Due Diligence Checklist–Determining Previous Licensees (Part 2 of 5)

Part 2 of 5:

In Part 1 of 4, we discussed steps to ensue that when you purchase a patent asset, you are actually obtaining complete right and title to the asset.   (http://ipinvestor.wordpress.com/2013/01/04/due-diligence-checklist-clearing-chain-of-title/),

When you are certain the seller can transfer full right and title to the patent asset, you must then determine (1) the extent to which the patent asset had been previously licensed and, if so, (2) whether the previous licenses affect the patent asset’s monetization potential.

(1) To determine the extent to which the patent asset had been licensed, you must ask  the seller to provide the previous license agreements.  Remember, license agreements are not public documents, so you must ask for them.

a) If the seller indicates that no previous license agreements exist, then insist that the seller represent and warrant to that fact in the patent purchase agreement.  If it turns out the seller is mistaken and previous licenses do exist, then the representation and warranty to the contrary will cause the patent purchase to be voidable, enabling you to obtain a refund of your purchase money.

b) If previous licenses do exist, but the seller gives you pushback regarding disclosing the agreements (e.g., they may be part of a larger business transaction and include non-relevant, confidential business information), then ask for redacted versions of the license agreements, sufficient to show the scope of each license.  If the seller cannot provide at least a redacted version of the agreements, then that’s a red flag.

When you obtain a copy a of the license agreements, you must then review the agreements to determine what was actually licensed, and to whom.  This is an involved process that I will be discussing in another post.

(2) Once you have a complete list and scope of the previous licenses, you can then determine whether the previous licenses affect the patent asset’s monetization potential.

To make such a determination, compare the previous licensee list to your “target list” for the patent asset.

A patent asset target’s list is a list of entities that likely infringe the patent asset, against whom you have a reasonable basis for filing a patent infringement suit.  A patent asset’s target list is typically industry specific (target industry) and will include a few companies with a large market share (tier I targets), and a number of smaller companies each with a respectively smaller market share (tier II targets) (e.g., the tablet industry includes tier I targets such as Apple and Samsung, and smaller tier II targets such as Xplore and Motion Computing).

a) If the previous licensee list does not overlap with the target list, then the patent asset’s monetization potential is untapped.  You can move forward with the patent purchase.

b) If the previous licensee list covers the target list, then you’ll need to make a business decision regarding whether or not to move forward with the patent purchase.  As an example, if the previous licensee list covers less than 25% of the market share in your target industry or only covers a handful of smaller tier II targets, then the asset is tapped, but not to an extent that significantly affects the patent asset’s monetization potential.  You can still likely move forward with the patent purchase.  On the other hand, if the previous licensee list covers more than 65% of the market share in your target industry or covers more than half of your tier I targets, then the patent asset is tapped.  Either negotiate for a significant discount in the purchase price, or focus your efforts on another investment opportunity.

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