I.P. Due Diligence: Being Prepared

1999-01-01

I.P.DUEDILIGENCE:BEINGPREPARED

BobH.Sotiriadis*
LEGERROBICRICHARD,Lawyers,
ROBIC,Patent&TrademarkAgents
CentreCDPCapital
1001VictoriaSquare-BlocE–8
thFloor
Montreal,Quebec,CanadaH2Z2B7
Tel.(514)9876242-Fax(514)8457874
www.robic.ca-info@robic.com

Intellectualpropertyduediligenceauditshavebecomecommonplaceinthe
biotechnologyindustry.Thesinglebiggestassetofmanybiotechnology
companiesistheirintellectualpropertyportfolio,andisthereforeoftenthe
subjectofintellectualpropertyduediligenceinseveralcontextssuchas
financingandre-financing,thelicensingoutofintellectualpropertyoreven
thesaleinwholeorinpartoftheirbusiness.Often,youngerbiotechnology
companieswhicharesubjectedtoanintellectualpropertyduediligence
auditareunpreparedtoefficientlyrespondtotheaudit.Thisrendersthe
wholeexperienceparticularlyunpleasantanddisruptiveandinsome
scenarioscanevenresultinlostopportunities.
Wewilldiscusssomeverybasicaspectsofin-housepreparationand
managementinrespectofpotentialintellectualpropertyduediligence.The
focushere,ofcourse,isonpatentedorpotentiallypatentabletechnology,
tradesecretsandknow-how.
Ofcourse,themostobviousadviceoncecanofferonthesubjectisthata
businessmustbewellorganizedandkeeppreciseeasilyretrievablerecords
onsubjectslikelytobeofinteresttoanoutsidepartywhoseeksanyformof
commercialarrangementwiththebiotechnologycompany.
Brieflyput,investors,potentialpartiestolicensesorsub-licensesorpotential
joint-venturersandthelike,areoftenmostinterestedinensuringthemselvesof
someverybasicfacts:thatthetargetcompanyisindeedthesoleownerof
thesubjecttechnologythatpatentprotectionhasbeenproperlysecured
andthatallofthedelaysinherentinthevariousnationalandregionalpatent
systemshavebeenrespected;thatinventionshavenotbeendisclosed

©LEGERROBICRICHARD,1999.*Lawyer,BobH.SotiriadisisoneoftheseniorpartnerswiththelawfirmLEGERROBICRICHARD,
g.p.andwiththepatentandagencyfirmROBIC,g.p.

publiclytotheextentthatpatentprotectionislost;theextenttowhichother
partiesmayalreadyhavehadaccesstothetarget’stechnology;theextent
towhichnon-patentabletechnologyhasbeenkeptsecretandthepotential
risksofsuchsecretinformationbeingdisclosedinthefuture;thepossibilitythat
futureuseoftechnologyofthetargetcompanymayviolatethepriorexisting
rightsofthirdparties.Thesearenottheonlyconcernswhichmayarisebut
sufficeforthescopeandgoalofthisdiscussion.
Inordertorespondtotheconcernsofthepartywithwhomonemaywishto
dobusinesswith,thebiotechnologycompanyshouldensurethatithastaken
certainstepsandhasclearrecordsinrespecttothosesubjectsthatare
indeedofaconcerntopotentialbusinesspartners.Forexample,the
biotechnologycompanyshouldhaveonhandallcontractsrelatingto
researchanddevelopmentleadinguptothecreationoftheunderlying
technologyofitsintellectualpropertyportfolio.Thismeansthatthe
biotechnologycompanyshouldbeabletoreadilymakeavailableproperly
completedemploymentagreements,independentcontractororconsultant
agreements,researchagreementswithuniversitiesorprivatesponsored
research,jointdevelopmentagreementsandmaterialtransferagreements,
etc.Thecompanyhastobeabletoclearlyexplainwhichtechnologyitowns
andwhichmaybelongtothirdpartiesandbyvirtueofwhatrighttheyare
entitledtouseandeventransfer,whererelevant,suchrights.
Manyoftheseconsiderationsresultfromthesubstantivelawofpatentsand
trade-secrets,tomentiononlyacouple.Sufficeittosay,thataninventoris
theownerofanyrightsinthatinventionunlessitwasmadeinthecontextof
employmentandthepurposeoftheinventor’semploymentwasinfactto
invent.Researchanddevelopmentemployeesgenerallyfallintothis
categoryofemployeeswhoseinventionsareownedbytheiremployers.Any
doubtastotheownershipofanythingdevelopedwithinacompanyorin
collaborationwithanoutsideparty,shouldbesettledbycontractandsaid
contractshouldbeavailableforreview.
Similarly,licenses,jointventureagreementsorpoolingagreementsaswellas
distribution,marketingorco-marketingagreementsshouldbeinplaceand
availableforrapiddisclosure.
Somefactsituationsandagreementshaverepercussionsonthe
biotechnologycompanythatwillbeofinteresttopotentialbusinesspartners.
Insomecases,theseresultfromrestrictionsthatwillhavebeenplacedonthe
businessthroughnon-competitionagreementsithassigned,orrestrictive
covenantsorconfidentialityagreementsithasenteredintowithregardto
technologyithasusedtodevelopitsowntechnology.

