This case involves an investment firm in North Dakota and a group of investors who sought to invest millions in an existing company that was entering a new developmental stage. The investor plaintiffs hired the defendant intellectual property law firm to conduct the due diligence examination of the investment target’s patents. The law firm had considerable experience assisting clients in conducting due diligence in transactions involving patents. The purpose in hiring the defendant was to ensure that all of the target company’s patents were owned and controlled by that company. The patents were important to the investors and to the success of the company. After the deal closed, the investors learned that the company did not own one of the critical patents that it believed it owned.
Question(s) For Expert Witness
- 1. What does a due diligence audit of intellectual property rights involve?
- 2. How did the defendant fail to adhere to accepted standards?
Expert Witness Response
The purpose of an audit is to identify existing and potential problems regarding ownership of intellectual property rights (IP) when a company is being purchased, sold or merged. Many entities mistakenly assume they are owners of IP rights. In order to confirm ownership of those rights, a due diligence audit requires a thorough research of the IP rights and their ownership, including examination of Patent and Trademark Office assignment records, in-depth analysis of company records on patent ownership; analysis of any problems on ownership and a recommended course; and a review of any licensing of patents that could adversely impact the patents.
The defendants breached the applicable standard of care by:
• Failing to adequately and properly supervise the work of the examiner, especially since this was his first due diligence assignment.
• Failing to adequately and properly follow-up on questions of ownership of the patent.
• Failing to adequately and properly determine and advise the plaintiffs that the patent was not owned or controlled by company being purchased.
• Affirmatively misrepresenting to its clients that the patent was owned by the company.
• Failing to advise the clients of curative steps that could be taken in respect to the ownership of the patent.
The expert is an attorney and former U.S. Patent and Trademark Office examiner who has worked for more than four decades as an intellectual property attorney handling hundreds of patent litigation matters.