INTELLECTUAL PROPERTY REPRESENTATIONS AND DUE … · International and Domestic Intellectual Property Strategic Counseling and Management ! Licensing, Information Technology, and

INTELLECTUAL PROPERTY REPRESENTATIONS AND DUE DILIGENCE

Business Law & Corporate Counsel Section Program

Speaker:

Marc A. Hubbard Gardere Wynne Sewell LLP Partner, Intellectual Property 1601 Elm Street, Suite 3000

Dallas, Texas 75201 (214) 999-4880

(214) 999-3880 Fax

Authors:

J. Andrew Lowes Haynes and Boone, LLP

Richardson, TX

Jeffrey A. Wolfson Haynes and Boone, LLP

Washington, DC

Thursday, June 10, 2010 11:30 a.m. – 12:00 p.m.

Marc Hubbard Partner, Intellectual Property

1601 Elm Street Suite 3000

Dallas,Texas 75201 Phone: 214.999.4880

Fax: 214.999.3880 [email protected]

Area(s)!of!Expertise!! Intellectual Property

! Copyright and Trademark ! Intellectual Property Litigation ! Patent

! Patent Specialty Practice Group ! Private Equity Industry Team ! Technology Industry Team

Practice!Emphasis!Marc Hubbard, a partner in the Intellectual Property practice group at Gardere, is a second generation IP lawyer who has practiced exclusively in the field of intellectual property law since 1988.

Mr. Hubbard enforces and licenses IP rights, as well as manages patent and trademark portfolios. His services include counseling on patenting strategies, drafting and prosecuting patent applications, clearing and registering trademarks, managing patenting and trademark registration activities throughout the world. Additionally, Mr. Hubbard assists clients with managing risk associated with third party IP rights by identifying and avoiding such rights, giving opinions concerning infringement and validity of IP rights, and resolving disputes involving patents, trademarks, web sites, domain names, copyrights and trade secrets. He also regularly represents and counsels clients in IP rights transactions, including structuring and negotiating complex business transactions involving sale and licensing of IP rights, technology transfer, and research and development activities.

Prior to joining Gardere, Mr. Hubbard was an equity shareholder at Munsch Hardt Kopf & Harr, P.C. in Dallas, Texas.

Clients!and!Matters!Fields in which Mr. Hubbard has patenting experience include:

! Bio Fuels ! Business Methods ! Computer Memory and Data Storage Systems ! Computer Software ! Data Coding and Compression ! Digital Circuits ! Digital Image Processing ! Digital Signal Processing ! Electro-Mechanical Systems ! Materials ! Medical Devices ! Oilfield Equipment ! RF Data Communication Systems, Antennas and Modulation Schemes ! Robotic Systems ! Semiconductors ! Telecommunication Systems, Including Voice and Data Networks, Optical Communication Systems and

Cellular Networks

Representative transactional and litigation matters of Mr. Hubbard include: ! IP indemnity agreements in the telecommunications industry ! Licenses and services agreements for software ! Patent portfolio cross-licenses in the telecommunications industry ! Structuring and documenting the sale and cross-licensing of IP assets in a business spin-off in the medical

equipment industry ! Various product development agreements ! Various sponsored research and licensing agreements with major research hospitals and universities in the

medical device industry ! Representation of a start-up company and a major research hospital in a patent infringement suit relating to

medical equipment

Education!! J.D., Southern Methodist University School of Law (1988)

! Member, The International Legal Fraternity of Phi Delta Phi ! Recipient, American Jurisprudence Award, Antitrust Law ! Recipient, Richard, Harris, Medlock & Andrews’ Award, Patent Law

! B.S., Swarthmore College (1985) ! Engineering (electrical engineering concentration)

Publications!Speeches!

! Speaker, Address to the Intellectual Property Section of the Dallas Bar Association: Value Added Patent Prosecution – Smaller, Stronger, Faster, Cheaper, Dallas, TX (Mar. 2010).

! Speaker, Address at the Tennessee Intellectual Property Law Association Fall 2009 CLE Seminar: Value Added Patent Prosecution, Nashville, TN (Nov. 13, 2009) (authored paper for seminar proceedings).

! Speaker, Address at the Center for American and International Law 47th Annual Intellectual Property Law Conference: Value Added Patent Prosecution – Bigger, Stronger, Faster Cheaper, Plano, TX (Nov. 10, 2009) (authored paper for conference proceedings).

! Speaker, Address at the University of Houston Law Foundation Intellectual Property for the General Lawyer Seminar: Licenses, Transfers and Other Contracts Involving IP, Houston, TX (Aug. 8, 2008).

! Speaker, Address at the American Intellectual Property Law Association Midwinter Institute: Can We Still Revive Unintentionally Abundant Applications – Aristocrat Technologies v. International Game Technology, Phoenix, AZ (2008).

! Speaker, Address at the State Bar of Texas Business Disputes in the Digital Age Seminar: Patent Litigation in the Digital Age, Dallas, TX (May 19-20, 2005).

! Speaker, Address at the State Bar of Texas 18th Annual Intellectual Property Law Course: The FTC Perspective on Patent Pooling, Austin, TX (Mar. 10-11, 2005).

Other Engagements ! Moderator, American Intellectual Property Law Association Annual Meeting, PCT Issues and International

Education Committee: A Global Patent Application, Washington, D.C. (2008). ! Moderator, American Intellectual Property Law Association Spring Meeting Plenary Session: Handicapping

Pending Supreme Court and Federal Circuit Cases – Patent, Trademark and Copyright, American Intellectual Property Law Association, Boston, MA (2007).

