In some cases, a business model is based on the assumption that a portfolio of patents 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, prices, marketing costs, revenues, margins, and so on. Whether or not these forecasts materialize depends on the actions of competitors. For example, if competitors are not hampered by the legal barriers expected by the patent portfolio holder, then market share and margins may fall well short of predictions. Too much of a mismatch between the patent owner’s expectations and the actual legal protection available can jeopardize the entire business enterprise. Entities that are investing in such a business model should carefully assess target patent portfolios to determine if the portfolio has the strength to support business development and growth.

The critical 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 IP 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 developing 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 marketed 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 to protect all that is reveals. For example, the fact that a marketed 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 be 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 may not be successfully enforced against that competitor. Quite simply, the name of the game is claims. Therefore, it is best to examine a patent’s claims to ensure that there is a “one-to-one” match with what competitors are likely to sell.

Third, does the patent have the correct geographic scope? Some companies choose to maintain only a domestic patent portfolio, while others choose to supplement their domestic 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 justification for introducing a product to the US market may apply with equal force 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 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 business is burdened with onerous overhead costs (e.g maintenance fees) for having acquired unnecessary extraterritorial patent rights.

Fourth, is the “history” of the patent pristine? Securing patent rights involves filing numerous legal documents within the prescribed time frames. Furthermore, errors or deficiencies in the content of these documents may cloud the validity of the patent or cast doubts on ownership. For example, the US Patent Office requires inventors to disclose prior publications that may be material to patentability. In some circumstances, failure to submit these publications may render a patent unenforceable. With regard to ownership, failing to properly document the transfer of an inventor’s property rights 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 must have the same mindset as one considering the purchase of a home or commercial property. A prudent real estate investor would never be satisfied with “conducted” inspections or “rushing through” a deed or loan documents. Such an investor would also not trust the verbal guarantees of the presumed owner. Instead, the investor would walk through the property with a critical eye and have legal professionals examine every contract, deed, or loan. The investor would have a certified inspector determine the safety and physical condition of the property. Similarly, patent investors must implement similar measures to determine whether a patent will live up to their expectations.