Practice Spotlight – A Due Diligence Case Study

September 2016

By: Keith F. Noe & David M. Roccio

The value of a merger or acquisition often depends on the potential value and risks associated with the target company’s intellectual property (IP).  However, the value and risks associated with the target’s IP may also help define how “involved” you want to become with the target. As noted in our May issue of TIPPs, the key points to keep in mind when navigating a due diligence include:

  • defining the goals;
  • knowing the target company;
  • identifying the players;
  • identifying and understanding IP issues, IP rights, and IP assets; and
  • determining your exit strategy.

A pointed case study including many of these navigation points is outlined below.

Challenge

Our client was interested in becoming involved, in some capacity, with a target company; however, they were not sure whether they wanted to acquire the company, invest in the company, or simply license/promote the company’s product. The client had some concerns regarding the patentability of the company’s product and whether it could be operated freely without infringing third party patents. This is when our team was brought in: to investigate the product and the company, and provide intelligence that would help our client define the most favorable arrangement.

Solution

During our initial discussion, we learned that our client placed a relatively high value on access to the product and on a potential relationship with the target company. It became clear, however, that the client did not have a complete view of the target company’s existing and future IP strategy nor a full understanding of the current state of the art. Without this information, it would have not been prudent for our client to enter into any sort of relationship with the company, and might have exposed our client to potential liability. With this intel, our next step was to speak to the target company’s legal counsel.

During a call with the target company’s counsel, we gained information about the company’s previously filed (and expired) provisional patent applications and their plans to imminently file multiple new applications. After the initial call, we reviewed the new and previously filed applications and determined that there were some issues regarding the patentability of the applications in light of current case law. When pressed on these concerns during a follow-up call, the company’s legal counsel validated our concerns that the claims would likely need to be relatively narrow, and tailored to a specific embodiment, to achieve patentability.

In light of the potential issues with the target company’s planned IP, our client decided to eliminate acquisition and investment as options moving forward. However, a desire still existed to potentially license and promote the company’s product, dependent on the current state of the art. We were asked to perform a freedom to operate search to determine whether the target company’s product could be used without infringing the patent(s) of other parties.

We optimized the freedom to operate search by utilizing multiple sources with access to different databases. Once the search results were combined and reviewed, we identified a group of patents with claims that were potentially troublesome in view of the product. We presented our findings to the client, who then asked us to present our findings to the target company’s counsel. In response, they provided us with a cursory opinion identifying a claim element (present in all claims) that the target company did not think was performed by their product. While we generally agreed with the analysis in the opinion, we recommended a more comprehensive analysis of the identified patents in relation to the product be performed, to aid our client’s decision-making, and to shield them from allegations of willful infringement, should they decide to proceed.

We reviewed the identified patents, the prosecution history of each identified patent, product information, and the opinion provided by company’s counsel. Our analysis confirmed that as long as the product was not operated in one specific way, such use of the product would not infringe the claims of the identified patents. We provided an in-depth analysis of the reviewed material and explicitly identified the claim element not performed during the limited operation of the product.

Result

The opinion allowed our client to identify how they could promote and use the target company’s product in such a way that it would not infringe the patents identified in the opinion.  Using our due diligence on the target company, the company’s IP, the product, and the current state of the art, the client was able to make an informed decision about what its relationship with the target company should look like and to specifically define the relationship, in light of the company’s future IP and the opinion, to limit potential risk to the client.