Due Diligence

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institutes into the company’s business units. For smaller companies that could not afford a research unit, technology usually comes from research institutes. Small companies sometimes collaborate with research institutes to perform joint-research by providing funding or manpower.

A research is preferred to be in a mature state and be able to fit into the receiver’s culture and business plan in order to be considered as a potential transfer target at very first place. Shall a technology could replace obsolete technology, increase efficiency, attract customers and engineers, and then it is more likely to be reviewed by technology receiver. When it comes to commercialization, commercial value is the only thing to be considered.

Technology transfer happens in a few ways, but all the aims are the same – to exploit the commercial value behind the invention. It could involve signing licensing agreement, transferring the right of invention, setting up joint ventures, establishing partnership, or spinning off a new company to commercialize. In this study, the author focuses mainly on technology licensing. However, prior to technology licensing, business corporates shall perform very detailed research and analysis on the to-be-acquired technology to avoid ended with scam technology or technology that does not fit with the company’s expectation through a process known as “Due Diligence”.

3.2 Due Diligence

Due diligence is a term used to describe a number of concepts, including investigation of a business, or natural person prior to signing a contract. It could be a legal obligation under certain legislation, but more often it applies to voluntary investigations. A common example of due diligence is the process of which a potential acquirer evaluates a target company’s assets during a merger and acquisition transaction.

Nowadays, more and more companies are highly aware about the value of IP, as it could act as an asset to expand their business, raise capital or to increase the

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company’s gain, because IP has begun to be included into a company’s balance sheet to give their investor an idea of what the company owns. According to a report dated on Feb-12, 2013 in Intellectual Property Watch written by Kelly Burke, the median price paid for US patents sales was US$ 221,000, while the average price paid was US$

374,000 in 2012²⁵. Before proceeding to acquire, or licensing a technology from a research organization, companies need to make sure that the patent is worth the price being paid.

The cost to conduct a proper due diligence is not too high, however the process of gathering sufficient information is often painstakingly time consuming, and thus might incur more cost to the due diligence process. Technology seller (TTO) often prefer not to disclose too much information on the subject invention, as a measurement to protect its own benefit and increase its leverage on technology buyer during transaction. Disclosing too much information might expose the weakness of the subject invention, or narrows the Zone of Possible Agreement (ZOPA) during licensing contract negotiation. Disclosing sufficient information to the public, enough to attract potential candidates, but not too much to weaken the position of TTO is an art, of which is not easy to master. Thus, the cost of information gathering might be very high for technology buyer. However, more and more governments are moving into a

“transparent government” administration, of which government agencies are required to disclose government-held information with some exceptions. Government agencies are bound by law (Freedom of Information Act in the U.S. and Freedom of Government Information Law in Taiwan) to publish information publicly and promote openness.

This initiative move the burden of proof of the party asking for information (technology buyer) to the government body (TTO), reducing cost and time of acquiring most technology-related information that is crucial for due diligence process.

25 Kelly Burke (12 Feb, 2013), Report Finds Average US Patent Cost US$ 374,000 In 2012, Intellectual Property Watch, Retrieved from http://www.ip-watch.org/2013/02/12/first-patent-value-quotient-report-shows-average-price-paid-for-issued-us-patents/?utm_source=post&utm_medium=email&utm_campaign=alerts

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There are a couple of reasons for a business corporates to spend huge amount of money to obtain a technology from others. The technology acquirer might be looking at i) a technology that complements with its current business; ii) a technology that could brings synergy to its current business; iii) a technology that could stop its competitor from competing with its current business; iv) a technology which the acquirer needs in order to start a new business; or v) a technology which could help the company out of an ongoing or potential litigation. That is why it is very important for a technology acquirer to understand the to-be-acquired patent thoroughly. Following shows the importance of patent due diligence:

1. It allows the acquirer to understand the technology in details

Understanding the potential technology in details allow acquirer to judge if the technology fits the aim of the transfer. Due diligence could reveal more information, restriction, possible application and limitation of the technology. A mature and ready to market technology usually value more than an immature invention.

2. It allows the acquirer to understand the scope and limitation of the patent By understanding the claim, scope, length and the strength of the patent, it gives the acquirer an overview of the protection a patent could provide. A broader claim could provide more protection while at the same time risk being invalidated by opponent during litigation. Technology or invention, which was applied as patents in more than a country, could gain multiple monopoly market access to acquirer. A patent with multiple claims, of which some of the claim might not be valuable to the acquirer might cost the acquirer excess money in maintenance. Since obtaining a patent does not means one could practice the invention, it is also very important to understand the freedom to operate an invention.

3. It gives the acquirer the fair market value of the patent

Due diligence reveals the fair market value to the acquirer, allowing the acquirer to decide how much to offer during licensing transaction.

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A proper due diligence could reduce the cost of transaction for the technology acquirer due to the asymmetric information both parties pertained. The discovery of some gaps or defects of a patent allows the acquirer to be aware of its risk before investing in the technology licensing process.