Successful Strategies for IP Due Diligence

John Storella510-501-0567wwwjohnstorellacom

Successful Strategies For IP Due Diligence

© Storella Law Group All rights reserved 2

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!


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 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

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


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 PortfolioA 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 ExcludeDevelop 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 StrategyThe 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 EnforceabilityTo 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 LicensesLicenses 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 TermsExclusivity:

– 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

“Funny” restrictions:– They come in many varieties –

If a restriction smells bad, avoid it!

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


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)


ConclusionYes …

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

Business

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