Why Technical Due Diligence Matters More Than Ever in Patent Portfolio Management

Introduction : Patent portfolios are really important for technology companies. These companies make things like intelligence systems, medicines, computer chips, medical devices and software. The ideas and inventions that these companies own are often a part of what makes them valuable. So when investors, buyers or partners think about working with these companies they want to know if their patent portfolios are strong.

In the past people looked at patent portfolios to see if the patents were legally valid. Lawyers checked if the patents had been approved, if the fees had been paid, if the ownership records were correct and if there were any disputes about who owned the patents. These things are still important. They do not tell the whole story about how strong a patent portfolio is. Just because a patent has been approved does not mean it protects something that's really valuable. A company might have a lot of patents. They might not be very good or useful. They might be old or easy to work with or they might not be valid. As technology gets more complicated people are looking at patent portfolios in a way. They want to know if the patents are really useful and if they can be used to make money.

Technical due diligence is when people look closely at the patents to see if they are any good. They want to know if the inventions are still useful, if they can be used to make products that people want to buy and if other companies can make products without infringing the patents. These are questions because they can affect how much money a company can make from its patents.

This is especially true in countries like the United States and the United Kingdom. In these countries courts are looking closely at patents to see if they are really valid and if they can be used to stop other companies from making similar products. So technical due diligence has become an important part of managing patent portfolios.

Understanding Technical Due Diligence in Patent Portfolio Management

Technical due diligence is generally conducted through a multidisciplinary review involving patent attorneys, engineers, scientists, and commercial specialists. When people do due diligence they usually work together as a team. The team includes patent lawyers, engineers, scientists and business people. Each person looks at the patents from a perspective. The patent lawyers look at the language of the patents and the history of how they were approved. The engineers and scientists look at if the inventions are really new and useful. The business people look at if the patents can be used to make money.

There are some questions that people ask when they do technical due diligence:

1. Does the patent protect something that is still useful and valuable?
2. Can someone use the patent to make a product that people want to buy?
3. Has something new been invented that makes the patent less valuable?
4. Can another company make a similar product without infringing the patent?
5. Does the patent still protect something that is important in the market?

These questions help people figure out if a patent is really valuable or not. They also help people decide which patents are important and which ones can be ignored.

As companies buy and sell patent portfolios technical due diligence has become more important. Buyers want to know if the patents they are buying are really valuable and if they can be used to make money. They do not just want to buy a lot of patents; they want to buy patents that're really good.

International organizations, including the World Intellectual Property Organization (WIPO) and the US Patent and Trademark Office (USPTO), are placing increasing emphasis on the importance of quality of a patent, the quality of disclosure, and the commercial significance of an invention.

This is especially true after a court decision in the United States. The court said that patents need to be written in a way that someone can use them to make the invention. If the patent is not written clearly it might not be valid. Similarly courts in the United Kingdom have started to look closely at patents to see if they are really valid. They want to know if the invention is really new and useful and if the patent protects something that's important.

So companies can no longer just rely on if a patent's legally valid. They need to do due diligence to see if the patent is really valuable. This helps them figure out which patents are strong and which ones are weak.

Technical Due Diligence as the Foundation of Patent Portfolio Value

The main difference between legal and technical due diligence is that while the former is concerned with issues of ownership, prosecution history, validity, assignments, licences, and maintenance of patents, the technical due diligence process targets a different set of issues. Technical due diligence aims to establish whether the subject of a patent is actually worth protecting – that is, if it can be used commercially, if it can be imitated by competitors, and if it corresponds to the current or future commercial product.

In particular, for businesses that operate in the US and UK, patent due diligence is a key process that is implemented during transactions such as mergers and acquisitions, venture capital financing, strategic alliances, technology licensing, and R&D collaborations. In most cases, patent portfolios comprise some of the most valuable assets of the companies that acquire, licence, or partner with another company. Thus, a portfolio that looks impressive from the legal perspective may nevertheless fail to meet the commercial requirements because of the technical characteristics of its patents.

As such, technical due diligence has transformed from a special-purpose due diligence process for large and important corporate transactions to a key element of patent portfolio management on an ongoing basis. Companies regularly perform technical evaluations of their patent portfolios to discover which patents actually serve their commercial and technical needs, which have more value than others, and which require further investment in terms of R&D and patent prosecution.

Cross-Functional Review: Integrating Legal, Technical, and Commercial Perspectives

For starters, patent attorneys and lawyers will review the legal validity of the patents within the portfolio, the commercial team will evaluate the commercial viability of the portfolio, and the technical experts will take a closer look at the technical validity of the portfolio. By cross-referencing these three perspectives, the company that initiated the technical due diligence process will be able to obtain a complete overview of the value of the target patent portfolio.

A patent that looks impressive technically might fail to meet the commercial needs of the acquiring company. Similarly, a technically valid patent that has already been implemented in most of the products of a certain sector will require even more attention from the commercial side in order to fully utilise its potential. The combination of diverse perspectives will allow the company to identify the strengths, weaknesses, and possible risks associated with the acquisition of a patent portfolio.

