Successful Strategies for IP Due Diligence

Successful Strategies For
IP Due Diligence
John Storella
510-501-0567
wwwjohnstorellacom

Why IP Diligence?

The Investors want to get comfortable …

… that your Company will be a solid investment

(And their lawyers are nervous …

… that they’ll miss a red flag that will embarrass them
later)
They’re going to scrutinize your IP and
focus on the danger zones.

So you need to be prepared!

© Storella Law Group All rights reserved 2

When Should You Prepare For IP Diligence?

Now!
Don’t wait until investors ask for it


How Should You Prepare for Diligence?

• Resolve any freedom
to operate issues
• Build a strong IP
portfolio
• Clean up title to your IP
• Negotiate solid licenses
• Get your IP portfolio
organized

Resolve Freedom To Operate Issues
Freedom To Operate is
the absolute essential
of Intellectual Property
– Lack of patents can
impair your competitive
advantage
– Lack of freedom to
operate can put you out
of business!


Investor Concerns On Freedom To Operate

Investors will ask you to provide copies of any freedom to
operate analyses you have performed
– And ask you to provide comfort on troublesome third party patents

Investors will ask if your Company:
– Has received threatening letters from
third parties
– Been sued for infringement
Investors will perform their own
freedom to operate analysis
– And bring new patents to your
attention for explanation


Freedom To Operate Procedures
You should:
– Establish freedom to
operate procedures from
the beginning
– Diligently execute these
procedures during:
• Product concept
• Product development
• Product launch


Freedom To Operate Analysis

Conduct thorough freedom
to operate searches for
the product as a whole
– Include issued patents and
pending patent applications
• US and major markets
Evaluate the results:
– Patents that require action
now
– Patent applications you
need to follow


Resolve Freedom To Operate Issues

Develop an action plan:
– Consider how long until the patent
expires
– Design around troublesome patents
– Obtain licenses on patents that cannot
easily be designed around
– Obtain opinion letters
– Get ready for litigation

You don’t want to be surprised by the Investor’s analysis
– But expect them to find some things you didn’t


Have Your Freedom To Operate Story Ready

Prepare a freedom to operate
presentation that
summarizes the results and
analysis
– Clarity, not complexity
Put potentially problematic
patents in the best light
– Put the freedom to operate
risk in perspective
– Explain how you are dealing
with possible threats


Build a Strong IP Portfolio
A strong IP portfolio gives you
a competitive advantage by
excluding competitors from
features that make your
products attractive to
customers
Strength is a function of scope
and enforceability
The Investors want to know
whether the IP portfolio:
– Excludes competitors from the
market
– Can be enforced against
competitors


Power to Exclude
Develop and implement a patent
strategy that is market oriented
rather than invention oriented
Focus on getting patent claims that
exclude competitors from selling
competitive products
– Rather than covering an “invention”
Show Investors how your patents
will stop competitors from
entering your market
– This is more compelling than
showing how your patents cover
specific technical aspects of your
products


Tiered Patent Strategy
The most powerful patents cover
the advantage that the
invention provides to the
customer
– e.g., cost, speed, ease of use
At the next tier, patents cover the
technical feature that provides
the advantage
– e.g., reduced reagent need,
increased efficiency of process,
automation
At the next tier, patents cover the
specific technical aspects of
the invention
– e.g., microreactors, coordinated
subassemblies, improved
algorithms


Patent Enforceability
To be useful, a patent must be
enforceable
Things that call enforceability into
question:
– Legal challenges to validity
• Suits to declare patents invalid
• Patent re-examinations
• Patent interferences to determine
first inventor
– Concealing prior art from the
Patent Office
– Purposely naming wrong inventors
If any of these are an issue, you
should have a explanation
ready to mitigate investor
concerns

Clean Up Title to Your IP
Clean title to your IP is
essential for a Company to
use that IP to exclude
competitors.
Any cloud on title to IP puts your
Company at risk
The Investors want to confirm
that you have clean title to
your IP


Strong Chain of Title
There must be an
unbroken chain of
title from the
inventors to the
Company
Title to IP is held,
initially, by the
Inventors


Securing Rights From Inventors
You must:
– Confirm that no prior employer can
claim rights to your IP
• Prior employers may have rights in
inventions made when the inventor was
their employee
• Obtain a waiver from the prior employer if
necessary

– Require every employee and contractor to execute an employment
agreement in which he or she “promises to assign and does hereby
assign” all inventions to your Company
– Obtain written assignments from inventors and record the assignments
in the USPTO
– Investigate and resolve challenges to inventorship by non-employees


Other Title Issues

Avoid out-licensing exclusive rights
that the Company needs to operate
Avoid encumberances (e.g., liens
and other security interests) and
release any encumbrances as soon
as possible
Comply with reporting and election
requirements under Bayh-Dole for
inventions made with government
funding


Negotiate Solid Licenses
Licenses are an incomplete
form of control over IP
– They come with strings
attached
– They can be revoked!
So the terms of a license are
critical to your success
The Investors will want to know whether there are
any undue restrictions that compromise your ability
to commercialize the technology


Solid Licenses

You should begin by:
– negotiating licenses with
good terms, or
– amend existing licenses to
provide better terms


License Terms
Exclusivity:
– Your Company needs to have an
exclusive license on foundational
technology
• Non-exclusive licenses are just
freedom to operate licenses
Field of Use:
– The field of use should be broad
enough to cover all uses
contemplated by the business plan
Restrictions on license transfer:
– Restrictions on transfer can
handicap “exits” such as M&A
– You should limit such restrictions to
the “noise” level
• For example, payment for transfer
rather than prohibition


License Terms
Financial terms:
– You need to make sure that the total royalty burden
on its products is low enough so that you can make
a healthy profit
– Balance royalty burden with gross margin and non-
COGS costs

“Funny” restrictions:
– They come in many varieties –
If a restriction smells bad, avoid
it!


Organize Your IP Portfolio
Your IP portfolio forms
the foundation of IP
diligence.
The Investors need to
understand the extent
of the portfolio so they
know what to focus on.


Create An Up To Date List Of IP
The list will:
– Include all the IP under which
your Company operates
– Identify whether the IP is owned
or licensed
– Classify IP as patent,
trademark, copyright or trade
secret
– Provide identifying information
such as serial or patent
numbers
– Indicate IP status (e.g.,
pending, lapsed, abandoned)


Conclusion
Yes …
Due diligence is an intrusive burden.
But …
A well run IP program will enable you
to successfully navigate any IP
diligence.
Take the initiative by being
proactive rather than reactive.

Do diligence on yourself
before diligence is done on you!


Successful Strategies for IP Due Diligence

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