patent

What Startups Need to Know About Patent Licensing

By Emily Miao and Margot Wilson

For startups, intellectual property is a major source of value as well as a major tool for attracting investments. A patent license is an intellectual property asset that can be used to launch a startup. For instance, a startup could seek to license technology from a university or company with the intent of commercializing the technology.  Given the cost and effort involved in developing and commercializing new products and processes, a potential licensee should conduct a patent due diligence review to allow informed business decision making. Patent due diligence can assist potential licensees in identifying any issues that may affect the value of a product or process, or that may hinder development or commercialization of a product or process.

For licensing transactions, patent due diligence review should be detailed enough to not only verify the startup’s ability to exploit the licensed patents, such as by ascertaining ownership and third party rights but should also ascertain the value of the patents by determining whether the claims cover the product/process, whether the remaining patent term and territory is sufficient for the licensee’s needs, and whether the claims are valid and enforceable.

Because of the complexity of due diligence review, startup companies should engage a patent attorney to identify issues in a patent portfolio for further investigation.  Startups can assist their attorneys in a number of ways to streamline and reduce overall review costs.[1]

Define Business Goals for the Licensing Deal

Before conducting any due diligence review, the potential licensee should clarify their business goals for the licensing deal by: (a) defining the product and/or process they wish to commercialize; (b) identifying the timing of the product/process launch; and (c) determining the territories for manufacturing and sales. Clarifying the licensee’s goals underlying the licensing deal is important for determining how much due diligence is really necessary for the transaction.  For instance, if the goal of the licensee to incorporate the licensor’s technology into the licensee’s existing manufacturing process, then the due diligence analysis should be narrowly focused on critical patents that cover the newly acquired process.

Validity/enforceability of non-critical patents remaining in the patent portfolio should not be a critical concern. Alternatively, if the licensee’s goal is to license the full patent portfolio and to create a primary business based on the portfolio, then validity/enforceability analysis of most, if not all, patents in the portfolio should be of greater importance. Invalidity or unenforceability of any critical patent can be a deal stopper without even reaching other due diligence issues, such as third party rights.

Understand the Roles and Licensing Objectives of the Parties

Patent due diligence review is essentially an audit to assess the quantity and quality of patent assets owned by or licensed to a company.  While the review is a two-way process between the licensee and licensor, the potential licensor has the burden of gathering and providing information and documents to the potential licensee for evaluation.

A potential licensee has three main objectives in due diligence review: (i) reducing risk in licensing an asset that may be a liability in the future; (ii) identifying any weaknesses in the patent portfolio; and (iii) obtaining value by licensing the patents at the lowest possible cost. Depending on the circumstances, the potential licensee may seek warranties and indemnifications from the potential licensor relating to non-infringement, validity, ownership, and possibly non-competition.

Conversely, a potential licensor should: (a) avoid making any representations or warranties that may result in future liability; (b) avoid any liability due to licensee’s actions; and (c) obtain the highest possible price for the licensing transaction. Before commencing with due diligence review, the licensor should maintain updated patent files[2] as well as lists of (1) all relevant patents and patent applications, including status and annuity payment history; and (2) assignments, confidentiality agreements, joint development agreements, government contracts, material transfer agreements, etc. Generally, any agreement that relates to the patents and patent applications, including security interests and other liens that encumber a patent owner’s rights should be included in these lists.  If there are any issues relating to the patent portfolio, the potential licensor should correct them prior to the due diligence review if possible.

Put a confidentiality Agreement in Place.

Finally, a startup should conduct patent due diligence either before or early in the licensing negotiations, and certainly before a deal is concluded. To encourage fair and open due diligence evaluations, the negotiating parties should consider signing confidentiality agreements that allow for the controlled exchange of confidential proprietary information between both parties. Failure to use confidentiality agreements before licensing negotiations and due diligence review can create problems later on for the parties.[3]

Patent due diligence review is important for informed business decision making, particularly for startups that developing commercial products/processes based on licensed technology.  Startups can assist and simplify the review by defining their business goals for the licensed technology and keeping patent counsel informed of these goals so that s/he can identify issues during the review that are material to these goals and work to resolve these issues in order to meet these goals.  By understanding the parties’ roles and objectives during the review and putting confidentiality protections in place early on, startups can further streamline the review and protect proprietary information.

[1] Emily Miao and Margot Wilson, Patent Basic Due Diligence Review in Patent Licensing Transactions (Vol. 17, Issue 2), https://www.mbhb.com/intelligence/snippets/basic-due-diligence-review-in-patent-licensing-transactions

[2] The USPTO includes public databases for patents, published patent applications and patent prosecution files, assignment and annuity payment information. For further information, please see https://portal.uspto.gov/pair/PublicPair.

[3] Emily Miao and Bryan G. Helwig, Avoiding Common IP pitfalls: What Every Startup Needs to Know (Summer 2018), https://www.mbhb.com/intelligence/snippets/avoiding-common-ip-pitfalls-what-every-startup-needs-to-know]

Emily Miao, Ph.D. is a partner with McDonnell Boehnen Hulbert & Berghoff LLP and serves as Chair of the firm’s Startups & Entrepreneurs Practice Group. Dr. Miao has over 20 years of experience in all aspects of intellectual property practice, including patent, trademark and copyright procurement and portfolio management; client counseling on validity, infringement, freedom-to-operate (FTO), due diligence reviews, and patent strategy matters; and licensing/secrecy agreements. 

Margot M. Wilson is an associate with McDonnell Boehnen Hulbert & Berghoff LLP. Ms. Wilson concentrates her practice on intellectual property matters including patent prosecution, litigation, and providing patentability and infringement analyses in the mechanical and materials area.

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