John Garvey, PhD & Michel Morency03.01.06
(Editor's Note: Last month Nutraceuticals World provided an article on the Importance of Intellectual Property. This is the second installment of that article.)
Transactions and strategic partnerships are on the rise, as the nutraceuticals industry is expected to grow 7% each year, reaching nearly $75 billion by 2007, according to Wall Street Capital Funding. Moreover, with the present shift in the nutraceuticals industry toward more R&D investments, companies are required to give more serious thought to protecting one's company from risk when dealing with other companies in domestic and cross-border business transactions. There are ways to structure transactions, with special care given to patents and trade secrets, international suppliers and cross-border issues, importation and exportation, which allow your company to effectively mitigate and manage certain risks inherent in business transactions.
As technologies are reduced to practice, intellectual property (IP) is created, which permits a nutraceutical company to consider a variety of business transactions, which in turn can help validate the products and the company. This usually leads to increased visibility in the industry, subsequent business deals, and may attract private or public equity investments. A strong technology transfer program can add significant revenues to the balance sheet and a company's IP assets may be the principal value that forms an acquisition strategy. Some companies are securing patents with a scope of protection that covers substantially more than their business model and are starting to enforce their patents against other nutraceutical companies. Companies on the receiving end of the infringement notices are often surprised and not well-informed as to how to proceed.
While the remainder of this article focuses on the strategic use of IP in business transactions, an important point must be made. Possession of patents and the ability to license them provides a company with assets for negotiating a transaction, but quality products and customer service are paramount. Patents are the tangible embodiments of the results of a research program, but they only protect ideas. In order for the company to succeed, the resulting products must be of high quality and consistent manufacture. Patents affect supply and quality drives demand. Prices are the equilibrium of supply and demand. Companies can no longer afford to ignore the importance of solid IP management and leave patents out of strategic business planning. Companies will need to be more attentive to building a stronger foundation for research of their products. Additionally, improvements in assays and quality control methods must be made in order for companies to be competitive and successful in the marketplace. Contract research and manufacturing deals require an exchange of a company's proprietary information, and new IP is often developed for such things as testing methods, processes for manufacture and formulations. IP is a necessary tool in doing business in the nutraceuticals industry, and this will only increase going forward. The future market will certainly demand that more research be undertaken by nutraceutical companies, so there will be a greater need to fortify one's positions in the market by finding the necessary protection.
Patents and Trade Secrets: To achieve either a significant technology transfer program or to prepare for an eventual acquisition, a company's technology must be well protected. A variety of IP formats are available, but the most common forms are trade secrets and patents. These are not mutually exclusive, despite the common misconception1.
It is critical that a company has both trade secrets and patents protecting its technology, and it is equally critical that the company's innovative technologies show the potential for real commercial success within the lifetime of the IP. For patents, this is 20 years from the date of filing, not counting the life of any provisional patent application2.
Provisional patent applications are not examined, automatically expire after one year and, unless they become regular utility applications, will never be disclosed to the public. Therefore, trade secrets may be memorialized in provisional applications, and allowed to lapse unless needed. This provides a hedge strategy against inadvertent disclosure, and is legally a constructive reduction to practice in the event of independent invention by a competitor.
In the event of a possible license, provisional filing provides insurance against breach of a nondisclosure agreement, or a dispute over what was known to a party prior to commencing discussions. In the event of a possible acquisition, provisional filing provides an additional level of comfort to the acquiring party that the target company has carefully managed its assets, potentially enhancing the valuation of the target company.
Due Diligence: Before entering into any IP transaction, a company must perform a thorough due diligence study of its own IP and that of the proposed partner/licensee. The purpose of due diligence is to test the underlying business and IP assumptions in the above deal situations, and must assess how the IP reality corresponds with the rationale for the deal. One should conduct any IP due diligence with that end in mind.
