IP Due Diligence

Business transactions involving intellectual property (IP) require thorough due diligence, often before any meaningful negotiations, if any, take place. The primary goal of IP due diligence is to identify and evaluate the relevant IP assets of interest, and then provide sufficient information to allow the evaluating party to make an informed business decision. In theory, this process seems straightforward and without peril for the attorneys to share this information and the due diligence analysis (“work product”) with the decision-makers in the company. However, every general rule has its exceptions.

Nonpublic/Confidential Information

Innovative companies that actively engage in research and development understand the importance of protecting their intellectual property assets, including as trade secrets and patents. When opportunities arise for such a company to acquire or license a competitor's competing or complementary IP assets, the situation for the innovative company gets a bit more complex ' compared with a company that does not have any related in-house research and development activities. Because due diligence requires thorough analysis and evaluation of the IP assets to be acquired or licensed, this analysis often includes confidential and/or non-public information.

For example, in the case of patent protection, a U.S. provisional patent application expires after one year and is not available to the public, whereas a U.S. non-provisional patent application or a PCT international patent application filed from the provisional is not published until about six months after filing (18 months total) ' assuming an applicant converts the provisional application to a non-provisional patent application (U.S. or PCT application) right before it expires. Thus, a patent application can be kept hidden from the public for as long as 18 months following its priority date. In highly competitive and rapidly developing technologies, a significant number of IP assets can be generated during this 18-month window. In such a scenario, a party may wish to investigate getting access to non-published information from a competitor while conducting its due diligence investigation. The challenge of course may be managing confidential interest.

Confidential Information

The confidentiality of one or both parties' technology can prevent the sharing of crucial information needed by the evaluating party to make an informed business decision. Although confidential information can be protected by a confidentiality agreement between the parties, the evaluating party may not want to receive or review “any” confidential and non-public information from the disclosing party, including any non-published provisional applications that are pending, during the due diligence. The obvious risk is that the disclosing party's technology portfolio may overlap with the evaluating party's own portfolio. Thus, receiving any non-public and/or confidential information may corrupt or otherwise put at risk the evaluating party's own R&D efforts and patent filings.

An innovative company may be especially concerned, for example, that its scientists could be accused of stealing and/or misappropriating the disclosing party's confidential information to advance its own business interests. In addition, the evaluating company may be highly risk-averse in these circumstances, and not willing to consider an “in-house attorney's eyes only” review as sufficient protection.

In these circumstances, the company may ask outside counsel to conduct the due diligence analysis and report its finding without revealing any nonpublic or confidential information from the disclosing party. Your outside counsel therefore has a duty of confidentiality to your company and all of its information and materials, as well as a similar duty (likely by contract and the nature of each contract may vary depending on the circumstances) to the disclosing party's materials and information. With access to all relevant and critical information of both parties, the outside counsel is in a position to carefully and freely review the materials and evaluate the merits of a proposed business arrangement between both parties. The only concern at this point ' and it's legitimate ' is how can the outside counsel share the results of the complex analysis with the client without disclosing any confidential information, and in a manner that allows the business to make an informed decision?

Hypothetical Example

The following fictional example is intended to illustrate this problem, and one possible solution to the question raised above.

Company ABC is an emerging biotech company, dedicating its research efforts to developing drugs for diabetes through a novel biological mechanism. It has positioned itself as a pioneer and a major player in this field and wants to keep it that way. All of its patent applications have been published, but not yet granted.

While attending a scientific conference, executives at Company ABC discover a poster and presentation by the Researcher in the very same therapeutic area with structurally similar drug candidates. Company ABC wishes to further understand and review Researcher's technology and IP assets to insure that Company ABC stays the first and most dominant player in this space. If, however, the Researcher's IP and related activities appear valuable, Company ABC will consider establishing an alliance with the Researcher before yet another potential competitor jumps at the opportunity. Nonetheless, because Company ABC is still engaged in vigorous drug discovery in diabetes therapeutics, it prudently wants to avoid any future accusations of misappropriation by Researcher based on this review.

Company ABC elects to shield itself from receiving any confidential and non-public information from Researcher (who has already agreed to share the relevant information under the terms of an executed confidentiality agreement with Company ABC), by approaching its outside counsel (“Counsel”) for assistance. Company ABC requests a comprehensive comparison of Researcher's and Company ABC's patent assets (published and non-published) to investigate any and all areas of overlap, and/or potential areas covered only by Researcher (so-called blocking assets).

