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Thelen Reid Brown Raysman & Steiner LLP
In
today's climate of frequent acquisition and divestiture
of assets, it is important that buyers and sellers give
appropriate attention to intellectual property (IP) assets.
Despite press coverage highlighting missteps, embarrassing
case studies of failed IP due diligence continue to make
headlines.
One
high-profile example came in mid-1998 when Volkswagen was
negotiating to acquire the automotive operations of Rolls
Royce. VW paid £479 million for these operations,
only to find that it had acquired no rights in the valuable
Rolls Royce trademark. The mark went to BMW, which had separately
negotiated to acquire the trademark rights. In the context
of this highly publicized transaction, VW's response options
were constrained: It had to get value for its purchase money,
yet it did not want to appear to shareholders, the business
press and to the public that it had carelessly failed to
nail down a key deal term.
Unless
the main motivation for the deal is acquisition of IP assets
(such as proprietary software, a key patent portfolio or
a valuable brand), buyers often underestimate the importance
of IP due diligence. Intellectual property assessment is
not considered mandatory in the sense that particular government
filings might be required. Intellectual property might not
be regarded as being as crucial as real estate, equipment
and employee matters. Accordingly, intellectual property
due diligence often is relegated to the end of the deal
checklist and, as a result, is addressed inadequately or
in a last-minute manner. Not surprisingly, there are numerous
cases in which an oversight in intellectual property matters
has caused the buyer's or the seller's position to be seriously
compromised.
From
the buyer's point of view, disclosures in the IP due diligence
process might provide the grounds to renegotiate the price
or other key terms of the transaction. For example, the
buyer might learn that the seller does not own the copyright
in, but merely licenses, key software. In such a case, the
buyer should confirm that the license is assignable and
that the terms of the license are acceptable or else negotiate
an independent license with the owner of the copyright.
The buyer might learn that the seller uses but has not registered
a key trademark that the buyer intends to continue using
after the acquisition. For a U.S. trademark, it is possible
that an assignment of common law rights and an adjustment
in the purchase price will satisfy the seller. However,
this arrangement will not work in a country that does not
recognize common law trademark rights (most countries do
not). In such a case, the buyer should evaluate whether
it will be able to use the mark without infringing third
party rights and perhaps demand a reduction in the purchase
price or some other suitable concession from the seller.
From
the seller's standpoint, reviewing all relevant information
regarding the intellectual property being conveyed will
allow the seller to craft the representations and warranties
in a way that limits the seller's exposure. For example,
the seller might represent that it is transferring all of
the IP assets that the buyer will need to continue doing
business. However, the seller might discover through due
diligence that the seller needs to keep rights to use a
particular trademark in connection with business assets
that are not being transferred. Or, the seller might determine
that it does not own a copyright in software it had commissioned
from an independent contractor because the project did not
qualify as work made for hire and because no assignment
of rights was executed. If the seller discovers such a situation
early enough, it can formulate a work-around that does not
kill the deal or compromise the seller's bargaining leverage.
The
level of IP due diligence should be appropriate to the deal,
considering the over-all value of the deal, the importance
of the IP assets and the parties' risk tolerance. The goal
for both buyer and seller should be to enter the deal with
eyes wide open as to what IP assets are necessary to the
deal, what IP assets are being transferred and what, if
any, encumbrances are attached to the relevant IP assets.
Once these questions are answered, both parties can better
evaluate their individual needs with respect to the representations,
warranties, indemnities and post-closing assistance.
The
following preliminary issues that should be reviewed by
both buyer and seller well before closing:
Patents
1.
Review all issued, pending and abandoned U.S. and
foreign patent applications and patents. Include all applications
and patents filed by the seller, currently or formerly owned
by the seller, or licensed to the seller.
2.
Review all patent searches conducted by or on behalf of
seller related to inventions or designs.
3.
Confirm payment of maintenance fees for all patent applications
and issued patents.
4.
Review all cooperative research agreements, license agreements
and merchandising agreements, regardless of whether seller
was the licensee or licensor.
5.
Review all threatened or pending interferences involving
seller's patent applications or patents.
6.
Review all invention disclosures related to the business
assets being transferred that are either awaiting disposition
or are to be the basis of a patent application.
7.
Review all technologies that are material to the business
assets being transferred, together with a description of
how each such technology was developed or acquired and copies
of all documents evidencing any such acquisition.