Professional!Affiliations!! Admitted to practice before:

! Texas State Courts ! U.S. Patent and Trademark Office

! Member, State Bar of Texas ! Intellectual Property Section ! Former Chair, PTO Committee

! Member, American Bar Association ! Intellectual Property Litigation Section ! Former Co-Chair, International Tech Transfer Subcommittee ! Former Co-Chair, Patent Policy Planning Committee/ Subcommittee

! Member, Dallas Bar Association ! Intellectual Property Section

! Council Member ! Member, American Intellectual Property Law Association

! Chair, International Education Committee ! Vice-Chair, 2011 Mid-Winter Institute Committee ! Member, Professional Programs Committee

! Co-Coordinator, Spring and Annual Meetings (2007, 2008, 2009 and 2010) ! Member, Advisory Board, Institute of Law and Technology, Center for American and International Law,

Plano, TX. ! Member, Institute of Electronic and Electrical Engineers ! Former Board Member, Dallas Association of Young Lawyers (1996 – 1998)

Honors!and!Awards!! Recognized, AV Preeminent Rating (5.0 out of 5), Martindale-Hubbell Attorney Directory

PUBLIC AND CONFIDENTIAL IP DUE DILIGENCE IN MERGER & ACQUISITION EVALUATIONS

J. ANDREW LOWES Haynes and Boone, LLP

2505 N. Plano Road Suite 4000

Richardson, TX 75082 Phone: (972) 680-7557

Fax: (972) 692-9057 [email protected]

JEFFREY A. WOLFSON

Haynes and Boone, LLP 1615 L Street, N.W.

Suite 800 Washington, DC 20036 Phone: (202) 654-4565

Fax: (202) 654-4268 [email protected]

State Bar of Texas 23RD ANNUAL ADVANCED

INTELLECTUAL PROPERTY LAW COURSE March 4-5, 2010

Austin

CHAPTER 4

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J. Andrew Lowes Partner Administrative Partner - Richardson Office [email protected] Richardson 2505 N. Plano Road Suite 4000 Richardson, Texas 75082

T +1 972.680.7557 F +1 972.692.9057

ARS

Areas of Practice ! Intellectual Property Litigation ! International and Domestic

Intellectual Property Strategic Counseling and Management

! Licensing, Information Technology, and Intellectual Property Transactions

! Patent Prosecution ! Patent Re-Examinations,

Trademark Cancellations and Oppositions

! Health Care ! International

Education ! J.D., Indiana University School of

Law--Bloomington, 1994, cum laude; Managing Editor, Federal Communications Law Journal

! B.S., Electrical Engineering, University of Alabama--Tuscaloosa, 1991

Bar Admissions ! Indiana ! Texas ! U.S. Patent and Trademark Office

Andrew Lowes is a member of Haynes and Boone's Intellectual Property Practice Group. He specializes in intellectual property law, including providing guidance to clients in a variety of technical fields with particular emphasis in medical devices, computer software and hardware, telecommunications, semiconductor devices, and mechanical equipment. Andrew represents several medical device companies and other high technology industries in both patent procurement and intellectual property management. In addition to numerous patent reexamination proceedings, he has also been involved in domestic and foreign patent enforcement litigations. Andrew's technology law experience includes:

! Developing intellectual property portfolios for both start-up and later stage technology companies, including establishing and formulating patent procurement strategies, obtaining domestic and foreign patents, and securing technology licenses and acquisition agreements.

! Counseling regarding new and existing products and patent infringement issues, including patent validity, and the design and implementation of non-infringing alternatives to patented technology.

! Assisting in the litigation of several patent cases including, Markman hearings and trials, preparing reexamination requests, and working on interference proceedings before the U.S. Board of Patent Appeals and Interferences.

Prior to attending law school, Andrew was a consultant in the nuclear power industry.

Memberships

! Texas Bar Association ! American Intellectual Property Law Association, Special

Committee on Mergers and Acquisitions ! IPO Association, Standards Setting Committee

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Jeffrey A. Wolfson Partner [email protected] Washington, D.C. 1615 L Street, NW Suite 800 Washington, District of Columbia 20036-5610

T +1 202.654.4565 F +1 202.654.4268

ARS

Areas of Practice ! Intellectual Property ! International and Domestic

Intellectual Property Strategic Counseling and Management

! Patent Prosecution ! Licensing, Information

Technology, and Intellectual Property Transactions

! Trade Dress, Design Patents and Product Clearance

! Mergers and Acquisitions ! Clean Tech ! Climate Change and Corporate

Sustainability ! Public Company Acquisitions and

Dispositions

Education ! J.D., George Washington

University Law School, 1995, with honors; Executive Managing Editor, The George Washington Journal of International Law & Economics (now the Geo. Wash. Int'l Law Review); Publication Staff, AIPLA Quarterly Journal

! Sc.B., Chemical Engineering, Brown University, 1992

Bar Admissions ! Maryland, 1995 ! District of Columbia, 1996 ! U.S. Patent and Trademark Office

Court Admissions ! U.S. Court of Appeals for the

Federal Circuit ! U.S. District Court for the District

of Columbia

Jeff Wolfson is a member of Haynes and Boone's Intellectual Property and Technology Transactions practice, with emphasis on strategic client counseling and patent opinion preparation in various areas including pharmaceuticals and chemicals, procuring hundreds of patents primarily in the chemical and materials science arts, and IP due diligence in connection with mergers/acquisitions, project finance, and other secured loan transactions. Jeff's experience in various technology areas includes a wide spectrum of pharmaceuticals and drug formulations including those approved and those not yet approved by the FDA; drug delivery technology; nanotechnology and materials science; petroleum and rig equipment and processes; petrochemicals including catalysts, polymer, and elastomer chemistry; food and flavor chemistry including frozen and chocolate-based, and bakery product formulations; thermographic printing; sporting goods and apparel; specialty chemicals including temperature-responsive gels, hindered amine light stabilizers (HALS), and ricinic materials; industrial assembly equipment and processing techniques; and linear electronic controllers.

Mr. Wolfson was named a SmartLawyer by SmartCEO magazine in 2008, and is AV® Peer Review Rated Preeminent 5.0 out of 5 (highest ratings in professional competence and ethical integrity) by Martindale-Hubbell® Law Directory. Selected Client Representations

! Represented domestic utility in IP diligence and licensing of CleanTech in connection with waste remediation

! Counsel pharmaceutical clients regarding patent issues in connection with product development and FDA filings

! Diligence of patent and trademark issues in connection with potential acquisition of domestic therapeutics business

Memberships

! American Intellectual Property Law Association (Special Committee on Mergers & Acquisitions, and Chemical Practice)

! Intellectual Property Owner's (IPO) Assoc. (Pharma Comm.)

