Are you Ready for a Patent Throwdown? Squaring Off on Alice, IPRs and SEPs in Patent-driven M&A Transactions | Practical Law

Are you Ready for a Patent Throwdown? Squaring Off on Alice, IPRs and SEPs in Patent-driven M&A Transactions | Practical Law

A discussion of key issues to address in connection with a patent portfolio acquisition or other patent-driven M&A transaction. This Legal Update contains links to Practical Law's resources for patent-focused legal due diligence and drafting and negotiation of patent-specific representations and warranties.

Are you Ready for a Patent Throwdown? Squaring Off on Alice, IPRs and SEPs in Patent-driven M&A Transactions

by Practical Law Intellectual Property & Technology
Published on 02 Jun 2015 • USA (National/Federal)
A discussion of key issues to address in connection with a patent portfolio acquisition or other patent-driven M&A transaction. This Legal Update contains links to Practical Law's resources for patent-focused legal due diligence and drafting and negotiation of patent-specific representations and warranties.
Across industry sectors and technology domains, patent valuation has become significantly more complex in recent years. Patent owners as well as prospective buyers and licensees must grapple with the implications of dramatic developments in patent law, both legislative and judicial, around issues affecting patent valuation, including:
  • Patent-eligible subject matter.
  • Challenges to patent validity.
  • Licensing and enforcement of standard-essential patents (SEPs).
Despite the increasing uncertainty around patent valuation, patent-driven acquisitions are on the rise. Reuters reports that in the first quarter of 2015, M&A transactions in the biotech and pharmaceutical industry alone reached nearly $60 billion, a 94% increase over the same period in 2014 and the highest volume in any year since 2009.
Innovation around the Internet of Things (IoT) is also driving patent-focused M&A activity, with multibillion dollar acquisitions of IoT technology companies by Google (Nest Labs), Facebook (Oculus) and Qualcomm (CSR) in 2014. Major software and communications technology companies are also forming standards-setting organizations around IoT technology, which may lead to increased strategic acquisitions of newly declared SEPs.
Counsel to both parties in a patent-driven M&A transaction must be prepared to address this increasing uncertainty and the associated risks through more patent-focused legal due diligence inquiries and provisions of the acquisition agreement, particularly representations and warranties. The standard intellectual property (IP) inquiries and representations and warranties may no longer be sufficient to address either party's concerns.

Key Issues in Patent-Driven Acquisitions

Patent-eligible Subject Matter

Recent decisions by the US Supreme Court and the Federal Circuit together with guidance issued by the US Patent and Trademark Office (USPTO) have resulted in the invalidation of more patents and made it more challenging for applicants to obtain patent protection for certain types of inventions, including:
For a discussion of these developments, see Practice Note, Patent-eligible Subject Matter.
Buyers in patent-focused M&A transactions, particularly in the software or communications industry or the biotech and pharmaceutical industry, may seek strong representations and warranties around validity and scope of the acquired patents, including patent coverage for key products. However, sellers may push back against these representations because of the current limitations and potential ambiguity concerning patent eligibility.

Patent Challenges

The Leahy-Smith America Invents Act (AIA), which was enacted on September 16, 2011, created various new proceedings at the USPTO that allow the USPTO to reconsider the patentability of previously issued patents. These proceedings include:
  • Post-grant review.
  • Inter partes review (IPR).
For more information on these proceedings, see Practice Note, USPTO Post-prosecution Patentability Proceedings.
According to USPTO statistics, nearly 3,000 IPR petitions have been filed since these proceedings became available to third-party patent challengers in September 2012. Of the IPR petitions filed, over 900 petitions challenging over 13,000 patent claims have been closed to date, resulting in approximately 25% of those claims being found unpatentable (see USPTO: Inter Partes Review Petitions Terminated to Date).
Given the volume of IPR and other new patent challenge proceedings and the increased risk of patent invalidation, the parties in a patent-driven acquisition may heavily negotiate:
  • Specific disclosures concerning any pending patent challenge proceedings relating to the acquired patents as part of due diligence.
  • Specific representations and warranties in the acquisition agreement on:
    • the existence of patent challenges; and
    • the likelihood of the acquired patents being found unpatentable.

Standards-Setting Organizations

A patent deemed necessary for the practice of a specified technical standard may be licensed through the seller's participation in a standard-setting organization (SSO) to any entity intending to make use of the technology embodied in the standard. Many SSOs require participants in the standard's development to make a commitment to license SEPs on FRAND (fair, reasonable and non-discriminatory) or RAND (reasonable and non-discriminatory) terms.
Recent Federal Circuit decisions have limited royalties that may be recoverable in SEP enforcement actions (see Legal Update, Federal Circuit Vacates $10 Million Damages Award Due to Erroneous Damages Instruction in RAND Patent Case; see also Legal Update, Patent Owner Must Apportion Down Royalty from Multi-component Smallest Saleable Unit: Federal Circuit). Depending on the value of the patented technology and the current and potential licensees under the SSO license, licensing commitments to SSOs may render the acquired patents considerably less valuable than buyers anticipate.
Buyers in patent-focused M&A transactions may seek specific disclosures relating to any SEPs included in the acquired patents and, more broadly, disclosure of the seller's involvement in technology standard-setting, as such participation may result in future disclosure or licensing obligations concerning the acquired patents. Sellers may seek to limit the scope of due diligence and representations and warranties only to:
  • Identification of acquired patents, if any, that have actually been declared as SEPs.
  • Licenses actually granted or enforcement actions actually commenced as of closing.
For model representations and warranties addressing these and other patent-specific issues, including government funding and prosecution matters, see Standard Clauses: Patent Representations and Warranties.
For a checklist of patent-specific issues to cover in legal due diligence, see Patent Due Diligence in M&A Transactions Checklist.
For a discussion of due diligence and negotiation of acquisition agreements in patent-focused M&A transactions, see Practice Note, Patent Portfolio Acquisitions.