The value of an early stage biotech company is driven primarily by the quality and scope of its intellectual property. As such, these companies’ primary goal is to stake out and consolidate a defensible claim in their technology space.
In sizing up an early stage company’s IP portfolio during due diligence, many investors and acquirers tend to focus on prior art issues related to patentability and freedom-to-operate concerns posed by the potential risk of someday being sued for infringing a third party patent. However, a hyper-focus on patentability and freedom to operate may be misplaced during early stages of technical development.
Often overlooked is the fact that substantive patent prosecution often winds through years of negotiation with the Patent Office. Moreover, claim sets in a filed patent application continuously evolve not only in response to Examiner rejections but also to track and cover important developments in lead candidate selection and pre-clinical product design, for example.
Additionally, biotech companies usually take advantage of the safe harbor set forth in 35 U.S.C. § 271(e)(1) to avoid charges of infringement for research activities associated with pre-/clinical development. This affords them a certain luxury of freedom with respect to third party patents as they develop their technologies. Therefore, while early stage companies are expected to understand their competitive IP ecosystem, be aware of potentially threatening third party IP and even have an informal game plan in place to deal with such risks; sophisticated investors and BigPharma acquirers infrequently require that such companies will have actually made cash-draining licensing investments or aggressively attacked third party patents through litigation or Inter Partes Review.
In practice, therefore, sophisticated due diligence with respect to an early stage intellectual property portfolio is often better served scrutinizing an entirely different and more pressing aspect of the technology: Chain of Title.
Between 2007 and 2012, U.S. industrial biopharmaceutical annual R&D spending dropped by about 15%. It is reasonable to assume that BigPharma’s internal early stage research programs disproportionately fell victim to such cuts. It is no surprise, therefore, that we have seen an increasing amount of initially publically funded academically derived technologies flowing through start-ups into larger companies.
Inventors generating these new technologies usually collaborate with other researchers at various universities, corporations and service providers. While University professors and post-docs generally owe a duty to assign their inventions to their respective institutions, industrial sponsored research arrangements and third-party grant making entities such as government agencies and philanthropies may nevertheless have their own rights in the IP arising out of the research they support.
Thus a complex juxtapositions of funding sources, inventors, technicians, institutions and former employers — particularly in an area of investigation where the number of experts is small — represents a minefield with respect to issues of technology control and ownership. If not properly managed from the outset Chain of Title issues can explode once a technology is deemed to have commercial value and an aggrieved party believes they are being excluded when the proverbial ‘cookie tray’ is being passed around in the form of liquidity event, for example.
We have often helped parties dealing with tangled chain of title issues. In the best cases, critical transactions are merely held up and cap tables potentially adjusted while ownership issues are cleaned up. In the worst cases, an exit is scuttled or a party is sued for breach of contract, breach of a duty of loyalty and misappropriation of trade secrets for example or even accused of inequitable conduct before the USTPO for willfully misnaming or excluding inventors.
Irrespective of who ultimately prevails on the merits in such disputes, the cost in terms of unproductive time, lost opportunity, money, anxiety and reputational damage will no doubt, have been immense. These are particularly painful to bear at the start up stage when cash and key person attention are at a high premium.
Therefore, when conducting due diligence on early stage biotechnologies, it is of critical importance to generate a comprehensive list of all scientists and technicians who were involved in the earliest stages of a technology asset. Each such individual’s contribution should be carefully analyzed with respect to whether they likely qualify as a legal inventor for example. Inventorship under U.S. law is tied to conception and linked in concrete terms a claim in a patent or patent application. The standard for inventorship with respect to know how can be much less clear.
In addition to analyzing inventive contribution, each such person’s obligations to assign their rights in their inventions must be assessed. For example, is a person entitled to keep all rights for themselves or are they obligated to assign to their respective employer/university? Have the critical requirements of the Bayh-Dole Act, e.g., iEdison reporting, been complied with by federally-funded institutions? Furthermore, does the inventor in question have a relationship with a funding agency, e.g., through a sponsored research agreement with a biopharma industry partner that has a rights, e.g., of first refusal, to the inventions it funded. It is imperative that these investigations are conducted early, be properly memorialized and that relevant employee policies, employment and funding agreements are collected and cataloged in preparation for potential future third party due diligence.
Only after matters related to IP inventorship, ownership and control are clarified, is a company in a strong position to efficiently go about raising money or seeking partners to exploit its intellectual property assets.