A Guide To Conducting IP Due Diligence In M&A

Transcription

1 Portfolio Media. Inc. 860 Broadway, 6th Floor New York, NY Phone: Fax: A Guide To Conducting IP Due Diligence In M&A Law360, New York (January 07, 2014, 10:48 AM ET) -- Based on the information gathered during your preliminary overview and any documentation or schedules produced by the target company, create a list of the intellectual property assets at issue in the transaction. For each listed asset or bundle of related assets, consider the importance of the asset or assets to the transaction and rank them accordingly in terms of priority and depth of investigation warranted. This list will form the basis for your due diligence review. There are three primary areas of focus for the IP due diligence review: (1) ownership, status and control of the IP assets, (2) the strength and economic value of the IP assets, and (3) the potential liability for infringement. Your due diligence plan should consider each of these areas in relation to your prioritized list of target IP assets. Ownership, Status and Control This area of review investigates the company s IP assets and whether there are any problems relating to ownership or control of those assets. Each asset must be reviewed to ensure: (1) all registrations to which the asset is entitled have either been obtained or applied for and are up to date with the relevant filing office, (2) a clear chain of title from the inventor, author, or previous owner, (3) the existence of appropriate assignment documents recorded in the public records, and (4) the lack of any encumbrances such as security interests or liens. Any contracts involving the grant of IP assets or the right to use or control must also be reviewed to identify any restrictions. Search and review the relevant patent, trademark and copyright office files and other public records. Verify the target company s valid ownership of the applications or registrations. Confirm that all registrations are valid and up to date on all maintenance, renewal or other fees and filing requirements. Review the chain of title to confirm that all necessary assignments are in place and filed or recorded in the relevant government agency. Confirming the existence of an appropriate assignment from each and every inventor is particularly important for patents. In some countries, including the United States, the inventor(s) is deemed to be the original lawful owner of a patent until it is assigned by the nature of the relationship (e.g., employee/employer) or by written assignment. Similarly for copyrights, the author of the work is typically the original, rightful owner except where there is an appropriate work for hire/assignment agreement in place. The public records may also reveal the existence of encumbrances such as security interests, liens or licenses. If that is the case, you must confirm that all necessary releases have been obtained and filed or recorded. A separate UCC search should also be conducted to ensure that all potential encumbrance issues have been identified.

2 Rather than rely solely on the other side s disclosure of IP assets, it is also good practice to perform separate searches by "owner" at the same time as you pull and review the records for the IP assets disclosed by the other party. You may uncover relevant patent, trademark or copyright applications or registrations that, for whatever reason, were not previously disclosed. Trade secrets The due diligence team should review any written trade secret policies and procedures as well as all agreements to recognize and maintain confidentiality. The team should also investigate the actual physical manner in which the company handles its materials containing trade secrets. Make sure the target company has taken adequate precautions to restrict or prohibit disclosure and use of trade secrets. Open Source Code If the proposed acquisition includes software, the team should investigate whether the software contains any open source code. If so, the team must review all restrictions, terms and conditions attached to the relevant open source code to ensure that the acquiring company will be permitted to own exclusive rights to the software. Review all contracts, agreements and licenses relating to the IP assets. This inquiry should focus on the grant of rights to the target as well as contractual grants by the target. If your client wants to acquire rights that have been given to the target by a third party, you must review those agreements (and any applicable law) to be sure the rights are fully assignable to the acquirer. Additionally, is the scope of the granted rights adequate for the contemplated business needs? You should review the representations and warranties for any issues. If software licenses are involved, you should check whether additional licenses must be purchased by the acquirer. If the target has licensed or transferred any of its IP interests to a third party, you must review the agreement to make sure the license is limited enough in scope not to impede the acquirer s goals with respect to that IP asset. You must review the agreement to determine whether the license is transferable and enforceable by the acquirer or whether the license will terminate under its terms once the acquisition goes through. License agreements often contain nonassignability clauses or "changes in control" clauses or the like, which might trigger termination of the license or some other event upon transaction. For the same reasons, all settlement agreements that could possibly relate to the ownership or use of the IP assets should be carefully reviewed for any potential restrictions on your client s intended use. Government Rights and Restrictions Where applicable, any government approvals, regulations and restrictions should be identified and evaluated in terms of the acquirer s intended use of the asset. This will be an important area of inquiry where the target s business is subject to regulation by the FDA, for example. Unregistered IP Evaluate the target s business for any potential unregistered rights such as trademarks and copyrights. Trademarks and copyrights need not be registered in the United States to be valid. Thus, you should

