Like death and taxes, due diligence on a patent portfolio is a certainty for a biotechnology company. Few biotechnology companies can bring a product to market without receiving venture capital and/or partnering with a larger company. Any potential investor or partner will critically evaluate your patent portfolio before deciding whether or not to invest in, or partner with, your company. While the due diligence process is rarely pleasant and is often costly, it should not uncover any surprises if you are prepared and have your patent portfolio ready for due diligence. This article summarizes some of the things you can (and should) do in advance of any due diligence to ensure that your patent portfolio is attractive to potential investors or partners.
Inventory
You should have a current list of all patents and applications that the company owns or licenses. The inventory list should include the country of filing, the serial number and the status of each application or patent. You should ensure that all of the applications and patents are in good standing and the maintenance fees have been timely paid at the correct rate. There was a recent case in Canada where a patent was held invalid as the maintenance fees were paid at the small entity rate even when the owner became a large entity (Dutch Industries v. Commissioner of Patents (14 C.P.R. (4th) 499) – see Biotechnology Focus Vol. _____ January 2002).
You should also keep a current list of all agreements relating to your patents and applications including any assignments, licenses, research collaborations and material transfer agreements.
Inventorship
Inventorship should be considered at the time the patent application is filed. You should confirm that the proper inventors have been named before your portfolio goes through due diligence. The requirements for being an inventor can vary slightly from country to country and inventorship is determined by the claims. In Canada, the inventor is the person (or persons) who conceives the invention and puts it into practical shape. In the United States, the inventor is the person (or persons) who conceives the invention and reduces it to practice. The inventors should not determine inventorship as they would often name the same people who they would list on a scientific publication - authorship is not inventorship. Ensure that inventorship decisions are based on facts and not on politics. Some biotechnology companies feel compelled to always name the chief scientific officer or president of the company as inventors. This may have been correct when the company was first formed and they did most of the research, but may not be correct years later when such persons take on a more managerial and less scientific role. Naming correct inventors is important as wilfully naming incorrect inventors is theoretically a ground for invalidating a patent in many countries. Getting inventorship wrong can also have other repercussions as was evidenced in Ethicon Inv. v. United States Surgical Corporation (135 F.3d 1456 Fed. Cir. 1998). In that case, Ethicon had licensed a patent for a medical device and sued United States Surgical for patent infringement. U.S. Surgical determined that the patent should have also named inventor Choi and they were successful in having inventor Choi named as inventor to the issued patent. They also obtained a retroactive license to practice the invention from inventor Choi. The action was therefore dismissed as U.S. Surgical was practicing the invention under a license agreement.
Ownership
During the due diligence process, third parties will want to confirm that the company is the correct owner or has a valid license to the patents and applications. If the company is to be the owner of the technology, ensure that the employees sign an employment contract that transfers their rights. Also have them execute assignments each time an application is filed and have the assignments recorded at the various patent offices. Make sure the inventors are not signing research agreements or other contracts with third parties that transfer ownership.
Strength of Portfolio
One of the key things that will be assessed during due diligence is the strength of the patents and applications in the portfolio. Generally, three things will be considered. First, the third party will want to confirm that the technology has been filed, or there is still the possibility to file, in countries that will likely have a large market for the technology. Typically, they will want to ensure that the application has been filed in United States, Europe, Japan and Canada. The best strategy is to file a Patent Cooperation Treaty (PCT) application that allows you to designate up to 117 countries on a single application and to delay entering national phase in each of the countries until 30 months from the date of filing the first priority application. The cost of filing an application in many countries can be very high so it is advisable to try and locate investment or a partner before the 30 month term expires. Therefore, filing a PCT application gives you the greatest flexibility when you have not decided where to file the national patent applications and/or you need time to locate a partner or money in order to pay for further patent costs.
Second, the third party will consider whether the claims that are pending or that have issued are broad enough to cover the aspects of the technology that have the most commercial relevance. For example, if the application claims a class of compounds that are useful in treating cancer, the third party will want to ensure that (a) the claims broadly cover the entire class so competitors cannot easily circumvent the claims and (b) the potential lead compound(s) is (are) also specifically claimed. In order to obtain such claims in many jurisdictions, you will need to have support in the patent application for both the broad class as well as the specific compounds. This is especially true in the United States where a written description of the invention is required. A proper written description means that the application conveys that the inventors were in fact in possession of the invention at the time the application was filed. Therefore, it is critical that you do not rush into patent filings until you have support for useful claims.
Third, the third party may want to ensure that the claims that are pending or that have issued are in fact valid. In this regard, they may conduct prior art searches to confirm the novelty and inventiveness of the claims. Before your portfolio undergoes such an analysis, you should already know the prior art. If you are aware of prior art that may be problematic, you should have a strategy for addressing the art.
One of the starting points for a prior art search are the disclosures of the inventors as these are often the most problematic with respect to patentability. Inventors should be interviewed in order to determine if they have made any disclosures of the technology prior to filing the patent application. Disclosures include publishing abstracts, giving poster presentations, presenting at a scientific meeting (no matter how small the audience), defending a thesis, giving a lecture at a university, giving an oral presentation during hospital rounds, publishing scientific papers and any other enabling disclosure that is not made in confidence.
Regarding the strength and validity of the claims, the potential inventor or partner will typically assess the U.S. applications or patents first so you should also start with your U.S. applications or patents.
Freedom to Operate
The potential inventors and/or partners will likely assess whether or not there are freedom to operate issues with respect to the patent portfolio. Consequently, you should be aware of any other patents that may impact your ability to use the technology. For example, if your technology relates to the new use of a known compound, do searches to ensure that the known compound is not under patent. Harder to find are broad generic patents that inadvertently capture what you do such as patents that cover product formulations. For example, if you plan to prepare your product in a liposome formulation, you will need to review the crowded liposome patent literature to ensure your formulation is not covered by an existing patent.
Future Plans
It can be helpful to share your future research plans and proposals for new patent filings with the third party. If there are weaknesses in the patent portfolio, there may be areas of current research that can form the basis of new filings in the future that may not have the same issues as the current portfolio. For example, you may decide to alter the formulation to avoid freedom to operate and/or prior art issues and at the same time you can add new filings on the formulation to your patent portfolio. Potential inventors and partners will be happy to learn that there may be potentially stronger patent filings in the future.
The patent portfolio is one of the most important assets of a biotechnology company. The strength of the portfolio is most often the key concern for potential inventors or partners. Having a strong, well maintained patent portfolio will greatly enhance your ability to attract investment or partners in your company. Any weaknesses in the portfolio (such as problematic prior art, incorrect inventors, ownership and freedom to operate issues) can be less damaging if they are communicated by the company along with a strategy for dealing with the issue. Being proactive, rather than reactive, will greatly facilitate the due diligence process and may increase your chances of success. Bonne chance!
Micheline Gravelle
Partner and Head of Biotechnology and Pharmaceutical Practice Group
Bereskin & Parr
