Patent Agreements Stock Art

Prior to acquiring or licensing a third party’s patents, a company should conduct due diligence to ensure that the patents contain enforceable claims with sufficient scope and that the patents are owned by the third party. Because of the associated time and expense, companies often wait until the details of a deal are nearly settled before asking their patent counsel to conduct its review. However, involving patent counsel early in the process allows for a more comprehensive review, and can provide the company with valuable leverage during negotiations. Clarifying the objectives of the deal with patent counsel allows them to provide the most helpful information in-house counsel in a cost effective manner.

Typically patent due diligence includes the following points:

1) Review patent assignments. According to U.S. law, inventions are owned by the inventors absent an assignment to another entity. Thus, even if each inventor has a duty to assign pursuant to his/her employment agreement or another contract, ownership of a patent application or patent remains with each inventor until the assignment is executed.

If the deal includes valuable foreign patents or patent applications, foreign counsel should be consulted to review the assignments and confirm they effectively establish the desired ownership rights in accordance with local law. This can be a critical issue. For example, recent cases involving some European patents determined that the right to claim priority to an earlier filed application was not properly assigned and resulted in the loss of priority to that earlier application.

As a general practice, an assignment to a priority application should be signed and dated prior to the filing of a PCT application (an international application that allows one to later file national applications). Further, the assignment should identify the priority application(s) and include a right to claim priority to these application(s). Finally, each signature on the assignment should be witnessed or notarized.

All assignments should be recorded with the applicable body. In the U.S., the assignments should be recorded with the U.S. Patent and Trademark Office (USPTO), where the chain of title is publicly accessible using the Patent Application Information Retrieval (PAIR) system. However, to view the actual assignment documents, a copy must be ordered from the USPTO.

2) Conduct a Freedom to Operate (FTO) Search and a Patentability Search. If the intellectual property to be acquired or licensed includes pending patent applications, it is often valuable to review patentability and determine the likelihood of obtaining patents with claims of the desired scope.

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The claims in a patent define the subject matter that the owner can exclude others from making, using, selling, offering for sale, or importing into the U.S. A patentability search reviews prior art (e.g. a disclosure anywhere in the world, that was published, such as in print, online or during a public presentation, prior to the earliest priority date) that discloses similar subject matter to what is claimed. The claims in a patent must be novel and non-obvious in view of these references. Often the claims in a patent application are amended during prosecution to distinguish the prior art. Although this allows the application to grant as a patent, the concession is often narrower, more specific claims. The narrower the claims, the easier it is for other companies to compete with you.

While a patentability search helps determine the likely scope of grantable claims, it does not tell you whether a proposed product can be made, used, or sold without infringing claims in another’s patent. For this analysis, a freedom to operate search is necessary. These searches are typically more expensive than a patentability search.

A complete freedom to operate analysis is only effective if the final proposed product is known. If you are uncertain regarding the components in a proposed product, a landscape search can be used to determine if the field is crowded, and identify likely competitors and/or potential licensees.

3) Confirm that maintenance fees were timely paid. In the U.S., maintenance fees are due every four years after a patent grants for up to a total of 12 years (i.e., three total payments). If a maintenance fee is not timely paid, it can still be paid with an additional surcharge for up to six months. If the maintenance fee is not paid by the surcharge deadline, then the patent expires. However, if the failure to pay was unintentional, the USPTO provides a mechanism to revive the patent that includes payment of the maintenance fee plus additional fees (currently $850 for a small or micro-entity and $1,700 for a large entity) and certain affirmations by the applicant. If the petition is filed within two years of the expiration of the patent, the petition can be filed electronically and is automatically granted. However, the USPTO can request additional information explaining the basis for the missed payment.

During due diligence, you should check the USPTO’s database to confirm that all relevant maintenance fees were timely paid. If your company will assume responsibility for future maintenance fee payments, you should ensure that these deadlines are added to your docket, or to the docket of your annuity payment service (e.g. CPA, CPI, etc.). The same should be done for all foreign patents and patent applications. For many jurisdictions, annuity fees, which are similar to maintenance fees in non-US countries, are due both while a patent application is pending, and after it grants. In some jurisdictions, such as in Japan, there is no mechanism to revive a patent if it expires due to a missed annuity payment.

Whether the patent due diligence will uncover a significant issue is unpredictable. Therefore communicating with patent counsel early in the negotiations can provide you with greater flexibility to resolve any issue, revise the terms of the agreement, or, if necessary, walk away from the deal before significant investments are made.

This article is for informational purposes and is not intended to constitute legal advice.