Japanese corporate venture capital (CVC) investments in the life sciences industry provide investors entry into a market by supporting the development of innovative products and services. But these innovations, and thus the companies behind them, derive their value from their exclusivity, so it is important to investigate how well protected they are from competitors before moving forward with a transaction.

In Part One of this series we explored investment structures and fund formation factors for CVC investors. In Part Two we looked at key terminology and deal terms relating to governance, exit strategies, and national security, as well as best practices for navigating potential challenges. We provide a summary of key intellectual property (IP) issues and due diligence related to transactions for CVC investors below.

Venture Investment and IP Rights

IP rights protect a company’s propriety technology and brand value in the form of patents, trademarks, and copyrights, preventing competitors from imitating the same product or service. Because IP rights determine a company’s value, venture companies and venture investors alike place great importance on such rights. There are several steps CVC investors can take during IP due diligence, including the following:

• Perform “patent landscaping.” Search and review third-party patents to identify crowded areas and troublesome IP. This search should include a freedom-to-operate (FTO) review of third-party patents and published applications to determine whether a product launch risks infringement. During the review, an investor might explore if the company targeted for investment has analyzed and prepared a legal opinion for noninfringement or invalidity positions.
• Check the quality of the patent portfolio. Assess matters such as whether an invention is patentable and whether, in the course of seeking a patent, the correct procedures were followed and enough information was provided to achieve a successful outcome. Keep in mind that good patents can withstand a US Patent and Trademark Office invalidity proceeding. The quantity of patent claims also matters since there is possibly a higher chance of surviving invalidity proceedings if there are more claims.
• Determine what is owned or licensed. Ask whether assignment documents are properly prepared, signed, and recorded or if employment agreements extend rights to an employee. If IP is licensed, check whether it is for exclusive or nonexclusive rights, what territory is covered, and whether it comes with rights to enforce, direct patent prosecution, or sublicense.
• Protect trade secrets. Identifying and labeling a trade secret can protect commercially valuable information from being shared outside of a business. Trade secret efforts should be proactive—for example, by labeling materials as “confidential.” Keep in mind that overuse of the “confidential” label can limit its effectiveness.
• Review third-party agreements. There are various types of third-party agreements that can be made while developing a product or service, including license, research, nondisclosure, joint research, consulting, and master transfer agreements. Regardless of what kind of arrangement is utilized, check what information was given to the third party and how information was recorded or protected.

Risks of Inadequate Due Diligence

Ventures without IP rights are a risk and become the cause for disputes over who is allowed to use or profit from a particular product or service. Given these stakes, taking time to identify and assess potential risks and benefits, along with developing strategies for any such risks, is important for potential venture investors.

IP Due Diligence Tips

• An FTO search is required to ensure that a potential investment target can use its invention and is not at risk of patent infringement.
• A patent attorney with litigation experience should evaluate the quality of the patent portfolio.
• Make sure to clarify IP ownership or the right to use, that trade secrets are kept confidential, and that all third-party agreements are reviewed.

For more details on CVC investment fund issues, please see our full presentation, Corporate Venture Capital Investments in US Startups (Part 3): CVC Investments in the Life Sciences Industry: Key IP Issues and Conducting IP Due Diligence (conducted in Japanese). This event is part of our 2023 series designed for Japanese companies and funds developing new business models through investment in US startup companies.

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