Jake L. Lee UnitedHealth Group & Stuart R. Hemphill Dorsey & Whitney LLP

Transcription

1 IP Due Diligence List for Business Acquisitions Jake L. Lee UnitedHealth Group & Stuart R. Hemphill Dorsey & Whitney LLP

2 Objectives Introduce a due diligence (DD) list for IP issues in business acquisitions Discuss how the list gets focused for a particular business and as the deal proceeds Discuss where and how to seek the information outlined by the list, and some typical obstacles Suggest how to use and report on DD results to the deal team Dorsey & Whitney LLP

3 DD List Assumptions Buyer finds target business it seeks to acquire Typical legal structures Acquiring assets of business Acquiring stock of entity that owns business Merger structures (more like stock deal) IP assets affect value of business by enabling activity and/or providing some exclusivity Dorsey & Whitney LLP

4 DD List Why? Buyer needs information on the IP issues of target business for several reasons: Evaluation for price; find complications that may affect IP value, availability, risks Drafting of IP transfer provisions (asset deal) and schedules Representations and warranties re IP (risk allocation) Post-closing activity of actual/physical transfer, integration, IP portfolio management DD list helps discipline process, in particular, aid focus on important issues Works in coordination with management meetings and diligence call with target Dorsey & Whitney LLP

5 DD List Factors Driving i Focus Deal scope affects DD focus: entire company; division; product line; product; technology; market share/customers; financial vs. strategic Kinds of IP assets important to target business varies by business type: Technology driven (patents, trade secrets) Brand and marketing-driven en (trademarks, copyrights) Technology and brand (all forms of IP) Products vs. services (designs vs. processes) Dorsey & Whitney LLP

6 DD List Factors Driving i Focus Connection of IP assets to revenue/value Costs, time needed for DD/deal size Team capacity/capability to understand IP Quality of target s t IP management Dorsey & Whitney LLP

7 DD List See list of inquiry areas in binder Covers all types of IP Formal (registered) vs. informal IP Owned vs. licensed-in Information sources Target or its counsel are main sources; data room Independent sources almost always necessary for thorough DD Dorsey & Whitney LLP

8 Independent d DD Info Sources See list: sources for formal IP are governmental authorities (USPTO, foreign counterparts; registrars) /i Alternate sources hi / b h annual reports; SEC files; financial statements, audits target s website(s) Internet news, articles, legal reports Dorsey & Whitney LLP

9 DD List - Barriers Target s records and organization (recent IP audit?) Target s limits on deal knowledge Target s resources and attitude towards deal; value perceptions and time Secrecy or competitive issues (confidentiality agreement) Target s attorney-client privilege Dorsey & Whitney LLP

10 Objectives for Due Diligence/Drafting What is buyer s objective for acquired IP? Temporary use while moving business to buyer platform Continued use, indefinite Aggressive extension of technology/brand; novel new uses Temporary use objective Transition license or services arrangement(s) with seller Continued, extended use objectives more complicated Dorsey & Whitney LLP

11 Objectives for Due Diligence/Drafting Longer term view requires clear ownership of all owned IP; no restrictions/encumbrances Exclusivity: valid IP rights Freedom to use 3 rd party licenses-in Match business use (now and future)? Remain in place per contracts t (or have plan for replacement); how long? Dorsey & Whitney LLP

12 Objectives for Due Diligence/Drafting What is seller s objective for target s IP? Temporary use for taper down; no retained business Continued indefinite use in a retained business; possible expanded use Temporary use Retained right or grant-back license or services arrangement(s) with buyer Retained business, expanded use Keep ownership or co-ownership ownership of all owned IP; or get license back Plan how to share exclusivity, enforcement Licenses-in in retained per contracts or have plan for replacement, focused on retained business Dorsey & Whitney LLP

13 DD List Patent t Issues Patents (Owned) Often most difficult to communicate value/risk to team Can be expensive to analyze length of term; geographical scope subject matter scope define relative to target and competitor products Potential exclusivity value Defects/risk of loss Dorsey & Whitney LLP

14 DD List Trademark Issues Trademarks (Owned) registered/unregistered unlimited duration somewhat easier than patents to analyze by strength, scope (local infringement standard) Exclusivity value, expansion possibilities Defects/risk of loss Seen in context of domain names, trade dress, social Dorsey & Whitney LLP

15 DD List Copyright Issues Copyright registered/unregistered long but not unlimited it duration (life of author+70 yrs) somewhat easier than patents to analyze by strength, scope If older (pre-1976), can have complex history Ownership issues; works made for hire Risk of loss author/successor termination right (17 USC 203, 304(c)) Copyright Office records limitedi Dorsey & Whitney LLP

