In some cases, a business model is based on the assumption that a patent portfolio will grant exclusive access to customers who wish to purchase a particular product or service. This supposed exclusivity can be a critical component in a business owner’s forecasts of market share, pricing, marketing costs, revenue, margins, etc. Whether these forecasts materialize or not depends on the actions of competitors. For example, if competitors are not hampered by the legal barriers expected by the patent holder, then market share and margins may well fall short of predictions. Too much of a gap between the expectations of the patent owner and the actual legal protection available can jeopardize the entire commercial enterprise. Entities investing in such a business model should carefully evaluate their target patent portfolios to determine if the portfolio has the strength to support business development and growth.

The patent review process is often referred to as “due diligence.” The fine points of due diligence can vary by industry. However, there are generally four common lines of inquiry that intellectual property professionals use when investigating the strength of a patent.

First, does the patent cover the current product? Patent applications are sometimes filed in the early stages of development of an innovative offering. Invariably, the technical characteristics of a product may change during testing or in response to feedback from a supplier or consumer. However, one of the “hard and fast” rules at the Patent Office is that the content of an application cannot be supplemented after filing. If a concept evolves in a direction not contemplated by the original patent application, then the commercialized version of that concept could become unprotected. Therefore, it is always prudent to compare the valuable features of the existing product with the content of its corresponding patent.

Second, is the patent relevant to competitors? A patent does not necessarily protect all that is reveals. For example, the fact that a commercialized product is shown in great detail in the figures of a patent does not translate into robust protection for that product. Take a scenario of an innovative “baby-friendly” handle that a parent can purchase to add to an existing bottle. It could happen that the patent describes the handle but only “claims” the handle in combination with the bottle. The gap in protection is that a competitor can avoid infringing this patent by copying and selling the new handle. without the bottle. As unfair as it may seem, if the competitor does not sell what the patent claims, there is a risk that the patent cannot be successfully enforced against that competitor. Claims are simply the name of the game. Therefore, it is best to examine the claims of a patent to ensure that there is a “one-to-one” match to what competitors are likely to sell.

Third, is the patent the correct geographic scope? Some companies choose to maintain only a national patent portfolio, while others choose to supplement their national protection with patent rights in other nations. Depending on the market, either approach may be the appropriate course of action. For example, because the European Union (EU) wields as much economic power as the United States, the rationale for introducing a product to the US market may apply just as strongly to EU markets. If so, the relatively high costs of obtaining patent protection in the EU may be justifiable. On the other hand, cultural differences or government regulations may make it unprofitable to enter markets outside of the US. In such cases, it may be better to focus financial resources for patent protection only on domestic opportunities. From an investor’s point of view, one concern might be whether the company has foregone potential foreign revenue streams due to inadequate patent coverage in those foreign states. On the other hand, one consideration might be whether the company is saddled with onerous overhead costs (e.g maintenance fees) for having acquired unnecessary offshore patent rights.

Fourth, is the “history” of the patent pristine? Securing patent rights involves filing numerous legal documents within prescribed time frames. In addition, errors or deficiencies in the content of these documents may cloud the validity of the patent or raise doubts about ownership. For example, the US Patent Office requires inventors to disclose prior publications that may be relevant to patentability. In some circumstances, failure to submit these publications may result in a patent being unenforceable. With regard to ownership, failing to properly document the transfer of ownership rights from an inventor to another party, such as the inventor’s employer, could make a patent unenforceable. Therefore, no “due diligence” is complete without first examining the documents associated with a patent to locate potential “land mines.”

In the end, a prospective IP buyer should have the same mindset as one considering buying a home or commercial property. A prudent real estate investor would never be satisfied with “conducted” inspections or “swifting” a deed or loan documents. Such an investor would also not rely on the alleged owner’s verbal assurances. Instead, the investor would walk through the property with a critical eye and have legal professionals examine each contract, deed, or loan. The investor would have a certified inspector determine the safety and physical condition of the property. Similarly, investors in patents must implement similar measures to determine whether a patent will live up to their expectations.