patent portfolio of a bankrupt company. Their reasons for acquiring the company were strategic decisions and was revealed by this due diligence.

Thus, whenever there is a possibility of acquiring another patent portfolio, it should be assessed on the ground that how the company will benefit from the same. These benefits may range from stopping a competitor from acquiring it or commencing business in a new territory or sector.

Procedural Due Diligence

Under this assessment, only the technical aspect of the portfolio is evaluated. This is also an important aspect in determining the key pointers, including, but not limited to: exact number of patents available for acquisition, whether all applications have been correctly filed, how many patents have been granted, how many are pending and the stage at which they are pending, any oppositions filed against the patents, any patents due for renewal, etc. This information can help in determining the exact strength of the patent portfolio.

Assume a situation where the patents for some popular vaccinations are up for sale, however, these patents are nearing expiry, after which they may enter the generic domain. It is only by Procedural Due Diligence this sort of information comes to light. A classic example of a lapse in this regard is the purchase of IP assets of Rolls Royce and Bentley by Volkswagen in the tune of $900 million. It was only after the deal was sealed that Volkswagen realized that the trademark “Rolls Royce” was owned by BMW through a prior agreement. Volkswagen then had to enter into a separate agreement with BMW for the said trademark.

Quality Due Diligence

This analysis is used to verify the real strength of a patent portfolio. The quality check is not just a formality, but a proper examination to determine the details of a patent portfolio. It helps in analyzing how the patents can actually be used by the acquirer.

After assessing the quality of each patent, the assesse can conclude the real value of the particular patent. It also helps in determining whether – the patent satisfies the criterion prescribed under the legislation, whether the document is properly described to include the whole invention, or are there any missing claims, etc.

Not just that, the due diligence highlights other issues like:

• What if the claims of a patent document do not cover the key technology?
• What if there is a significant portion of the document which is not properly drafted?
• What if the technology required for working is not mentioned in the document?
• What if there is a significant overlap of the patents with a competitor?

All these issues can only be recorded after the quality due diligence is completed.

Tactical Due Diligence

After all the other aspects of Due Diligence are completed, then the tactical assessment is done. It provides recommendations to all the queries raised under the strategic, procedural and quality analysis of a patent portfolio.

Under the tactical review, the following details can be examined –

• How can the strategies of both the parties (acquiring and to be acquired) be aligned for the smooth transition?
• What key steps are required to be taken?
• What procedure or process must be followed?
• Are any renewals to be filed; are any responses to FERs due; are any oppositions or counter-statements or any procedural requirements pending to be filed; any priority applications pending; etc.

Methodology

To identify promising IP assets for Licensing or Acquisition activities, Effectual Services collaborates closely with their clients to ranking these patent based on our proprietary or client specified ranking models. The output of such a scoring model eventually ranks patents as High, Medium and Low. The ranking methodology can be of two types:

Semi‐automated solution

We understand the need of optimizing costs for our clients and of delivering maximum value to them. We have developed a scoring system for identifying key patents from a large portfolio, based on certain parameters. This scoring system takes into account both objective and subjective parameters such as forward citation, number of independent claims, claim length, detect ability of overlap, market segment and size, etc.

Manual solution

Depending on the client’s needs, we can also provide an entirely manual approach for ranking patents analysis, wherein the scoring is based on a completely manual analysis. Such an analysis does include all the parameters used in semi‐automated approach, but also the analysis is extended to more subjective parameters, such as, remaining life, number of foreign family members, availability of alive family member, number of office action responses, etc.

Tools & Resources

Free databases:

We use free databases such as Google Patents, Espacenet, USPTO, WIPO to collect relevant patent data related to the technology domain.

Paid databases:

We use paid databases such as Derwent Innovation, PatBase, Orbit to collect relevant patent data related to the technology domain.

AI-based Semantic Search Databases:

We use AI Based tools such as PatSeer, Ambercite, Questel Orbit, Patsnap, Patentfield, Patent Quality Artificial Intelligence (PQAI), Amplified to collect relevant patent data related to the technology domain.

Effectual Service Propriety Tool: RanEffect

With an in-house devised algorithm, RanEffect obtain a patent’s value, strength and weight based on business context. RanEffect provides an intuitive interface to easily upload portfolio of any volume and independent of any jurisdiction.

RanEffect Features:

• Identifies Patent strength and ranks Assets as High/Medium/Low.
• User defined weightages for key parameters based on business context.
• Background algorithm using weighted average and conventional indicators to assess individual patents.
• Intuitive interface to upload, download and display evaluated portfolio.

Case Study

A corporation interested in entering a new industry approached us with the purpose of buying a patent portfolio from a firm that operates in that field. The corporation then turned to us to conduct a comprehensive patent ranking analysis of the portfolio they were considering purchasing from the target firm. The patent ranking analysis we performed was based on careful manual reviews of multiple patents as well as key strategies such as patent life remaining, number of foreign family members, and response to office action during the evaluation of the portfolio. While conducting this evaluation, we were able to keep the prospective acquisitions confidential through the entire process.

Through our patent ranking analysis, the corporation now has the ability to quickly identify which patents are most valuable and should be the focus for purchase; therefore, their overall intellectual property value will increase. We received considerable praise from our client for providing this valuable service to them and helping them to create a strategic plan that will enable them to become a strong competitor in the new marketplace.

Why Choose us?

At Effectual Services, we offer a comprehensive and proven approach to patent bucketing and ranking that sets us apart as the preferred choice for organizations seeking to unlock the full potential of their intellectual property assets. Here are compelling reasons to choose us.

Expertise in Patent Analysis

Our team comprises seasoned experts in patent analysis and intellectual property management. We bring years of experience and in-depth knowledge to the table.

Customized Solutions

We understand that every client is unique. Our approach is tailored to your specific objectives and requirements, ensuring that the bucketing and ranking process aligns perfectly with your goals.

Comprehensive Taxonomy Development

We excel in creating comprehensive taxonomies that serve as the foundation for categorizing your patents accurately. Our structured approach ensures clarity and precision.

In-Depth Analysis

Our thorough analysis goes beyond surface-level categorization. We delve deep into each patent, considering both objective and subjective parameters to provide a holistic assessment.

Proprietary Ranking Models

Leveraging our proprietary ranking models, we assess patent value with precision. Our models consider a wide range of factors, enabling us to identify high-potential patents effectively.

Proven Success Stories

Our track record is a testament to our capabilities. We've helped numerous clients streamline their patent portfolios, making informed decisions about licensing, acquisition, and strategic management.

Cost-Effective Solutions

We understand the importance of cost optimization. Our solutions are designed to deliver maximum value while respecting your budget constrainats.

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