Thecompanymayalsobenefitfromnon-competitionandconfidentiality
agreementssignedbythirdpartiesinitsfavour.
Obviously,manyduediligenceconcernsarecommontoallkindsof
transactionsandarenotnecessarilyspecifictobiotechnologytransactions.
Therefore,morecommonagreementsuchasshareholdersandpartnership
agreementsshouldalwaysbemaintaineduptodatealongwithcorporate
booksandrecords.Manycommercialarrangementswithbiotechnology
companiesinvolveachangeofcorporatestructureandrequireaproper
legalsnap-shotofthewholecorporateandshare-structureofthecompany.
Itiseasytoimagingthetroublewhichcanresultincaseswhereaventure
capitalpartnerissoughtorwhereastrategicallianceispredicatedonthe
creationofanewentity.
Inadditiontointellectualpropertyrights,muchimportanceisplacedonthe
experience,pastsuccesswhereapplicable,expertiseandevenpersonalityof
theprinciples,managementandresearchersofbiotechnologycompanies.
Biotechnologycompaniesmustensurestabilityinrespectofitshuman
resourcesandassureitselfofstabilitythroughtheimplementationof
appropriatecontractualarrangementsandcompensationpackages.Allof
thismustbeproperlydocumentedandrecordsmustbekeptcurrent.Any
doubtwithrespecttothestabilityofthehumanresourcesaspectscouldin
andofitselfcanbesufficienttounderminepotentialtransactionmaking.We
shouldaddthatitisnevertheidealtimetonegotiatecontractswithkey
peoplewhenoneisinthemidstofnegotiatinganimportanttransaction.
OneofthegoalssoughtinpreparingforanI.P.auditistodemonstratethat
thebusinessismanagedinanorderlyfashion.Havingclearresearchand
developmentproceduresandpolicyisonewayofreassuringpotential
businesspartnersofacompany’sseriousnessandthequalityofits
management.Companiesthatimplementpoliciesconcerningthekeeping
oflaboratorynotesandlogbooksandwhoimplementproperprocedures
withrespecttoconfidentialityanditslaboratoriesandR&Dfacilitieswillalso
respondbettertoaduediligencereviewandincreaseitschancesof
concludingasought-aftertransaction.Furthermore,thedegreeof
preparationandorganisationofthecompanyusuallycontributetothe
degreeofsuccessobtainedinthepotentialnegotiation.
Patentsandtradesecretsare,ofcourse,extremelyimportantinthebusiness
transactionsofbiotechnologycompanies.Itisalwaysadvantageoustohave
onhandphysicalcopiesofpatentsandpatentapplicationsandwhere
relevant,documentsreflectingownershipinotherintellectualpropertyrights.

Oneshouldbeabletoeasilyconveywhichpatentshavebeenappliedfor
andthestatusofeachpatentapplication.Adistinctionshouldalwaysbe
madebetweenpatentapplicationsthathavebeenlaidopenandthosethat
remainconfidential,sinceconfidentialityagreementsshouldintervenein
respectofapplicationsthathavenotbeenlaid-open.
Often,patentabilitysearcheswillhavebeencarriedoutbythecompany
priortofilingforpatentprotectionandopinionsrenderedpursuanttosuch
searchesareextremelyrelevantintheduediligenceprocess.Thesamecan
besaidfornon-infringementsearchesandstateoftheartsearches.License
listsshouldalsobekeptbyanyseriouscompanyandperiodicallythelicense
filesofacompanyshouldbereviewedinordertodeterminethestatusof
eachlicense.Alloftheseshouldbeproperlyfiledandreadilyaccessible.
Asstatedattheoutset,wehavesoughttosetout,inverygeneralterms,a
summaryexplanationofsomeofthemainconcernswhichariseinthe
contextofintellectualpropertyduediligenceandwaysinwhichacompany
canprepareinadvancetoaddressthoseconcerns.Insodoing
biotechnologycompanies,especiallysmaller,youngerbiotechnology
companies,whoforonereasonoranotherhaveneverhadtheopportunity
toproceedtoaproperauditoftheirownrecordsandbusinessmethodswill
actuallybynecessityimprovetheoverallmanagementandorganisationof
theirbusiness.Beingpreparedinthisway,addsvaluetothecompanysinceit
isdoneinrelationtothecompany’smostimportantassetsandincreasesthe
chancesofsuccessindesiredbusinesstransactions.
Publishedinthe(September/October)1999issueofBiotechnologyFocus23-
24

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