The first step is to analyze the state of relevant industry and the target company. Identify their products and services, and prioritize their assets. Next, identify the landscape of the corresponding IP. Then determine the scope of protection provided by the IP assets of your own company. Verify the "exploitability" of your IP assets in the eyes of the other company and tighten up any gaps. To do this, one conducts its own non-infringement investigation. If the target company can design around your IP, there is little reason for them to spend the money to obtain these rights. Establish a value for your IP assets, and identify issues that may be used to negotiate a valuation reduction. Review any other business considerations, and file any needed patent applications, trademarks or other forms of IP as needed. These steps will provide comfort in the representations, warranties and indemnities one would be willing to make as to the company's own IP. In certain circumstances, insurance is available to mitigate risk that may be incurred from contractual obligations. Only after these due diligence steps are completed should the target company be approached.
Nondisclosure Agreements: At this point, and prior to any substantive business discussions, a nondisclosure agreement should be negotiated and executed. Read these types of agreements carefully, as they are binding contracts. Ignore the common misconception that these agreements are easily invalidated in court. Irrespective of whether they can be sustained, litigation is expensive, takes significant time and carries an emotional burden.
The nondisclosure agreement should contain a provision exempting from confidentiality any information known to your company prior to execution of the agreement. It is often common to add the provision that such exempted information must be evidenced by written documentation; hence, the filing of provisional patent applications should satisfy this criterion. Risk and opportunity are two sides of the same coin, and although business transactions have an inherent risk of failure, strategic planning can mitigate risks to acceptable levels.
The underlying deal rational will dictate which type of transaction should be pursued. The prospective licensee/acquirer will always have a deal rationale, which is, simply stated, the business reasons for making the license/acquisition. The deal rationale usually includes a business model for generating revenues from the target technology/company post-acquisition, but can also include removing a perceived obstacle. In both cases, the power of patents to confer market exclusion rights to the owner provides significant business advantages. Therefore, the deal rationale always has certain underlying IP assumptions. To initiate and close a successful transaction, a nutraceutical company must evaluate the deal rationale from the viewpoint of the prospective licensee/acquirer, and must be ready to convince the prospective acquirer that the deal provides the requisite industrial logic. Three transaction types are discussed in turn: a license, a collaborative R&D program and an acquisition. Each has similarities, but also distinctive qualities. Some of the more significant factors that weigh in favor of each transaction are summarized in Table 1.
License: A license is a transfer of rights to an asset without the transfer of title3. There are numerous types of licenses, such as a conveyance of exclusive rights, sole rights and non-exclusive rights, and the variations on these are almost endless, involving such factors as retained rights, specificity as to particular fields, geography or timeframes.
One factor that favors a license strategy is if the companies want to preserve independence, perhaps because of divergent business goals or pending litigation against one of the parties. Moreover, a license allows a company looking to acquire technology to be selective rather than taking the good with the bad. A licensing strategy is also an excellent way to recover revenue from IP that is not core to a company's operations. The availability of a license permits companies to take advantage of opportunities for obtaining related products where there may be a need for freedom to operate in a particular technology space. This provides a "win-win" situation for the licensor and licensee unless the two are in competition for the same industry space or products. Deliberately creating potential freedom to operate issues for a target company through patent filings is an aggressive but effective way to create licensing opportunities for your technology.
In an ideal world, the company has issued patents. However, the examination process is typically very slow, and it is not unusual for there to be several years between filing and issuance4. It is quite possible to design a successful technology transfer program around patent applications-even provisional applications; however the value of a patent lies in its ability to exclude competitors from the market. To the extent an application demonstrates favorable office actions, the apparent risk to the licensee will be reduced and the value of the application should increase. There will be a clear relationship between the value and the "newness" of the application, with the value appreciating as the probability of issuance increases. The value curve is not necessarily linear. Applications publish 18 months following the first filing, or "priority" date5. After publication, an applicant accrues provisional rights that permit (in limited circumstances), the applicant to obtain for infringement of any patent issuing from the application, reasonable royalties retroactive up to the publication date of the application6.
