Investing in Patents: A Four-point checklist

In some cases, a business model is based on the assumption that a patent portfolio will ensure exclusive access for customers who wish to purchase a particular product or service. This implies the exclusivity can be a critical component in the forecasts of the owner of the company market share, prices, marketing costs, products, margins, etc., If these forecasts materialize hinges on the actions of competitors. For example, if competitors are not impeded by the legal barriers provided by the holder of the patent portfolio, then the market share and margins may fall dramatically short of predictions. Too much disparity between the expectations of the owner of the patent and the actual legal protection can place the entire enterprise at risk. The entities that invest in such a business model must carefully evaluate the target’s patent portfolios to determine if the portfolio has the strength to support business development and growth.

The process of critical analysis of patents is often referred to as the “due diligence”. The fine points of the due diligence may vary depending on the industry. However, there are usually four common lines of inquiry that are used by the professionals of the intellectual property when considering the strength of a patent.

First, the patent covers the actual product? Patent applications are sometimes filed early in the development stages of an innovative offer. Invariably, the technical features of a product may change during test or in response to feedback from a provider or a consumer. However, one of the “hard and fast” rules of the Patent Office is that the content of a request may be completed after the filing. If a concept is evolving in a direction that is not contemplated by the original patent filing, then the commercialized version of this concept may be left without protection. Therefore, it is always prudent to compare the features of existing products with the contents of its corresponding patent.

Secondly, the patent is it relevant to the competitors? A patent does not necessarily mean protect all he communicates. For example, the fact that the marketing of the product is shown in specific detail in the figures of a patent does not translate into a robust protection for the product. Take a scenario of a new “baby friendly” handle that a parent can buy to add to a bottle. It may happen that the patent describes the handle, but only “claims” of the handle in combination with the bottle. The gap in the level of protection is that a competitor could avoid infringement of a patent, by copying and sale of the new handle without the baby bottle. As unfair as it may seem, if the competitor is not to sell what the patent claims, there is a risk that the patent may not be invoked against a competitor. Quite simply, the name of the game is the applications. Thus, it is best to examine the claims of a patent to ensure that there is a “one to one” correspondence with what the competitors are likely to sell.

Third, the patent has the right to geographical scope? Some companies choose to keep only one domestic patent portfolio, while others choose to complete their national system of protection of patent rights in other countries. According to the market, an approach that may be the appropriate course of action. For example, because the European Union (EU) wields so much economic power that the united States, the rationale for the introduction of a product in the US market can apply with the same force in the markets of the EU. If yes, the relatively high cost of obtaining patent protection in the EU may be justifiable. On the other hand, cultural differences or government regulations may make it unprofitable for entry into the UNITED states markets. In such cases, it may be preferable to concentrate the financial resources for the protection of patents in-house opportunities. From a point of view of the investor, a concern could be whether the company waived potential foreign sources of income as a result of the lack of patent coverage in foreign countries. On the other hand, a review may be to know if the company is struggling with heavy overhead costs (for example the maintenance costs) to have acquired unnecessary extra-territoriality of patent rights.

Fourth, a “history” of the patent virgins? The securing of patent rights involves the filing of many legal documents within the prescribed time. In addition, errors or shortcomings in the content of these documents can affect the validity of the patent or raise doubts as to the property. For example, the U.S. Patent Office requires inventors to disclose the prior publications, which may be material to patentability. In certain circumstances, failure to submit these publications can result in a patent held unenforceable. In respect of the property, neglecting to properly document the transfer of the property rights of the inventor to a third party, such as the inventor’s employer, may make the patent impossible to enforce. So no “due diligence” is complete without first scouring the documents associated with a patent to locate potential “landmines.”

In the end, the prospective purchaser of the intellectual property should have the same state of mind of the one considering the purchase of a home or commercial property. Prudent real estate investor would never be satisfied with “drive by” inspections or “breezing through” a deed of sale or loan documents. Be it an investor, to rely on the verbal assurances of the alleged owner. Instead, the investor at the foot of the property, with a critical eye, and legal professionals scrutinize each and every contract, deed, or loan. The investor would have a certified home inspector to determine the safety and the physical condition of the property. In a similar manner, investors in the patent should implement similar measures to determine whether a patent will be at the height of their expectations.

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