In some cases, a business model is based on the assumption that a patent portfolio will guarantee exclusive access to customers who wish to purchase a particular product or service. This presumed exclusivity can be a critical component in the forecasts that a business owner makes for market share, prices, marketing costs, revenue, margins, etc. Whether these forecasts materialize or not depends on the actions of the competitors. For example, if competitors are not hampered by legal barriers expected by the patent portfolio holder, market share and margins can drop dramatically below predictions. Too much disparity between the expectations of the patent owner and the actual legal protection available can jeopardize the entire business enterprise. Entities that are investing in such a business model should carefully evaluate the target patent portfolios to determine whether the portfolio has the strength to support business development and growth.
The critical analysis process for patents is often referred to as “due diligence.” The details of due diligence can vary by industry. However, there are generally four common lines of inquiry that IP professionals use when investigating the strength of a patent.
First, does the patent cover the current product? Sometimes patent applications are filed early in the development stages of an innovative offering. Invariably, the technical characteristics of a product can change during testing or in response to feedback from a supplier or consumer. However, one of the “hard and fast” rules of the Patent Office is that the content of an application cannot be supplemented after filing. If a concept evolves in a direction not covered by the original patent application, then the commercialized version of that concept could be left unprotected. Therefore, it is always prudent to compare the valuable features of the existing product with the content of its corresponding patent.
Second, is the patent relevant to competitors? A patent not necessarily to protect all that is reveals. For example, the fact that a marketed product is shown in rigorous detail in patent figures does not translate into strong protection for that product. Consider a scenario of an innovative “baby-friendly” handle that a parent can purchase to add to an existing bottle. It may happen that the patent describes the handle but only “claims” the handle in combination with the bottle. The gap in protection is that a competitor can avoid infringing this patent by copying and selling the new identifier. without the bottle. Unfair as it may sound, if the competitor is not selling what the patent claims, there is a risk that the patent may not be successfully asserted against that competitor. Quite simply, the name of the game is affirmations. Therefore, it is best to examine patent claims to ensure that there is a “one-to-one” correspondence with what competitors are likely to sell.
Third, does the patent have the proper geographic scope? Some companies choose to maintain only a national patent portfolio, while others choose to supplement their national protection with patent rights in other nations. Depending on the market, either approach may be the appropriate course of action. For example, because the European Union (EU) wields as much economic power as the United States, the justification for introducing a product to the US market can apply with equal force to EU markets. If so, the relatively high costs of obtaining patent protection in the EU may be justified. On the other hand, cultural differences or government regulations can make entering non-US markets unprofitable. In such cases, it may be better to focus financial resources for patent protection only on national opportunities. From an investor’s point of view, a concern might be whether the company has given up potential foreign income streams due to inadequate patent coverage in those foreign states. On the other hand, a consideration could be whether the business is burdened with onerous overhead costs (e.g maintenance fees) for having acquired unnecessary extraterritorial patent rights.
Fourth, is the patent “story” flawless? The guarantee of patent rights implies the presentation of numerous legal documents within the established deadlines. Furthermore, errors or deficiencies in the content of these documents may affect the validity of the patent or raise doubts about ownership. For example, the United States Patent Office requires inventors to disclose prior publications that may be relevant to patentability. In some circumstances, failure to submit these publications may result in a patent being unenforceable. With regard to property, neglecting to properly document the transfer of property rights from one inventor to another party, such as the inventor’s employer, could make the patent unenforceable. Therefore, no “due diligence” is complete without first examining the documents associated with a patent to locate potential “landmines.”
Ultimately, a prospective IP buyer should have the same mindset as someone considering buying a home or commercial property. A prudent real estate investor would never be satisfied with “driven by” or “fast-track” inspections of a deed or loan documents. Nor would that investor rely on the alleged owner’s verbal assurances. Instead, the investor would walk the property with a critical eye and have legal professionals examine every contract, deed, or loan. The investor would have a certified inspector determine the safety and physical condition of the property. Similarly, patent investors must implement similar measures to determine whether a patent will live up to their expectations.