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IP Due Diligence in M&A: Investigating
Transferability of IP Assets, Blocking Rights,
Liens and Other EncumbrancesLeveraging Diligence Results When Negotiating Price and Other Deal Terms
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THURSDAY, OCTOBER 4, 2018
Presenting a live 90-minute webinar with interactive Q&A
Randall E. Colson, Partner, Head of Technology Transactions Practice Group, Haynes and Boone, Dallas
Stephen Feingold, Partner, Kilpatrick Townsend & Stockton, New York
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Presented by:
Stephen Feingold Randall Colson
IP Due Diligence in M&A Transactions
IP Due Diligence Issues Being Covered
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I: IP Diligence & Team Review Issues
II: Post-NDA Considerations
III: Diligence on Target’s Agreements
IV: Typical diligence problems
V: Leveraging diligence in deal negotiations
I: Introduction to IP Due Diligence
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IP assets are a component of virtually every deal and drive many high technology merger and acquisition strategies.
IP issues can materially affect deals: Failure to transfer important IP rights IP rights not as strong as “first impression” Inadvertently acquire potential or actual IP problems
The primary reason for IP due diligence is to: Value the Target’s IP assets, which can affect deal value Minimize risk of deal or operation of Target upon a closing
I: Introduction to IP Due Diligence
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Business goals should drive the focus and depth of the IP due diligence Are the business goals realistic? Understand the industry and the IP issues that predominate
the industry
Will IP ill produce large profits or protect profitable markets?
I: The Reality of IP Due Diligence
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Diligence is a living process with moving targets Plan, but be ready to adjust as needed
(IP DDRs, explanations, public record searches)
Adjust deal terms based on diligence discoveries to secure key deal terms (value, rights/obligations, risk allocation)
I: The Due Diligence Team Pre-NDA
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Assemble a due diligence team – pre-NDA Team can include the Buyer’s best technical folks because this is
based on public information
Be aware of the potential prosecution “taint” later Duty of disclosure obligations (37 C.F.R. § 1.56)
Employee v. consultant / outside lawyer
Establish data management protocols Spreadsheets, databases, e-Rooms, etc.
I: Pre-NDA Limitations
Buyer is initially limited to public records Benefits: Target won’t know of interest
Helpful for
initial cut on valuation
General understanding of Target IP policies
No risks of prosecution taint
Problem: No access to the good stuff!
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I: Pre-NDA Limitations (Continuation)
Issues To Consider:
Patent, Trademark and Copyright applications and registrations.
Gaps in Coverage
Litigation
Licenses
Open Source/Open Content Issues
Privacy Issues
Trade Secret Issues
Domain Names/ Social Media
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I: Identify, Categorize, & Evaluate Target’s IP Assets
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Compile an initial list of Target’s IP assets, focus on business as run, and Buyer’s integration plans
Consider Following Often Overlooked Souces: Regulatory submissions
U.S. Food and Drug Administration identifies small molecule drug patents in the “Orange Book”; biologics listed in the “Purple Book”
SEC Filings – finances, licenses, etc.
Court records - related litigation and court papers
Social Media/Google Searching
I: Identify, Categorize, & Evaluate Target’s IP Assets
Analyze the ownership and clean title of the IP –verify the target can transfer clean title. Assignment records
Maintenance fee payment records
Security interests
Employee/contractor agreements; joint and gov’t ownership; open source/open content
IP assets asserted, licensed or enforced?
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I: Pre-NDA – Ownership Red Flags
Question everything about chain of title! Track Record – they’re virtually all deficient
Missing assignments by listed inventors
Disputes over rights
Rights still in the name of a 3rd Party
Investigate further if suspicious
Stanford case – get present assignments (“hereby assign”), not just future executory assignments
Inventor rights / royalties in certain countries
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Case Study 1: When IP Is Presumably Not Part of the Deal
Client Evaluating Acquisition of Start Up Offering New Level of Identify Verification. Technology is Critical/Branding Not Relevant Since Will Be
Rebranded
Initial Due Diligence Reveals that Target has five registered trademarks for Identity Verification products. Start up has never sold any product to any consumer.
Is This Evidence of Sloppiness or Representative of Other Issues.
Initial Due Diligence Reveals that Target has one Patent App Inventor is a well-known author, but no disclosure of relevant
publications
Prosecution history reveals False (not just incorrect) statements
Is this Evidence of inequitable conduct?