The value of cross-functional review has become especially prominent in those industries where the rate of innovation is extremely high. At the moment, such industries include artificial intelligence, biotechnology, telecommunications, semiconductors, and software, among others. In most cases, technology becomes commoditised rather quickly; thus, businesses need to identify the most valuable patents that protect innovative technologies to ensure the continuous development of their products.

Indicators of Patent Portfolio Quality

In addition to reviewing the legal, commercial, and technical aspects of a patent portfolio, portfolio reviewers also focus on a set of key indicators of patent portfolio quality. Even though the factors below might vary depending on the industry of a company, the majority of them remain applicable in most cases.

First of all, portfolio reviewers pay close attention to whether the subject of a patent actually corresponds to the technologies that are used in commercial products. In cases when a patent protects an outdated technology development, such a patent will barely provide any meaningful commercial advantage for the company that acquires it.

Secondly, when reviewing the quality of a patent portfolio, reviewers also look at the breadth of its claims. Ideally, a balance should be maintained between the level of detail provided in the claims and their scope. Claims that are too narrow and specific to a certain technology might fail to provide adequate protection, while overly broad claims might be invalidated due to their lack of specificity.

Another vital element of a patent portfolio that needs to be reviewed is the relationship between the specification and the claims. Ideally, a patent specification should contain enough details for someone who is familiar with the field of technology to implement the invention as described in the claims. If the description is inadequate or incomplete, the patent might be invalidated in court. A crucial factor in determining the value of a patent portfolio is whether the technology described in it corresponds to the key industry trends, as well as the future research plans of a company. In most cases, patents that correspond to industry trends and have the capacity to become key elements of the future product offerings will be much more valuable than any isolated patent that fails to meet current industry needs.

The Importance of Technical Disclosure: Insights from Amgen Inc. v. Sanofi

The importance of conducting a thorough technical disclosure was reiterated by the United States Supreme Court in the case of Amgen Inc. v. Sanofi, 598 U.S. 594 (2023). Even though the case concerns the invalidity of pharmaceutical patents, the lessons learned from it apply to all technology-based industries.

To begin with, this case is an excellent example of why companies should invest in thorough technical due diligence processes when considering the acquisition of a large patent portfolio. Amgen, Inc. filed a patent infringement suit against Sanofi, alleging that the latter’s monoclonal antibodies were infringing on several patents owned by the former. The key issue raised by the dispute was whether the claims of Amgen’s patents were overly broad given that the specification failed to enable researchers to replicate all of the techniques described in them.

As a result, the Supreme Court invalidated these claims under 35 U.S.C. § 112(a). By delivering the opinion of the Court, Justice Gorsuch stated that “the more one claims, the more one must enable.” His remarks demonstrated that simply describing a few functioning antibodies is not enough for enabling a patent that covers a much greater category of antibodies that bind to PCSK9, as in the case of Amgen, Inc. v. Sanofi.

When it comes to patent portfolio management, Amgen, Inc. v. Sanofi further underlines the importance of a cautious approach to patent acquisition and investment strategies. In particular, companies should always carefully review the technical disclosure of a patent before investing significant resources in its maintenance and development. Moreover, the experience of Amgen, Inc. demonstrates that even the best legal protection might be rendered useless in court if the technical disclosure is inadequate. It is essential for portfolio buyers to assess the possibility of potential validity challenges that may arise from various issues, including the patent specification’s inability to enable the claims. If not for the technical due diligence process, investors, acquirers, and licensing buyers would greatly underestimate the value of a patent portfolio. In fact, the case above demonstrates that many patent portfolios fail to meet the expectations of those who buy them simply because their claims are overly broad.

Practical Significance of Technical Due Diligence in Commercial Transactions

Nowadays, as intellectual property (IP) becomes increasingly important for business, technical due diligence goes beyond patent prosecution and litigation to include commercial transactions where the value of a firm’s patent portfolio is relevant to the deal’s structure. This includes mergers and acquisitions, venture capital and private equity investments, licensing agreements, and franchise sales.

Technical due diligence helps in assessing whether the target company’s patents are valuable assets that can be integrated into the buyer’s own R&D and commercialization strategy. It also plays an essential role in valuing a patent portfolio by determining the proportion of the portfolio that is relevant to the buyer’s business, how much protection individual patents offer, and how much these patents contribute to the overall value of the portfolio. It helps identify patents that have little value to the buyer but make the target’s IP portfolio appear more attractive than it is. When the portfolio consists of many patents, some of them may have little value to the buyer and be found as weaknesses during the due diligence stage.

In particular, M&A deals increasingly recognize the importance of IP, specifically patents. The logic is that, for a technology-based company, a significant portion of its value is often comprised of intangible assets, and a substantial amount of these intangible assets take the form of patents. Therefore, when acquiring such companies, it is essential to ensure that the value of the acquired patent portfolio justifies the purchase price. This requires technical due diligence to assess which patents in the acquired portfolio have real value to the buyer’s business and can be expected to contribute to the combined company’s value.

