Earlier this week, I attended a very informative event entitled “The Do’s and Don’ts of IP Due Diligence”. The main idea was for two IP Lawyers to give some background to VCs on patenting, and some tips on the right way to do due diligence in that area. I think it is worth sharing my top takeaways:
(This doesn’t constitute legal advice, just my personal summary of what was discussed)
1. There are three types of IP due diligence work: freedom-to-operate (FTO) research, patentability research, and strategic overview. FTO is used to make sure that a company’s operations are not infringing on any existing IP. Patentability research is used to understand whether a startup’s IP is likely to become patent-protected, and strategic overview is when one tries to understand the competitive landscape and each player’s present and future advantages from an IP point of view.
2. What makes IP law and due diligence complex is the fact that patents are far from perfect, to say the least. When a patent application is filed, the USPTO (patenting office) needs to look for anything (prior art) that may invalidate the patent. But given the large volume of patents, the deep expertise required, and the limited resources available, many patents are granted that can later be invalidated when someone (a competitor for example) does find invalidating prior art that was missed by the USPTO.
3. Patent trolls are non-practicing entities (NPE) that own or claim to own patents (that may or may not be valid), and who threaten to take legal action against companies that allegedly infringe on their IP in the hope that they can make large amounts of money in settlements. The frustrating dilemma for companies is that defending themselves is often more expensive than settling even when they are right. Trolls often use techniques similar to spam, accusing many companies and holding on to the ones that respond. The lawyers’ advice was to ignore anything that may look like a troll accusation, and run it by your lawyer right away.
4. This brings me to a tricky one: “the less written communication, the better”. I know it sounds kind of shady at first, but the advice came from experts and I wanted to pass it along. While attorney-client privileges guarantee confidentiality, they may need to be waved later (at a company’s own choice) in order to prove that their was no willful infringement for example. At that time, the lawyers’ rule of thumb was that the less you have written, the better. They cited several examples of clients of theirs who had lost over $1M due to a single email they had replied to. On a related note, another piece of advice is that communications about IP between two companies, or between VCs and startups should go through their lawyers.
5. While you can prove that a patent is invalid, by finding prior art that invalidates it, you can never really prove that a patent is valid, because you don’t know if someone will find invalidating prior art at a later date. So all you can get for patentability is an opinion. The math equivalent to this is something I heard way too many times during my studies: “a counterexample is a proof, but an example is not”.
6. Patents should be driven by commercial value and incremental business opportunities, not by incremental improvements in technology.
7. The four suggested steps to create commercial value through IP were: a - identify the barriers to entry in your business; b - obtain more than one patent per barrier; c – make sure your patent claims are mapped to competitors or potential competitors; d – identify areas of future innovation and attempt to patent around them.