Patent due diligence in high-tech acquisitions

Patents are a focal issue in the acquisition of high-tech companies, as the acquisition of the patents of the target company is usually the motivation for acquiring such companies. If, in an acquisition of a high-tech company, investigation of the patent situation of the target company is not thorough, it could impact the outcome of the strategic acquisition. More seriously, the acquired patents could instead become a heavy burden on the acquirer. Accordingly, in addition to carrying out the due diligence routine in an acquisition procedure, the acquirer should also do due diligence specifically on the target company’s patents.

Integrity of patent rights. The first focal point of the due diligence is confirming whether the target company has patent rights in the specific technologies, and whether such rights are without defect. First, it should be confirmed whether a third party outside the target company has asserted co-inventor rights in any specific patent of the target company. If any of the target company’s patents is a co-invention, its value will be substantially reduced, and accordingly it is best to ensure that all of the co-inventors have transferred their rights to the target company. Second, it should be investigated whether there are any disputes concerning whether any of the target company’s patents is not a service invention. This requires taking into consideration the specific provisions on service inventions in local patent law, with the focus being to ascertain whether there are written provisions between the target company and its employees on the vesting of inventions, and whether such written provisions comply with relevant laws. Finally, if the target company acquired a patent in question through a transfer, the acquirer needs to confirm whether the transfer complied with relevant provisions of the local patent law.

Liu Zhaojun is a partner and Yang Bin is an associate at East & Concord Partners