L.A. Daily Journal

Daily Journal Extra
September 29. 2003

Intellectual Property

BURST BALLOON

Due diligence that is taken before corporate or patent acquisition could
unearth flaws fatal to the assets' worth.

by John D. McConaghy

Adversity often is seen in hind-sight as having promoted new strengths. The adversity of the last few years in the Nottech investment community has led to industry maturation. In addition to obvious investment caution and greater reliance on core business fundamentals, healthy trends regarding technology-based intellectual property have emerged. substantive intellectual property has continued to be recognized as adding great capital value to high-tech enterprise.

In the recent past, technical intellectual property was a term near-synonymous with value and promise. Details were looked on as unimportant.

Specific instances have been observed where independent after-the-fact studies of patent portfolios held by acquired companies provided unwelcome surprises. Complete disconnects were found between the portfolios of patent protection and the products, services or developments where protection had been an important factor in the acquisition.

Such disconnects do not by themselves portend future corporate doom. The news prompted corporate realization that a significant capital investment based on perceived intellectual-properly protections was little more than stroke. Reassessment of corporate strategies followed.

In the wake of these and similar experiences, not to mention the evaporation of fortunes in the recent high-tech bust due diligence in transferring or investing in intellectual property has become a growth industry for the intellectual-property world.

Such due diligence is undertaken before corporate acquisition, corporate investment patent acquisition, patent licensing and corporate capital offerings, to name a few.

The findings of intellectual-property due diligence can unearth flaws fatal to intellectual-property worth. This is the extreme. Often such findings are only first steps in the valuation process.

Scope: The Measure of a Patent

Appropriate due diligence requires an investigation of patent scope attributed to the patent portfolio.

Every patent affords a specific scope of protection unless it is found invalid or unen forceable. Scope is defined by the claims of he patent which are the numbered parapaphs at the end of the patent specification. They are the measure of exclusivity afforded by the patent

First and foremost, the plain meaning of he words and phrases in a claim is examned for its construction.

The patent itself, the prosecution history available from the Patent Office and the references to prior technology considered durng prosecution form the intrinsic informa-ion on which construction of the claims is neasured.

With scope defined through the above access, a meaningful comparison between patent exclusivity, defined by scope, and the atent owner's products or services can be made with the help of those skilled in the relevant technology. The breadth of coverage for meaningfully excluding others can be evaluated.

Beyond coverage of the relevant products or services, the commercial relevance of what is covered is appropriately reviewed through intellectual-property dire diligence.

For example, the novelty in the scope of coverage on a camera patent may be in a new mechanism for winding film The corporate products are found to use the patented winding
mechanism.

Of course, conventional mechanism for winding film have long been known. Terefore, the issue remains whether exclusivity on this specific patented winding mechanism (protected technology) offers some competitive or other advantage over conventional winding mechanisms (unprotected technology). If not, the patent may offer little or no value.

The breadth of scope defines the line between protected and unprotected technology.

Intellectual-property due diligence establishing that line supports a technical or marketing evaluation directed to the commercial advantages of the barriers provided by the patent portfolio.

Once commercial advantage is resolved patent valuation is possible in the context of exclusive intellectual-property protection as well as the significance of the exclusive intellectual-property protection for current or prospective products or services.

With scope defined, infringement and validity issues can be addressed.

Infringement issues are measured against products and processes, not patents However, another's patent that is found to block signficantly the practical application of a patent portfolio significantly affects the value of such a portfolio. Scope measures that practical application for comparison with threatening patents.

Patents are afforded a substantial presumption of validity based on the court acknowledged rigors of examination by the Patent Office. Even so, the presumption of validity of any given patent or any specific claim of a patent could become vulnerable when faced with anticipatory or highly relevant prior technology.

What is anticipatory and relevant prior technology affecting validity and enforceability is measured in the context of claim scope. Intellectual-property due diligence typically includes certain technology searching and investigation of corporate records guided by claim scope.

Searches: Placing the Patent Portfolio In Industry Context

Patents frequently are misunderstood to provide assurance that the product or service practicing or embodying the patented invention is free from the infringement of other patents. Not so. For example, if a first inventor patents the automobile without mentioning the transmission and a second inventor patents the automobile with a transmission, the second inventor cannot make automobiles without infringement, with or without a transmission.

Because no infringement assurance is conveyed by a patent dire diligence has come to include substantial infringement searching in the area of the relevant patent portfolio. Such searching can be both to avoid infringement and to assess whether patents block the portfolio. Various types of searches frequently are undertaken.

