Category Archives: Due Diligence

Best Practices for Maintaining Brand Security – Part 2

When performing due diligence, it often suprises me how often a company claims to have no intellectual property or other intangible assets.  However, even a company with no patents, registered trademarks or registered copyrights will have a significant amount of its value tied to intangible assets such as customer and supplier relationships, reputation, and other elements generally associated with goodwill.  In my last post, I wrote about preventive actions that a company can take to help manage adverse events that can damage a company’s goodwill.  In this post, I’ll discuss actions that a company can take after an adverse event — and hopefully after it took preventive actions — in order to guard against long-term harm to its brand. Continue reading

Recent Court Decisions Limit Patentability of Business Methods

The Federal Circuit recently issued two opinions addressing the question of “what is a patentable invention” in the context of software and business methods.  Although the opinions are not likely to cause a major change in current USPTO examination practice, they do affirm certain aspects of that practice.  The cases also will guide corporate IP managers and due diligence professionals who need to examine the likelihood that a software/business method invention is patentable — or whether an issued software/business method patent is likely to withstand a challenge in the future. Continue reading

IRS Proposes Reporting Requirement for Transactions Involving Patented Tax Planning Methods

Today the IRS published a proposed rule that will add “patented transactions” to the categories of reportable transactions under the federal income tax regulations.  The proposed rule defines a “patented transaction” as “any transaction for which a taxpayer pays (directly or indirectly) a fee in any amount to a patent holder or the patent holder’s agent for the legal right to use a tax planning method that the taxpayer knows or has a reason to know is the subject of the patent.”  Patented transactions also include any “transaction for which a taxpayer (the patent holder or patent holder’s agent) has a right to payment for another person’s use of a tax planning method that is the subject of the patent.”   When the new rule is final, any person who pays or receives a fee for the right to use a patented tax planning method will be required to report the payment/receipt as a reportable transaction.  The proposed rule defines a “tax planning method” as “any plan, strategy, technique or structure designed to affect Federal income, estate, gift, generation skipping transfer, employment or excise taxes.” Although the number of issued patents covering tax planning methods is relatively small, the rules may be the IRS’ reaction to legislative action that seeks to ban tax patents altogether.  In fact, the patent reform bill passed by the House of Representatives on September 7 includes such a ban.

How to Assess the Risk of a Permanent Injunction for Patent Infringement

IP risk assessment often includes a review of whether a company risks liability — or even worse, a permanent injunction — based on infringement of a third party patent.  In the 2006 eBay, Inc. v. MercExchange LLC case, the U.S. Supreme Court effectively reduced the risk of a permanent injunction in patent cases by stating that a permanent injunction is not an automatic remedy.  Instead, the inquiry is fact-specific, and in the context of IP due diligence it may be difficult to assess the risk unless certain facts about the patent holder are known.

My colleagues Mike Renaud and Matt Kaplan at Pepper Hamilton recently published an analysis of the eBay case after CSIRO v. Buffalo Tech, Inc., a recent ruling from the Eastern District of Texas which highlights the fact that no “bright line” rule exists for determining when a permanent injunction is warranted.  To read the full article at the Pepper Hamilton website, click here.

Considering the New GNU General Public License (GPLv3) in IP Due Diligence

In June 2007 the Free Software Foundation released version 3 of the GNU General Public License relating to open source software code.  Under version 3, distributors of open source software have the option to continue distribution under GPLv2 or changing distribution to GPLv3. 

When IP due diligence reveals that a software product is licensed using the GNU General Public License, the license version (GPLv2 or GPLv3) can be important.  For example, GPLv3 does not permit licensed open source code to be used as a “technological measure” for controlling access to a copyrighted work.  Thus, if the software product at issue includes technical features such as digital rights management (DRM) to prevent copying, GPLv3 prohibits the use of licensed open source code to achiee the DRM or similar features. 

In addition, GPLv3 expressly requires a user of open source code to license any relevant patents to others who also want to use the open source code.  Thus, if a software product is covered by a patent but also contains open source code, the resulting product’s code must not only be made available to others, but any patents covering the product also may be automatically licensed to others.  Of course, this can significantly reduce the value of the patent.

Issues such as these may require that IP due diligence include an inquiry into which version of the GPL covers open source code.  The complete text of GPLv3 is available from the GNU Project.

Are Patent Opinions Still Valuable After In re Seagate?

Last week the Federal Circuit’s opinion in In re Seagate Technology, LLC raised the bar for a finding of willful infringement in patent litigation.  Under the prior standard, whether or not the infringer relied on an opinion of patent noninfringement or invalidity was critical to the analysis of whether the infringement was willful.  Under the new standard, infringement is willful only if the patent holder shows that the defendant engaged in “objective recklessness.”  In particular, the Court stated that “there is no affirmative obligation to obtain an opinion of counsel.” 

The change is important because a patent infringer can be liable for punitive (triple) damages if the infringement is willful.  Thus, the Court’s opinion indicates that patent opinions are not necessarily required to avoid liability for willful infringement.

