Life science startups are known for their agility, speed, focus, and creativity. But sometimes those traits – which are beneficial to the company’s formation and evolution – can result in recurring nightmares for IP and corporate attorneys. Many of the mistakes life science startups commonly make during company formation can result in long-term negative consequences. Below are real-life examples of mistakes we have seen in our practices and the lessons life sciences startups can learn from them.

Startups are often loath to spend money on IP attorneys, preferring instead to direct all resources into research and development. As a result, scientists often perform their own patentability and freedom to operate analyses and then communicate their findings to others. For example, a scientist might send an email claiming that he or she “busted” a larger company’s patent in the course of a freedom to operate analysis. A problem arises, however, when the startup is acquired by the larger company whose patent it supposedly “busted.” Internal communications such as these are not privileged and must be disclosed to the opposing party in litigation; this allows the defendant in a patent infringement action to submit evidence that the plaintiff’s scientist (the acquired company’s scientist) believed the acquirer’s patent did not cover the molecules of the start-up. While a scientist’s opinion may have no legal bearing on patentability, it is often convincing for juries. Lesson learned: The easiest ways for startups to avoid the “armchair lawyer” issue is to educate scientific staff on these privilege issues, to stress from the highest levels (the CEO) the fundamental importance of refraining from making statements that could be construed as “legal” opinions. In addition, startups should consult a patent attorney at the early stages of drug discovery, and then frequently thereafter. Scientists may understand the science underlying a patent, but it is unlikely that many fully grasp the intricacies of claim construction, the differences between legal definitions and scientific definitions, and the implications of prosecution history on the scope of an issued patent’s claims. Somewhat paradoxically, if your drug candidates are worth partnering with a bigger Pharma or acquisition by the same, then litigation should be expected – it is the sign of a successful product.

Startups that are eager to secure investment and partnerships often rely upon the strength of their patent portfolios. To demonstrate that strength, the first impulse for many startups is to provide prospective partners with an opinion of counsel, such as an invalidity opinion or a noninfringement opinion, to demonstrate that not only is their science good, but their understanding of the IP landscape is sophisticated. However, providing prospective partners with the actual opinion of counsel can waive attorney-client privilege as to the contents of the opinion, which can cause real headaches later on in litigation. Lesson learned: There is no need for pharma startups to proactively provide opinions of counsel to prospective partners. Not only can it waive attorney-client privilege, it is typically unnecessary; any reputable investor will likely perform its own due diligence and rely upon the opinion of its own counsel. Savvy startups protect their assets by refraining from disclosing opinions regarding any potential strengths and weaknesses of their patent portfolios when the attorney-client privilege would not attach.

As startups grow, they often restructure or change the flow of ownership rights. They do this for several reasons, such as to obtain a tax benefit or for the ability to spin off certain IP assets cleanly for partnership or acquisition. But because each person involved in the restructuring is focused on the issues that matter most to them (e.g., tax benefits, employee relocation, etc.), the details of company structure and chain of title may not be communicated clearly to the company’s IP attorneys. Shuffling IP assets around among corporate entities can cause problems during due diligence because it can create gaps in the chain of title and possibly lead to a loss of priority for patent applications. In litigation, confusion over the ownership of IP assets can destroy standing and preclude the recovery of lost profits, such as in situations where one entity owns the patent and another entity makes the profits. Lesson learned: To prevent confusion over IP ownership, it is vital to maintain communication between the company’s executives, corporate attorneys, and IP attorneys. Before restructuring, companies need to understand the placement of IP assets and how those placements may impact their IP rights, including ownership, assignment, priority, and standing for litigation. While some of these issues can be fixed after the fact, some errors during corporate restructuring, such as a loss of the right to claim priority, may not be curable, with potentially devastating effects on a patent’s strength or validity.

This occurs when a company publishes or otherwise discloses information – i.e., the results of clinical trials, present posters at a conference, or issue press releases – without clearing the disclosure with its IP attorney. Small companies frequently make exaggerated claims about the effectiveness of their product or talk about what they hope it can do rather than what it actually does. “Big talk” like this can cause problems during patent prosecution, such as exactly what and when to disclose to a patent examiner, for example, when a company performs clinical trials and discovers that its product has properties it did not anticipate – whether good or bad. Lesson learned: All startups should have a pre-publishing clearing process in place and explain to their employees the real risks of premature disclosure. This process should also be tailored to take into account the entity’s unique circumstances. For example, academic institutions face pressure to publish early and often. Their IP counsel should thus make sure employees know the clearance process and understand the ramifications of failing to follow it.

Departing employees do not always leave on the best of terms. But these “disgruntled exes” can continue to cause problems for their former employers after they leave, such as by testifying for an opposing party in a later patent infringement action. While assignor estoppel precludes a person who assigns a patent from later stating that the patent is invalid, a disgruntled ex-employee who testifies negatively about his or her former employer can make for very bad trial optics. Lesson learned: To prevent disgruntled ex-employees from causing future harm, startups should have employee agreements in place that protect themselves to the greatest extent possible. Such agreements should contain clauses that correctly assign inventions, obligate post-employment assistance, and require confidentiality. It is also crucial for companies to know their invention stories. Telling a compelling invention story at trial can be a powerful tool for jury persuasion, but, too often, disgruntled employees take their invention stories with them when they leave.