To maximize licensing opportunities, all IP should be initially created to be as complete and divisible as possible. Ideally a patent portfolio should include one or more "composition of matter" patents, with multiple "method of use" patents covering planned activities for each field to be licensed. It is important to back up broad patents with ones having very specific and narrow claims. Broad patents can often be challenged for failure to meet the written description and enablement requirements of the patent laws, and as such it is harder to invalidate narrow patents7.
Collaborative R&D Program: In some cases, particularly where technologies are less mature, it makes more sense to collaborate on the development of technologies. In the biotechnology industry, collaboration was a very popular business strategy during the positive economic times of the late 1990's. In the recessionary environment of the past few years, it tended to be supplanted by M&A transactions, since cash-poor biotechs were bargains for pharmaceutical companies looking to fill their research pipelines. Other drivers that promoted a shift to M&A appear to be the transition of the pharmaceutical companies from pure chemistry-based research to one incorporating biology-based technologies, as well as the need to pay out milestones on research agreements and licenses. As "big pharma" took on characteristics of their collaborators, and increasingly large payments came due to the now cash-poor biotech companies, many pharmaceutical companies simply acquired the smaller companies.
It remains to be seen whether nutraceutical companies will attractsteady interest from the pharmaceutical industry. As purification methods improve, and it becomes easier to isolate the actives of natural products, certain members of the nutraceuticals industry will begin to appear very much pharma-like. The increase in research collaborations will enable these technology improvements. From the pharma-side, many large pharmas have consumer product divisions that already produce such things as vitamins, holistic remedies and non-prescription products. So as the healthcare sector becomes more integrated, transactions involving nutraceutical and pharmaceutical companies are a strong possibility.
Collaborations are particularly suited where one company has a "platform technology" that fits into the pipeline of another company, such as where the technology platform is highly dependent on know-how and it can benefit other company initiatives, or where the business goals are common as to a particular indication or research program. Companies should nevertheless consider a license if their products are mature or if they have truly dominant IP positions.
Collaborations allow companies to preserve the independence of the entities but also to share the costs and research burdens. It is also appropriate where the companies each want a certain degree of control or input into the decision-making processes while maintaining independence. Each party should bring something to the collaboration. As discussed previously, it is important to have provisional patent application filings in place before there is any exchange of information. The IP used to drive collaborations should overcome a critical problem of the other company, but should force that company to go to individuals-not documents-for the solution. Therefore, one should hold back certain critical know-how from patents after the initial filing8. The goal of early negotiations for structuring any collaboration is to show the other side that they need you and can't appropriate your research or otherwise design around your intellectual property.
A variation on the collaborative transaction is contract research. This structure is dominated by one party who will generally own the results of the research. In many instances, failure to properly structure such type of transaction has jeopardized ownership in process improvements and testing methods. The contractual ownership of any IP should be clear prior to commencing any actual work. Don't assume that the obligation to pay for the work will automatically provide ownership in any resultant IP. In cross-border deals, this problem is magnified.
Merger & Acquisition (M&A): As discussed previously, M&A has emerged as an attractive exit strategy for nutraceutical companies. Acquisition deals have a high upfront cost but lower overall cost compared to licensing transactions, where the obligation to pay royalties may become expensive in the long-term. In one sense, M&A can be an end-stage transaction, where the target company is rolled-up into the operation of the acquiring company. Depending on the acquirer's business plan, product lines may be assimilated or assets sold off. This is where understanding the deal rationale is of paramount importance.
IP becomes the principal asset, and the target company should take necessary steps to perfect its IP, lest defects reduce valuations. Where the target company is ceasing operations due to lack of funds, getting the IP in shape will at least maximize the sale price, even if the acquirer is getting a bargain.
In another model, M&A is essentially a marriage of two companies. This is usually a "consented-to" transaction, where the companies have common business goals and the acquirer wants to control all of the IP and business decisions.
