You’ll need to determine (1) whether to use an entity; (2) whether to use an existing entity or newly-created one; (3) the entity type; and (4) the place of incorporation.

(1) Entity?

If you are purchasing a patent asset, avoid holding them as a personal asset.  Put them into a corporate structure that provides limited-liability protection.  In the worst case scenario, this will limit damages to the assets of the company, and won’t bleed through to your personal assets.

(2) Existing or newly-created entity

If you already own a related portfolio in which you have a monetization plan, consider whether to add the newly-acquired to the portfolio of the existing entity.  As an example, if you have a portfolio you are monetizing against targets in the GPS industry, if newly-acquired assets target the same players, it may add leverage to your existing campaign.

If you can’t add the portfolio to an existing company to bolster a currently-existing campaign, consider forming a new entity. 

(3) Entity type

There a number of corporate structures.  I recommend a limitied liability company for the following reasons:

–LLCs provide single pass through taxation, so you avoid double taxation.

–LLCs provide limited-liability protection (discussed above).

–LLCs do not require a tie between ownership and revenue shares. This provides flexibility for backend arrangements.  As an example, if you provide an inventor with 10% of gross revenues, you don’t need to provide the inventor with 10% ownership of the LLC. 

(4) Place of incorporation

Incorporate the entity in the state in which you plan to assert your litigation.  If you file in the Eastern District of Texas, create a Texas LLC.  If you plan to file in Illinois, create an Illinois LLC. 

Aligning your place of incorporation and filing strategy will be factor you can use against motion to transfers, should defendants file such motions. 

Examples of such terms include (1) proper and complete patent listings; (2) provisions ensuring inventor cooperation; (3) built-in due-diligence windows, if needed; (4) explicitly-recited consideration; (5) properly recited assignment-provisions; (6) an assignment exhibit; (7) other relevant deliverables; and (8) appropriate seller representations and warranties.

In this post, I’ll be discussing (8).

(8) Representations and Warranties

This section is your insurance.  If the seller violates a representation or warranty, you will get an automatic refund, usually up to the amount paid under the contract, pursuant to any likely-included limited-liability section.

Include at least the following representations and warranties from the seller:

–The seller has full power and authority to enter into the agreement and transfer the assets.

–The seller owns all right, title, and interest to the patent assets.

–There are no previous licenses, covenants not to sue, or any other related restrictions to monetize the patents.  If there are, you’ll need to see all prior agreements and ensure your determined target list and market share are still on the table.

–The seller and has no obligations posed upon it by any standards-setting committee.  If there are, just like above you’ll need to be made aware of all such obligation and ensure your determined target list and market share are still on the table.

–If patent owner claimed “small entity” status during prosecution, ensure the claimed status was appropriate and there were no licensees to the patent that were not a “small entity.”  If there is a violation of “small entity” status designation during prosecution, conduct legal research to determine the effect on the patents and your campaign outlook. 

–There is no statutory bar to patentability (e.g., prior sale or disclosure more than one year prior to the priority date of the patent asset).

–The inventor or owner of the patent application engaged in equitable conduct during prosecution, and did not make a material misrepresentation or omission that would affect patentability (e.g., misrepresentations or omissions to the patent office, a court, or standard-setting organization).

–The seller notifies and provides documentation regarding prior notice of infringement given to any third party and any commenced enforcement actions (e.g., any pending litigations?). 

–The seller provides notice of any previous, pending, or threatened declaratory judgment proceedings, reexaminations, post-grant reviews, Inter Partes Review proceedings, etc.

–The patents were not found invalid or unenforceable.

–The seller provides notice of any threats of invalidity or unenforceablity, and the basis for such threats.

–All maintenance fees and annuities have been timely paid on the patent assets.

Examples of such terms include (1) proper and complete patent listings; (2) provisions ensuring inventor cooperation; (3) built-in due-diligence windows, if needed; (4) explicitly-recited consideration; (5) properly recited assignment-provisions; (6) an assignment exhibit; (7) other relevant deliverables; and (8) appropriate seller representations and warranties.

In this post, I’ll be discussing (4), (5), (6), and (7).

(4) Consideration

A patent purchase agreement is a contract–it’ll need to include consideration to ensure that it’s a valid one, i.e., you’ll need to illustrate a bargained-for exchange.  You’ll be receiving an assignment to the patent assets.  In exchange, include the purchase price or any applicable backend arrangement to the seller. 

(5) Assignment Provisions

The assignment is what transfers to you full right and title to the assets. 

Include a clause that the inventor is transferring full right, title, and interest to the assets and, for past, present, and future infringement, the right to sue, collect damages, and seek injunctive relief.  This latter clause will ensure you have a right to collect damages and other necessary remedies going forward, and for the past statutory six-year look-back period.