Copyrights
1.
Review all copyrightable works that seller has created,
commissioned or acquired rights to that are used with the
business assets being transferred. If seller does not own
a copyright in such works, review who owns the copyright
and the nature of seller's right to use the works.
2.
Review all documents concerning all copyright registrations,
including applications, correspondence, transfers and security
interests.
3.
Review all licenses, regardless of whether seller is the
licensee or licensor, related to any copyrightable works
used by seller.
Trademarks
1.
Review all trademarks and service marks registered or used
by seller anywhere in the world, whether as owner or as
licensee. Review both the geographic area of use and the
date of first use of each such mark in each region.
2.
Review the prosecution files for any registrations or pending
applications.
3.
Review all trademark searches performed or obtained in connection
with such marks.
4.
Review all licenses related to such marks, regardless of
whether seller is the licensee or licensor.
5.
Review all quality control manuals, files or guidelines
relating to goods or services sold under the marks.
6.
Review specimens of each use of such mark for each jurisdiction
in which the mark has been used or registered.
General IP Due Diligence Issues
1.
Review copies of all cease and desist or demand letters
sent out or received by the seller concerning IP.
2.
Review all threatened or pending litigation concerning IP.
3.
Review all settlement agreements concerning IP.
4.
Review all domain names in the name of or controlled by
seller that incorporate any trademark or service mark of
seller or are used in connection with any of the business
assets being transferred.
5.
Review all trade secrets concerning the business assets
being transferred and the means by which their secrecy is
maintained.
6.
Review any proprietary information owned by seller and not
protected by copyright, trademark or patent, including trade
secrets, know-how and confidential information.
7.
Review all agreements pursuant to which seller's goods or
services are distributed or marketed to third parties.
8.
Review seller's standard form agreements with employees,
officers, directors, temporary employees and independent
contractors regarding employment, confidentiality, non-disclosure,
work-made-for-hire, assignment of inventions and copyright.
9.
Review all non-standard agreements between seller and its
employees, officers, directors, temporary employees and
independent contractors regarding employment, confidentiality,
non-disclosure, work-made-for-hire, assignment of inventions
and copyright.
10.
Review all policies and guidelines of the seller relating
to the protection or use of proprietary information protected
by copyright, trademark, patent and trade secret.
11.
Review all documents and filings affecting title to IP (security
interests, releases of security interests, assignments,
changes of name) to confirm a complete chain of title.
12.
Review all security interests, security agreements and releases
of them, whether or not recorded, relating to any of the
IP assets scheduled to be transferred.
The
buyer should use the seller's responses to these queries
as a starting point for evaluating the validity of the rights
it is to receive. These results should be compared against
information available to the public at the U.S. Patent and
Trademark Office and the U.S. Copyright Office. If appropriate,
the corresponding records of other countries also can be
checked through online data sources or with the assistance
of counsel. Also, the information provided by the seller
should be reviewed for internal consistency -- for every
trademark used there should be a registration, and for every
registered mark there should be a recent specimen of use.
Discrepancies discovered through this process should be
brought to the attention of the seller immediately so that
an explanation can be provided or an accommodation can be
negotiated.
The
next step, assuming the IP rights are sufficiently valuable
to the buyer to merit the effort, is to evaluate the quality
(as opposed to ownership) of the IP being transferred. For
patents, the buyer should consider obtaining a validity
or right to use investigation, which is designed to disclose
other patents covering similar technology that might affect
the validity of the patent rights being transferred or that
might prevent the buyer's use of those rights. For trademarks,
the buyer might consider having a dilution search conducted
to determine what other parties have registered or are using
the same or similar marks for other goods and services.
This will help the buyer evaluate whether the marks being
acquired will enjoy a broad scope of protection.
To
get the maximum benefit from the due diligence, the buyer
should begin the process early and be persistent in following
up on questions and inconsistencies. Experience shows that
a discrepancy is more likely to be reconciled to the satisfaction
of the buyer if it is raised early than if it is raised
at the 11th hour, when the buyer will be forced to choose
between forfeiting this found leverage and calling off the
entire deal.
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For more information about the issues covered in this report, please contact Rauer L. Meyer in our Los Angeles office at 213-576-8005 or at rlmeyer@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction Department, click here.
©2002 Thelen Reid Brown Raysman & Steiner LLP
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