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I: Special Issues
Copyright: Termination Rights
Music Deals: Royalties, Sync Rights, Video Rights, Author’s Rights, Publisher Rights
Real Estate Deals: Visual Arts Issues
Brand Driven Deals: Watch reports, demand letters, common law rights
Privacy: World Issues (e.g., GDPR). Sign up for newsletters using customized email ([email protected]).
Domain Names/Social Media: Handles, account access.
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I: Special Issues (Continued)
Open Source Issues
Industry Specific Issues Publishing – inadequate permissions
Retailers – compliance with NJ consumer laws
Retailers - style names clearance process
Everyone: Data Breach
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I: Pre & Post-NDA Considerations – “Do No Harm”
Reporting to Buyer’s Management Candor is important. But not always written candor.
Reserve certain issues for deep-review post-closing
Report only to actual client Related inventors need their own counsel
Discuss negotiation tactics and valuation in view of IP DD
Consider if deal structure is right (or still worthwhile) Acquisition? Merger? Or use license, supply/distribution, or joint
venture?
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II: NDA Considerations
Term(s) including confidentiality obligations Parties who are bound?
What if deal dies?
Strict limitations on who can receive at each party? Non-solicitation? Non-compete? “Standstill”? Exclusive discussions?
Do any non-party providers of info have a right to sue?
Usually, strictly limited rights to use info in M&A deals
Confidentiality retained post-transaction (whether or not successful)? NDA v. NDA terms in Purchase Agreement, and all parties including ‘Sellers’
Does Target want a prosecution bar on recipients?
“Confidential” marking requirements?
Establish Joint Defense Agreement
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What Team will handle further diligence review? Factors: Size of Buyer? Product/tech overlap? NDA terms?
Same team? Efficiencies, but raises concern of taint
New team?
Will “clean room” procedures protect Buyer? Merger of Direct Competitors? Indirect? Strategic Fit?
Lighting Science Group (Target) v. Koninklijke Philips Electronics NV
III: Post-NDA Issues
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Many Deals Require Multiple IP Teams: Copyright, Trademark, Privacy all involve distinct skill set
that cannot be presumed to exist in every soft IP lawyer.
Privacy/Social Media Existence of Internal Guidelines
Mapping of data collection procedures
How will Buyer and Target integrate Data? Can They?
III: Post-NDA Issues
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Trade Secrets Does Target Have List of Proprietary Information?
Contractual Protection?
Software Open Source Integration?
III: Post-NDA Issues
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Old but financially struggling target is valuedprimarily on its patents and trade secrets Due Diligence reveals in prior acquisitions by Target that not all
assets of its targets were transferred. Those non-transferredassets include technology that is derivative of patents assigned toTarget and which are not subject of patents owned by thirdparties.
Due Diligence Also Reveals that Third Party Was Using ProprietaryMethods in its Business that were developed by Target.
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III: Post-NDA Considerations – Case Study 2: The Hidden Picture
III: Post-NDA Considerations – Case Study 3: When Trademarks Don’t Matter
Target is Tech Company that tracks consumers online.Focus of deal is on patents and data protection. In due diligence advised that no formal opinion letters but that all marks
are cleared.
Due Diligence shows multiple marks abandoned after 2(d) refusal.
In presentation to Client Target discussed new product launch XXX but indue diligence no search report for XXX. Preliminary search reveals XXXalready registered.
Client not concerned. Trademarks are not important.
Post signing but before execution: Two demand letters come to light that were not disclosed.
Cost to settle is below threshold for indemnity.
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How Do You Avoid?
Find an ally The Lead M&A Partner
The Person at Client who will be tasked with sorting out these issues post deal.
Check the Most Obvious Sources of Problems Leading competitors’ brands and registrations.
Trademark search
Domain Name variants.
Check domain name variants
Social Media
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III: Post-NDA Considerations – Copyrights: Case Study 4
Company is buying private mint company thatmakes medals and other collectables. Who owns copyrights in medals?
Possible registrants:Artist
Entity commissioning the work
Mint
Which national law applies? If Foreign Artist could copyright be restored?
Can Client make new runs of medals after acquisition?
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III: Post-NDA Considerations
Determine patent term (esp. for pharma) How much patent exclusivity is left?
Related marketing exclusivity? Check FDA Orange Book
Key GATT date: June 8, 1995
Pre-GATT term: 17 years from issue or 20 years from earliest priority date, whichever is longer
Post-GATT term: 20 years from earliest priority date
Patent term adjustments
Hatch-Waxman § 156 Exclusivity
Consider product lifespan plans and substitutability (for all industries); some of this can be done pre-NDA.