3 make inquiries and review the target s business materials to check for any unregistered IP rights owned by the target. Listed below are some of the checklist items relevant to exploring ownership, status and control, which the due diligence team may consider including in its due diligence plan. Patent Obtain a complete list of the U.S. and foreign patents and patent applications (utility and design) Review maintenance and annuity fee records from independent sources (relevant patent offices) Conduct owner searches from relevant patent offices to ensure that no applications or registrations were excluded from the asset schedule Confirm that all necessary assignments are in order and recorded in the relevant government agency (i.e., chain of title has been perfected) Identify all relevant recordations of patents with U.S. customs or equivalent foreign customs authorities Obtain technical descriptions of products, including formulations and manufacturing processes Review U.S. Food and Drug Administration or other regulatory communications relating to the products Obtain all invention disclosures received from employees and third parties Check employee and consultant agreements to confirm obligations to assign U.S. and foreign patent rights Search for patents and patent applications in the names of key personnel and consultants to ensure that all relevant patents and patent applications have been assigned to the company Conduct Uniform Commercial Code searches and determine whether the company has assigned or granted security interests against any patents Review all license agreements and any other contracts relating to the patents, including settlement agreements. Trademark and Trademark-Related Obtain copies of all U.S. and foreign trademark registrations and applications Review maintenance and renewal records from independent sources (relevant trademark offices) Conduct owner searches from relevant trademark offices to ensure that no applications or registrations were excluded from the asset schedule

4 Confirm correct owner and that all necessary assignments are in order and recorded in the relevant country s trademark office (i.e., chain of title has been perfected) Identify any trademarks that have been recorded with U.S. Customs or equivalent foreign customs authorities Conduct UCC and trademark database searches for security interests, liens, license recordals and any other encumbrances Confirm ownership and clear title to domain names Review all license agreements and any other contracts relating to the trademarks or domain names, including settlement agreements Review and confirm sufficient procedures for quality control over licensee use of trademarks Confirm that license agreements have been recorded where required by law or where it is otherwise beneficial to record Review all products and marketing, promotional and packaging materials to confirm and identify trademark use and trade dress, including unregistered rights Copyright Obtain works protected by copyright as well as all copyright registrations and applications Identify and gather all derivative works Review copyright office records and conduct a separate owner search to ensure that no applications or registrations were excluded from the asset schedule Confirm correct owner and that all necessary assignments are in order and recorded in the relevant country s copyright office (i.e., chain of title has been perfected) Identify all relevant recordations of copyrights with U.S. customs or equivalent foreign customs authorities Review all work for hire/assignment and consultant/independent contractor agreements to ensure proper transfer of rights Check employee and consultant agreements for appropriate work for hire/assignment acknowledgements Identify any moral rights issues where applicable Review all license agreements and any other contracts relating to copyrights, including settlement agreements