Public and Confidential IP Due Diligence In Merger & Acquisition Evaluations Chapter 4

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TABLE OF CONTENTS

I. INTRODUCTION................................................................................................................................................... 1

II. PRE-NDA CONSIDERATIONS AND DILIGENCE ............................................................................................ 1 A. Business Goals Drive the Due Diligence ........................................................................................................ 1 B. Acquisition of Intellectual Property ................................................................................................................ 1 C. Acquisition of Products ................................................................................................................................... 2 D. Merger of Competitors .................................................................................................................................... 3 E. Summary of Pre-NDA Analysis...................................................................................................................... 4

III. POST-NDA CONSIDERATIONS AND DILIGENCE.......................................................................................... 4 A. Evaluation of Confidential Information Under the NDA................................................................................ 4 B. Ethics Risk of Violating Other NDAs ............................................................................................................. 6 C. Strategic Considerations in Selecting Evaluator of Confidential Information ................................................ 6 D. Ethical Compliance with the NDA Provisions Post-Deal ............................................................................... 8

IV. CONCLUSION ....................................................................................................................................................... 9


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PUBLIC AND CONFIDENTIAL IP DUE DILIGENCE IN MERGER & ACQUISITION EVALUATIONS By: J. Andrew Lowes & Jeffrey A. Wolfson1 I. INTRODUCTION This article addresses some of the strategic considerations that arise when conducting IP due diligence through public resources and then from confidential materials provided under a Non-Disclosure Agreement (“NDA”). The acquiring party should make every effort to identify as many issues through their own efforts in reviewing publicly available materials before agreeing to be bound to confidentiality provisions. Once an NDA is in place, acquirors and targets each must maintain an emphasis on ethical conflicts and conduct imposed by confidentiality obligations and the duty of disclosure to clients and to the U.S. Patent & Trademark Office (“PTO”). The different ethical dangers that arise when the deal terminates short of consummating the expected transaction, or when the deal concludes successfully and problems arise later, are also addressed. Additionally, given the risks of ethical violations, this article also touches on typical warning signs of rocky ethical waters ahead and some practical tips for addressing these issues. II. PRE-NDA CONSIDERATIONS AND

DILIGENCE A. Business Goals Drive the Due Diligence Unlike a prospective date analysis, business partner due diligence offers many options.

1 J. Andrew Lowes is a partner in the Richardson, TX office of the law firm of Haynes and Boone, LLP. His practice emphasizes patent and trade secret law, with a focus on strategic client counseling, patent procurement and management, including due diligence and IP-related agreements. He may be reached by email at [email protected] or by phone at (972) 680-7557.

Jeff Wolfson is a partner in the Washington DC office of the law firm of Haynes and Boone, LLP. His practice emphasizes patent and trade secret law, with a focus on strategic client counseling, patent procurement and management, including due diligence and IP-related agreements. He may be reached by email at [email protected] or by phone at (202) 654-4565.

The authors also wish to acknowledge the contributions of Jerry Fellows of Greenberg Traurig along with our Haynes and Boone, LLP colleagues Evert Uy and Greg Webb.

Accordingly, focusing on important organizational goals and priorities is critical. Valuations of proposed partner assets will vary widely depending on the organization’s goals. If intellectual property is expected to produce large profits or protect profitable markets, significant due diligence is often necessary. In contrast, if other assets drive the value of the deal, the intellectual property only deserves a more limited review. The best results in initial due diligence will be obtained by adopting a flexible, dynamic approach by seasoned personnel taking into account the type of proposed business relationship being considered by the parties. B. Acquisition of Intellectual Property As discussed above, in some acquisitions, one of the primary value points driving the deal is the relative importance of acquiring the intellectual property of the proposed business partner. These acquisitions can include a complete purchase of the proposed business partner, or a transfer of ownership of some or all of the intellectual property assets (“target IP”). In most of our client’s transactions, the first step in due diligence is to create a complete listing of the intellectual property assets that the proposed business partner has that the client is seeking to obtain. In many cases, most of these assets will be publicly registered as patents, trademarks, domain names, or copyrights and can be easily identified even before an NDA is put in place. The next step is to determine the current registered owner of each of those assets to make sure they have been properly assigned to the proposed business partner. During the process of determining ownership, a review should be undertaken to look for any granting of rights to third parties or limitations on its assertions. These can include active litigations, settlements in litigation, covenants not to sue, covenants not to compete, cross-license agreements, and university or government-sponsored research activities. While many of these agreements may be confidential, we have found that there’s often a public reference in a press release or other source indicating that such an agreement exists. These should be cataloged for later inclusion in due diligence request lists to be submitted to the proposed business partner. Another consideration is the strength of the target IP and whether it provides any unique protection in the appropriate competitive market. First, a comparison should be made between the target IP and the buyer’s current and future products. Often, the buyer is seeking the intellectual property rights in order to clear roadblocks to future product expansion or even to existing products. If this is the case, the purchaser will want to understand the potential strength of the target IP as it relates to current


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products and future expansion plans. Depending on the client, a further objective may be to obtain the target IP for assertion against competitor products and/or blocking the expansion of competitors into a new or expanding market area. In these instances, it is also important to understand the strength of the target IP and how it fits in the overall landscape of competitive products and competitor IP. Here again, it is a good idea to establish a level of understanding concerning whether issued claims cover current competitive products. In addition, clients often seek some guidance concerning a best estimate of whether claims will issue in the future to protect a future market segment. In many transactions, this is an important value driver as the buying company may have plans for expansion into this future market and wants to be certain that the target IP will provide them additional protection if they make a significant investment in research and development. An additional consideration when purchasing intellectual property assets is ensuring the purchaser has some understanding of whether the issued patents are enforceable based on publicly available information. Specifically, considerations might include: whether there are any issues in the patents’ file histories, such as improper payment of small entity fees; obvious errors in the submission of information disclosure statements with respect to related U.S. applications and/or related international or foreign applications; and obvious on-sale bar activities. Often, even if the answer cannot be confirmed via public information, the publicly available information provides hints that there are problems in the files. The proposed business partner’s confidential files can be further analyzed to reach a resolution concerning activities hampering the assertion of the target IP. In addition to activities of the proposed business partner that blemish or impair their own intellectual property, it is possible that the proposed business partner may not have been aware of important prior art relating to their patents. This is particularly the case where the proposed business partner is new to the industry segment and could file in good faith on supposed inventions that others in the industry were previously well aware of and would not have thought patentable. This type of analysis can inform the buyer, and help the buyer inform the seller, of potential valuation issues regarding the intellectual property. It is important to keep in mind that the buying company should be cautious in receiving informal written reports and opinions from its counsel completely discrediting the validity or enforceability of a particular piece of IP. It is often the case that the ultimate decision in these areas is highly uncertain, as the issue will be decided by a judge or jury. Since the