(6) Assignment Exhibit

Include an exhibit specifically earmarked for an assignment document.  Have this exhibit executed and notarized by the seller.  This exhibit should include just the assignment and no other contract terms –you’ll use this exhibit to record the assignment with the patent office, after the purchase. 

(7) Other Deliverables

Have the seller deliver all documents evidencing conception and reduction to practice of the patented invention—include this as a requirement prior to closing. 

Prior to the AIA’s first-to-file rule, these documents could help establish an earlier priority date, to overcome certain prior art references.  While this isn’t applicable with patents subject to the AIA first-to-file rule, you’ll nevertheless need these documents, as you’ll need to eventually turn them over in litigation.

And if the prior owner created or sold any products or services embodying the patented invention, have the seller deliver representative samples of marketing materials such as brochures, advertisements, product packages, etc.  These documents can help establish compliance with any applicable marking provisions. 

And if such products or services exist, consider if it would further your campaign goals (e.g., tell your story) to also have copies of design schematics, testing documents, manufacturing documents, etc. 

Examples of such terms include (1) proper and complete patent listings; (2) provisions ensuring inventor cooperation; (3) built-in due-diligence windows, if needed; (4) explicitly-recited consideration; (5) properly recited assignment-provisions; (6) an assignment exhibit; (7) other relevant deliverables; and (8) appropriate seller representations and warranties.

In this post, I’ll be discussing (1), (2), and (3).

(1) Proper and Complete Patent Listings

For every patent asset you intend to purchase, include all related parents, continuations, continuations-in-part, divisionals, reissues, reexaminations, and all foreign patents and applications (I’ll discuss patent-family issues in another post). 

Never purchase a patent asset without the entire family.  In the event the family includes a terminal disclaimer (a clause indicating that the patents are enforceable only when the patents are commonly owned), you’ll need to ensure that all patents are included in the patent list.

Regarding terminal disclaimers, include a clause indicating that if the patent list is inadvertently missing a related patent, it is automatically and retroactively transferred and included in the patent purchase agreement, as of the effective date of the patent purchase agreement. 

This retroactive ownership of any missing patents will ensure common-control requirements, for any patents subject to a terminal disclaimer (I’ll discuss more about terminal disclaimers in another post).

(2) Inventor Cooperation

Inventor cooperation is critical for you campaign.  Nothing derails a campaign faster than an inventor testifying against the properness or legitimacy of your campaign. 

If it takes an agreed-upon hourly rate or a backend arrangement, include inventor-cooperation terms (e.g., providing documents, deposition, or trial testimony) in the patent purchase agreement or separate consulting agreement.  

(3) Due-Diligence Windows

For patent acquisitions that require heavy resources for due diligence, it helps to lock in the contract before investing the resources.  You can build in a due-diligence window (e.g., 30 to 60 days) in which to conduct your research, prior to close of the contract.

Before investing to purchase a patent asset, verify that no obvious statutory bars exist with respect to the patent asset.

If a statutory bar exists, then the patent will be invalidated–no questions asked.

A statutory bar applies when any of the following scenarios occur, more than one year prior to the patent asset’s filing date: (1) the patent asset is patented or described in a printed publication (anywhere in the world); (2) the invention is in public use in the U.S.; or (3) the invention is on sale in the U.S.

Less obvious statutory bars occur with respect to (1) above–this usually surfaces in litigation after the defendants conduct a very thorough prior art search.

More obvious statutory bars occur with respect to (2) and (3).

Regarding (3), if the seller or any prior owner sold a product embodying the invention of the patent asset, verify the first sale was not more than a year prior to the filing date of the patent asset.

Regarding (2), if the seller or prior owner disclosed an invention prior to filing a patent on it, verify the disclosure was confidential and occurred under the protection of a non-disclosure agreement, or that the disclosure was less than one year prior to filing the patent application.

If either (2) or (3) above does not check out, do not purchase the asset.

When purchasing a patent asset, always ask whether the seller or any previous owners put any third parties on notice of infringement and, if so, ask for any and all documentation evidencing such notice (e.g., letters sent to potential licensees).

Providing third parties of notice infringement is a double-edged sword.  On the one hand, if a previous owner provided notice of infringement to a potential licensee, but the potential licensee continued to infringe, you (the new patent owner) now have a willful infringement claim against the licensee.  This significantly enhances the patent asset’s monetization potential, because a willful infringement claim enables you to earn treble damages against the licensee.

On the other hand, if the seller or any previous owner provided notice of infringement to a third party, but waited an unreasonable amount of time before bringing suit and such a delay prejudiced the potential licensee, then the licensee may raise the equitable defense of laches.  If the potential licensee prevails on its claim of laches, then you may only be entitled to post-suit damages–i.e., you may lose your six-year lookback period of damages.  This serves to undermine the patent’s monetization potential.

