United States: 10 Key Intellectual Property Issues For M&A Deals

Anderson L. "Trey" Baldy is a Partner in our Tampa office.

HIGHLIGHTS:

  • Intellectual property (IP) assets often constitute the most significant component of technology sector businesses. As a result, IP legal issues are of crucial importance in merger and acquisition transactions.
  • There are several key issues that should be addressed in pre-transaction IP due diligence, as well as IP terms and conditions in technology sector purchase agreements.

Intellectual property (IP) issues are increasingly important factors in merger and acquisition (M&A) transactions. Of the various industry sector transactions included in recent American Bar Association (ABA) Business Law Section M&A Deal Points Studies, technology sector transactions consistently rank at or near the top. Because IP assets often constitute the most significant component of technology sector businesses, IP legal issues are of crucial importance in these transactions. Key issues that should be addressed in pre-transaction IP due diligence, as well as IP terms and conditions in technology sector purchase agreements, include the following:

1. Identify the IP

The scope of IP assets obviously will depend on the nature of the particular business, and IP assets exist in a variety of formats, but most significant IP assets are comprised of registered patents, trademarks and copyrights, as well as software, trade secrets, internet domains and technology licenses. Identification of what IP is important or necessary in the target's business will include an assessment and categorization of what IP is owned, used and licensed in or out by the target. Once the relevant IP is identified, acquirors, investors and their advisors can evaluate IP operational risks and determine how to best address them before consummating the transaction.

2. Ownership of IP

To determine ownership of registered patents, trademarks and copyrights, a good starting point is to search the registration databases of the U.S. Patent and Trademark Office (USPTO) and the U.S. Copyright Office. However, IP law includes some subtle variations from traditional property ownership principles that may not be apparent from ownership searches. For example, if a patent is registered in the name of multiple co-inventors, each co-inventor has separate rights to grant licenses and receive royalties. A complex ownership question also may arise if the target is a business unit or division within a family of affiliated companies, and technology is shared among the affiliates. In such cases, an intercompany license and/or transition services agreement may be needed. Ownership rights of employees, agents and independent contractors also must be addressed.

3. Employee and Contractor Rights

IP laws recognize ownership rights of individual inventors and authors, so if a company's IP is developed by individual employees, agents or contractors, the parties need to resolve those ownership rights in the transaction process. Generally, without an express assignment, an employee inventor retains ownership of patent rights unless the employee was employed to create the specific invention or the invention was otherwise within the scope of employment. For works of authorship and software, the copyright law "work for hire" doctrine may operate to vest title in the employer to the extent the work was created by the employee within his or her scope of employment. To ensure clarity and avoid potential disputes, the best practice is to obtain IP assignments from all employees, agents and contractors who have contributed to the development of the target's IP, including patent assignments from all employees and agents who are co-inventors and copyright assignments from all co-authors. As to independent contractors who have contributed to inventions or works of authorship, the terms of relevant independent contractor agreements should be reviewed to assess any potentially unresolved contractor IP rights.

4. Liens and Encumbrances

With the increasing prominence of IP as a balance sheet asset, it is common for lenders to include IP as collateral in secured debt financing. Thus, a buyer needs to determine if the target has granted liens on specific IP assets, including liens on patents, trademarks and copyrights, software, internet domain names, etc. There are complex IP lien perfection rules, and due diligence regarding IP liens is multifaceted. In addition to conducting lien searches of the USPTO and U.S. Copyright Office databases, state level Uniform Commercial Code (UCC) lien searches should be conducted in relevant state UCC lien databases pursuant to Article 9 of the UCC.

5. Licensed IP

Even if it is clear that a target company is the owner of an IP asset free and clear of liens, the IP asset still may be the subject of third-party rights pursuant to a license granted by the IP owner. Alternatively, there may exist crucial IP assets being used by a target company that it does not own, but are available under license from a third party. In either case, a buyer must pay close attention to the relevant license agreement terms to determine the respective rights, obligations and terms of use regarding the licensed IP. Key issues often addressed in IP licenses include duration, royalties and fees, scope of use, exclusivity, territorial limits, sublicense rights, rights to enhancements and improvements, and assignability.

6. License Assignability

The law with respect to assignments of IP licenses is different in some respects from general contract law regarding assignments. Under the contract law of most states, in the absence of express restrictions agreed to by the parties, contracts are assignable without the requirement for consent. Thus, it is often assumed that if a contract is silent as to assignability, the courts will uphold an assignment. However, due to the strong deference in IP law to the rights of registered patent and copyright owners, federal case law generally provides that patent and copyright licenses are not assignable without the consent of the licensor, unless the terms of the license agreement expressly provide otherwise. Consequently, in the M&A diligence process, the buyer needs to assess the transferability of the target's licenses to determine if any third-party consents are necessary.

7. Infringement

Even if the USPTO has issued a patent or trademark, and even if it is established that a party holds clear title to such IP, it is possible that a third party could own IP rights that are infringed by the issued patent or trademark, so a buyer still needs to consider whether the target IP infringes any rights of third parties. Similarly, it is possible that a third party may be infringing the target's IP. A buyer can partially address this risk via standard "non-infringement" representations, warranties and indemnification in the purchase agreement, but the risk of a post-closing IP infringement dispute may still remain. Steps that can be taken in the diligence process to reduce this risk include assessment of any prior infringement claims, as well as analysis of the merits of any prior demand letters, cease/desist letters or invitations to license. If the target assets include a specific registered patent or trademark that is of particular importance or value, the buyer may consider retaining IP legal counsel to perform a pre-closing infringement analysis and to provide a formal legal opinion as to its conclusions.

8. IP Validity

Even if there is no evident infringement risk, another potential concern, particularly with patents, is whether the IP was "validly issued." For example, it is possible that during the original patent application process, an important component of "prior art" was not considered by the USPTO. If so, the validity of the issued patent subsequently could be challenged on the basis that the "prior art" was not appropriately considered in the initial application process. If a patent is a key asset in a proposed transaction, this concern may warrant retention of a professional search firm to conduct a prior art search, or retention of IP legal counsel to perform a validity analysis and to provide a validity opinion. Even if this level of diligence is pursued, there still may be no absolute certainty on the validity question without a judicial determination. For critical registered patents and trademarks, another matter to consider is whether all necessary government maintenance fees have been paid and whether all renewal filings have been made in order to avoid expiration or lapse of registration.

9. Open Source Software

If a buyer is seeking to acquire exclusive rights to use and/or license a particular software product, the buyer should attempt to determine if the software includes any "open source" components. A list of open source software is available online. As a condition of using open source code, the user must comply with the applicable open source license terms. The Free Software Foundation may seek to prosecute violations. If target assets incorporate open source components, the entire software package may be subject to free use rights. Parties can take various actions in order to identify open source software issues with particular software, including software audits by independent experts and code scanning by service providers.

10. Transfer Documents/Filings and Trademark Assignments

Upon consummation of an assignment and transfer of registered IP, assignment filings should be made with the applicable IP registrar to evidence the transfer (the USPTO for patents and trademarks, and the U.S. Copyright Office for registered copyrights). Internet domain name filings also should be made with the applicable domain name registrars. Note that for a trademark assignment to be valid, the "goodwill of the business" related to the trademark must be assigned along with the trademark. The concept underlying this requirement is that a trademark should not have inherent value apart from the product or service associated with the trademark. Thus, appropriate language should be included in a trademark assignment including transfer of the goodwill related to the assigned trademark.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.