Purchase and Sale of a Business: Intellectual Property Considerations
We’re continuing our series on the purchase and sale of a business with a look into intellectual property considerations when purchasing a business. Intellectual property is a large part of many companies’ value. Failing to sort out potential restrictions on the use and further development of a company’s IP may leave the buyer with a significantly less valuable company than it anticipated. Below are some of the major intellectual property considerations to have in mind when you purchase a business:
Ownership of and Right to Use the IP
The first hurdle, and perhaps the most important consideration when reviewing a target company’s intellectual property rights, is confirming that it owns, or at least has a valid license for, all of the key intellectual property and technology that it uses. Typically this involves reviewing the company’s registered intellectual property ownership records and reviewing any IP or technology-related agreements to ensure the company has the right to continue to use the IP. Also, it is important to obtain broad representations and warranties regarding ownership and use of the IP in the purchase and sale agreement..
Confirming that the target company has the right to use its IP and technology is only part of the IP battle when buying business. Making sure the company has not given away rights to the IP and will still have the necessary IP and technology post-closing is just as important. A buyer may be required to obtain a new license to use third-party technology or get an assignment of an existing license agreement.
Reviewing Intellectual Property Agreements When Buying a Business
IP agreements often present a number of significant issues when buying a business. You will want to confirm that the scope of the agreement is broad enough to cover current and future anticipated uses of the IP, including the right to make modifications to the IP—ideally the provisions surrounding modifications should allocate ownership of any modifications to the target company. The agreements should also include indemnification provisions that are sufficient to protect the target company from the licensor’s potential liability.
The IP and technology agreements should also include provisions that require the third-party licensor to keep confidential the target company’s IP and technology. The buyer should also review the agreements to make sure they do not include definitions or other provisions that could grant any rights to the buyer’s products or IP. Last, it is important to confirm that there are no issues with or restrictions on the buyer’s ability to maintain the IP and technology agreements after the purchase. Depending on how the transaction is structured and the IP agreement is written, there may be restrictions on assigning rights under the existing IP agreements.
Pending and Potential Infringement Claims
The two types of infringement to be aware of are infringement by the target company of a third party’s IP rights, and infringement by a third party of the target company’s IP rights. As is true with all litigation, IP infringement litigation is expensive and time-consuming. Depending on the nature of the target company, it is generally advisable to complete extensive patent, trademark, and copyright searches to determine if there are any pending or potential infringement claims. It is also important to review any letters regarding potential infringement in the company’s records.
Knowing whether the target company is aware of any potential third party infringement of its IP is useful to analyze the value of the target company’s IP. The cost of defending its IP rights against potential infringers can drive down the value of the target company’s IP.
Exclusive Rights Agreements
The buyer should pay careful attention to the IP and technology contracts to identify grants of exclusive rights or agreements not to pursue a particular product or use. This can include exclusive licenses for particular products or appointment of exclusive distributors or resellers in a particular territory. Failing to identify these obligations can lead to unintended breaches and liability in the future.
Does the target company owe royalties and other commissions to any third parties in order to continue to use or develop its products? Are there any similar fees that may be owed as a result of closing the purchase of the target company? These are important questions to answer to determine the value of the target company and properly document the business purchase.
Assigning Registered IP
The buyer should request a list of all of the target company’s registered intellectual property. It is important to take the necessary steps to transfer ownership of all registered intellectual property, including patents and patent applications, copyright registrations, trademarks and trademark applications, and internet domain names. Typically the buyer will need to file notice with the federal agencies to record the transfer of ownership. To get an idea of the transfer process for trademarks, here’s a previous post highlighting the steps to transfer ownership of a registered trademark.
Employee and Contractor Issues
It is important to verify that all employees and contractors have signed a written agreement that assigns ownership of all IP and technology developed by those employees and contractors to the company, and requires strict confidentiality regarding the company’s IP and technology. Any employees or contractors that have not signed any written agreement to assign IP rights can lead to significant hassle and expense if the employee or contractor creates a similar product or claims ownership of a portion of the company’s IP and attempts to restrict the company’s use of such IP. The necessary provisions associated with assigning IP rights are generally included in the company’s employment and independent contractor agreements.
This list provides many intellectual property considerations when buying a business, but no two purchases are the same. You should understand your particular circumstances and ensure you understand the allocation of intellectual property related risk before closing on the purchase of a business.
If you enjoyed this post, please check out the rest of our series on the Purchase and Sale of a Business. If you’d like to learn more about intellectual property considerations when buying or selling a business, please feel free to contact us.