Due Diligence Checklist–Clearing Chain of Title (Part 1 of 5)

When purchasing a patent asset, it is absolutely critical you conduct thorough due diligence.  Otherwise, you may end up paying top dollar for a lemon.

Below is a due-diligence checklist you should follow each time you make a patent purchase:

1. Is the chain of title complete?

2. Are there any previous licensees?

3. Any marking issues?

4. Was there prior notice given to potential licensees?

5. Are there any statutory bars?

In this post, I’ll be focusing on chain of title–title is everything.  If a seller does not have full and right and title to an asset, then there is no way you can obtain full right and title to the asset.  And without full right and title, you can’t enforce it.

Even when a seller believes it has full right and title, it may not.  Hence, you need to verify on your own that title is clean.

How can you determine if seller has full right and title to a patent asset?

There are three basic scenarios for which to watch:

1. Previous assignments.  If the patent was assigned from one entity to another, that’s okay–you just need to verify that each transfer of title from one entity to another was unidirectional and linear.

Unidirectional: when a first entity transfers a patent asset to a second entity, verify the first does not maintain a residual interest to the asset.  If the first entity maintains a residual interest in the patents, then you may need the first entity to relinquish those rights, before you can obtain full right and title to the assets.

Linear: verify that when a first entity transferred the asset to a second entity, the first entity did not also make a parallel transfer to a third entity.  If so, there is a non-linear chain, and you’ll need to make sure you’re receiving rights from the proper chain.

2. Contractual ownership issues.  Verify that the previous patent owners did not have an obligation to assign its patent rights.  This typically comes up when an individual inventor is employed during the time he or she conceives of and/or files a patent application, and his or her employment agreement dictates how patent rights are allocated between the employer and employee.  If the individual inventor was employed during this time, you’ll need to review the inventor’s employment agreements, to determine if any obligations exist to assign the patented invention to the employer.  If so, you’ll likely need a release from the employer.

3. Security interests and liens. Security interests and liens are commonly granted.  If one exists in the chain of title, you’ll need to make sure the security interest or lien is released, prior to your purchase.

In upcoming posts, I’ll be discussing previous licensees, marking, prior notice, and statutory-bar issues.

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