IP due diligence: "The patent covers what?"

Zephyr and McDermott Will & Emery

In New York, Debra MacKinnon has sued her patent attorney over alleged errors in the patent application he prepared in 2009. (New York Daily News). MacKinnon had invented a silicone bra insert to elevate, enlarge and enhance cleavage. The device was kidney-shaped which permitted it to be folded to match the natural contour of the breast and thereby enhance cleavage. The effect was dependent on certain ratios that defined the shape of the insert.

Zephyr and Victoria's Secret

Although MacKinnon's company Zephyr had a successful business relationship with Victoria's Secret to the tune of some $120 million sales over 10 years, the relationship turned sour. So sour that although a first dispute between them was dismissed by both parties, MacKinnon later sought advice as to whether there were grounds to sue Victoria's Secret and other retailers for patent infringement in respect of their own versions of the silicone insert. The advice was not pleasant. She was informed that not only were there errors in the specification but also that the alleged infringements were not covered and possibly could not be covered by the patent.

MacKinnon then obtained advice as to whether the firm who handled the original drafting were at fault and on the basis of that advice, has sued the original firm. It also appears that Victoria's Secret may have paid royalties under the patent while there was a business relationship with Zephyr. A better understanding of the product and relevance of the patent could have been obtained and money saved.

Irrespective of the merits of this case, the case for thorough IP due diligence can be directed towards all parties.

Ocado's 'add-on' IP rights

The second news item appeared in The Times on 29 August 2014 ("Ocado shares plunge amid warning over the robot that carries its hopes") as a press release from the equity brokers Redburn Partners. Redburn Partners' report regarding the potential of Ocado, the supermarket distributor, resulted in £375 million being written off Ocado's share price.

The report provides several reasons that may have justified the down-rating of Ocado but of note are the comments regarding the IP position. It was reported that the patent situation was not as originally anticipated/presented to the decision makers. It had been understood that Ocado possessed proprietary technology that could possibly place it in an advantageous position with respect to competitors in an effort to monetise their IP. However, further investigation revealed that Ocado's IP was not directed to groundbreaking technology, but an improvement or "add-on" to third-party IP rights: "Investigation of Ocado's patent filings suggests the group's technology is less unique than we previously thought. Ocado's patent appears to be essentially an 'add-on' to the Autostore system."

Should they have been surprised? In the Ocado's 2011 annual report there was acknowledgement under "Principal Risks and Uncertainties" of the following in respect of IP Rights: "The business, IT systems, bespoke software and intellectual property are not protected by patents or registered design rights which means that the Group cannot inhibit competitors from entering the same market if they develop similar technology independently. In addition, third parties may independently discover Ocado's trade secrets and proprietary information or systems."

To those of us in the IP profession, the oversight of Ocado's IP position was one that was potentially avoidable. Thorough IP due diligence by either investors or Ocado should have identified the prevailing third party rights. Investors, if principally interested in the technology, could have reduced their investment in Ocado and directed it to the true originator of the perceived advantageous technology.

The value of IP due diligence

These are just two stories that have hit the headlines. There are likely to be many other board rooms in the UK, Europe and US where investments are reviewed and questioned as IP issues arise.

Both stories support the opinion that IP due diligence, by some dismissed as a 'necessary evil', is actually a critical phase of the decision-making process.

The use of appropriately trained attorneys and solicitors (with the correct technological background and day-to-day practice in drafting, prosecuting and enforcing patents and related IPRs) will only increase the chances of obtaining accurate advice. Furthermore, conducting searching for appropriate third party patent rights is essential, despite this being an expensive exercise. The overall investment is minimal compared to the hundreds of millions at stake in both these cases.