buying company will end up with the assets after completion of the transaction, it will be detrimental to have informal negative statements and incomplete analysis in the file associated with the target IP. Negative comments made after a quick review during an accelerated due diligence process can deeply inhibit the buyer’s ability to assert similar patents against their competitors. A good rule of thumb is that one should not damage the goods when doing the due diligence inspection and assessment. Finally, in some situations, the buyer is considering the value of asserting the target IP against a competing company. To assist in this valuation of the target IP when held by the buyer, due diligence is conducted to determine what type of actions will occur if the buyer assert the patents against the competitive company. Just because new patents are located that can be asserted against the competitive company, that certainly does not mean that it is necessarily a good idea to assert those patents without a detailed due diligence process. Any time litigation or in-depth licensing discussions are contemplated, a detailed analysis should be undertaken in advance to assess the likely outcome of those results, both in terms of the asserted intellectual property as well as any assertions that the competitive company may make in response to such allegations. C. Acquisition of Products In some situations, we have represented companies more interested in continuing the sale of the proposed business partner’s products and services, rather than in simply acquiring the intellectual property assets. When the value of the acquisition is driven more by the sales of existing and future product offerings, it is important to advise the client on any risks that may arise concerning continued marketing efforts and particularly concerning new marketing efforts. One of the first steps is to conduct a “freedom to operate” study to determine if there are any third party patents that may present road blocks to continued or expanded commercialization of the proposed business partner’s product lines. This assessment is sometimes quite difficult if the product is still in development and/or there are many competitive entities with similar research and development projects. In each case, a search of issued patents and published patent applications is conducted to identify likely targets, with particular emphasis on known competitors. If infringement risks are identified, it is often necessary to take the next step and evaluate questions concerning the validity of the patent at issue and whether there is a sound basis that the patent is invalid and could not be asserted against the products. The same type of “freedom to operate” analysis should also be performed concerning the


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product trademarks, trade dress and branding. Significant risks identified at this stage can lead to meaningful discussions with the proposed business partner concerning who will bear the risk and any changes in the purchase price. A further consideration when acquiring the right to continue the sale or manufacture a product, is whether the proposed business partner’s intellectual property in fact covers the products being transferred in the acquisition. The acquiring organization is often in a position to make a “build it or buy it” decision on the product offerings. If the intellectual property of the proposed business partner does not protect their products, the acquirer may instead decide to build their own competing products and use the savings from the acquisition to fund their marketing efforts. Alternatively, if a proposed business partner’s intellectual property squarely protects their product offerings and provides protection for next generation products, it creates a strong nexus between the current product offerings and related sales revenues. Beyond traditional IP issues, a further area of diligence relates to the acquiring company’s continued right to sell and market the product offerings of the proposed business partner. Specifically, every effort should be made to ascertain the scope of any necessary regulatory clearances were obtained by the proposed business partner. For example, Food and Drug Administration clearance for particular products may have limited transferability, environmental and other regulatory issues may prohibit transfer of ownership and/or may carry additional obligations that should be accounted for in the purchase price. For example, if one is acquiring a manufacturing facility that has serious environmental issues, the cleanup of those environmental issues may dwarf the revenues expected from the sale of the products. Still further, business people may have an idea of the types of software and other third party services that are utilized in the proposed business partner’s product and service offerings. In many instances, there may be limitations on the transferability or assumption of these agreements. In several situations, we have run into problems with assuming license rights to software being used by the target company. Having an idea of which components of the software or third party licenses are critical to the ongoing production and sale the products and services provides a roadmap for further due diligence in this area, as well as any government or third party consent that may be required to proceed. Finally, a discussion with the client concerning the proposed business partner’s sales and distribution arrangement may highlight other areas of concern. Specifically, there may be limitations in third party distributor agreements that prohibit the acquirer from

distributing the products in the most efficient manner and/or require significant buyouts to transition to a new sales model. D. Merger of Competitors In some situations, it makes sense for two competitors in the same market to merge their businesses and continue operations as a larger and stronger company. As an initial matter, any issues concerning anti-trust and potential market dominance of the new combined company must be assessed to evaluate if both companies can be combined to form a single unit or if portions of the company or product lines must be divested to permit the merger to continue. This topic is beyond the scope of the present paper and will not be further addressed. In instances where a merger is possible, the negotiation and drafting of the non-disclosure agreement will be critical because the companies are direct competitors and the confidential information is highly sensitive. Thus, the due diligence before any non-disclosure agreement is in place is extremely important to assist the business leaders in evaluating the value of any potential merger. Fortunately, for both competitors they each have subject matter experts on the overall business, market share, product offering, expected growth plans, geographic footprint, and general strength and weaknesses of both themselves as well as the potential merging partner. More often than not, whether it’s through in-house intellectual property counsel or their outside counsel, each of the companies also has a fairly good idea of the respective intellectual property positions. For example, it may be known internally that one competitor has a number of patents they would like to assert against the other competitor but for certain reasons have chosen not to. Similarly, they may also know of the opposing company’s patents that could be asserted against their product lines but are curious as to why these assertions have not been made. It is important to draw upon this institutional knowledge to develop a complete picture of all aspects of the proposed business partner. Oftentimes the persons with the institutional knowledge can generate a good overview and analysis of the proposed business partner within a couple of weeks to provide management with an excellent picture based on all available public resources. Unfortunately, in a situation when competitors are contemplating a merger, the individuals most knowledgeable concerning the business aspects of the proposed business partner and its intellectual property and ongoing research and development of new products, must be excluded from the confidential information of the proposed business partner. Each of these individuals would have difficulty receiving the


