In transactions involving research-centric businesses like biotechnology firms or pharmaceutical companies, the intellectual property (IP) assets of the target are the focus of the deal. The terms of a proposed acquisition are directly affected by the relative strength and weakness of any such assets. Similarly, the amount the acquiring company is willing to pay will depend on the demonstrable value of the IP assets.

One of the key questions management typically asks before proceeding with a deal is whether it would be free to operate in a specific technology space and whether it will have the necessary legal rights to exclude others from doing the same. These questions are at the heart of any freedom to operate (FTO) analysis conducted within the scope of acquisition-related IP due diligence, and their answers form a significant basis for valuing a deal.

The high level goals of an FTO analysis, from the acquiring company’s standpoint, are to establish whether the company can make, use, and sell the target’s products without infringing any IP rights owned by third parties. This is by no means a simple task, especially given the time constraints often posed by the business needs implicated in the deal. However, there are a series of calculated steps that can be followed to limit potential liability and ensure that no relevant patents are overlooked.

These steps begin with an identification of key products and processes of critical importance to the company, along with any alternatives under serious consideration at the target. Next, an IP lawyer focuses on understanding the relevant products and processes, often by consulting with internal personnel at both the acquirer and the target. Any documentation describing the products and processes should also be obtained.

After those foundational activities, IP clearance searches should be conducted to find any current patents that might relate to the product or process, any intermediates, intended uses, starting materials or reactants, and steps in the process to produce a key product. Confirmation checks on the searches provide added assurance that no relevant patents have been missed.

Next, the litigation risk profile of the target is addressed. This begins with a formal inquiry to the target company’s counsel as to any known pending litigation and any outstanding threats of litigation. From there, computerized databases are searched, dockets at probable venues are checked, and industry publications are reviewed. The results are used to identify any third party patents or trademarks that potentially cover a key product or process. If problematic patents or trademarks are uncovered, a clearance opinion must be produced if the target company has not already formulated a written opinion.

The remaining steps involve making a detailed inquiry into and examination of any licenses or IP agreements involving any aspect of a key product or process, finding relevant expired patents, vetting any IP indemnities from suppliers or to customers, checking relevant pending patent applications in foreign jurisdictions, and surveying related litigation to gauge the relative litigiousness of the affected areas. The end product of the FTO analysis is a final opinion communicated to management that encapsulates the results, providing a crucial basis for valuing the IP assets at stake in the deal.

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