In more aggressive M&A deals, the acquirer may be motivated by the target company's IP. This might arise where the target IP dominates the industry space, or has posed a problem to the acquirer in the past, or if there are few opportunities in the market for similar products.
The best acquisition targets have late-stage products with a good pipeline, and no litigation problems. IP of a target company should dominate the particular industry space-or at least the part most significant to the acquirer-but it also needs to be defensible. To position one's company for acquisition, the IP portfolio needs to be complete. The objective is to generate assets for the eventual sale. Assets should be created with a specific aim of attracting particular companies.NW
About the authors: John Garvey, PhD, and Michel Morency, PhD, are partners in the Boston, MA, office of the law firm Foley & Lardner, LLP. Both gentlemen are members of the Biotechnology and Pharmaceutical practice groups and the Nutraceuticals and Nanotechnology industry teams. Dr. Garvey can be reached at 617-342-4085 or jgarvey@foley.com, and Dr. Morency can be reached at 617-342-4080 or mmorency@foley.com.
References:
1. To be entitled to a patent, an applicant must disclose enough information to satisfy the requirements of 35 U.S.C. 112.See, e.g., Pandrol USA, LP v. Airboss Ry. Prods., 424 F.3d 1161, No. 04-1069, 2005 U.S. App. LEXIS 20054, *7 (Fed. Cir. 2005) (defining the written description requirement). The information that is disclosed in a patent is not protectable as a trade secret. See, On-Line Techs., Inc. v. Bodenseewerk Perkin-Elmer GmbH, 386 F.3d 1133, 1141 (Fed. Cir. 2004) (quoting RESTATEMENT (THIRD) OF UNFAIR COMPETITION 39 cmt. f(1995)).
2. 35 U.S.C. 154(a)(2) (2000).
3. "[A] patent grant is a legal right to exclude, not a commercial product in a competitive market." Intergraph Corp. v. Intel Corp., 195 F.3d 1346, 1355 (Fed. Cir. 1999). "Implicit in the right to exclude is the ability to waive that right, i.e., to license activities that would otherwise be excluded, such as making, using and selling the patented invention in the United States." Prima Tek II, L.L.C. v. A-Roo Co., 222 F.3d 1372, 1379 (Fed. Cir. 2000).
4. "The time to obtain a patent depends greatly on the technology area of the invention, the amount of negotiation that is required with the patent office to obtain the patent, and on other factors. . . . In the computer, electrical, internet, and business method arts, this time can range from 18 months to nearly three years, just to get a first examination." Leonard Hope, How Long does it take to get a patent?, The Patent Prosecution Law Blog, http://www.patentprosecutionblog.com/archives/patent-prosecution-basics-24-how-long-does-it-take-to-get-a-patent.html (posted Oct. 9, 2005).
5. 35 U.S.C. 122(b)(1)(A) (2000).
6. 35 U.S.C. 154(d)(1) (2000). However, the patent that ultimately issues must cover "substantially identical" inventions as published in the provisional applications, Id. 154(d)(2), and the action must be brought within six years of the issuance, id. (d)(3).
7. See, LizardTech, Inc. v. Earth Res. Mapping, Inc., 424 F.3d 1336, No. 05-1062, 2005 U.S. App. LEXIS 21434, *31 (Fed. Cir. 2005) (holding that a specification that clearly describes one narrow embodiment of the invention did not support a broad claim).
8. See, e.g., Bayer AG & Bayer Corp. v. Schein Pharms., Inc., 301 F.3d 1306, 1314 (Fed. Cir. 2002) ("Unlike enablement, the existence of a best mode is a purely subjective matter depending upon what the inventor actually believed at the time the application was filed.") (emphasis added); Eli Lilly & Co. v. Barr Labs., 251 F.3d 955, 963 (Fed. Cir. 2001) ("[T]he factfinder must determine whether, at the time of filing the application, the inventor possessed a best mode for practicing the invention.") (emphasis added).
