Even after a small acquisition, IP diligence should never be overlooked.

A large acquisition is traditionally an all-hands-on-deck affair with no stone left unturned in the diligence process. Smaller deals, however, don’t always attract the same attention, especially when commercial considerations dictate a quick closing to snatch up a great opportunity before a competitor. When it comes to intellectual property considerations, commercial counsel handling the deal might focus primarily, or even exclusively, on simply confirming the chain of title or security interests in registered IP. Important to be sure, but other and potentially more disruptive dangers may yet lurk. Indeed, few things like a recognizable name or deep pockets, real or perceived, turn a party previously willing to endure a potential infringement of IP rights into an aggrieved plaintiff.

This article provides an outline for limited IP diligence that can easily, yet effectively, still identify many of the most significant potential risks without the expense associated with a much larger scale review. In many instances, these can be carried out internally by the law department, even in the absence of in-house IP counsel, sometimes for free using one or more of the databases accessible through the U.S. Patent & Trademark Office’s website. Even when more in-depth understanding and experience is required, all of the following items can be accomplished readily by parceling out to any qualified outside IP counsel, without the need to incur the same high hourly rates likely charged by the firms typically retained as deal counsel.

Conduct a Name Search of U.S. Patent & Trademark Office Databases

Small businesses often skip formalities. This sometimes means filing patent applications in the name of the company without having ever recorded or even obtained an assignment from the inventors. Thus, a patent owned by the business would not turn up under a title search if title was never recorded in the first place. Moreover, owners of young businesses commonly file for patents under their own name, without naming the company at all. As a result, transferring an important asset could be missed that would need to be corrected later.

An important related consideration is that under U.S. law, absent an employment agreement to the contrary or special circumstances, an employee generally retains ownership of his or her inventions (different from copyrights, which are automatically owned by the employer). The business only retains certain rights to use the invention that can significantly limit realization of its full value. Identifying a patent with no matching assignment can help flag whether the target business has the appropriate ownership interests in the IP of the assets it purports to sell.

Similar searches can be conducted for registered trademarks and copyrights that may have been filed in the name of an owner rather than the business, although Copyright Office records are far more difficult to find and many businesses make the mistake of rarely registering even key copyrights (which is necessary to enforce, but not actually obtain, rights).

Check Renewal Status and Expiration Dates

Another overlooked, but easy-to-check item is whether the target business has taken the necessary steps to pay maintenance fees, which are required periodically to prevent U.S. patents from expiring early. Likewise, trademark registrations are subject to renewal fees and associated filings to prove marks are still in active use. All of this information can be quickly assessed from the U.S. Patent & Trademark Office databases with little more than the registration number. While trademarks can last indefinitely, patents expire based on a term measured from their earliest filing date, not their issue date – thus, a two-minute review of the front page of a patent can help identify how much life a patent has left.

Identifying foreign counterparts of patents and trademarks and their respective status tends to be a more complicated endeavor, but the European Patent Office website has an excellent interface to identify worldwide counterparts for the most common international patent filings to spot-check the reach of the target’s patent portfolio.

Identify Current or Prior IP Litigation

Most IP rows are easily flagged during even basic diligence reviews as part of a standard U.S. District Court litigation search. However, the nature of patent and trademark registrations means disputes are also commonly contested in administrative proceedings and some typical search tools (such as the PACER database of federal court litigation) won’t identify Patent & Trademark Office proceedings. That means a current or past effort to cancel a target business’ trademark in an Opposition proceeding or a challenge to a patent’s validity would be missed. Again, though, a quick search of the appropriate (and free) U.S. Patent & Trademark Office databases can quickly identify the existence of any such active or historical matters.

