Intellectual Property. Mergers and Acquisitions.
Whether you are merging or acquiring a small business or a larger conglomerate enterprise, there are a number of intellectual property (IP) factors to take into account. Consider these things BEFORE final arrangements are made. Yet oftentimes, especially with smaller businesses, they overlook these details. Due diligence relating to the existence of intellectual property is key. Are there copyrights, trademarks, patents, and trade secrets, as well as potential copyrightable or patentable work? Are there words, phrases, names, designs that can be protected by trademark? Proper due diligence will also identify outstanding licenses.
During the pre-transaction process here are are a few key issues that the potential buyer should look out for. They include the following:
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Identify the Nature of the Intellectual Property.
Is it a trademark? a Copyright? a Patent? a Trade Secret? Is it a combination of several types of IP assets? Are there rights of publicity issues? Once these IP assets are identified, you can then determine who owns what.
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Who Owns the Intellectual Property.
This is not as simple a question as one would imagine. A good starting point is do a registration database search on the U.S. Patent and Trademark Office (USPTO) and the U.S. Copyright Office websites. If there are multiple owners with different rights, you will need to identify who owns what and act accordingly. A thorough review of any existing and expired contracts will be your next step. You may ask, “Why am I looking at expired agreements?” The short answer is the contract may have ended, but the rights may nonetheless belong to someone else. Ownership issues may also arise if an employee or a contractor created content. Ownership of rights issues must be resolved before any deal is secured.
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Liens on the IP.
Potential buyers should review all tax documents to determine how IP assists are held. Some businesses include their IP as collateral on their balance sheets, so that the business can receive financing.
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Licensed IP.
As a buyer, you should identify all outstanding and expired license agreements. Plus, a thorough review of any license agreements to ensure that the terms are compatible with your definitions. Not all contracts are created equal. Third-party agreements may include terms that vary from your definition, such as royalties, fees, scope of use, exclusivity, territorial limits, net, gross, and sublicense rights.
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Assignability of the IP.
Not all assets can be assigned to a new owner. Make sure you are getting what you think you are getting. Again, your due diligence will be key. Some licenses cannot be assigned at all, some require extra steps, some require the consent of a board of directors or members of an LLC.
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Infringement.
Even if the IP is free and clear when conducting the search on the U.S. Patent and Trademark Office (USPTO) and the U.S. Copyright Office, there is the possibility of third-party infringement. The best option in checking on infringement is to start to research whether there were any prior infringement claims, demand letters or cease/desist letters.
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Is the Intellectual Property Still Valid?
For example, you may purchase a business with trademarks. But because you failed to do your due diligence, you discover, after the fact, that the trademarks were cancelled or abandoned. That information was readily available had you done your homework.
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Software Including Open Source.
Sometimes, especially with startups, they use open source software as the foundation for their work. That can prove to be problematic, because you would own what you think you own. Here it is important to read the license agreements and terms of use to understand your rights. A list of all Open Source software can be found on this link: https://opensource.org/licenses.
During an M&A, the sellers need to have all of the documentation ready to disclose to the potential buyers. While the potential buyers must conduct their own due-diligence when reviewing all of the IP assets. Additional points can be found on this blog post on Abovethelaw.com. If you don’t know what you are doing, hire someone who knows or pay dearly.