5 Assess the adequacy of licenses for all software; check for any restrictions on use or ownership by the acquiring company Trade Secrets Obtain a list of trade secrets Determine whether appropriate confidentiality and noncompete agreements are in place, particularly for key personnel Evaluate written policies and procedures for maintaining secrecy and limiting access as well as the history of enforcement of these procedures Evaluate physical security measures with respect to maintaining secrecy and limiting access Consider whether there have been any noteworthy arrivals or departures of key personnel; review records of key personnel where appropriate Strength and Economic Value At this stage in the due diligence plan, the team has gathered all issued and pending patents, and trademark and copyright registrations and applications. Any other IP assets such as trade secrets have also been gathered. Valid ownership and clear chain of title have been established. The due diligence plan should now consider whether to further investigate the economic and strategic value of the target s IP assets. Such a further investigation may be advisable where the IP assets or a subset of the IP assets are especially important to the client s business objectives and goals. For example, the exclusive practice of a particular patent may be intended as the business model for a new division. In that case, the strength of that patent and its ability to carve out a strong exclusive market for your client s new division will be critical to the success of the transaction. The economic value of IP assets depends on the strength, scope and limitations of the IP, as well as how that scope compares to your client s proposed business plan requirements. In addition to examining the face of the patent, trademark or copyright for the nature and scope of the claimed protections, the due diligence plan may investigate the quality of the asset. A patent s file history and relevant prior art may be examined for validity and quality of the claims. This examination should include a consideration of the need for such technology and the potential ability of competitors to design around the patent. Depending on the role of the asset in the transaction s objectives, the plan may also include an independent validity or right to use opinion. Similar quality reviews may be conducted on important trademark and copyright files. For trade secrets, the strength will depend on the quality and success of the measures taken to keep the proprietary information secret. The strategic value of the IP asset depends on its ability to advance the company's business objectives and whether it can be effectively enforced against competitors. Does the asset provide, for example, effective exclusivity of a product or a feature of a product in the relevant market? The client will be able to make this business determination of the asset s strategic value to the company

6 once he or she is armed with the results of the due diligence investigation of the IP assets strength, scope and limitations, validity and enforceability. Listed below are some of the checklist items relevant to the strength and economic value review, which the due diligence team may consider including in its due diligence plan. Patent Request and review the file history and prior art in the target s files Obtain prosecution history from the U.S. Patent and Trademark Office (and, where appropriate, any foreign patent offices) Analyze the marketplace to determine the effect of the patent on that marketplace and the potential for competitor design-around Where recommended by initial file history and prior art review, conduct additional prior-art searches and analyses for validity and scope Request and review the target company s patentability, validity and right to use searches Consider whether to request legal opinions resulting from these searches, keeping in mind that disclosure may cause a waiver of the attorney-client privilege For those products or processes that the buyer intends to utilize in its business operations posttransaction, conduct a freedom-to-operate/right-to-use search including all contract rights that may potentially fail to transfer to the buyer post-transaction (e.g., manufacture and distribution agreements and licenses of third-party rights) Consider whether the client would benefit from the retainer of an expert in the relevant field of use for the IP asset, to assist in understanding that field and determining the marketplace value of the IP asset Trademark and Trademark-Related Obtain results of clearance searches conducted by the target company Consider whether to request legal opinions resulting from these searches, keeping in mind that disclosure may cause a waiver of the attorney-client privilege Where further investigation is justified, obtain and review prosecution history from the U.S. Patent and Trademark Office (and, where appropriate, any foreign trademark offices) Conduct independent searches for exclusive right to use trademarks of particular importance to the buyer s post-transaction business operations Copyright

7 For works of particular importance, request and review the target company s files relating to creation, including any prior works of authorship on which the work was based Miscellaneous Review all license agreements and other contracts relating to IP rights licensed in or out of the target company for such issues as exclusivity, field-of-use restrictions, geographic restrictions and transferability to the buyer Review all settlement agreements relating to the IP assets for any restrictions on the ownership and/or use of the assets Potential Liability This part of the due diligence plan investigates the risk that the target company is infringing the IP rights of a third party or otherwise has some risk exposure due to allegations of IP infringement. Thus, in addition to reviewing any known litigation or threat of litigation, this phase of the due diligence plan should explore the target s history and procedures for obtaining IP clearances and otherwise ensuring it is not infringing the IP rights of others. If an IP asset is sufficiently important to the buyer s post-transaction business, it may even be advisable for the due diligence team to perform (or cause to be performed) its own investigation with respect to noninfringement of third-party rights and the buyer s ability to operate its post-transaction business free from allegations infringement. The due diligence team should similarly review the target s procedures for protecting and enforcing its own IP rights against infringement by third parties. This review will explore, for example, the target s procedures for tracking and enforcing its IP rights against third-party infringement and for maintaining quality control over the use of its trademarks by licensees. Listed below are some of the checklist items relevant to potential liability review, which the due diligence team may consider including in its due diligence plan. Patent Identify all actual or threatened litigation or claims against the target company Identify all actual or threatened litigation or claims by the target company accusing third parties of infringement With respect to all situations identified in points 1 and 2 above: (a) Obtain copies of all relevant notices, cease-and-desist letters, complaints and case files, as well as any opinions (b) Obtain copies of all settlement agreements and releases (c) Identify current status of all ongoing proceedings and negotiations (d) Assess the merits of the allegations

