Intellectual property assets, such as registered patent rights, are routinely becoming a more substantial component of a company’s overall value when a merger or acquisition (“M&A”) transaction is being contemplated. While traditional due diligence, as performed for bricks-and-mortar-type assets, offers a template from which to consider patent due diligence, there are intricacies in patent law that require a more nuanced approach to uncover the pitfalls or hidden value in patent rights that are being sold or purchased. The purpose of this article is to highlight a few key issues that should be considered when patents are part of an M&A transaction.
Chain of Title
It is well understood that a seller has to have title to their patent rights before they can sell them. Further, a patent owner cannot assert their patent rights against a potential patent infringer unless they are the owner of such rights. Beyond these relatively simple statements, however, there are routinely complex issues involving chain of title when patent rights are being sold or acquired. Unlike real property where a simple visit to a Land Title Office should uncover the identity of the owner of the real property, a review of documents filed at the Canadian Patent Office may not, in fact, disclose the actual owner of the patent in question.
While the filing of patent assignments makes sound legal and business sense, there is no absolute requirement under the Canadian Patent Act to file a copy of an assignment when a patent is assigned from one party to another; rather, section 51 of the Patent Act states that a registered assignment has effect against a subsequent assignment, thus outlining a significant benefit of registering an assignment. In reality, many patents are owned by companies that, over time, go through several rounds of corporate reorganization, which result in the assignment of patent rights from one corporate entity to another within the same organization. Often times, the patent assignments related to these reorganizations are not filed with the Patent Office. A properly conducted M&A transaction should have these chain of title issues dealt with well in advance of closing. As with most due diligence issues, providing counsel with sufficient time to review the relevant chain of title documentation is highly advantageous as compared with waiting until the last minute to resolve these issues.
Patent Validity and Patent Infringement
A purchaser of patent assets will necessarily want a representation from the seller that the patents being acquired are valid and are thus worth the consideration agreed to as part of the transaction. Additionally, the purchaser is well advised to conduct their own due diligence on the validity of the patent assets. There are numerous factors which can impact the validity of a patent. For example, relevant prior art (which includes documents such as prior patents, published patent applications, and published technical articles) may anticipate an issued patent such that the issued patent is, in fact, invalid for not being novel. Further, relevant prior art may render an issued patent invalid for being obvious in light of the prior art. In these cases, an effective due diligence process should identify the relevant prior art and provide a sound opinion as to the likelihood that the issued patent is valid (or invalid).
There are also factors such as the requisite annual payment of maintenance fees which, if not paid in a timely fashion, can invalidate an issued patent or render a patent application irrevocably abandoned. During a M&A transaction, there are a myriad of legal and business issues being contemplated such that the “relatively” small matter of “who is paying the annual patent maintenance fees” can fall off the collective radar screen. Clients contemplating such a transaction should ensure that their counsel is aware of these types of pitfalls.
Further, a purchaser of patent rights also needs to be aware that the acquisition of patent rights does not give the purchaser the right to practice the invention without the risk of infringing a third party’s patent rights. As a result, purchasers of patent rights should not only attempt to negotiate strong representations and warranties with respect to the non-infringement of these assets, they should also conduct their own due diligence to ensure that their newly acquired assets do not result in a newly acquired patent infringement lawsuit.
Patents are issued by countries or, in certain instances, by organizations such as the European Patent Office. The international nature of patent rights routinely requires local counsel to engage foreign counsel in each of the jurisdictions where patent rights are pending or issued. The effective use of foreign counsel is essential for ensuring that patent rights in a particular jurisdiction of interest are in force and for ensuring that any pending deadlines are met, especially if they fall during the period in which an M&A transaction is being completed. Because of the international nature of patent rights, it is highly recommended that parties to an M&A transaction contact their local counsel early in the process so that effective international patent due diligence can take place in a timely fashion.
Patent-related due diligence, such as determining the validity of a patent, requires counsel that have experience working with and interpreting patent documents. In Canada, clients have the opportunity to either work with lawyers who have experience in patent matters or patent agents. Importantly, in Canada there is no formal recognition of privilege for opinions or work product that is carried out exclusively by patent agents. Clients should be cautious of working exclusively with patent agents who are not also lawyers for matters related to due diligence as it is highly preferable to have such opinions and related matters protected under the long-standing recognition of solicitor-client privilege.
Due diligence issues related to patents can be complex and time consuming. A common denominator for effectively dealing with these issues is to find trusted counsel and to engage such counsel early in the process so that M&A transactions can proceed effectively and efficiently, both from a time perspective and a legal-cost perspective.