Understanding Patent Rights

The due diligence process must take into consideration the competitive patent landscape.

Are the patents paid up in the Patent Office?

Do at least some of the patent claims cover the seller's products?

In that transaction, my client, a large manufacturer, sought to expand its non-commodity product offerings by acquiring "CleanCo", a small manufacturer of a patented consumer product. My client found CleanCo to be a good target for acquisition because CleanCo's product met a strong consumer need and, at that time, commanded a premium price in the market.

Due diligence revealed that CleanCo had few assets: the small manufacturing plant, limited but growing sales and distribution and several patents covering the sole CleanCo product. CleanCo owned the patents and had kept the fees paid. CleanCo's patent attorney had done a good job on the patents: the CleanCo product was covered well by the patents and there were no obvious legal errors made in obtaining the patents. So, I gave the transaction the thumbs up from the patent perspective. When everything else looked positive, my client became the proud owner of CleanCo and its product.

Given the fact that more than $150 million was spent on the CleanCo acquisition, these marketing professionals not surprisingly believed that the competitive products must be infringing the CleanCo patents. However, I found that each of these competitive products was a legitimate design-around of the patented CleanCo product.

As a result of this increasing competition for the CleanCo product, price erosion began to occur.

In hindsight, the competition for the CleanCo product could have been anticipated during the M ; A due diligence process. As the "chair' has improvement over the 'stool', the patent office granted a patent to Bartholomew for his invention.

The basic patent only has both positive and negative right, where as all improvement patent enables their owner to exclude others from practicing their patented products.