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confidential information and then discarding it as they go forward and make important decisions concerning their own business and legal decisions. E. Summary of Pre-NDA Analysis There is no one set of factors or items that must be considered during a pre-NDA due diligence. Often the emphasis that is placed on a particular area or type of asset within the business is driven by the client’s value proposition for making the transaction. As outlined above, certain areas receive more emphasis depending on the core value that the client intends to derive from the acquisition. The more time and energy that can be spent on these core value areas through intensive advance review of public information, the better they can assist the acquisition team to decide whether they wish to gain access to the confidential information of the proposed business partner. Unattractive deals can be avoided much more cost-effectively by carefully analyzing publicly available information. Alternatively, a strategic due diligence process can guide the business leaders in making informed decisions as they negotiate purchase price and other concessions in advance of a confidential document review, as well as guiding the document requests in areas of concern for a review of confidential information to make sure a full and accurate picture is created of the proposed business partner. III. POST-NDA CONSIDERATIONS AND

DILIGENCE A. Evaluation of Confidential Information Under

the NDA Typically, an NDA protects non-public business information that is of the most value to a company. It is often the case that this information is similarly or even more valuable to a company’s competitors, which can lead to unexpected ethical tensions in transactions. This problem can be particularly acute when competitors contemplate, but do not follow through with, an acquisition or merger. While there is often a flow of confidential and non-confidential information in both directions when contemplating a merger or acquisition, typically the bulk of information flow is from the target company (seller) to the acquiring company (buyer). Accordingly, the discussion below will often refer to the “target” when referring to the party disclosing information, and the “acquiring company” when referring to the party receiving the information. Under the NDA, the target can convey valuable information for evaluation by the acquiring company while retaining a mechanism to minimize the risk that the acquiring company, or someone affiliated with it having access to the information, will steal or use the

information without approval, such as for purposes beyond the deal evaluation. Some of the main goals of due diligence at this phase of a deal are to identify all non-public intellectual property assets, confirm title to owned assets, obtain some confidence as to the viability and scope of licensed assets, ensure that these assets are free of technical defects or encumbrances, and ensure that the assets are transferable. Having a suitable NDA in place furthers that goal by allowing the acquiring company to readily review non-public information from the target that it would otherwise not have access to. This helps the acquiring company consider some latent risks and can help confirm the proper value for the transaction. Unfortunately, it also raises ethical issues that are often overlooked in the rush to evaluate or conclude a transaction. To identify and locate all the intellectual property assets of the target company, the acquiring company will typically submit at least one due diligence request for information under the pre-Letter of Intent NDA regarding all relevant intellectual property rights (IPR) and other issues discussed in part below. Initially, a target acting ethically in the diligence will want to disclose materials related to significant problems in response to this first request. In numerous transactions, we have seen a target provide carefully worded responses or limited information, only to receive a key document that poses insurmountable risks or problems 6 weeks later in response to a third diligence request. At that point, it can be too late to create potential alternative ways the parties can address the problem, and the target will be dismayed to learn that the acquiring company is no longer interested in proceeding--because it can no longer trust target’s credibility. Relevant IPR may be owned by the target (in whole or in part), or licensed in or out of the target, or even be owned by a third party who might be in a position to assert its IPR against the target. Particularly important for an acquiring company to receive for further evaluation are any non-public, material IPR, including the following:

• unpublished patent applications and the file histories to date;

• improvements on patented technology; • invention records and related

documentation; • all unregistered trademarks, service marks,

trade dress and product configurations, logos, trade names, corporate names, and all other indicia of source;

• all unregistered works of authorship; • all computer software, data, and

documentation;


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• all trade secrets and confidential business information, including know-how, formulas, drawings and technical plans, schematics, prototypes, designs, models, data and databases, and manufacturing and production processes and techniques;

• licenses relating to all IPR licensed into and out of the target;

• important litigation filings that are under seal (which may require modification of a court order); and

• correspondence from a third party alleging violation of its IPR or threatening suit based on its IPR.

In addition to identifying the target’s IPR, the target’s future marketing plans and any competitors’ IPR should also be assessed. If the target has performed a freedom to operate analysis and is open to initially providing at least a summary of that analysis, this should also be reviewed to ascertain the risk of future litigation. Other areas that may require diligence from an IP perspective include the following:

• future product launch plans; • landscape evaluations of third party patent

and trademark rights; • opinions regarding any owned IPR, licensed

IPR, and third party IPR; • main thrust of any upcoming R&D efforts;

and • competitive intelligence gathered on main

competitors. In some cases, the target may not be willing to disclose some of the more highly sensitive categories of confidential information before a Letter of Intent, or even a definitive Purchase Agreement, is in place. For example, a target may be reluctant to reveal future product plans, ongoing R&D focus, and opinions of counsel, until the proposed relationship is closer to being cemented—even if an NDA is in place. This is typically a wise assessment, as waiver of privilege can even affect the acquiring company if the transaction is consummated. Before receiving any opinions of counsel, lawyer communications regarding advice on a proposed or threatened suit, or other privileged legal assessments, care must be taken to enhance the likelihood of preserving the attorney-client privilege. This loss of privilege can weaken the enforceability of the target’s IPR whether or not the deal proceeds, by permitting a third party to more readily obtain it, such as in an enforcement litigation. Any opinions of counsel that are obtained through diligence should be reviewed carefully and evaluated to determine the resulting