Analysis

The Researcher provided Counsel with several unpublished provisional and non-provisional applications (“applications”) and Company ABC also provided Counsel with its relevant IP. After reviewing the relevant disclosures and pending claims of all IP, it was immediately apparent to Counsel that there was some significant overlap between both portfolios. Fortunately, Company ABC had earlier application filing dates where all overlap was identified.

Researcher's patent portfolio was grouped based on the chemical structures of the genera and species along with any biological data (or note of lack thereof). Next, relevant structure/activity information available from public sources, such as journal articles or presentations in conferences, was included next to the relevant genera/species. Finally, the closest genera/species from Company ABC's portfolio were listed next to each of the Researcher's genera.

The immense challenge facing Counsel at this point was analyzing the extent and types of overlap (genus and species levels) between Researcher's and Company ABC's IP portfolios, and then attempting to assess whether there is any value in pursuing any of Researcher's technology that is not covered by the ABC portfolio.

At the genus level, the scope of overlap and difference between Research's and ABC's genera were initially examined. Researcher's genera were defined very broadly and often encompassed Company ABC's genera. While this may be perceived initially as a major problem, Counsel recognized that in small molecule drug discovery, the most critical IP usually resolves down to species level analysis for so called “lead compounds.” Therefore, the most challenging and complex portion of the analysis involved examining the species or a group of closely related species disclosed by the Researcher and determining: 1) whether the exact species was disclosed by Company ABC; or 2) if not, whether the species is covered by any ABC genus.

Upon completion, Company ABC requested that Counsel prepare and present a summary report without disclosing any confidential information of the Researcher. In hindsight, Counsel recognized this last piece ' how to convey sufficient information to allow an informed business decision ' as the most challenging.

Presentation to Client

As requested, a comprehensive report was prepared, listing all the information outlined above, but with all of Researcher's confidential information (i.e., from all non published applications, including application numbers and filing dates) redacted. All relevant and available public information was provided in the report, right next to the corresponding confidential information that was redacted. A two-word summary was also provided near the end of the report for each genus group: “complete overlap,” “partial overlap,” or “no overlap.” The term “complete overlap” indicates that Company ABC's (earlier filed) applications cover and dominate a specified Researcher genus/species. Regarding the categories “partial overlap” and “no overlap,” Counsel also included comments based on: 1) the available public information, including in vitro and in vivo data; 2) whether any species of Company ABC anticipates Researcher's genus; and 3) the existence of any closely related ABC species.

Regarding item (1), the publicly available biological data could provide insight about the quality of Researcher's genera or species. Company ABC could ignore a genus of Researcher's species, even though the structures are not revealed, if all of them appear to be inactive, or otherwise contain inherent properties that preclude them from advancing to further development. In addition, the quantity of available biological data ( e.g. , in vitro data, in vivo data, metabolic profiles, pharmacokinetic studies, animal studies) could also be analyzed to determine how likely a particular species would become a drug candidate.

Regarding item (2), because many of Company ABC's applications have earlier filing dates, ABC's species may anticipate Researcher's genus, and render Researcher's pending claims unpatentable during prosecution. Such species/genera of Researcher therefore would not be a threat to Company ABC.

Finally, regarding item (3), if Company ABC has closely related species that do not overlap with what Researcher is claiming in its applications, Company ABC can likely make some high level assessment of whether Researcher's species could be promising drug candidates and whether Company ABC needs to consider these species more carefully.

In summary, all the above information can be used by Company ABC to assess the strength and weaknesses of Researcher's applications, and whether or not Company ABC wants access to these applications to help protect its market leading position.

Conclusion

As demonstrated above, and despite some significant hurdles, outside counsel can conduct a comprehensive due diligence analysis and deliver a sufficient result-driven analysis without disclosing any confidential information from the disclosing party. The approach outlined above protects all confidential information without risk to the client, provides ample insights regarding the value of the other party's IP, and offers sufficient flexibility for the client to make an informed business decision about a path forward.

Michael McGurk is managing partner of Finnegan, Henderson, Farabow, Garrett & Dunner, LLP's Boston office. W. Caroline Chen is an associate at the firm, resident in the Washington, DC, office. Reach them at [email protected] and [email protected], respectively.