Transactions and strategic partnerships are on the rise, as the nutraceuticals industry is expected to grow 7% each year, reaching nearly $75 billion by 2007, according to Wall Street Capital Funding. Moreover, with the present shift in the nutraceuticals industry toward more R&D investments, companies are required to give more serious thought to protecting one's company from risk when dealing with other companies in domestic and cross-border business transactions. There are ways to structure transactions, with special care given to patents and trade secrets, international suppliers and cross-border issues, importation and exportation, which allow your company to effectively mitigate and manage certain risks inherent in business transactions.
As technologies are reduced to practice, intellectual property (IP) is created, which permits a nutraceutical company to consider a variety of business transactions, which in turn can help validate the products and the company. This usually leads to increased visibility in the industry, subsequent business deals, and may attract private or public equity investments. A strong technology transfer program can add significant revenues to the balance sheet and a company's IP assets may be the principal value that forms an acquisition strategy. Some companies are securing patents with a scope of protection that covers substantially more than their business model and are starting to enforce their patents against other nutraceutical companies. Companies on the receiving end of the infringement notices are often surprised and not well-informed as to how to proceed.
While the remainder of this article focuses on the strategic use of IP in business transactions, an important point must be made. Possession of patents and the ability to license them provides a company with assets for negotiating a transaction, but quality products and customer service are paramount. Patents are the tangible embodiments of the results of a research program, but they only protect ideas. In order for the company to succeed, the resulting products must be of high quality and consistent manufacture. Patents affect supply and quality drives demand. Prices are the equilibrium of supply and demand. Companies can no longer afford to ignore the importance of solid IP management and leave patents out of strategic business planning. Companies will need to be more attentive to building a stronger foundation for research of their products. Additionally, improvements in assays and quality control methods must be made in order for companies to be competitive and successful in the marketplace. Contract research and manufacturing deals require an exchange of a company's proprietary information, and new IP is often developed for such things as testing methods, processes for manufacture and formulations. IP is a necessary tool in doing business in the nutraceuticals industry, and this will only increase going forward. The future market will certainly demand that more research be undertaken by nutraceutical companies, so there will be a greater need to fortify one's positions in the market by finding the necessary protection.
Preparing for the Transaction
Patents and Trade Secrets: To achieve either a significant technology transfer program or to prepare for an eventual acquisition, a company's technology must be well protected. A variety of IP formats are available, but the most common forms are trade secrets and patents. These are not mutually exclusive, despite the common misconception1.
It is critical that a company has both trade secrets and patents protecting its technology, and it is equally critical that the company's innovative technologies show the potential for real commercial success within the lifetime of the IP. For patents, this is 20 years from the date of filing, not counting the life of any provisional patent application2.
Provisional patent applications are not examined, automatically expire after one year and, unless they become regular utility applications, will never be disclosed to the public. Therefore, trade secrets may be memorialized in provisional applications, and allowed to lapse unless needed. This provides a hedge strategy against inadvertent disclosure, and is legally a constructive reduction to practice in the event of independent invention by a competitor.
In the event of a possible license, provisional filing provides insurance against breach of a nondisclosure agreement, or a dispute over what was known to a party prior to commencing discussions. In the event of a possible acquisition, provisional filing provides an additional level of comfort to the acquiring party that the target company has carefully managed its assets, potentially enhancing the valuation of the target company.
Due Diligence: Before entering into any IP transaction, a company must perform a thorough due diligence study of its own IP and that of the proposed partner/licensee. The purpose of due diligence is to test the underlying business and IP assumptions in the above deal situations, and must assess how the IP reality corresponds with the rationale for the deal. One should conduct any IP due diligence with that end in mind.
