May 4, 2017
Due Diligence: Patents Just Became a Bigger Problem
This Cleary blog says that as a result of a recent Supreme Court decision eliminating laches as a defense to a patent infringement claim, the challenges of M&A intellectual property due diligence just increased significantly.
In SCA Hygiene Prod. v. First Quality Baby Prod.137 S. Ct. 954 (2017), the Supreme Court refused to bar damage claims for infringement occurring within the six-year period prior to filing a lawsuit, even if there was “an unreasonable, inexcusable and prejudicial delay” in bringing the suit. The case comes on the heels of an earlier decision easing plaintiffs’ ability to obtain treble damages in patent infringement cases.
So what does this mean for M&A? Buyers can’t afford a “no news is good news” approach when it comes to due diligence on potential infringement claims:
Now that plaintiffs can collect damages for infringement occurring up to six years prior to filing suit despite their delay tactics during that period, M&A purchasers cannot assume that just because the target has not heard (or heard back) from a patent holder the risk of facing suit in the future is small. Therefore, they should carefully diligence any risk of patent infringement within the preceding six years.
The blog also notes that the increased litigation risk should be considered when negotiating the terms of the transaction:
Additionally, parties should be mindful of this heightened threat of patent litigation when negotiating risk allocation in a purchase agreement. In light of diligence findings and the general risk of patent litigation in a particular industry, a buyer should carefully consider how far the look-backs in reps should extend and how long they should survive so as to mitigate the risk of costly litigation.
Since the risk that a target could face unknown infringement claims has increased, parties should consider the appropriateness of knowledge qualifiers. Finally, sellers in M&A transactions should account for their increased exposure to indemnity obligations arising from breach of such reps (associated with patent suits from long-dormant plaintiffs) and adjust their indemnity obligations accordingly.
– John Jenkins