The best preparation for diligence begins well in advance of any discussions with companies interested in investing in or purchasing assets of the innovating company. Ideally, the innovating company should implement policies and practices from day one of the company to help avoid problems that will inexorably come to light under the scrutiny of diligence. Inventorship, the starting place for chain of title on patents, and ownership are fundamental to any deal, and can cause havoc when a company gets it wrong.
The share of U.S. granted patents naming more than one inventor continues to grow, with more than 20% of all patents granted in 2016 naming four or more inventors. More inventors means potentially more inventorship and ownership issues to confirm, clarify, and correct in preparation for diligence.
The innovating company whose technology is to be scrutinized should put in place policies that describe the inventorship determination process. Having an inventorship determination process that is open, inclusive, and fair can prevent issues with disgruntled employees who are terminated after the deal is complete. See our related blog for suggestions for making the process fair and open. Any issues identified in the process should be confronted within the organization quickly and effectively.
This determination process should include a review of contributions of employees of the innovating company, as well as the contributions of any others who may have participated in the inventive process. For example, special issues arise when the innovating company in-licenses technology from or collaborates with universities, or uses contract research organizations (CROs). These relationships should be investigated fully to identify any inventions arising outside of the innovating company.
- Tip for Investing Companies: During diligence, an investing company should assess the innovating company’s policies for determining inventorship and determine whether the process on its face appears comprehensive and fair. Investing companies should also ask whether there are any known inventorship issues and what, if anything, has been done in order to resolve them.
Inventorship is a key driver for patent ownership since it is the starting point for chain of title. An innovating company should review its employment agreement(s) for a present assignment clause – “I hereby assign” rather than “I agree to assign” or “I promise to assign.” It should also be confirmed that every employee has executed an employment agreement with an assignment clause.
Standard procedure should include obtaining executed assignments for each invention as close as possible in time to the patent application filing, i.e. when the inventors are more likely to be accessible and cooperative. Where this is not possible, the employment agreement can serve as evidence of assignment.
While these procedures may seem like givens, it is not uncommon for missing assignments and/or employment agreements to come to light in diligence.
- Tip for Investing Companies: During diligence, an investing company should search public records for recorded assignments and review the content of the assignment documents to determine whether title has effectively passed to the innovating company. Investing companies should be wary where assignment documents are not publicly available, and should request that any unrecorded assignments be made accessible in diligence.
An innovating company should also review its collaboration agreements, to understand to whom each inventor is obligated to assign. Investigation beyond these agreements may also be needed.
In one common scenario, a university researcher hired to consult may execute an agreement with the company, with or without the university’s knowledge, purporting to assign their inventions to the company. Savvy universities, however, include assignment clauses in their employment agreements and in their IP policies that obligate their researchers to assign to the university.
In another common scenario, companies, particularly in the life sciences, use CROs for research which can lead to a CRO employee being an inventor on the innovating company’s patents. Agreements with CROs typically provide for the innovating company to be assigned ownership of CRO employee’s invention.
In both scenarios, and generally, care should be taken in how and in what order the assignments are executed. Where a third party inventor is obligated, by employment agreement or policy, to assign to her CRO- or university-employer, she should not assign directly to the innovating company. To ensure proper chain of title, the third party inventor should assign to her employer first, and her employer should assign to the innovating company second.
While this may seem self-evident, surprisingly, it is not uncommon to see assignments executed out of order with the result that the transfer to the innovating company is not effective. Unraveling and correcting this will be costly and may be difficult or even impossible to do.
- Tip for Investing Companies: During diligence, the investing company should ask the innovating company to disclose whether there are any third party inventors; and in the case of a university researcher, whether the university has been made aware of the university employee’s consulting agreement with the innovating company and has agreed to the assignment obligations. Investing companies should keep in mind that once an asset is acquired, inventorship and ownership issues will become its issues.
Proper naming of inventors is critical for maintaining patent rights, as inventors are the first owners of the patent. Proper assignments thereafter are also necessary to ensure ownership transfers. Addressing inventorship and ownership issues early will help to ensure that diligence proceeds smoothly and the deal gets done.
 Office of the Chief Economist, IP Data Highlights, No. 2, February 2019.