The first step is to analyze the state of relevant industry and the target company. Identify their products and services, and prioritize their assets. Next, identify the landscape of the corresponding IP. Then determine the scope of protection provided by the IP assets of your own company. Verify the "exploitability" of your IP assets in the eyes of the other company and tighten up any gaps. To do this, one conducts its own non-infringement investigation. If the target company can design around your IP, there is little reason for them to spend the money to obtain these rights. Establish a value for your IP assets, and identify issues that may be used to negotiate a valuation reduction. Review any other business considerations, and file any needed patent applications, trademarks or other forms of IP as needed. These steps will provide comfort in the representations, warranties and indemnities one would be willing to make as to the company's own IP. In certain circumstances, insurance is available to mitigate risk that may be incurred from contractual obligations. Only after these due diligence steps are completed should the target company be approached.
Nondisclosure Agreements: At this point, and prior to any substantive business discussions, a nondisclosure agreement should be negotiated and executed. Read these types of agreements carefully, as they are binding contracts. Ignore the common misconception that these agreements are easily invalidated in court. Irrespective of whether they can be sustained, litigation is expensive, takes significant time and carries an emotional burden.
The nondisclosure agreement should contain a provision exempting from confidentiality any information known to your company prior to execution of the agreement. It is often common to add the provision that such exempted information must be evidenced by written documentation; hence, the filing of provisional patent applications should satisfy this criterion. Risk and opportunity are two sides of the same coin, and although business transactions have an inherent risk of failure, strategic planning can mitigate risks to acceptable levels.
Choosing the Right Transaction
The underlying deal rational will dictate which type of transaction should be pursued. The prospective licensee/acquirer will always have a deal rationale, which is, simply stated, the business reasons for making the license/acquisition. The deal rationale usually includes a business model for generating revenues from the target technology/company post-acquisition, but can also include removing a perceived obstacle. In both cases, the power of patents to confer market exclusion rights to the owner provides significant business advantages. Therefore, the deal rationale always has certain underlying IP assumptions. To initiate and close a successful transaction, a nutraceutical company must evaluate the deal rationale from the viewpoint of the prospective licensee/acquirer, and must be ready to convince the prospective acquirer that the deal provides the requisite industrial logic. Three transaction types are discussed in turn: a license, a collaborative R&D program and an acquisition. Each has similarities, but also distinctive qualities. Some of the more significant factors that weigh in favor of each transaction are summarized in Table 1.
License: A license is a transfer of rights to an asset without the transfer of title3. There are numerous types of licenses, such as a conveyance of exclusive rights, sole rights and non-exclusive rights, and the variations on these are almost endless, involving such factors as retained rights, specificity as to particular fields, geography or timeframes.
One factor that favors a license strategy is if the companies want to preserve independence, perhaps because of divergent business goals or pending litigation against one of the parties. Moreover, a license allows a company looking to acquire technology to be selective rather than taking the good with the bad. A licensing strategy is also an excellent way to recover revenue from IP that is not core to a company's operations. The availability of a license permits companies to take advantage of opportunities for obtaining related products where there may be a need for freedom to operate in a particular technology space. This provides a "win-win" situation for the licensor and licensee unless the two are in competition for the same industry space or products. Deliberately creating potential freedom to operate issues for a target company through patent filings is an aggressive but effective way to create licensing opportunities for your technology.
In an ideal world, the company has issued patents. However, the examination process is typically very slow, and it is not unusual for there to be several years between filing and issuance4. It is quite possible to design a successful technology transfer program around patent applications-even provisional applications; however the value of a patent lies in its ability to exclude competitors from the market. To the extent an application demonstrates favorable office actions, the apparent risk to the licensee will be reduced and the value of the application should increase. There will be a clear relationship between the value and the "newness" of the application, with the value appreciating as the probability of issuance increases. The value curve is not necessarily linear. Applications publish 18 months following the first filing, or "priority" date5. After publication, an applicant accrues provisional rights that permit (in limited circumstances), the applicant to obtain for infringement of any patent issuing from the application, reasonable royalties retroactive up to the publication date of the application6.