impact to the value of the target’s IPR, as the opinions may result in the target’s IPR, products, and services having significantly lesser (or greater) value. Practical tips in this regard include having an initial discussion about the scope and general contents of any such opinions or critical legal assessments; providing a summary of the opinions without disclosing their contents; and eventually entering a Joint Privilege Agreement to demonstrate the common interest the target and acquiring company have to minimize the risk of waiver of the attorney-client privilege. Yet another task for the acquiring company is confirming title of the target’s IPR. While most of this information may be available on public websites, it is a good practice to request assignments, consulting agreements, and employment contracts that trace inventorship and the chain of title to the seller. If obtaining or reviewing all the specific agreements is too burdensome for either or both parties, an exemplary agreement of each type coupled with written assurance (and the proper representations and warranties in the definitive agreement) by the target that all personnel of that category (manager, officer, employee, consultant, etc.) are bound by a substantively similar agreement may be sufficient. There are also in- and out-licenses of IPR, which are rarely public unless they are material to a company, or an exclusive license, which might sometimes be publicly recorded. While checking title to IPR should be unnecessary, surprisingly, more than 90% of the deals we have handled for clients have had multiple title defects in the IPR owned by the target. Unfortunately, some companies look at patent and trademark legal work as a mere commodity instead of a core asset of the business and, therefore, do not allocate proper resources to using best practices in securing their IPR. Many of these deficiencies are the result of mere oversight, and are often corrected by the target during the diligence phase. Examples of this type of correctable problem include corporate name changes or mergers without consequent updating of PTO records, and failure to record the termination and release of security interests in one or more IP rights. One type of more significant problem uncovered in past deals is the failure of one or more inventors to assign, or to properly assign, rights to the target or a predecessor entity. In one case, an inventor assigned rights to a completely unrelated entity. These problems can be correctable if the employee is still working for the target or if an agreement with an ex-employee can be reached, which may involve a payment to provide the proper incentive in exchange for an assignment. But when there is no employment agreement (or there is an employment agreement that does not contain preferred provisions regarding


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disclosure and assignment of IPR to the target) or no agreement is reached with an ex-employee, the target may not be able to guarantee exclusive ownership of a critical patent and the deal may unravel or the target may be worth significantly less. If such a patent had only the one inventor, it may even be possible that a product line will need to be shut down or carefully redesigned to avoid potential infringement. Moreover, to determine the scope of the target’s rights, any existing agreements that involve the transfer of IPR, including licenses, material transfer agreements, and collaboration agreements, should be examined. In one problematic diligence, it was uncovered that the key technology of the target was unpatentable despite a pending PCT application. The deal was restructured so our client ultimately paid only 5% of the multi-million dollar original valuation. In addition to the financial discount, the value drivers of the customer list and know-how of its newly acquired employees made this a deal worth concluding for our client despite the lack of patent protection. Another important aspect to the diligence is competitive intelligence and the associated licensing and partnering potential of the target’s technology. There may already be documentation regarding potential infringement of the target’s IPR by a third party, or potential infringement by the target of a third party’s IPR. Care should be taken to evaluate the progress and level of success in pursuing any potential infringers with the target’s IPR, as it can often quickly highlight one or more scope, enforceability, or validity problems. Where third party IPR is concerned, an opinion of counsel and potentially a redesign of target products or services may be needed to help manage the business risks of being charged with infringement. B. Ethics Risk of Violating Other NDAs While the acquiring company is free to request all the information needed to make an informed decision, the target must ensure that it is not itself violating any of its NDAs with third parties by providing the requested information. The target should provide as much information as willing and as possible, but without disclosing another party’s confidential information. One consideration is whether the confidential information is material to the contemplated transaction. If it is not material, disclosure is not required. This is often a threshold determination, and if the result is that the confidential information is material then a disclosure plan will require careful consideration before accidentally disclosing such third party confidential information. The existence of third party NDAs relating to a material part of the target’s business will be one of the ethical red flags that great care may be required to

navigate such a proposed transaction. Evaluation may show that some of the information is public and can be unthreaded and shared with the acquiring company without running afoul of the third party’s NDA. In one transaction, we collectively determined through three-way interviews with one of the acquiring company’s engineers and the target’s founder that the founder had apparently cobbled together the target’s key technology from confidential information derived from prior positions at other companies. This deal ultimately proceeded to completion under very different circumstances, and our acquirer had to ensure that it did not make use of the improper confidential information in the target’s possession. A few options to avoid the ethics puzzle of conflicting NDAs are as follows. In many circumstances, the acquiring company and the third party aren’t even in the same business. Thus, the target can approach its third party and obtain consent to sharing the confidential information under the deal NDA. Third parties, particularly those in a non-competitive business, may be willing to let their confidential information be shared in confidence in the hope that the acquiring company will continue to retain their services post-transaction—or simply to curry favor with the target whether or not the deal is closed. Third parties may find that concept insufficient, and may require a direct NDA with the acquiring party who would be receiving its confidential information. C. Strategic Considerations in Selecting

Evaluator of Confidential Information There are several strong reasons to carefully evaluate which members of the acquiring company’s personnel and in-house and outside counsel will evaluate a target’s confidential materials. Care should be taken in this selection, because it can minimize not only liability reasons, but also ethical risks for the lawyers involved. An in-house lawyer who learns of and accidentally uses a target’s confidential information in later business outside the parameters of the deal, or encourages another to do so, might run an increased risk of ethical problems as to the duty of disclosure. If the deal is consummated, litigation tends to occur when the financial terms end up being less favorable than expected, e.g., due to changes in market conditions. Generally, however, litigation is less common due to problematic IPR when the deal is consummated, if only because many deals are driven by the finances or other business market reasons rather than IP value. If the deal terminates short of closing, however, the target may be harmed (e.g., public-company targets are typically harmed at least