8 (e) Consider whether any matters justify continued negotiations and/or litigation Review all right to use opinions Review all technology licenses licensed to or from the target company to confirm compliance and to issue spot for potential claims Review all industry standards applicable to the target products to determine any patent rights involved in the standards Trademark and Trademark-Related Identify all claims of trademark infringement, trade dress infringement, dilution or unfair competition asserted by or against the target company Identify opposition or cancellation proceedings in the U.S. Patent and Trademark Office or the equivalent foreign proceedings where applicable With respect to all situations identified in points 1 and 2 above: (a) Obtain copies of all relevant notices, cease-and-desist letters, complaints and case files, as well as any opinions (b) Obtain copies of all settlement agreements and releases (c) Identify current status of all ongoing proceedings and negotiations (d) Assess the merits of the allegations (e) Consider whether any matters justify continued negotiations and/or litigation Identify any trademarks that have been recorded with U.S. customs or the equivalent foreign customs authorities. (This may have already been completed when reviewing ownership and control issues.) Review and confirm sufficient procedures for quality control over licensee use of trademarks. (This may have already been completed when reviewing ownership and control issues.) Identify any pending or potential domain name disputes. Copyright Identify and evaluate all assertions of copyright infringement by or against the target company, using similar methods as employed for patents and trademarks Evaluate the target company s procedures for obtaining copyright clearance and otherwise avoiding infringement of the rights of others

9 Identify all relevant recordations of copyrights with U.S. customs or equivalent foreign customs authorities. (This may have already been completed when reviewing ownership and control issues.) Miscellaneous Obtain and assess adequacy of insurance coverage against IP infringement and false advertising claims Documenting Your Work IP counsel should keep clear records of each due diligence step completed and the results of that review. Similarly, where particular areas or issues of note have been excluded from your due diligence review (for cost, time or other constraints, for example), you should make note of the excluded issues and the reasons for the exclusion. In addition to being good practice, these records will be helpful to IP counsel in communicating with corporate M&A counsel or the client. IP counsel may be asked to provide a summary report on the due diligence process and its findings, which will describe the searches and other investigations conducted and any observations gleaned from your legal review. Preparation of such a report (even if it is done quite informally and is not intended to be included in the client s documentation) may be helpful in the negotiation and drafting of the representations and warranties. Moreover, if corporate counsel will be providing a legal opinion in conjunction with the transaction, it is important that IP counsel review that opinion for any statements relating to the subject IP. IP counsel may even be asked to provide a separate opinion on the IP aspects of the transaction, which will be made a part of the broader opinion. Again, careful documentation of your process and conclusions will be very helpful. By Ethan Horwitz, King & Spalding LLP, and Kandis Koustenis, The Francis Co. Ethan Horwitz is a partner in King & Spalding's New York office. Kandis Koustenis practices with Cloudigy Law, a cloud-based intellectual property and technology law firm, and is a strategic consultant with The Francis Co., an intellectual property advisory company. This article is excerpted from Lexis Practice Advisor, a comprehensive practical guidance resource providing insight from leading practitioners on the topics critical to attorneys who handle transactional matters. For more information on Lexis Practice Advisor or to sign up for a free trial please click here. Lexis is a registered trademark of Reed Elsevier Properties Inc., used under license. The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice. All Content , Portfolio Media, Inc.