Business transactions involving intellectual property (IP) require thorough due diligence, often before any meaningful negotiations, if any, take place. The primary goal of IP due diligence is to identify and evaluate the relevant IP assets of interest, and then provide sufficient information to allow the evaluating party to make an informed business decision. In theory, this process seems straightforward and without peril for the attorneys to share this information and the due diligence analysis (“work product”) with the decision-makers in the company. However, every general rule has its exceptions.

Nonpublic/Confidential Information

Innovative companies that actively engage in research and development understand the importance of protecting their intellectual property assets, including as trade secrets and patents. When opportunities arise for such a company to acquire or license a competitor's competing or complementary IP assets, the situation for the innovative company gets a bit more complex ' compared with a company that does not have any related in-house research and development activities. Because due diligence requires thorough analysis and evaluation of the IP assets to be acquired or licensed, this analysis often includes confidential and/or non-public information.

For example, in the case of patent protection, a U.S. provisional patent application expires after one year and is not available to the public, whereas a U.S. non-provisional patent application or a PCT international patent application filed from the provisional is not published until about six months after filing (18 months total) ' assuming an applicant converts the provisional application to a non-provisional patent application (U.S. or PCT application) right before it expires. Thus, a patent application can be kept hidden from the public for as long as 18 months following its priority date. In highly competitive and rapidly developing technologies, a significant number of IP assets can be generated during this 18-month window. In such a scenario, a party may wish to investigate getting access to non-published information from a competitor while conducting its due diligence investigation. The challenge of course may be managing confidential interest.

Confidential Information

The confidentiality of one or both parties' technology can prevent the sharing of crucial information needed by the evaluating party to make an informed business decision. Although confidential information can be protected by a confidentiality agreement between the parties, the evaluating party may not want to receive or review “any” confidential and non-public information from the disclosing party, including any non-published provisional applications that are pending, during the due diligence. The obvious risk is that the disclosing party's technology portfolio may overlap with the evaluating party's own portfolio. Thus, receiving any non-public and/or confidential information may corrupt or otherwise put at risk the evaluating party's own R&D efforts and patent filings.

An innovative company may be especially concerned, for example, that its scientists could be accused of stealing and/or misappropriating the disclosing party's confidential information to advance its own business interests. In addition, the evaluating company may be highly risk-averse in these circumstances, and not willing to consider an “in-house attorney's eyes only” review as sufficient protection.

In these circumstances, the company may ask outside counsel to conduct the due diligence analysis and report its finding without revealing any nonpublic or confidential information from the disclosing party. Your outside counsel therefore has a duty of confidentiality to your company and all of its information and materials, as well as a similar duty (likely by contract and the nature of each contract may vary depending on the circumstances) to the disclosing party's materials and information. With access to all relevant and critical information of both parties, the outside counsel is in a position to carefully and freely review the materials and evaluate the merits of a proposed business arrangement between both parties. The only concern at this point ' and it's legitimate ' is how can the outside counsel share the results of the complex analysis with the client without disclosing any confidential information, and in a manner that allows the business to make an informed decision?

Hypothetical Example

The following fictional example is intended to illustrate this problem, and one possible solution to the question raised above.

Company ABC is an emerging biotech company, dedicating its research efforts to developing drugs for diabetes through a novel biological mechanism. It has positioned itself as a pioneer and a major player in this field and wants to keep it that way. All of its patent applications have been published, but not yet granted.

While attending a scientific conference, executives at Company ABC discover a poster and presentation by the Researcher in the very same therapeutic area with structurally similar drug candidates. Company ABC wishes to further understand and review Researcher's technology and IP assets to insure that Company ABC stays the first and most dominant player in this space. If, however, the Researcher's IP and related activities appear valuable, Company ABC will consider establishing an alliance with the Researcher before yet another potential competitor jumps at the opportunity. Nonetheless, because Company ABC is still engaged in vigorous drug discovery in diabetes therapeutics, it prudently wants to avoid any future accusations of misappropriation by Researcher based on this review.

Company ABC elects to shield itself from receiving any confidential and non-public information from Researcher (who has already agreed to share the relevant information under the terms of an executed confidentiality agreement with Company ABC), by approaching its outside counsel (“Counsel”) for assistance. Company ABC requests a comprehensive comparison of Researcher's and Company ABC's patent assets (published and non-published) to investigate any and all areas of overlap, and/or potential areas covered only by Researcher (so-called blocking assets).

