MX: Patent buyer, beware

Companies have long used internal research and development and patent protection of the subsequent discoveries as the primary method for growing their patent portfolios and intellectual property assets.

Because of the significant reduction of time and costs over this internal development strategy, companies have also pursued the acquisition of outside assets, including patents, as a way of adding to their portfolios. While this acquisition strategy is an attractive option, any firm electing to take this route should be aware of five significant issues before it buys any patents. Potential pitfalls lurk in matters regarding ownership, status, coverage, value, and the maintenance costs of the patent or suite of patents a company is considering. We shall explore each of these five concerns below in order.

Ownership of the portfolio

Absent an agreement to the contrary, each joint inventor owns an equal stake in the patent or application. Therefore, before spending any amount for the patent, companies must be sure that all inventors assign their rights in the patents to either the entity selling it or to the purchasing company directly. All too often, ownership rights in a patent are overlooked, and if the purchasing company mistakenly obtains only partial rights, it cannot stop any other co-owner, co-owners, or co-inventors from practicing the invention or (perhaps) worse, licensing it to a direct competitor.

In a corporate setting, employees are typically under an obligation to assign their rights to a patent application over to their employers. Assignment documents are often recorded at the United States Patent and Trademark Office to put the public on notice of a change in ownership.  Before agreeing to purchase a patent, it is easy to check the Patent Office records to confirm which party has current ownership. It also may be prudent to look into whether there could be any potential ownership disputes regarding the patent. For example, it is recommended that a company looking to acquire a patent portfolio review assignment documents, employee agreements, and agreements with third-party design firms, if applicable. 

Be sure to also consider the underlying invention disclosures. Suppose a co-inventor helped develop the technology but has no obligation to assign it to the company selling the patent. That inadvertently omitted co-inventor may later be added to the patent and therefore considered a co-owner in the patent. This situation subsequently undermines the purchasing company’s exclusive ownership rights in the patent.

Status of the portfolio

Once a patent application is filed, the Patent Office assigns it an eight-digit serial number (e.g., 13/123,456). Typically, the Patent Office publishes the application 18 months after it has been filed. (Note that publication numbers start with the publication year, e.g., US2011/1234567.)

Publication does not mean a patent has been granted. In fact, it is common for an application to sit for a year or more before it is examined at the Patent Office. During this time, the patent application is pending, but there are no definitive patent rights. The application may not result in a patent, and the scope of a potentially resulting patent is not clear. 

For example, an inventor may file a patent application on a new product that becomes an instant success in the market. There may not even be another product like it. However, this does not guarantee that the inventor is entitled to broad patent protection for the new product. The Patent Office will conduct a search and may uncover an earlier (never commercialized) patent that either prevents the inventor from obtaining a patent or drastically changes the scope of patent protection available.

As an initial matter, a company should know whether it is buying patents, patent applications, or a combination of both. It is important to realize there is uncertainty with a patent application regarding both the potential coverage of a resulting patent and also the costs associated with the application maturing into a patent. This will be discussed further below.

Furthermore, when considering the purchase of a patent application, check to make sure the application has not gone abandoned. When the Patent Office sends an action to the applicant, there is always a time period to respond. If the applicant fails to respond in a timely manner, the application goes abandoned. In some circumstances, the deadline can be delayed with the payment of fees. Once an application goes abandoned, it can be difficult, costly, and sometimes impossible to revive.

Patent coverage in the portfolio

The claims in a patent appear as numbered sentences at the end of the patent and define the scope of the patent. A patent typically includes independent claims and dependent claims, i.e., those that arise from another claim. Infringement of an independent claim occurs only when all the limitations of the claim are met, whereas infringement of a dependent claim occurs only when all the limitations of the dependent claim as well as all the limitations of the claim, or claims, from which it depends are met.

If there are numerous limitations in each of the independent claims, the patent coverage may be considered to be more narrow, and it may be easy to “design around” that particular claim because there can be no infringement if at least one limitation in the claim is avoided. Thus, it is preferable to have as few limitations in the independent claims as possible to prevent easy “design-arounds.”

In addition, do not assume the patent covers what is shown in the drawings of the patent. A patent may include several different embodiments, or modified forms of the invention, yet all embodiments are not necessarily claimed.

It is important to consider the claims of the patent being acquired in order to assess the coverage, remembering that the scope of the claims may change in a pending patent application. This leaves more uncertainty over whether or not the pending claims in an application are patentable. However, it may be desirable to have one or more pending applications because it enables the acquiring company to alter the scope of the claims by drafting new claims or amending the claims if there is support in the application for the alterations. This gives a company the ability to draft claims that cover the product and potentially a competitor’s product.

Value of portfolio

Once the patent coverage is determined, companies should assess whether the patent they want to purchase is needed for a key product or whether they could design around the patent to avoid its scope. They should also assess whether the patent coverage would have value to competitors.  If so, decide whether it would be worth it to acquire the patent in order to either prevent competitors from entering a market space or to use it as leverage in return for something a competitor may have.

Also consider whether it would it be easy for competitors to design around the patent. The answers to all of these questions will help companies evaluate whether it makes sense to acquire the patent and, if so, whether it will help assign a dollar value to the patent. In some industries, there is also value in being able to market a product as “patented” or “patent pending.” Thus, even if a patent does not include broad patent protection, as long as the claims in the patent cover the product, there may be some value in marking a product as “patented.”

Costs of maintaining portfolio

Once a patent is issued, fees must be paid to the Patent Office to keep the patent alive. For a U.S. utility patent (the most common type of patent), maintenance fees are required three times during the life of the patent. The fee increases successively at approximate rates of $1000 after 4 years, $2500 after 8 years, and $4000 after 12 years for most companies. For many foreign patents and some foreign patent applications, keeping the patent alive requires payment of annuities, which typically range from $200 to $2000 per year but can vary widely by country. The one exception to this is U.S. design patents, which do not require any fees to keep them active once they are issued.

A company considering the purchase of one or more patent applications must take into account not only the expected maintenance fees and annuities due over the life of a resulting patent but also the costs associated with prosecuting the application up until the patent is issued. These costs may be much more substantial than the maintenance/annuity fees. As mentioned above, there is uncertainty with a patent application over the scope of a resulting patent. 

When considering whether to purchase a patent application, a company may also want to conduct a pre-transaction search in order to uncover the prior art and assess what may or may not be patentable. This may help to determine the scope of patent protection available and may also provide a rough idea of how expensive the prosecution of the application might be. If there is a lot of similar prior art, it may be an uphill battle with the Patent Office to get allowable subject matter, and prosecution may be more difficult and expensive as a result. 

Although an issued patent has been examined by the Patent Office and has a presumption of validity, conducting a search may also help to assess whether there are potential holes in the patent that a third party could later attack. For example, a search may uncover an earlier patent that perhaps was not considered by the patent examiner. Such a patent may affect the validity of the claims.

A Great Strategy

Purchasing a patent, a patent application, or both from another company can be a great strategy for supplementing a company’s existing patent portfolio. Once a company considers the critical issues described above and resolves them to its satisfaction, its executives can feel confident in the extent of their due diligence. Most important, they will better understand the risks involved in the prospective purchase and the value of the patent under consideration.

Shannon M. Vittengl is an associate in the mechanical technologies group at Wolf, Greenfield (Boston), a law firm devoted to intellectual property law. She focuses on patent prosecution in the areas of medical devices, mechanical products, and athletic equipment. Vittengl can be reached at [email protected].