By way of background, a presumption of laches exists when more than six years pass between the time a patent owner knew or should have known of its infringement claim against a defendant (e.g., providing notice of infringement to a third party) and the time a suit is filed.  This presumption may be rebutted if you can show the delay was reasonable or the potential licensee was not prejudiced.

Notwithstanding the above, willful infringement and laches are defendant-specific issues.  Put another way, if a willful infringement claim or laches defense exists between you a given licensee, this has no bearing regarding the issues between you and another licensee.

Hence, pay particular attention regarding whether a prior owner provided notice of infringement to a  tier I target–this can cause the asset’s monetization potential to significantly swing one way or the other.

When purchasing a patent asset, you must determine whether or not the seller, previous owners, and all licensees complied with 35 USC 287’s marking requirement.

The statute’s marking requirement requires that if a patent owner or licensee sold a product that embodied a patented invention, then the product must have been clearly marked with the respective patent numbers.  If the previous owner or licensee failed to mark such a product, then this failure may adversely affect the patent asset’s monetization potential.

Namely, when you file a patent infringement suit, you are entitled to a six-year lookback period in which you are allowed to collect damages six years prior to the filing of the lawsuit.

If a patent owner failed to comply with the marking statute, then you (the new patent owner) will only be entitled to damages at the point you provide notice of infringement to a potential licensee.  Typically, this falls on the date you file the lawsuit.

This means that if a patent owner or licensee failed to comply with the marking statute, you may lose six years of damages.  This may significantly undermine the patent’s monetization potential.

To determine if the previous owners or licensees complied with the marking statute, determine the following:

1) Was there a product for sale that embodied the claims of the patent asset you are attempting to purchase?  If there was no sale by either the previous patent owners or licensees, then there was no obligation to mark, and you will not lose the six-year lookback period.

2) If there was a product for sale that embodied the claims of the patent asset, did the previous owner or, if any, licensees mark the products?  If yes, then so long as the product was clearly marked (e.g., on the outside packaging, on the product itself), then you will not lose out on the six-year lookback period.  In this scenario, ask for a sample product that was sold and look for the proper markings.  If the seller cannot furnish a sample product, then insist that the seller represent and warrant in the patent purchase agreement that all previous owners and licensees complied with its marking obligations.

3) On the other hand, if there was a product for sale that embodied the claims of the patent asset and a previous owner or licensee did not mark the products, then your lookback period may be at risk.

3i) If it is a patent owner that failed to mark, see 3iii below.

3ii) If a licensee failed to mark, look at the corresponding license agreement and, specifically, look to see if the license agreement included an obligation to mark.  If the license agreement included an obligation to mark but the licensee failed to do so, then you will not lose your six-year lookback period.  But if the the licensee failed to mark and if the license agreement failed to include a marking obligation, then go to 3iii below.

3iii) If you’re here, then there was a failure to mark.  In this scenario, look at the claims and determine if you have any assertable method/process claims (any claim with elements ending in a gerund, i.e., “ing”).  As a general rule, the marking requirement applies to system claims, but not to method claims, so long as you only assert method claims in the litigation.  If the patent has method claims on which you can rely on a direct theory of infringement (I’ll discuss this in another post), then be sure to assert only the method claims.  If you assert only the method claims, then, depending on the jurisdiction in which you sue, you will not lose your six-year lookback period.

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.

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.

There are pros and cons to purchasing patents in bulk.  If you are a company and your patent portfolio is small and slowly growing, a bulk purchase of 100 or even 1000 patent assets can significantly increase your numbers; sometimes there is strength in numbers and that alone can enhance your company’s credibility.

But while the increase in numbers may have showcase value, a bulk purchase may not be profitable for you.  For example, if you purchase 500 patent assets but none of them have claims that read on relevant markets or industries, then the patents will likely have zero potential for monetization (e.g., through a licensing campaign).  Further, the bulk purchase will certainly create liability for you in the future, because you will need to pay maintenance fees to the government to keep them active and enforceable.  The more patents you purchase, then the greater burden these maintenance fees become.

If you are looking to earn a financial return on your patent assets, avoid purchasing assets in bulk.  Rather than purchasing an entire portfolio, hand pick the patent assets whose claims have a relevance to key markets and industries, and conduct a thorough due diligence on just those patent assets.  Then, negotiate for just those assets.

Purchasing assets you hand pick can reduce the purchase price considerably, and reduce your future maintenance fee obligations by streamlining the number of patent assets you own.

Regarding how to hand pick such patent assets, I will be addressing this topic in future posts.