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IV: Typical Problems in IP Diligence - Opinions
Due Diligence of Product Clearance Don’t blindly ask for opinions (FTO, non-infringement, etc.)
Ask for list of opinions relevant to key products (None?)
Seek summary of important opinions
Consider a common interest / joint priv. agreement
Facts for prior user defense under AIA needed?
3rd Party IP rights may be sold to a troll Buyer could be a new “deep pocket” that triggers litigation
Is collection search or FTO study warranted? Opportunity to buy/license blocking IP identified?
Consider litigation risk from past entanglements/resolutions
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IV: Typical Problems Arising During IP Diligence
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Target’s Counsel – Tends to tailor disclosure Full disclosure often limited in auction-style M&A until post-bidding war;
only last 1-2 candidates see full disclosure
Avoid reliance on Target opinions & access to ongoing lit.
Need to comply with 3rd Party NDAs Approach for consent to share with Buyer/Buyer Counsel
Create extract/summary to share?
Share in confidence and bear risks
Targets seek to track materials to prevent misuse
Reps/Warranties limited to avoid problems But, line-item indemnities to address risk
IV: Typical Problems Arising During IP Diligence
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Some other 3rd Party Roadblocks Post-Closing
Marketing problems (branding? competitor prods.?)
Does Target own rights to its web site or is it owned by developer? Does it own all content on web site (espphotos).
Regulatory approvals (medical devices/pharma?)
Government investigations (EPA? FTC?)
Supply issues / delays
Infringement allegations against acquired Target
New products not cleared early (branding & patents)
IV: Typical Problems Post-NDA: Case Study 5
$20 MM acquisition with 3 key personnel, 2 patent applications, know-how, manufacturing equipment, and a customer list
Client teamed with IP lawyer for on-site visit
Interviews of key personnel re: technology
Freedom-to-Operate evaluation
Patentability evaluation of application
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IV: Post-NDA: Case Study 5(cont’d)
Analysis of IP-related diligence?
Patent scope would be limited, if any
FTO was reasonably clean
Serious questions about development of tech
Lack of documentation on transferred know-how
Diligence Result = Re-negotiate financials to $5 MM deal with annual $1 MM payout and consulting
Actual Result = Only $1 MM paid; 95% savings
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IV: Post-NDA: Case Study 6
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$150 MM M&A transaction
Two inventors assigned; one had not
3rd inventor filed a paper in the file history:
“Those guys are not inventors. It’s all me!”
Employee agreements had IP assignment clauses
Some ideas to address this? Pay 3rd inventor for rights just in case?
Affidavit from other inventors / manager
E scrow holdback to resolve specific issue
IV: Post-NDA: Case Study 6A
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$90 MM M&A acquisition
Two inventors assigned; one had not (Sound familiar?)
3rd inventor had no employment agreement
3rd inventor left the company. . . on bad terms
Some ideas to address this?
Have a 3rd party try to acquire the rights?
Support for hired-to-invent doctrine?
IV: Post-NDA: Case Study 7 (Not strictly M&A)
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$250 MM Facility Being Built for Joint Venture
Patented Tech and Know-How being licensed
Cease & desist correspondence unresolved
Contacting 3rd party forbidden by co-venturer
Multi-pronged resolution
Walkthrough of independent R&D efforts
Sufficient extended indemnification
Client understanding and acceptance of RISK
IV: Post-NDA: Case Study 8
$60 MM deal to acquire Target from a larger corporate family
100-patent family spread across 8 entities
Target owned 9 patents
Deal progressed for 3 months w/o IP input
Target used patents to be retained and retained entities used Target patents
Result: Cross-license needed; Email Link Corp. v. Treasure Island re terminal disclaimer.
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IV: Post-NDA: Case Study 9
$300 MM deal to acquire One Business Line
Buying ABC Soda but Target will retain rights to ABC Whiskey, ABC Beer, and ABC Bartender Guide
Co-existence Agreement? Cross-License?
Associated Marks Doctrine requires single owner.
What about future enforcement?
Result: Assignment of ABC SODA. Target to own marks in Associated Marks countries. Policing to be co-managed. (What About Trust Ownership?)
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IV: Post-NDA: Case Study 10
$300 MM deal to acquire content provider
Assurances that no use of Open Content or Open Source.
