Three Steps to Avoiding Intellectual Property Issues Before a Medtech Transaction Begins

Intellectual property ("IP") is often a Medtech company's most important asset. Nonetheless, many companies fail to adequately protect their IP or to avoid problems with others' IP.

On November 17, 2009, Faegre & Benson hosted a Medtech Roundtable, a discussion among industry leaders and investors on how to avoid common missteps that may negatively affect your company's valuation or bring deals to a halt. We also discussed the top IP diligence issues important to VCs and strategic investors considering whether to invest in or acquire a medtech company. As a follow-up to the Roundtable, this article contains highlights of the obstacles to be aware of in medtech intellectual property matters.

The Importance of Momentum

In financing and mergers and acquisitions deals, momentum is important: IP problems bring deals to a halt. You increase the likelihood of a successful transaction by taking steps before a transaction starts—by setting up processes to monitor intellectual property issues in the day-to-day operations of the company you'll keep the momentum of a deal going forward.

There are three intellectual property problems that can kill a deal in its tracks (or at least lower the valuation of the deal):

• The investor finds a patent that is relevant to the company's technology (one the company didn't know about)
• An unresolved or unexplained infringement claim against the company
• The lack of clear ownership to the company's IP

The investor finds a patent that is relevant to the company's technology. No investor wants to buy into a company staring at a potential lawsuit. As a result, patent diligence focuses on both what patents are present in the field and what claims have been made against the company. Investors will often perform their own patent search to determine whether the company is free to operate without significant infringement risk. When an investor finds a relevant patent through these searches, the company will have to explain why they don't have a problem. Without an adequate explanation, the deal can die at this point.

An unresolved or unexplained infringement claim against the company. Similarly, when an unresolved infringement claim is found in due diligence, the investor will investigate. If there isn't a plausible explanation (such as "we received opinion of counsel that there is no problem"), the investor will reach their own conclusions by taking a very conservative approach to the issue. If they conclude that the target company has an infringement problem, they will then try to estimate the scope of the problem and the cost to resolve the issue. The cost will be deducted (at least in the investor's mind) from the sale price. This can kill a deal.

The lack of clear ownership to the company's IP. Equally as bad is finding that the company doesn't own the intellectual property it thinks it owns. University or institutional researchers may have conflicting obligations to assign things they create. Consultants may have developed software without a written obligation to assign the software to the company. Employees may not have invention assignment agreements covering their entire period of employment or may have obligations to their former employers. All of these things can lead to others owning important company IP rights.

So, how do you avoid incurring problems with intellectual property even before a transaction begins? We have three suggestions:

• Conduct an IP audit
• Perform patent landscaping
• Appoint an IP guru

Conduct an IP audit. IP audits commonly involve two components. The first component is an assessment of the processes and procedures in place to generate, perfect and protect your IP assets, as well as to avoid infringement upon the rights of others. The second common component of an IP audit is a substantive evaluation of your IP assets. An IP audit provides a "snap-shot" of your IP rights and the procedures in place to ensure continued effective protection of current and future rights. An IP audit can limit unnecessary costs and substantially reduce the risk of litigation, help you avoid jeopardizing valuable assets, and augment the value of existing assets.

Obtain patent landscapes on new technology developments. You should know more about the patent landscape than the investor or buyer. You should find out early about any significant patents in your path and then either seek a license to or design around the patents. Advice of patent counsel is crucial at this stage and adds credibility to resolution of these issues.

Appoint an IP guru. The IP guru should be a senior member of the management team who understands both the technology and the business strategy and has the clout to get things done. The IP management portion of their job should not be viewed as a bolt-on responsibility, but instead should be a part of their day-to-day duties. The guru should be responsible for creation and management of repeatable IP processes: obtaining descriptions of new ideas, making sure employee invention assignment agreements are signed, obtaining patent landscapes when new technologies are developed, conducting periodic IP audits and resolving infringement issues.

By protecting your IP and avoiding others' IP, you will improve your company's valuation and reduce the risk of a deal-killing problem popping up in due diligence. As we said before, momentum is critical in deals!

Faegre & Benson's Medtech Roundtable was held on November 17, 2009 at the Golden Valley Country Club. Featured presenters included Bruce KenKnight, vice president of Research and Business Development for Boston Scientific Corporation; Fin Samson, venture partner for Affinity Capital; and Jason Kraus, Robert Leonard and Jonathan Zimmerman, partners with Faegre & Benson.