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in terms of stock price) and may often look for a culprit. The most likely culprit is the would-be acquirer and its personnel, and possibly its counsel, all of whom may now become the new “target” in a breach of contract action. The jilted target may argue that the acquirer or its personnel or counsel took and misused information received in confidence that was to be used only for evaluation purposes under the NDA. In this context, the nature of the acquiring company and the target selling a portion of its assets or its entire business, and their pre-deal relationship, must be taken into consideration. An acquirer that is an acquisition fund or another type of indirect competitor of the target is less likely to face accusations of wrongdoing because the acquirer is less likely to be conducting significant R&D, selling competing products, or pursuing patent applications in connection with their existing assets. But even then, problems can arise. For example, if the indirect competitor reviews confidential information from target A, terminates the deal, and then consummates a deal with A’s competitor, target B. Target A can then allege that its confidential information was misused to consummate the deal with target B, or worse yet, that target B is now using that confidential information it received improperly through the indirect competitor acquiring target B to compete against A with its own trade secrets. One solution to this is to have different teams working on the evaluation of targets A and B. This may not be too popular a strategy, because the expertise gained in evaluating the first deal can smooth the path and minimize legal fees for the second deal—but that’s just the point about how A’s information has been misused even if unintentionally. Another ethical red flag involves situations where the acquiring company and the target are direct competitors or could become direct competitors in the manner noted above. As is often the situation in proposed acquisitions and mergers that make the most sense, the risk of suit is greater where the parties are direct competitors and the deal collapses. Thus, in these situations, it is more important to implement and conduct this phase of diligence as if the deal might be terminated early. Most NDAs include a provision that restricts the use of the confidential information solely to evaluation of the proposed transaction. Yet jilted targets have been known to allege—sometimes legitimately—that further developments of the would-be acquirer are so substantially similar that they were derived from improperly used confidential information. As evidence, the jilted target often need only point to the inventor(s) of the new technology, coupled with the fact that the identical inventor(s) were on the diligence team that had access under the

NDA to the target’s confidential information. Under such circumstances, it will be difficult or perhaps impossible for the acquiring company to prove it conducted truly independent development and that no confidential information was used in developing the new technology, even if that was the situation. In effect, the appearance of the impropriety can create a difficult or even a potentially unwinnable situation for the acquiring company. In view of this serious ethical consequence, a target may sometimes insist on an NDA provision that restricts access to its confidential information so that technical personnel of the acquiring company, or any personnel of the acquiring company, cannot participate in this diligence phase. Even if this provision is not present, in view of the above-noted concerns, it may still be wise for the acquiring company to consider forming a diligence team that does not include the acquiring company’s technical personnel, managers, and sometimes even its attorneys, particularly those personnel that are likely to help the acquiring company further develop similar technology in a field if the deal terminates early. This helps manage the business risk that may arise from successful technological developments by other employees or consultants of the acquirer following a failed deal. This need for segregation between a deal evaluation team and the regular R&D personnel is particularly true for those personnel and outside patent counsel that engage in inventive activities or patent prosecution for the buyer, respectively. The ethical red flag gets raised again when these facts are present and the parties are also direct competitors. For a sufficiently large acquiring company not under any particular restrictions from the NDA as to who internally may review confidential diligence materials from the target, one possibility is to arrange for technical staff to review materials that are outside their typical job responsibilities. Another possibility is to have one or more technical employees who participate in all deal diligence to keep this work segregated from the technical staff developing inventions and the personnel or counsel involved in patenting further technology developments. This can bolster a defense (or lead to a quick settlement) when the would-be-acquirer can show the relevant personnel or counsel never saw—or never had access to—the target’s confidential information. This strategy becomes more difficult for smaller acquiring companies that may not have sufficient technical staff or financial resources to hire consultants for such a dual-track arrangement. In those situations, one solution to this apparent ethical problem is to have outside counsel conduct the diligence review and provide only reasoned conclusions without revealing the relevant underlying


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confidential information. This raises another ethical concern, which is that acquiring company’s patent counsel who reviewed the target’s confidential diligence materials may prepare a draft application based on the acquiring company’s later developed technology, and may accidentally inject improvements or suggestions that arise from the target’s confidential information. Because patent counsel is so involved in the drafting of patent applications, it can be difficult to neatly separate information. This issue can be avoided by using competent IP counsel to conduct the diligence that is not actively involved in protecting the acquiring company’s intellectual property. Another tactic for acquiring companies of any size is to instruct its inventors to carefully document dates of conception of an idea and reduction to practice, as it may be that the invention arose before the confidential information was revealed to other acquiring company personnel as part of the diligence. Of course, such recordkeeping is an essential part of the best practices for protecting IPR in any event. Of course, if diligence counsel is the same as prosecution counsel—possibly even if the lawyers are partners at the same firm—the accusation of misuse of the target’s confidential information would simply shift from the acquiring company to its law firm or other representatives. For this reason, engagement letters or other written client notification of the additional ethical issues that could result, and possibly even written consent might be required or wise, when the same firm represents an acquiring company as both the deal counsel and regular patent counsel. As discussed above, this ethical tension can also arise when the same firm represents the acquiring company in successive evaluations of competitive targets and selects one target to acquire. In view of these concerns, there is a substantial justification for acquiring companies to limit the number and type of people that have access to the target’s confidential materials under the NDA. Another strategy is to phase the diligence so the target does not reveal its business critical trade-secrets or other confidential information until later in the diligence, and preferably not until after a definitive agreement is signed with the necessary contingencies for further IPR diligence. At that time, the deal is more likely to proceed to closing and the risk of a failed deal is lower. Another potential way to minimize the ethical impact when the same or an overlapping group is (a) evaluating confidential disclosures from the third party and, on the other hand, is (b) helping the acquiring company to conduct further R&D or file for patent protection, is to have a memo or other documentation such as an email setting forth the acquiring company’s plans for conducting diligence in

an ethical manner to protect third party confidences. While this won’t always be sufficient, it can minimize the likelihood of an acquiring company being formally accused of improperly taking confidential information. Importantly, it can help demonstrate good faith or negate accusations of bad faith from that could, for example, lead to a finding of willful conduct that might lead to enhanced damages or attorney fees being owed to a target. Another reason an acquiring company should be careful of who reviews the target’s confidential information is the ethical tensions inherent in triggering the Rule 56 disclosure obligations to the PTO. Under Rule 56 of the Code of Federal Regulations, a patent attorney and others closely involved in the prosecution of the patent are required to disclose all information that is known by that individual to be material to the patentability of the claimed invention. Consider the situation where, during review of the target’s confidential information, material information surfaces that reveals that the claims of one or more of the acquiring company’s patent application(s) are unpatentable. Patent counsel and others associated with a pending application who reviewed the confidential information are then obligated to disclose that information to the PTO under the Rule 56 disclosure requirements. This obligated disclosure of the confidential information to the PTO may create a breach of contract action against the acquiring company under the terms of NDA. On the other hand, if patent counsel chooses not to disclose this information, he or she runs the risk of obtaining an invalid and an unenforceable patent based on charges of inequitable conduct. Further, if patent counsel forgets or elects not to disclose the information, patent counsel also personally risks charges of ethics violations by the PTO. Certain PTO personnel have also suggested in public presentations that the failure to thoroughly read and understand each prior art reference being submitted is also itself an ethical violation. D. Ethical Compliance with the NDA Provisions