Venture capital and private equity investments similarly rely on technical due diligence to evaluate the value of the target’s patents. A growing number of such investors realize that, despite the importance of patents for the value of an early-stage company, the mere presence of a patent portfolio is not sufficient for an investment to be successful. An investor should be able to rely on the technical due diligence of the target’s patents to ensure that the company’s fundamental inventions are of high quality. A patent portfolio that includes commercially relevant inventions and is supported by high-quality disclosures will generally be more attractive to such investors.

Licensing deals also benefit from technical due diligence to assess the value of a patent portfolio. In particular, a licensee would only pay significant amounts for patents that offer meaningful protection against infringement. Before licensing negotiations start, potential licensees should evaluate whether the portfolio includes relevant patents that protect products the company is considering bringing to market and whether the patents’ claims are sufficiently broad to offer the required level of protection. Technical due diligence gives insight into the actual technology at the core of the licensed patents, enabling a company to make a well-informed licensing decision.

Preventing Patent Portfolio Overvaluation

One of the main reasons for conducting technical due diligence is to prevent patent portfolio overvaluation. This problem emerges when a portfolio’s value is estimated based on quantitative factors such as the number of patents in the portfolio, the number of countries in which they are protected, the length of their remaining protection period, and their current licensing status. In particular, when a company possesses numerous patents, it may assume that the quantitative characteristics of its patent portfolio indicate its high value. However, these characteristics say little about the relevance of the portfolio’s underlying technologies to the company’s business and about the actual value of the patents’ claims. Technical due diligence helps to avoid overvaluation by examining whether the patents currently offer valuable protection to the company that owns them.

It also helps in focusing on the relevant patents. For instance, some patents may no longer be beneficial to the company, allowing the company to divest from them in favor of other patents that better align with its strategic goals. Technical due diligence makes it possible to examine whether the patent portfolio covers core technologies that allow the company to maintain its competitive position in the market and to identify patents that no longer serve this purpose. This helps the company to optimize its patent portfolio and reduce maintenance costs for unneeded patents.

The Position in the United Kingdom and the United States

Despite the differences in the patent systems of the United Kingdom and the United States, companies in both jurisdictions have seen the need for technical due diligence to ensure the quality of their patent portfolios. In particular, both countries require specification in patent applications, which indicates the importance of technical aspects of due diligence for patent management. UK legislation states that a patent application must provide a description of the invention that enables a person skilled in the art to carry out the invention, while the claims define the scope of protection sought. Similarly, US legislation stipulates that a patent application must contain a written description sufficient to enable someone with ordinary skill in the art to make and use the invention. Courts in the US have consistently enforced this requirement, as can be seen in the recent Amgen Inc. v. Sanofi ruling. As a result, patent owners must ensure that their patent specifications are detailed enough to withstand scrutiny.

Conclusion

The due diligence process in patent management has changed dramatically over the last decade. While legal aspects of a patent portfolio, such as its validity and ownership, remain important, they are no longer sufficient. This is especially true for portfolios of substantial size, where the relevance and value of individual patents to the portfolio’s overall value must be considered. The value, in turn, is determined by examining not only the commercial viability of the patented technologies but also the scientific and engineering principles that make these technologies possible. Technical due diligence helps to accomplish this task by analyzing the scientific and engineering aspects of the patents in a portfolio. It supports the informed decision-making of portfolio managers, who can then decide which patents to divest from and which ones to renew.

The growing importance of technical due diligence is reflected in the increased focus on technical aspects of patents, such as the quality of disclosure, in the UK and the US. This trend highlights the shift toward valuing patent portfolios according to the principles of continuous improvement in technological progress. Technical due diligence enables a company to ensure that its patent portfolio represents a valuable asset by basing its decisions on objective information. This will become increasingly important for companies that are considering investment in the innovation sector, as such companies will use technical due diligence to identify the most valuable patents. Ultimately, the true value of a patent portfolio is no longer based on the number of owned patents but rather on the quality of the inventions those patents represent.

Author :- Aakriti Gupta, in case of any query, contact us at Global Patent Filing or write back us via email at support@globalpatentfiling.com.

Endnotes / Reference

1. Patents Act 1977 (UK).
2. 35 U.S.C. § 112(a) (United States).
3. Amgen Inc. v. Sanofi, 598 U.S. 594 (2023).
4. World Intellectual Property Organization (WIPO), WIPO Patent Drafting Manual (2nd ed., 2022).
5. World Intellectual Property Organization (WIPO), PATENTSCOPE User Guide.
6. United States Patent and Trademark Office (USPTO), Manual of Patent Examining Procedure (MPEP), Chapter 2100.
7. United States Patent and Trademark Office (USPTO), Patent Quality Initiatives.
8. UK Intellectual Property Office (UKIPO), Manual of Patent Practice.
9. Organisation for Economic Co-operation and Development (OECD), Patents as an Indicator of Technological Innovation (OECD Publishing, 2009).
10. Bronwyn H. Hall & Dietmar Harhoff, "Recent Research on the Economics of Patents," 4 Annual Review of Economics 541 (2012).
11. Ashish Bharadwaj, Vishwas H. Devaiah & Indranath Gupta, Multi-Dimensional Approaches Towards New Technology: Insights on Innovation, Patents and Competition (Springer, 2018).