Assignee searches uncover the patent positions of competitors. Due diligence on competitive positions has been found most useful.

In-house document reviews of patents accumulated by the portfolio owner as prior technology in the patenting process, both domestic and foreign, as documents of earlier infringement concerns or as teaching disclosure to aid in development are a source of likely relevant patents which could be of concern.

Subject-rnatter searches through computer word searching and category searching at the Patent Office are more difficult and are open-ended. None of the above, however, can provide complete assurance that there is no infringement.

Validity searching is less commonly undertaken in intellectral-pmperty duel gence efforts The focus is effectively the same as used by the patent examiner in determining patentability. Because the task is open-ended until an anticipatory reference is found, the scope of the task is driven by how much is to be spent Validity evahiation of the intellectral•property portfolio based on the references located in the assignee search and in house document reviews should, however, be undertaken.

Corporate Review: Avoiding Intrinsic Rot

The enforcement of patents is subject to several defenses. Anticipation of such defenses principally relies on technical evaluation with heightened awareness through intellectual-property due diligence.

For example, there is a low but present requirement for operability. Disclosure of a best mode of the invention at the time the application was filed also is required.

A duty of candor is owed the Patent Office by patent applicants. Information relevant to such issues is either intrinsically found in the patents of the intellectual-property portfolio or is located through due-diligent investigation and disclosure of the entity holding the intellectual-property rights.

John D. McConaghy is an intellectual-property partner in the Los Angeles office of Fulbright & Jaworski. He represents technology companies.

August 25 2003

Nanotechnology Draws Increasing Funding
By Toni Vranjes

The cutting-edge field of nanotechnology is attracting an increasing amount of venture capital funding, according to a New York-based firm that tracks such investments.

Nanotechnology is the science of manipulating atoms to create devices that are faster, better and cheaper. The research could lead to seemingly endless creations: super-fast miniature computers, lighter spacecraft, and cancer-fighting drugs with fewer side effects and on and on.

Venture capital investments in nanotechnology companies worldwide increased from $130 million in 2001 to $386 million in 2002, according to Lux Capital, a New York venture capital firm that focuses on nanotechnology.

While some nanotechnology products already are on the market; much of the work is still in the research phase. And billions of dollars' are flowing into nanotechnology research projects.

In 2003, governments, corporations and others will spend $4 billion on nanotechnology research and development, according to forecasts from Lux Capital. The group expects that nanotechnology will become the largest government- funded science initiative since the space race of the Cold War era.

"All the trends we're seeing point to an explosion coming in funding activity and commercial activity," Peter Hébert cofounder and partner of Lux Capital, says.

Last quarter, Lux Capital invested in two nanotechnology companies: Nanosys Inc. of Palo Alto and NanoMateria Inc. of Chicago. The venture capital firm expects to fund one or two such companies in upcoming quarters, according to Hébert. "Nanotechnology is one of the hottest if not the hottest, sectors within early-stage technology investing," he says.

While Pasadena venture capitalist Alex Suh also believes that nanotechnology holds great promise, he has some reservations. Suh's firm, California Technology Ventures, has been hesitant to jump into nanotechnology investing. Some of the nanotechnology companies the firm has evaluated have been at a stage that is too early to Kind, Suh says. Others have been less attractive funding candidates because they make so-called "enabling" products that are designed to improve other products-for instance, a coating intended to enhance a medical device.

"When you're only assisting and enhancing products that already have a market, and you're developing your market, that's a tough business to do," says Suh, commenting on these "enabling" technologies.

California Technology Ventures has invested in two nanotechnology companies: Insert Therapeutics Inc. of Pasadena, and San Diego-based FeRx Inc.
But the Pasadena venture capital firm carefully scrutinizes potential transactions. The firm came very close to funding a Bay Area nanotechnology company several months ago, but it decided not to provide funding because of concerns about the company's future prospects, Suh says. He declines to name the company.

Although lawyers who handle nanotechnology financing deals may need to learn new scientific concepts, the attorney's job won't change fundamentally, says Harry Hathaway, a Los Angeles corporate partner at Fulbright & Jaworski, which represents nanotechnology companies.

“This technology isn't going to change the way we lawyers do things from the standpoint of advising clients and negotiating and structuring deals," Hathaway says. "It's another business."

The complex field presents exciting new opportunities for lawyers, Hathaway adds. "Do not be intimidated - get involved if the opportunity presents itself,” he says.