In-house counsel share M&A due diligence tips
Uber, Nestlé and a luggage company speak to Patent Strategy about their due diligence difficulties during mergers and acquisitions and how they avoid the inherent portfolio analysis pitfalls
During a merger and acquisition, patent departments are often confronted with the huge task of combing through multiple portfolios.
In-house counsel tell Patent Strategy that this due diligence process is an important part of a successful M&A project because it reveals the value of a company’s intangible assets and prevents litigious mistakes from being made. But it is often a complex and arduous task.
“There is no magical recipe for measuring the value of a portfolio,” says Olivier Corticchiato, patent lead for Nestlé’s IP nutrition team in Switzerland. “Evaluating both the risk and potential opportunity from an M&A exercise is often a huge hurdle.”
He adds that M&A due diligence is all about striking the right balance of time and resource. A business can waste money if it spends too long analysing a patent portfolio but may risk not recognising a key patent’s worth and creating future losses if it does not look hard enough.
Worse still, a key patent may be found to be invalid if a proper evaluation has not taken place. Regina Sam Penti, partner at Ropes and Gray in Boston, says companies might pay millions of dollars in such situations for something that is largely worthless.
Sources add that it is important to pick and choose your battles. Anand Varu, IP director at UK-based it luggage, says that it might not always be wise for a company to spend all its resources on an M&A, but instead to keep them for future lawsuits. “The objective is to understand how good the patent is, not to invalidate it,” he says.
Who owns what?
In-house counsel say that discovering who owns what is a big M&A due diligence challenge because it involves tracking an invention’s patent life cycle from who filed it to who created it. This task can become particularly problematic if a company has hired a sub-contractor.
“Where it becomes challenging is around companies that don’t have good hygiene around sub-contractors,” says Penti. “The US has more relaxed laws regarding patenting the inventions of sub-contractors. But European counsel would need to dig further to see if the company really owns the relevant patents.”
Varu warns that third party rights present a particularly perilous pitfall when a larger company acquires a smaller one. Such rights would allow unforeseen external players to appear on the radar and potentially sue the larger company.
He notes: “It is important for a large player to be confident of the patent landscape during any acquisition to ensure that they minimise the risks of being subjected to a successful patent infringement action post-acquisition. “This is normally done through IP due diligence using patent landscaping, patent analysis, infringement clearance, patent validity checks, questions about historical and current contentious issues concerning products and patents, and so forth.”
Due diligence also involves investigating all patents relevant to the transaction. Chris Storm, legal director of emerging technologies at Uber, says that when a merger is driven for the sole purpose of acquiring a single patent, getting the necessary details can be fairly straightforward.
But when two large companies with extensive IP portfolios merge for other reasons, such as to expand their size and resource, in-house counsel could find themselves sifting through large patent portfolios. And getting the necessary information in the required period of time can be challenging.
Large companies with extensive IP portfolios often have a single employee with the sole responsibility of knowing the details of the portfolio, as well as some information about the competitor. This point of contact is useful for understanding the validity of the patent as well as the freedom to operate (FTO) of a commercial product.
Without this information, FTO becomes a problem. IP lawyers spend a lot of time conducting searches to see whether or not a product is exploitable. Proper due diligence is needed to make sure there are no third party rights and other pending patent claims. In-house patent departments will likely not have the necessary resources for such a task and will need to outsource the work to a private practice partner. Small acquisitions of just 20 patents can take between six to eight weeks, according to Denis Bourgarel, partner at Cabinet Plasseraud in France.
Understanding the scope of the patent portfolio is another challenge. In-house sources explain that a portfolio could come bundled together with patents that a company is not interested in keeping.
In such cases, it is important to have the technical aspects of these patents properly evaluated by experts in the field. That is a daunting task if the patent in question relates to a futuristic technology that has yet to be or cannot yet be commercialised – and a leap of faith might be required.
Storm at Uber says businesses can identify how many other companies are trying to solve similar problems by looking at just one patent. But he adds that that process takes a lot of time.
“In-house counsel must make assumptions when analysing a large number of unexploited inventions,” he says. “If it is something that solves a serious problem for us, you can assume others will face the same problem.”
Patents represent a difficult challenge for any IP lawyer regardless of the size of the company or patent portfolio. Not only do lawyers occasionally work under a shroud of secrecy, they do so while under time and pressure constraints. Due to their potential pitfalls, M&A deals remain one of the most challenging and intellectually stimulating exercises for any IP lawyer.