16 DD List Mask Works Not Halloween! Semiconductor chip layouts 17 USC 901 et seq.; sui generis protection Underutilized in U.S.? Available in Japan, EPO, India, Brazil, etc. Short time to register in U.S. - 2 yrs from 1 st commercial exploitation anywhere Dorsey & Whitney LLP

17 DD List Trade secrets Identification elusive if not embodied or documented Software is documented (but not easy to review) A process of making something may not be Elusiveness can pose problems for: Valuation: what is it? secret or published? Reps/Warranties: Need identification to anchor rep Transfer: Difficult, if not embodied and personnel not coming with business Dorsey & Whitney LLP

18 DD List Websites, etc. Domain names with multiple registrars Registrant names Transfer not done by assignment, but rather per registrar rules (value of DD) Social media account ownership Linkage to trademarks (often embedded) Cross-border asset Dorsey & Whitney LLP

19 DD List Software and IT Software owned by seller: developed or acquired Most companies develop some software or data as they do business Ownership issues common 3 rd party licensed-in software: contractual rights under license or services contracts Essentially all businesses have data and data processing that requires licensed software Many contracts to be reviewed; Open source licenses-in See last year s Institute for more detail Dorsey & Whitney LLP

20 DD List Licensed-in i IP Can be any kind of IP: patent, TM, etc.; often software (mix of IP) Review of contracts necessary, sometimes difficult Getting signed, final versions Getting all attachments, including statements of work, amendments Dorsey & Whitney LLP

21 DD List Licensed-in i IP Possible importance to acquired business: key technology dependency royalty costs/disputes/expansion improvements (access, IP ownership) troubling risk allocation In asset deal, transferability issues; express provisions and IP law when no express prohibitions Dorsey & Whitney LLP

22 DD List Encumbrances Broad definition in most deals: Encumbrance means any claim, charge, lease, covenant, easement, encumbrance, pledge, security interest, lien, option, pledge, right of others, mortgage, deed of trust, hypothecation, conditional sale, or restriction (whether on voting, sale, transfer, disposition iti or otherwise), whether imposed by Contract, understanding or Law. For IP, meaning includes special IP issues Security interests granted but no comprehensive law Licenses out Obligations from target s acquisition of asset (royalty, restriction) Dorsey & Whitney LLP

23 DD List Encumbrances Grant of security interest in IP Per UCC, can cover any general intangible = IP USPTO recording on patents, t trademarks (not security interest per UCC; protection against bona fide purchaser (quote/cite) Copyright Office ((not security interest per UCC; protection against bona fide purchaser (quote/cite) Contractual limitation on owned IP Examine surrounding contracts identified in DD Not fully owned; developer has some rights Licenses out Dorsey & Whitney LLP

24 DD List 3 rd Party IP High stakes risks: block use of IP or expansion of it; block product or service not in area of target s IP focus Target s A/C privilege as barrier to access Large liability, uncertainty of outcome May be necessary for buyer to do own evaluation (FTU search) Liability can complicate baskets and caps negotiated Dorsey & Whitney LLP

25 Freedom to Use (FTU) Issues Most DD is on IP assets owned by target business or licensed-in from third parties Use of these can be affected by third party IP rights that have not been licensed, may not even be known Third parties may own IP that t has been, is or will be infringed by continuation of the acquired business Past and future liability for IP of others needs to be assessed and understood Dorsey & Whitney LLP

26 Freedom to Use Issues Target needs to disclose any IP or IT-related claims made or threatened, studies of possible liability done in reaction A DD survey of the business area may disclose parties with IP portfolios used against target or other competitors Focused clearance or freedom to use studies may have been done by target or may be done by buyer Licenses-in may have warranties or indemnifications that protect against IP claims of third parties, but these are generally limited to the licensed-in subject matter, which may be a small corner of the target s activity Dorsey & Whitney LLP

27 IP Map? Target/Seller Owned patent, TM,, T/S; licenses in Sub1 Owned patent, TM,, T/S Licenses in Software Liability/Risk Encumbrance Sub2 Owned patent, TM,, T/S Licenses in Software Dorsey & Whitney LLP

28 DD List Using the DD Results DD info gathered plays several roles: Input to valuation analysis Input for acquisition deal structure provisions Input to reps and warranties; indemnification Input for/to ancillary contracts IP transfer/assignability decisions (see Appendix) Dorsey & Whitney LLP

29 Due Diligence Deliverables Investigation leads to due diligence report to buyer Red flags (examples): Ownership problems with key owned IP asset(s) Owned assets encumbered with licenses out, or limitations of a non-compete or similar provision Target operating in breach of license-in Target license-in does not support buyer business plan Validity or protectability of owned or licensed-in IP affects expected exclusivity Dorsey & Whitney LLP