To maximize licensing opportunities, all IP should be initially created to be as complete and divisible as possible. Ideally a patent portfolio should include one or more "composition of matter" patents, with multiple "method of use" patents covering planned activities for each field to be licensed. It is important to back up broad patents with ones having very specific and narrow claims. Broad patents can often be challenged for failure to meet the written description and enablement requirements of the patent laws, and as such it is harder to invalidate narrow patents7.
Collaborative R&D Program: In some cases, particularly where technologies are less mature, it makes more sense to collaborate on the development of technologies. In the biotechnology industry, collaboration was a very popular business strategy during the positive economic times of the late 1990's. In the recessionary environment of the past few years, it tended to be supplanted by M&A transactions, since cash-poor biotechs were bargains for pharmaceutical companies looking to fill their research pipelines. Other drivers that promoted a shift to M&A appear to be the transition of the pharmaceutical companies from pure chemistry-based research to one incorporating biology-based technologies, as well as the need to pay out milestones on research agreements and licenses. As "big pharma" took on characteristics of their collaborators, and increasingly large payments came due to the now cash-poor biotech companies, many pharmaceutical companies simply acquired the smaller companies.
It remains to be seen whether nutraceutical companies will attractsteady interest from the pharmaceutical industry. As purification methods improve, and it becomes easier to isolate the actives of natural products, certain members of the nutraceuticals industry will begin to appear very much pharma-like. The increase in research collaborations will enable these technology improvements. From the pharma-side, many large pharmas have consumer product divisions that already produce such things as vitamins, holistic remedies and non-prescription products. So as the healthcare sector becomes more integrated, transactions involving nutraceutical and pharmaceutical companies are a strong possibility.
Collaborations are particularly suited where one company has a "platform technology" that fits into the pipeline of another company, such as where the technology platform is highly dependent on know-how and it can benefit other company initiatives, or where the business goals are common as to a particular indication or research program. Companies should nevertheless consider a license if their products are mature or if they have truly dominant IP positions.
Collaborations allow companies to preserve the independence of the entities but also to share the costs and research burdens. It is also appropriate where the companies each want a certain degree of control or input into the decision-making processes while maintaining independence. Each party should bring something to the collaboration. As discussed previously, it is important to have provisional patent application filings in place before there is any exchange of information. The IP used to drive collaborations should overcome a critical problem of the other company, but should force that company to go to individuals-not documents-for the solution. Therefore, one should hold back certain critical know-how from patents after the initial filing8. The goal of early negotiations for structuring any collaboration is to show the other side that they need you and can't appropriate your research or otherwise design around your intellectual property.
A variation on the collaborative transaction is contract research. This structure is dominated by one party who will generally own the results of the research. In many instances, failure to properly structure such type of transaction has jeopardized ownership in process improvements and testing methods. The contractual ownership of any IP should be clear prior to commencing any actual work. Don't assume that the obligation to pay for the work will automatically provide ownership in any resultant IP. In cross-border deals, this problem is magnified.
Merger & Acquisition (M&A): As discussed previously, M&A has emerged as an attractive exit strategy for nutraceutical companies. Acquisition deals have a high upfront cost but lower overall cost compared to licensing transactions, where the obligation to pay royalties may become expensive in the long-term. In one sense, M&A can be an end-stage transaction, where the target company is rolled-up into the operation of the acquiring company. Depending on the acquirer's business plan, product lines may be assimilated or assets sold off. This is where understanding the deal rationale is of paramount importance.
IP becomes the principal asset, and the target company should take necessary steps to perfect its IP, lest defects reduce valuations. Where the target company is ceasing operations due to lack of funds, getting the IP in shape will at least maximize the sale price, even if the acquirer is getting a bargain.
In another model, M&A is essentially a marriage of two companies. This is usually a "consented-to" transaction, where the companies have common business goals and the acquirer wants to control all of the IP and business decisions.