Review Patents to Identify Significant Claim Limitations

It’s one thing to get a patent, it’s another to get one that has meaningful coverage. A target business, particularly a small and/or young business, may be eager to have a trophy to hang in the lobby or insufficient resources to have fought for the broadest coverage. The time and expense of a detailed analysis of a patent, its claims, and file history may not be merited in every diligence review (although that is generally advisable, at least as to any key patents believed to serve as the underpinning of the target business’s technology). But, even an hour should be enough for counsel to read the broadest claims of a patent to identify any clear issues that dictate further inquiry. For example, if the target business is a medical device start-up with a flagship product to correct broken vertebrae, it would be useful to at least confirm the patent claims didn’t end up with language that limits protection to fixing a broken toe.

Clear Trademarks Like It’s the First Time

Much like having a patent, having a trademark or even a trademark registration doesn’t mean that infringement risks don’t still exist. Someone else could be using the same mark in a way that is a significant infringement of the target’s mark, or the target’s use of the mark may be considered an infringement by another party of its rights. Unregistered, common law trademarks may not have been reviewed by the target, and even the registration process doesn’t fully ensure that all risks have been identified, as petitions are routinely filed to cancel trademarks based on a likelihood of confusion even after they have been registered. The target business may not have cleared the mark prior to launching or the mark’s current use, or simply may have a higher tolerance for risk than the acquiring business which might more conservatively evaluate a mark. Or the acquiring business’s planned use may be different or of a broader scope than that of the target. Thus, even a previously cleared mark might be in use or of a planned use that now poses an unidentified infringement risk. Further, the acquiring business – particularly if larger and/or having a more recognizable name – may be more likely to be accused of infringement due to perceived deep pockets. In any event, it can only be helpful to better understand the strengths or weakness of the marks being acquired. Unlike patent clearances, which are typically expensive and time consuming to fully vet, trademark clearances can be done relatively quickly, typically within a few days when necessary, and with a limited amount of attorney time invested.

Review Product Samples for Proper Trademark Usage and Patent Marking

Depending on the number of product offerings of the target business, review a sample of marketing materials and product packaging, at least for key products. This can quickly give insight into the target business’s marking practices and whether trademarks are being used properly. Incorrect use can jeopardize the mark’s renewal when it comes due. Problematic comparative advertising or product claims – a favorite among class action lawyers – can also be flagged early.

A number of other worthwhile efforts can be done easily, but not independently. If time allows, request existing license agreements – both in-licensed third-party technology as well as out-licensed target IP – to identify limitations of expanding into new markets. Similarly, request and review development or collaboration agreements. New businesses in some technology areas routinely develop through public funding that often places certain reporting requirements or reserves certain license rights that would be good to know prior to closing.

Further, ask about the target company’s practices for new product development and introduction. Even if time and budget constraints don’t merit an independent search and analysis, at least knowing if the target did its homework through competent counsel can help the acquiring business better appreciate the risk of a third-party claim popping up after closing.

The foregoing is far from an exhaustive list of the diligence that can or should be done. However, when time or cost considerations are at work, these simple items can be accomplished quickly and relatively inexpensively but provide much information useful to help uncover and take care of IP rights issues before the deal closes.

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Photo of Lois Duquette - McNees Wallace & Nurick LLC Lois Duquette - McNees Wallace & Nurick LLC

Lois Duquette practices in the McNees intellectual property practice group where she counsels clients in the areas of trademark, copyright, trade secrets, licensing, open innovation, advertising, promotions and food regulation. Her 18 years of in-house experience helps her to provide legal counsel with…

Lois Duquette practices in the McNees intellectual property practice group where she counsels clients in the areas of trademark, copyright, trade secrets, licensing, open innovation, advertising, promotions and food regulation. Her 18 years of in-house experience helps her to provide legal counsel with an understanding of associated business challenges.

Photo of Shawn Leppo - Mcnees Wallace & Nurick LLC Shawn Leppo - Mcnees Wallace & Nurick LLC

Shawn is a patent attorney and Co-Chair of the McNees Intellectual Property Group. His practice includes advice and counseling on all aspects of intellectual property law, with a focus on patent matters, including patent prosecution, enforcement, licensing, and risk avoidance strategies.