Acquiring Patents in an M&A Transaction – Are You Buying a Problem?

By James D. Bennett II, P.E.

Today, innovative discoveries are being made at an increasingly astounding rate. This rapid pace is due to accelerated access to information resulting in a proliferation of ideas, discoveries, and new uses for technology fueled by innovation.

“In the United States, the market for intellectual property (IP) has developed
out of an increased awareness of IP value and the priority of innovation
management. US companies have experienced a shift in focus of their value
from tangible to intangible assets, which are now 90 percent of corporate net
worth and this reality has produced the need to understand, value, and
monetize intellectual property through transactions.”¹

Because of its intrinsic value, the lure of generating revenue with acquired technology through an M&A transaction is compelling to potential investors who seek to procure the exclusive rights and ultimately, to benefit from the acquired IP. Achieving that objective is not without risk.

The first level of risk exposure is related to determining the value of the new technology. Issues to consider are: (1) how advanced or closely linked the new technology is to previous innovations or pre-existing knowledge, (2) sophistication, (3) variability of the application outside the core technology, and (4) “completeness” of the development of the technology.

The next level of risk exposure lies in ensuring that the innovation is properly patented and that the purchase specifies the exclusive ownership of the patent.

However, even after ownership issues are resolved, piracy is a very real risk to value. In light of this, the need for patent and revenue loss protection for inventions is more significant today than at any other time in history. In other words, even after you own it, you have to protect it. So how much does patent protection litigation cost? It depends on whether an out-of-court settlement is reached, whether the dispute goes through a lengthy trial, and whether there is an appeal.

“The average patent litigation lasts about two years and costs about $3
Million+. An appeal can add another $2 million+ and one year to that
estimate.”²

“If you go all the way through a trial, it will cost at least a million dollars.
You can get a settlement for about a half-million. About 70% to 90% of
these [knock-off] companies will settle with you, but you have to have the
money to pursue them, and they know it. They figure most inventors don’t
have the money for a long legal battle.”³

There is also commercial risk that can adversely affect the value of a patent. The marketability of a specified technology may be contingent upon: (1) How long it is expected to remain a superior solution or application before a similar or newer technology emerges and (2) Whether new, previously-unconsidered applications may be identified for the patent.

Buying a company with a hot, new technology may be very lucrative business, but it is also very risky business. The best course of action is to engage the services of experienced professionals who can help you avoid buying a problem.

James D. Bennett, II is a registered Patent Agent. He provides patent prosecution, IP portfolio management, and expert witness testimony services for government agencies, private sector businesses, accounting firms, law firms, and individual inventors.

1. Hillery, John S, “Securitization of Intellectual Property: Recent Trends from the United States,” Washington CORE, March 2004, p.1.

2. Cohen, Pontani, Lieberman & Pavane LLP, “US Litigation: Cost and Duration of Patent Litigation,” Managing Intellectual Property, February 2009.

3. Mills, Jerry, Attorney-at-Law, Baker & Botts LLP, quoted in “Patent Protection,” Dallas Business Journal,June 12, 1998.