Obtain assurance for $50 MM to address any
Issues
Obtain copy of primary software as part of due diligence and retain outside expert who examine for existence of open source code. Cost $1 MM paid by Buyer.
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IV: Post-NDA: Case Study 10 (cont.)
Outside Consultant finds significant open source issues estimated to cost $5 MM to remediate., effectively lowering cost of transaction by
$4 MM.
Outside Consultant also finds use of Open Source content that places ability to sell content at risk.
Deal price lowered by another $10 MM (estimated to be cost to rewrite that content).
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IV: Post-NDA: Case Study 11
$5 MM Stock Deal To Acquire On the Line Construction Company Located in El Paso.
Will be merged into national construction
Company and change name
No registered IP
Under Schedule of “All Trademarks” nothing listed.
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IV: Post-NDA: Case Study 11 (cont)
One month after deal, former employees start new business On the Line Used Construction Equipment across the street from Target
Buyer writes demand letter
On the Line Construction Used Equipment files DJ saying that Target did not own trademark rights in name as shown in Acquisition Agreement.
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IV: Post-NDA: Anticipate, and Simplify the Deal
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Target Diligence Tips – Streamline Before Selling
Internal transfer / clean-up agreements w/ counterparties
Consider creating high-level summary of agreements
Clean up recorded title & ownership docs for IP
Develop draft Reps/Warranties; test accuracy before Buyer due diligence
Make necessary disclosures early; don’t hide the ball
Before diligence, determine what, if any, privilege waiver or 3rd Party info the Target can agree to (and enter a common interest / joint privilege agreement with Buyer)
V: Leveraging Diligence Results in Negotiations
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Representations and warranties
Be wary of knowledge qualifiers & knowledge group
Representations and warranties may mitigate risks of non-produced documents, e.g., agreements affecting rights transferred
Consider whether the Target is collectable post-close, damages limitation reasonable, and escrow is sufficient
Do not sign a representation that says you have seen all you need to see and have entered into the transaction willingly (but it’s ultimately up to the Client)
V: Leveraging Diligence Results in Negotiations
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Non-Competes, Lock-Ups, Break Up Fees
Clauses should be tailored and specific, limited in time and possibly geographic scope
Tied to the life of patent? Term of Copyright? To continued use of brand name?
Scope relative to patent claims or disclosure?
Finite terms, related only to the disclosed materials, carving out existing IP and development activities of acquiring company
May filter curious (but not serious) buyers
V: Leveraging Diligence Results in Negotiations
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Determine scope of Target’s pre-existing licenses
What rights are being licensed? Are they sufficient to accomplish Buyer’s goals and expansion plans?
What are the restrictive clauses to monitor?
Territory
Field of use
Exclusivity
Sublicensable/Transferable? (see Section III)
Does the license survive the upcoming transaction? Does it need to?
V: Leveraging Diligence Results in Negotiations
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Determine the scope of any pre-existing agreements the target has and what effect the structure of the proposed transaction will have on those agreements
Transferability Issues
Will change of control or anti-assignment clauses be triggered?
Will there be transferability issues?
Will all necessary licensed rights transfer to the new entity?
Will the transaction trigger any liabilities?
V: Case Study 12: Creative Leveraging of Licensing
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John Adams Medical School, Brookline, Mass,
Operates John Adams Hospital.
Mass Pike Health Care, local respected HMO.
Create JV
Control?
50/50 board split and complicated tie breaking alternating between each group every year.
Agreement calls for JAM and MPHC to select name mutualyagreeable
V: Case Study 12: Creative Leveraging of Licensing (cont)
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Before Closing JAM suggests that JV be branded John Adams Medical Services per royalty free license.
Confer brand equity on entire network most efficiently
Two years later major battle over whether to allow chiropractors into JAMS. MPHC has right to decide ties that year and says “yes”. Decides yes.
JAM declares JAMS in breach of trademark license for violating quality control provision. Threatens to revoke license if decision not changed.
V: Leveraging Diligence Results in Negotiations
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IP Indemnification
How long? 18 months?
Is there a duty to defend?
Line-item indemnities?
Does the target have assets to indemnify?
Consider an escrow or hold-back fund
Limitations on Liability
Dollar amounts?
Separate baskets / caps?
Rep and warranty Insurance
Q&A
Thanks for your time!
Questions for Randy and Steve?
Randy Colson [email protected]
214.651.5665
Stephen Feingold [email protected]
212.775.8782
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