In more aggressive M&A deals, the acquirer may be motivated by the target company's IP. This might arise where the target IP dominates the industry space, or has posed a problem to the acquirer in the past, or if there are few opportunities in the market for similar products.
The best acquisition targets have late-stage products with a good pipeline, and no litigation problems. IP of a target company should dominate the particular industry space-or at least the part most significant to the acquirer-but it also needs to be defensible. To position one's company for acquisition, the IP portfolio needs to be complete. The objective is to generate assets for the eventual sale. Assets should be created with a specific aim of attracting particular companies.NW
About the authors: John Garvey, PhD, and Michel Morency, PhD, are partners in the Boston, MA, office of the law firm Foley & Lardner, LLP. Both gentlemen are members of the Biotechnology and Pharmaceutical practice groups and the Nutraceuticals and Nanotechnology industry teams. Dr. Garvey can be reached at 617-342-4085 or jgarvey@foley.com, and Dr. Morency can be reached at 617-342-4080 or mmorency@foley.com.
References:
1. To be entitled to a patent, an applicant must disclose enough information to satisfy the requirements of 35 U.S.C. 112.See, e.g., Pandrol USA, LP v. Airboss Ry. Prods., 424 F.3d 1161, No. 04-1069, 2005 U.S. App. LEXIS 20054, *7 (Fed. Cir. 2005) (defining the written description requirement). The information that is disclosed in a patent is not protectable as a trade secret. See, On-Line Techs., Inc. v. Bodenseewerk Perkin-Elmer GmbH, 386 F.3d 1133, 1141 (Fed. Cir. 2004) (quoting RESTATEMENT (THIRD) OF UNFAIR COMPETITION 39 cmt. f(1995)).
2. 35 U.S.C. 154(a)(2) (2000).
3. "[A] patent grant is a legal right to exclude, not a commercial product in a competitive market." Intergraph Corp. v. Intel Corp., 195 F.3d 1346, 1355 (Fed. Cir. 1999). "Implicit in the right to exclude is the ability to waive that right, i.e., to license activities that would otherwise be excluded, such as making, using and selling the patented invention in the United States." Prima Tek II, L.L.C. v. A-Roo Co., 222 F.3d 1372, 1379 (Fed. Cir. 2000).
4. "The time to obtain a patent depends greatly on the technology area of the invention, the amount of negotiation that is required with the patent office to obtain the patent, and on other factors. . . . In the computer, electrical, internet, and business method arts, this time can range from 18 months to nearly three years, just to get a first examination." Leonard Hope, How Long does it take to get a patent?, The Patent Prosecution Law Blog, http://www.patentprosecutionblog.com/archives/patent-prosecution-basics-24-how-long-does-it-take-to-get-a-patent.html (posted Oct. 9, 2005).
5. 35 U.S.C. 122(b)(1)(A) (2000).
6. 35 U.S.C. 154(d)(1) (2000). However, the patent that ultimately issues must cover "substantially identical" inventions as published in the provisional applications, Id. 154(d)(2), and the action must be brought within six years of the issuance, id. (d)(3).
7. See, LizardTech, Inc. v. Earth Res. Mapping, Inc., 424 F.3d 1336, No. 05-1062, 2005 U.S. App. LEXIS 21434, *31 (Fed. Cir. 2005) (holding that a specification that clearly describes one narrow embodiment of the invention did not support a broad claim).
8. See, e.g., Bayer AG & Bayer Corp. v. Schein Pharms., Inc., 301 F.3d 1306, 1314 (Fed. Cir. 2002) ("Unlike enablement, the existence of a best mode is a purely subjective matter depending upon what the inventor actually believed at the time the application was filed.") (emphasis added); Eli Lilly & Co. v. Barr Labs., 251 F.3d 955, 963 (Fed. Cir. 2001) ("[T]he factfinder must determine whether, at the time of filing the application, the inventor possessed a best mode for practicing the invention.") (emphasis added).