Top 5 Patent Due Diligence Red Flags

Like a house inspection for real estate, patent due diligence is an investor’s opportunity to look under the hood of a life science company’s intellectual property (IP) before making an investment. Since IP represents 75 to 90% of the value of life science transactions, due diligence is a critical component of the valuation process. IP is a present indicator of the future value of a life science company — especially when the time to market for a drug averages about ten years.

A comprehensive patent due diligence analysis looks beyond rosy forecasts, and considers whether the patent claims will keep out the competition (claim scope). The claim scope, in turn, may depend on the back and forth between the patent Applicant and the patent Examiner at the U.S. Patent & Trademark Office (USPTO).

In the startup space, a significant portion of the company’s patent portfolio may consist of active or pending patent applications at the USPTO rather than issued patents. The company may also be actively filing new applications.

Since the patents have not issued, there is more uncertainty regarding the value of any patents that eventually issue. Pending patents impart value, but cannot be used to exclude competition until they issue. Without issued patent claims to review, how can you determine the value of a pending patent application?

Below are the top 5 red flags to look for when evaluating pending patent applications:

  1. Length of Prosecution

Brevity is the soul of wit, and patent prosecution. A lengthy prosecution could indicate limitations on claim scope and a shortened patent term.

Patent prosecution is a “conversation” between Applicant and the patent Examiner. Typically, the Examiner issues an office action in response to a patent filing and rejects the claims for both substantive and procedural reasons (e.g., prior art, insufficient disclosure, failure to comply with drawing rules). The Applicant responds by amending the claims, or making counter arguments.

This conversation creates the “Patent Prosecution History” (PPH). When you sue a competitor, the court will interpret the meaning and scope of the patent claims and consult the PPH to see if the Applicant made any statement which narrows the scope of the claim.

For example, the Applicant may have argued that the dosage range of 0.5 to 1.0 μg/ml per recited in its claim to treating prostate cancer with drug X cannot be any higher without causing negative side effects in an effort to avoid a prior publication disclosing a dose of 1.1 μg/ml. Now, the Applicant is “estopped” from arguing that a competitor’s use of 1.1 μg/ml is “equivalent” to its claims because of its prior argument to the contrary, and the scope of the claim would be narrowed. A lengthy patent prosecution could increase the risk of admissions made during the patent prosecution, that could be used to narrow the interpretation of a patent claim.

In addition, the longer the prosecution, the shorter the patent term. Prior to June 8, 1995, there was not a significant downside to extending the number of rounds since the term of a US Patent was 17 years from the date of issuance. However, since 1996, the term of a US Patent is 20 years from the date of filing. From the moment an application is filed, the clock is ticking for an application, and any subsequent application claiming priority to the original application.

2. Examiner and Art Unit Statistics

Although the USPTO takes a number of steps to ensure uniformity of policies and procedures, the Patent Examiner assigned to a case and the Art Unit where the Examiner resides may have a great deal of influence on the rejections applied and likelihood of success in obtaining a valuable, issued patent.

The USPTO examines applications from numerous scientific disciplines. In order to distribute applications to Examiners best suited to examine them, the USPTO divides Examiners into “Technology Centers” which are, in turn, broken down into “Art Units” using a comprehensive classification system. Although the USPTO develops rules and guidance issued to the office as a whole, Art Units develop their own approaches to patent examination and may issue certain rejections more frequently than others and may be more or less receptive to certain arguments. Analyzing statistics regarding the Art Unit and/or Examiner handling an application, may indicate how difficult it will be to obtain meaningful patent protection and the time frame for patent issuance.

Data regarding the percentage of applications issued by an Art Unit and Examiner at various stages during patent prosecution may indicate the likelihood of success depending on the stage of patent prosecution (e.g., first office action, final office action, after final, and appeal). These statistics can be used to predict outcomes based on the specific stage a given application is at with the Examiner.

Data regarding the percentage of applications issued by an Art Unit and Examiner at various stages during patent prosecution may indicate the likelihood of success depending on the stage of patent prosecution (e.g., first office action, final office action, after final, and appeal).

These statistics can be used to predict outcomes based on the specific stage a given application is at with the Examiner. A statistical “snapshot” of individual applications or a portfolio as a whole provides quick and inexpensive feedback before committing to a larger scale (and more expensive) complete IP due diligence.

It is important to recognize that each case is unique, and such statistics are not a substitute for substantive analysis of the merits. However, knowing whether an Examiner is likely to respond to certain arguments at different stages of prosecution is valuable for predicting outcomes and developing strategies to overcome rejections.

3. Frequency and Types of Rejections

It is common to receive certain types of rejections depending on the technology area being examined. Each rejection type could indicate the prosecution challenges for a given application or portfolio.

For example, it is common to receive written description and enablement rejections under 35 USC Section 112, 1st paragraph for biotechnology inventions. Often biotechnology patent applications are filed before complete data regarding the invention is available to obtain priority and to avoid creating prior art that could preclude obtaining any patent protection.

The Examiner may believe that the Applicant has not shown adequate possession of the invention at time the patent application is filed or that the Applicant has not adequately shown how to make and use the invention in the application. Determining the number of such rejections may indicate that the Applicant’s patent specification is not complete enough to support the desired claims.

Rejections based on lack of patentable subject matter are now common in both life sciences and computer software technology. Understanding the basis for a patentable subject matter rejection is very useful in evaluating the patent application, and asking pertinent questions of the target company.

4. Comparison to Competitors

How does the investment prospect compare to the competition? Statistics regarding the above parameters can be compared to competitors in the industry. For example, how does your investment prospect’s patent portfolio compare to its competition in front of the same Examiner or in the same Art Unit? If the investment prospect is facing longer prosecution timelines or more difficult rejections, there may be underlying issues with the patent prosecution strategy that can be explored with counsel.

5. Responsiveness to Questions

The tools identified above are useful for developing an initial set of questions for the investment prospect and their patent counsel. Their ability to answer questions related to the above, and brainstorm regarding strategies to overcome challenges is a good indicator of how successful they will be in meeting the challenges of patent prosecution.

There are several important caveats to using these red flags. Patent prosecution is a complex process, and actions are taken (or not taken) for a variety of legal, business, and scientific reasons. There may be a perfectly reasonable explanations for a lengthy patent prosecution, disparities with respect to the average case for a given Art Unit or Examiner, or receiving certain types of rejections. Thus, the “red flags” should be used as a starting, not ending, point in the patent due diligence process.

However, the presence of several red flags may be an early sign that something is awry and are a powerful tool to have at the initial stage of due diligence.