Due Diligence for Licensing Outside Technologies

Open innovation often leads to licensing external technologies. In-licensing is fraught with pitfalls, many of which can be avoided without too much pain if good diligence is done up front. How do you know if the partner you are looking at really has something of value that they can license to you? How do you know they are for real and can be trusted? There is always risk, but due diligence can help contain the risks and lead to moving forward with more confidence.

Joshua B. Goldberg of The Nath Law Group offers a useful summary of important steps for due diligence. "An Introduction to Intellectual Property Issues Associated With the In-Licensing Due Diligence Process" on the LES (Licensing Executives Society) website lists some of the basic documents that will be needed early in this process:

Documents You Should Expect to See
The first step in conducting a complete due diligence analysis is obtaining all necessary documents from your potential licensing partner. The critical documents you should want to see include any patent and patent application files; all supporting documentation (e.g., Assignments); any previously executed agreements (such as licensing, material transfer, consulting, research and development, manufacturing, and/or key employee agreements); laboratory notebooks; scientific publications by inventors/employees; SEC documents; and the results of any previous prior art searches.

You may also wish to explore public documents showing litigation, bad press, or other problems your prospective partner has faced. Word of mouth input from those who have done business with the company can also help. Character matters, and sometimes (not always), reputation is a reflection of that.

After conducting searches to assess freedom to operate and patent validity, there is still more that should be pursued. Joshua also makes these wise recommendations:

Looking for Others Who May Have Rights to the Technology
Another important area to look at is whether the potential licensor has had any previously terminated relationships. Any such relationships should be closely scrutinized, as the previous partner may still own residual rights and obligations, or may possess unexercised options to the technology. In addition, any patent applications filed after the previous agreement was first executed may be in question, as there may be issues concerning the source of any data, and whether the proper owners and/or inventors have been named. Lastly, you may want to look into why the previous relationship is terminated before you enter into an agreement with the licensor. After all, it is good to know who you are "marrying"!

Another important issue to investigate is whether the invention arose from a university. If the company you are talking with is a university spin-off, there may be some uncertainty or disagreement between the university and the spin-off as to who owns all of the patent rights. This is an important issue to resolve early on; otherwise you may just be buying another headache.

As you move forward, make sure you have considered a wide variety of scenarios, such as the company being acquired, being sued, going bankrupt, spinning off a unit, going global, losing the management team you have worked with, having patents or claims ruled invalid, etc. Standard terms may address all these issues, but run through these scenarios and make sure the agreement is adequate. However, avoid getting the agreement bogged down to explicitly cover numerous scenarios unless you don't mind taking forever to get the agreement through. Ultimately, it's about trust. If you can't trust the partner, don't work with them. But even trusted partners change as people change positions or outside forces change companies, so yes, you need a flexible agreement to mitigate some of these risks.

Prior art searching is one of the painful parts of due diligence. It's painful because it requires a lot of heavy lifting and never comes to a sure conclusion: there is always risk that you are missing the most important art, or that your interpretation of the art won't match that of a future judge or jury. Then there is the risk the patents of interest will be found invalid due to shifts in judicial whims that are impossible to predict. What is clear and definite today may be vague and indefinite tomorrow, or may not even be patentable subject matter after the next round of judges ruminates over the metaphysics of terms like "abstract" in patent law. We have to live with that risk all the time as we move ahead to take advantage of IP opportunities the best we can.