During IP due diligence, it’s common that a potential buyer asks the target to investigate the effect of certain patents on the target’s business. If the buyer knows of a patent that could prevent the target from making, using or selling a key product or service, then the buyer can — and certainly should — ask the target whether and how the target can avoid the patent.
A problem arises when the target has taken a “see no evil” approach to patents during the target’s history. Under U.S. patent law, potential damages for patent infringement liability can be trebled if the infringer knows about a patent and continues to infringe anyway. A target who performed no patent searches typically won’t already know about the patent. In this situation, if the target is in fact infringing, the due diligence request can create a risk of willful patent liability for the target.
I’m not a fan of the “see no evil” approach to patents. A better name for the approach might be the “head in the sand” philosophy, because it’s usually better to know about a patent — and design around it or take a license — early in the stage of a product or company. Closing your eyes and waiting for a patent owner to find you means that a company’s biggest risk arises after it has become successful. By that time, it’s often too late to design around a patent, and the patent holder will a considerable upper hand in license negotiations.
However, it’s also important for a buyer to recognize a target’s decision to follow this approach and not create a suprise risk for the target during due diligence. What is a buyer to do in such a situation? There are several possibilities:
- The buyer can review the patent and ask the target focused questions about the target’s technology — without disclosing the patent to the target — so that the buyer can make its own assessment of potential liability.
- The buyer can disclose the patent to target’s patent counsel and ask target’s patent counsel to investigate the issue and report back to the buyer.
- The buyer can require the target to obtain or pay for a freedom-to-operate opinion for the seller as a condition of the transaction, and the buyer can use that information to help it assess the risk.
If the target is willing to review the patent, then simply alerting the target of the patent is the simplest approach to IP due diligence. However, it’s useful if a potential buyer asks the target about its patent searching philosophy before alerting the target about a particular patent.