Analysis

The Researcher provided Counsel with several unpublished provisional and non-provisional applications (“applications”) and Company ABC also provided Counsel with its relevant IP. After reviewing the relevant disclosures and pending claims of all IP, it was immediately apparent to Counsel that there was some significant overlap between both portfolios. Fortunately, Company ABC had earlier application filing dates where all overlap was identified.

Researcher's patent portfolio was grouped based on the chemical structures of the genera and species along with any biological data (or note of lack thereof). Next, relevant structure/activity information available from public sources, such as journal articles or presentations in conferences, was included next to the relevant genera/species. Finally, the closest genera/species from Company ABC's portfolio were listed next to each of the Researcher's genera.

The immense challenge facing Counsel at this point was analyzing the extent and types of overlap (genus and species levels) between Researcher's and Company ABC's IP portfolios, and then attempting to assess whether there is any value in pursuing any of Researcher's technology that is not covered by the ABC portfolio.

At the genus level, the scope of overlap and difference between Research's and ABC's genera were initially examined. Researcher's genera were defined very broadly and often encompassed Company ABC's genera. While this may be perceived initially as a major problem, Counsel recognized that in small molecule drug discovery, the most critical IP usually resolves down to species level analysis for so called “lead compounds.” Therefore, the most challenging and complex portion of the analysis involved examining the species or a group of closely related species disclosed by the Researcher and determining: 1) whether the exact species was disclosed by Company ABC; or 2) if not, whether the species is covered by any ABC genus.

Upon completion, Company ABC requested that Counsel prepare and present a summary report without disclosing any confidential information of the Researcher. In hindsight, Counsel recognized this last piece ' how to convey sufficient information to allow an informed business decision ' as the most challenging.

Presentation to Client

As requested, a comprehensive report was prepared, listing all the information outlined above, but with all of Researcher's confidential information (i.e., from all non published applications, including application numbers and filing dates) redacted. All relevant and available public information was provided in the report, right next to the corresponding confidential information that was redacted. A two-word summary was also provided near the end of the report for each genus group: “complete overlap,” “partial overlap,” or “no overlap.” The term “complete overlap” indicates that Company ABC's (earlier filed) applications cover and dominate a specified Researcher genus/species. Regarding the categories “partial overlap” and “no overlap,” Counsel also included comments based on: 1) the available public information, including in vitro and in vivo data; 2) whether any species of Company ABC anticipates Researcher's genus; and 3) the existence of any closely related ABC species.

Regarding item (1), the publicly available biological data could provide insight about the quality of Researcher's genera or species. Company ABC could ignore a genus of Researcher's species, even though the structures are not revealed, if all of them appear to be inactive, or otherwise contain inherent properties that preclude them from advancing to further development. In addition, the quantity of available biological data ( e.g. , in vitro data, in vivo data, metabolic profiles, pharmacokinetic studies, animal studies) could also be analyzed to determine how likely a particular species would become a drug candidate.

Regarding item (2), because many of Company ABC's applications have earlier filing dates, ABC's species may anticipate Researcher's genus, and render Researcher's pending claims unpatentable during prosecution. Such species/genera of Researcher therefore would not be a threat to Company ABC.

Finally, regarding item (3), if Company ABC has closely related species that do not overlap with what Researcher is claiming in its applications, Company ABC can likely make some high level assessment of whether Researcher's species could be promising drug candidates and whether Company ABC needs to consider these species more carefully.

In summary, all the above information can be used by Company ABC to assess the strength and weaknesses of Researcher's applications, and whether or not Company ABC wants access to these applications to help protect its market leading position.

Conclusion

As demonstrated above, and despite some significant hurdles, outside counsel can conduct a comprehensive due diligence analysis and deliver a sufficient result-driven analysis without disclosing any confidential information from the disclosing party. The approach outlined above protects all confidential information without risk to the client, provides ample insights regarding the value of the other party's IP, and offers sufficient flexibility for the client to make an informed business decision about a path forward.

Michael McGurk is managing partner of Finnegan, Henderson, Farabow, Garrett & Dunner, LLP's Boston office. W. Caroline Chen is an associate at the firm, resident in the Washington, DC, office. Reach them at [email protected] and [email protected], respectively.