Post-Deal If the transaction is successful, typically the acquiring company can freely use the confidential information of the target following closing to operate the ongoing business. But in the wake of an incomplete deal, there are some typical NDA provisions that require careful attention to help ensure the jilted target is not provided with good cause to sue for breach of the NDA. Importantly, consideration should be given to whether the confidential information provided to the acquiring company must be destroyed or returned to the target automatically or only upon request. While


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financial, market, and even some customer information may go stale with the passage of time, proprietary technical information and know-how may be valuable for decades. In addition to the timing issue, there are good reasons discussed above that weigh in favor of destroying or returning any confidential information following a failed transaction. If the transaction is unsuccessful, a target may want to carefully track and create records of what confidential information was disclosed and to whom it was disclosed. This may have already been done during the diligence phase through use of a secure data room, which can track this information and create a log that can be stored for potential later use. Targets with sufficient resources may even consider monitoring public information from the would-be acquiring company for a time after the deal discussions to help evaluate if any of its confidential information has turned up in the press releases, products, or filed intellectual property rights of the acquiring company. Another concern post-diligence is a common NDA provision requires the acquiring company to provide prompt notice of any court or governmental agency action requiring disclosure of confidential information in order to provide the target an opportunity to seek a protective order and to narrow the scope of the disclosure. Importantly, the NDA language from the diligence will be helpful in determining what actions should be taken, as the NDA should indicate whether the acquiring company must be compelled before it can disclose confidential information or whether it merely needs to have received a request for the information in a legal proceeding. Another provision that can wreak havoc on a would-be acquirer in the event of deal failure is the inclusion of vague or exceedingly strict prohibitions on the use of confidential information received. For example, is the information permitted to be used only for the evaluation, for any legitimate purpose under the agreement, or “not in any way detrimental to the disclosing party”? This last phrase is fairly vague and may give rise to spurious charges by a jilted target. For example, the acquiring company may terminate a potential deal with the first target and pursue one with a second potential target. The first target may argue that information gleaned during diligence led the acquiring company to terminate negotiations and pursue a different target, thereby using the information in a way detrimental to the first target. Thus, even if confidentiality obligations have been scrupulously obeyed, the mere prior possession of such confidential information can be risky for an acquiring company.

Yet another compliance issue tends to arise in situations where the NDA from the failed deal requires the acquiring company to treat all information disclosed by the target as being subject to the terms of the NDA, not just the target’s non-public information. Efforts should be made when entering an NDA to seek language limiting the confidential information to non-public, confidential, or proprietary information. Failure to limit this type of provision leads to creation of new obligations and the consequent ethics problems where none would have existed under the law without the overbroad NDA provision. It is also critical for an acquiring company to share the target’s confidential information only with permitted recipients under the NDA. Poorly worded NDA language limiting the permitted recipients to consultants may not include finance sources who would want to review this information before committing to funding the proposed transaction. This may lead to an acquiring company violating the NDA even during the diligence, or at the least requiring an amendment to the NDA. There are other NDA provisions that might also be carefully reviewed to ensure the agreement fits the contemplated diligence evaluation and to help ensure compliance by the acquiring company. IV. CONCLUSION It is important that before any deal is completed both parties have conducted sufficient diligence to accurately set forth the details of the properties being transferred and to indentify as many risks to the value of the assts as possible. Without even engaging the seller, a detailed review of publicly available information can greatly assist the acquiring party in determining the potential value of the assets and provide signals for areas where potential problems may exist. The acquirer can then negotiate the NDA to be sure they gain access in the relevant areas. Once the NDA is in place, tailored requests can be made to investigate problematic areas. Careful consideration needs to be made of what an NDA will prevent you from doing ethically, and what limitations exist on actions you can ethically pursue with the confidential information you received as the acquiring company or its counsel—whether or not the transaction proceeds. Because of the ethical challenges of a poorly planned diligence, it can be helpful to create a diligence plan that fits the facts of each proposed transaction to minimize ethical risks and liability for, e.g., disclosing a third party’s confidential information. For example, care is required in selecting a diligence review team at the acquiring company, as poor choices here can lead to more substantial problems later. This is particularly true when weighing obligations to disclose third party


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confidential information to an acquiring company, or target confidential information to the PTO, against the restrictions of an NDA in a merger or acquisition deal. Even better in some cases is the preparing of contemporaneous written documentation of the plan to minimize the spread of confidential information received from a target or a third party under a deal NDA to only those acquiring company personnel, consultants, and lawyers that have a need to know, and are hopefully not involved in typical ongoing competitive business operations against the target. When care is taken to avoid onerous NDA terms and to select an appropriate diligence review team, many of the serious ethical problems that arise from an NDA that survives a failed deal can be minimized or avoided completely. But certainly, these potential problems strongly weigh in favor of conducting diligence from available public information before even entering an NDA where possible, as this can minimize or even avoid ethical limitations that an NDA can generate. Further, in taking care to ethically follow the obligations set forth in the NDA thereafter to minimize the increased risks inherent in a failed deal. Ultimately, these ethical and related concerns provide a significant incentive to enter this phase of merger or acquisition diligence only if there is an expectation of taking the deal to completion.

Documents

INTELLECTUAL PROPERTY REPRESENTATIONS AND DUE … · International and Domestic Intellectual Property Strategic Counseling and Management ! Licensing, Information Technology, and