So are opinions of counsel still valuable?  Yes, although the Seagate decision suggests that they may not be required in every situation.  Some examples of situations where patent opinions continue to have value after Seagate include:

  • situations where an accused infringer beleives that it is at risk of being named as a defendant in a patent infringement suit, so that the infringer can document a reasonable belief that its actions did not amount to infringement of a valid patent;
  • due diligence situations, with a “freedom to operate” opinion that minimizes infringement risks are minimized and reassures investors, lenders and possible acquirors; and
  • pre-litigation preparation by patent holders, to ensure that they have a reasonable basis for filing a patent suit against an infringer.

In some cases, it may be possible to consider a streamlined opinion that briefly documents the basis for a belief of no infringement of a valid patent.  Thus, while Seagate may make it more difficult for patent holders to establish willful infringement, patent opinions can still be valuable where potential litigants want to understand the risks and actions for avoiding patent infringement liability.

UPDATE:  For information about the Broadcom v. Qualcomm case, a post-Seagate decision that addressed the relevance of opinions in the inducement context, click here.

IP Due Diligence and Willful Patent Infringement

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.

Does Your Due Diligence Include a Software License Audit?

A common shortcut in due diligence is to give commercially-available, off-the-shelf (COTS) software a cursory review, since such licenses can easily be purchased if needed after the transaction is complete.  However, if a due diligence target is out of compliance with a COTS software license, the cost to correct the noncompliance can be substantial — especially for a small company or a company that does not ensure that its employees understand the risk of noncompliance. 

 The U.S. Court of Appeals for the Sixth Circuit recently issued a reminder of this cost in Thoroughbred Software International v. Dice Corp. (No. 06-2080, June 14, 2007), when it considered a software license that permitted the licensee to make one backup copy of each licensed product.  However, a software audit found the licensee made a 38 extra copies of one licensed product,and 31 extra copies of another product.  Although most of the copies were merely residing on computers that were not being used, the court found the copies to violate the terms of the license and awarded the software company nearly $184,000 in damages.  The Sixth Circuit also vacated the lower court’s denial of attorney’s fees and remanded the case to determine whether the infringing licensee should also pay the software company’s attorneys’ fees.

 A few well-placed inquiries during due diligence can help to avoid headaches down the road, since in most cases software noncompliance can be corrected before a transaction is complete.

The Patent Expired? Don’t Blame Your Spouse

If you are planning to license a patent or invest in a company holding important patents, the Federal Circuit recently issued a strong reminder of the importance of a thorough due diligence review. Continue reading

Tips for Structuring the IP Due Diligence Process

Every corporate merger or acquisition requires an examination of the target’s intellectual property.  Items as routine as customer lists and employee records can be covered by copyright and trade secret laws.  Even small companies who don’t have any patents or significant trademarks often develop their own software or customize third party software to help them implement manufacturing or other processes.  It’s important that every due diligence investigation identify and confirm the ownership of all such IP.  Important issues to consider in IP due diligence include:


When requesting information about patents and patent applications, a buyer should request copies of ownership records, fee payment records, files corresponding to pending applications, and an explanation of how each patent relates to the company’s products or services.  The buyer should also independently check ownership records, fee payment records, and status information with the USPTO.  The buyer’s review should ensure that each inventor has assigned his or her entire interest in the patent to the seller because the patent will be jointly owned unless the seller has acquired all such interests.  The buyer should also identify and acquire all of the seller’s patents that expired within the past six years, as the buyer can acquire the right to sue for past infringement of such patents.


When requesting information about trademarks and trademark registrations, the buyer should inquire about and independently check the status of all trademark applications and registrations.  In addition, it is important to correlate the registration with the goods or services that are the subject of the registration, to ensure that the seller is using the mark in connection with the relevant goods or services.  This is because a trademark owner must continuously use the mark with the goods or services in order to keep its trademark rights.


The buyer should obtain a list of domain names that are owned and registered by the seller.  Then, the buyer should independently check ownership records for those domain names with a known registrar.  The buyer may also wish to check domain name registrations that correspond to important trademarks of the business.  This independent check can be performed using a database from a commercial domain name registrar.


The seller should provide a list of registered copyrights, along with a list of unregistered copyrights that are material to the business.  Many times a company will not obtain a copyright registration on software that it owns.  It is important to obtain this software by listing it on a schedule of material unregistered copyrights.  It is also important to determine who created material copyrightable works (i.e., employee or non-employee), to ensure that the seller owns the work.  If a non-employee created the work, then the target should produce an assignment document showing that the target acquired the work from the creator.


The target should provide copies of all licenses, security interests, payment obligations and other documents affecting the company’s intellectual property.


The target should identify all third party intellectual property that it uses, and it should also provide copies of all license agreements regarding third party intellectual property, including off-the-shelf software.  If any of the licenses involve patents, the buyer must note that patent licenses are not assignable unless assignment is specifically permitted by the terms of the license agreement.


A buyer should ask the target whether it has obtained any legal opinions relating to intellectual property.  However, the target may be reluctant to provide copies of the opinions before closing, as disclosure of the opinion may result in loss of attorney-client privilege.


The buyer should request detailed information about current litigation, past litigation that resulted in a settlement or court order that affects current operations, and any other information suggesting that a potential for litigation involving IP exists.  Litigation matters include not only infringement matters, but also claims that could adversely affect the validity or target’s ownership of IP.  If a potential for litigation exists, the buyer should determine the potential loss of income that may occur if the lawsuit prevailed against the target in order to assess the potential risk that the litigation may pose.