30 Due Diligence Deliverables Due diligence deliverables in IP should address: deal blockers Identify defects fixable before signing or closing (e.g., title record issues) factors significantly affecting buyer valuation risk allocation points provide background for negotiation of IP reps/warranties Dorsey & Whitney LLP

31 Due Diligence Post Closing Plan Due diligence deliverables should plan for closing and post closing : Assignments for closing; recording post closing Arrangements A t for IP file transfer or contacts t with counsel, new powers of attorney Delivery of documents and services to enable use/possession of acquired IP Administration of any transition services Timing to match business plan Dorsey & Whitney LLP

32 Conclusion IP assets are increasingly a central component to deals Significant due diligence is required to ID the assets and issues they raise Lawyers need support of business persons and to understand their focus DD list can outline a plan, but adaptation to deal is always necessary Questions? Dorsey & Whitney LLP

33 Appendix Assignability of Licenses-in Dorsey & Whitney LLP

34 DD on Licensed-in i IP Transferability of license-in rights can affect deals, either asset or share-based License contract may ypermit or forbid any assignment or be silent IP licenses generally forbid assignment of license, except to an affiliate; exception may have limitations or costs License also may allow termination in case of change of control of licensee Sometimes the anti-assignment clause may say that a merger or other change of control will be considered an assignment Licenses that need to be assigned before or at closing need careful scrutiny; consents may be required Dorsey & Whitney LLP

35 DD on Licensed-in i IP Seller can consider whether license that can be assigned can be replaced, sometimes by buyer s existing arrangements with the same vendor Where seller needs to keep use of the licensed IP, there may be no easy solution, as licensor will end up with two licensees and will want two separate agreements When is license contract assignable? Depends on type of IP, exclusive/nonexclusive, what the contract says (or does not say) Dorsey & Whitney LLP

36 DD on Licensed-in i IP Licenses-in must be found, reviewed! Law on assignability of contracts Generally assignable under state law, except when personal (e.g., individual consultant) But there is an overlay of federal law on assignability of licenses involving patents, trademarks, copyrights, where the property p arises under federal law In general, assignment of IP licenses is disfavored However, rules are not entirely consistent Dorsey & Whitney LLP

37 DD on Licensed-in i IP Options where license assignments are prohibited Consent of licensor Acquire shares of licensee Merger with licensee may be used to get a similar result If a licensor does not like the deal, it may challenge it Licensors have challenged some changes in licensee as violating anti-assignment clauses and/or the federal law disfavoring IP license assignments (see Appendix) Dorsey & Whitney LLP

38 Assignability of Licensed-in i IP Cases of interest on assignability of licenses and merger SQL Solutions, Inc. v. Oracle Corp., No. C MHP, 1991 WL (N.D. Cal. 1991) Licensor argued that t a reverse triangular merger (target is the surviving entity) effected an assignment of a software license Court agreed, despite the fact that transaction involved only share ownership changes Dorsey & Whitney LLP

39 Assignability of Licensed-in i IP Cincom Sys., Inc. v. Novelis Corp., 581 F.3d 431 (6th Cir. 2009) Licensor argued that a forward merger of a software licensee (AO) into a sibling (AT) followed by a multiple entity merger of AT into itself and three subsidiaries effected an assignment of a software license to AO Court said federal common law makes copyright licenses unassignable absent express language; court also acknowledged that state (Ohio) law governs mergers and makes the general statement that the surviving entity in a merger possesses all rights of the constituents by vesting without further act or deed Further noting that the state law said merged-in entities cease to exist, the court concluded, in the context of a patent or copyright license, a transfer occurs any time an entity other than the one to which the license was expressly granted gains possession of the license. Irony: software is still running on same computer in same location Dorsey & Whitney LLP

40 Assignability of Licensed-in i IP States have different laws on significance of a merger for assets. Some speak of transfer to the surviving entity by vesting; some expressly state there is no transfer in a merger As a result, it is unclear by state what will be the finding on enforcement of an anti-assignment clause against a change in licensee by merger Form of merger may still matter, as in reverse triangular merger (but see SQL) See: and ca.pdf Dorsey & Whitney LLP

41 Transition Services In some cases, target business as desired by buyer can be preserved, without assignment licensed-in IP transfer blocked seller wants to retain certain IP IP map of target business may identify gap Transition services by seller can be agreed to fill the gap Possible technical violations of internal use provisions in licenses-in to seller Temporary violations may be tolerated Dorsey & Whitney LLP