Conducting a due diligence review of intellectual property (IP) matters as part of a merger or acquisition has become commonplace with the growing importance of commercial IP. While most lawyers are aware of a general need to protect the more popular forms of intellectual property (patents, copyrights and trademarks) in the course of a transaction, there are a number of specific nuances that should be taken into careful consideration to avoid potentially painful missteps.
Intellectual property rights are intangible rights having no physical characteristics, and are established through the legal frameworks that they operate under. Accordingly, IP rights are very sensitive to changes in legal and administrative policy. These policies have evolved over the years in light of a shifting legal landscape in which the public opinion, laws passed by legislators, judicial decisions and bureaucratic decisions have all had their role in reforming how the various systems operate.
The implementation of international treaty obligations and international bodies such as the World Intellectual Property Organization (WIPO) further complicate the ecosystem, as the national systems also co-exist with international frameworks.
Conducting a solid IP due diligence is a deceptively challenging task that requires an acute awareness of recent legal changes. This article seeks to highlight some lesser-known pitfalls that may come into play over the course of a transaction.
“Abandoned” United States patents and patent applications
On December 18, 2013, the Patent Law Treaties Implementation Act came into effect and removed a 24 month time limit for reviving patents under the “unintentional standard”. As a result, patents once thought to be irrevocably abandoned for failure to pay a fee are now revivable with the submission of a simple petition indicating that the previous abandonment was “unintentional”. Similarly, a two year time limit for petitioning that a patent application was unintentionally abandoned was removed, and now patent applications may also be revived under this standard. This also applies to patent applications which were abandoned for failure to respond to an office action.
Given that the state of the art often takes unexpected turns, some abandoned patents previously thought to have no commercial value may actually include claims or claimable subject matter that read on now-foundational technologies. A target company may be unaware that it is actually in possession of an untapped patent goldmine.
Accordingly, a prudent transactional lawyer should request to review not only pending and granted patent rights, but make sure also any relevant abandoned patents and abandoned patent applications are included, in the event that they end up finding new life.
Non-published applications and provisional applications
While some IP rights are often listed on a number of easily searchable public databases, it should be kept in mind that not all applications are publicly available.
Regular patent applications generally enjoy a period of confidentiality that lasts up to 18 months from the date of filing; an entity may also have a number of provisional applications filed to establish earlier priority dates for their inventions, the provisional applications never being published unless relied upon to file a non-provisional application.
To further complicate matters, applicants in the United States can avoid publication entirely by certifying that they have not and do not intend to file a foreign patent application corresponding to the pending United States patent application.
Other types of applications for intellectual property rights may also enjoy a period of non-publication, such as design patent applications in the United States.
Accordingly, it is important to request a target party to disclose all non-published applications, including both pending patent applications and provisional applications, as these cannot be readily uncovered through even the most diligent of searches.
Rights for not-yet-applied-for inventions
Not every invention conceived in the course of a target’s company’s business will have applications covering the invention, and it may be important to obtain rights over the future fruits of a company’s research and development efforts.
This may involve ensuring the involvement of key individuals following a transaction to aid in examination, obtaining power of attorney agreements to execute various documents, etc.
These rights are often considered under various intellectual property-related clauses in agreements with employees and contractors, and it is prudent to review these clauses to identify any risks related to the ownership of the applications once filed.
It is also important to note that as the United States has now adopted a “first-to-file” patent system, time may be of the essence in ensuring that applications are filed as soon as practicable.
Utility models are a type of right that do not exist in Canada or the United States, but exist and are more popular in some jurisdictions, such as Germany, Finland, Austria, Korea, Taiwan, Japan, and China.
Utility models are sometimes known as “petty patents”, and are a set of limited rights over an invention that an applicant can file an application for having generally a shorter period of protection than for regular patents. The key benefit for applying for utility models is that the process is much faster, cheaper, and often does not involve substantive examination.
While utility models may be unfamiliar to some practitioners, they simply cannot be underestimated. Recent Chinese decisions have awarded very significant damages for the infringement of utility models. In some countries, practitioners concurrently apply for both a patent and a utility model, expeditiously obtaining rights over the invention through the granting of the utility model, and then converting the utility model rights upon the granting of the regular patent.
Patents issued with terminal disclaimers
During examination of United States patent applications owned by the same entity, the USPTO allows applicants to file terminal disclaimers to avoid issues with double patenting. These terminal disclaimers disclaim a part of the term of the exclusive right conferred by one of the applications.
From the perspective of a transaction, it is important to remember that, in general, terminal disclaimers require a statement that the patents in question will be “commonly owned”. The patents in question cannot be transferred separately, and the failure to concurrently acquire all of the patents covered under a terminal disclaimer will severely prejudice a party’s ability to enforce these patents.
IP assets held by related companies or holding companies
IP rights are often held at a separate entity different than the operating entity. There are various rationales for doing so, including tax structuring, bureaucratic / administrative efficiency, etc., and it is important to make sure that the entities having ownership of the intellectual property are properly considered as part of the transaction. Further, it is also prudent to check the chain of title reaching back to the original assignees to avoid any downstream surprises.
A good source of information regarding ownership can often be found in databases maintained by the patent offices, such as the TechSource database in Canada and the USPTO Assignments database in the United States. These searches may also turn up relevant information related to security interests attached to the intellectual property rights.
Other sources of IP
While a company’s most obvious and easily found intellectual property may indeed be their patents, registered copyrights and registered trademarks, there are also other sources that should not be forgotten. These include trade secrets covering a company’s confidential information, common law copyrights (e.g., source code, work products, documentation), common law trademarks, plant breeders rights, integrated circuit topology rights, industrial designs (design patents in the United States), among others.
Given that IP rights are creatures of the law, it is very important to stay abreast of recent developments, both substantive and procedural. Even seemingly minor procedural changes in the various systems may end up raising significant opportunities or risks; any established checklists or workflows used for IP due diligence should be carefully monitored and adapted to ensure that they are reflective of the latest jurisprudence and procedural practices.