Intellectual Property Considerations in Business Transactions-part Ii

• Publication year: 2003
• Pages: 79

32 Colo.Law. 79 Colorado Lawyer 2003.

2003, June, Pg. 79. Intellectual Property Considerations in Business Transactions-Part II

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79

Vol. 32, No. 6, Pg. 79

The Colorado Lawyer
June 2003
Vol. 32, No. 6 [Page 79]

Specialty Law Columns
Intellectual Property and Technology Law
Intellectual Property Considerations in Business Transactions--Part II
by Peter J. Kinsella
C 2003 Faegre & Benson LLP

This column is prepared by the CBA Technology Law and Policy Forum Committee. The column provides information of interest to intellectual property attorneys and other attorneys who counsel technology companies, by focusing on developing law applicable to technology businesses

Column Editors

Jim Brogan, Cooley Godward, LLP, Broomfield - (720) 566-4190 jbrogan@cooley.com; and Nathaniel T. Trelease, WebCredenza, Inc., Denver - (720) 937-9930, ntrelease@webcredenza.com

About The Author:

This month's article was written by Peter J. Kinsella, Denver, a partner at Faegre & Benson LLP - (303) 607-3645, pkinsella@faegre.com.

This two-part article examines intellectual property issues associated with business transactions, such as stock or asset sales, security offerings, secured financings, and joint ventures.

The transfer or pledge of intellectual property ("IP") in business transactions involves several unique legal considerations. For example, licenses must be analyzed to verify whether they are transferable. Depending on the financial magnitude of the business transaction and the extent of due diligence, various risk allocation mechanisms may need to be considered. Such an approach may include the use of contingencies, warranties, and legal opinions.

Part I of this article described the unique IP aspects of due diligence for major business transactions.1 Building on Part I, this article analyzes principles unique to the transfer or pledge of IP. The article discusses the allocation of risk among the parties to an IP business transaction and also addresses the use of representations and warranties.

Transferability and
Assignability of IP

The determination of whether an IP right is transferable depends on a number of factors, including: (1) whether the company owns the underlying IP registration or merely holds a license in the property; (2) if licensed, whether it is exclusive or non-exclusive; and (3) the form of the transaction. Ownership and corresponding transferability issues will depend on the specific IP asset, as described in greater detail below. The Table in this article summarizes the treatment of the transfer of IP licenses in business transactions.

By "assigning" an IP right, the assignor conveys its entire ownership interest, or all "right, title and interest," in the particular IP to the assignee. Assignments of IP are effective between the parties when made. However, to establish the assignee as the record holder of the right and establish priority against subsequent bona fide purchasers, the assignments should be recorded in the Patent and Trademark Office ("PTO") for patents and trademarks or the U.S. Copyright Office for copyrights. If there are assignments for multiple unissued patents, each should be filed separately. If this is not done, as soon as one of the patent applications issues, the entire assignment becomes public - including unissued patent applications. Separate filing helps ensure the confidentiality of the unissued patent applications.

The assignment of registration for the IP asset does not automatically transfer the right to sue for past infringement of an IP right.2 Therefore, if an assignee wants to be able to assert assigned rights against preexisting infringers, language should be included in the assignment that allows such action.3 In addition, it usually is advisable for the buyer of the IP right to obtain a covenant of further assurances to ensure that after the closing, the seller will sign any required instruments of assignment or other documents of conveyance required to be executed to fully effect the assignment.

Transferability of Patents

A patent is a type of personal property. As such, a patent may be owned, licensed, sold, pledged as collateral, willed, or inherited. To be effective, the patent conveyance must be in writing and signed by the patent owner.4 Thus, oral promises to sell or otherwise convey the entire patent or any exclusive rights are not enforceable. Patents also are subject to the various state rules and regulations governing the ownership, inheritance, and transfer of personal property.5 For example, Colorado probate law would control the transfer of a patent in a decedent's estate.

Ownership of a patent must be distinguished from ownership of a physical object embodying an invention covered by the patent. Thus, ownership or transfer of such a physical object (such as a microprocessor) does not, in and of itself, include ownership or conveyance of the corresponding patent right (such as the electrical design underlying the microprocessor). Likewise, ownership or transfer of the patent right does not inherently include ownership or conveyance of any right to a physical object covered by the patent.6

Although not required, transfers and assignments recorded in the PTO may serve as constructive notice of the transfer and control priority of ownership between two innocent good-faith purchasers for value.7 Licenses, security interests, and other documents affecting title to a patent or patent application also may be recorded in the PTO.8

Transferability of Copyrights

The copyright in an original work of authorship, such as a short story, is property that is separate and distinct from the physical property embodying the original work of authorship - for example, a book containing the short story. Like patents, the ownership or transfer of the physical property that embodies a copyrighted work does not confer ownership or conveyance of the copyright in the work. Similarly, the ownership or transfer of the copyright in a particular work does not inherently include any right to physical property embodying that copyrighted work.9

The owner of a copyright may independently transfer the rights conveyed by the copyright. The conveyance may be either written or oral; however, a transfer of exclusive rights under the copyright must be written and signed by the copyright owner.10 Although not required, recording in the Copyright Office may serve as constructive notice of the transfer between two innocent good-faith purchasers for value,11 thereby protecting a purchaser from a subsequent fraudulent conveyance.

Transferability of Trademarks

A trademark has no significance independent from the business goodwill it symbolizes.12 Therefore, a trademark cannot be assigned apart from the goodwill with which it is associated.13 If such an assignment is attempted, it generally is considered invalid and no rights are passed to the assignee.14 An assignee succeeds to all the rights and priorities of the assignor only if the trademark is assigned with its goodwill.15

The Lanham Act16 imposes additional restrictions on the transfer of "intent-to-use" trademark applications.17 Specifically, to prevent the trafficking of trademarks, an intent-to-use trademark application may not be assigned separately from that portion of the applicant's business to which the mark pertains.18 For example, if a company files several intent-to-use trademark applications that are intended to promote products from its tire division, it may transfer those trademark applications in connection with the transfer of the physical assets of the tire division. Failure to effect such a transfer can result in the abandonment of the mark.

Similar to patent registrations, assignments of federal trademark registrations may be recorded in the PTO.19 Federal recordation is permitted, not mandatory. Similar to patent and copyright registrations, there is no requirement to record an assignment, but it is advisable to protect against a subsequent bona fide purchaser.20

Transferability of Licenses

Courts have often determined that the transferability of a license is significantly impacted by whether the license is exclusive or non-exclusive in nature.21 Exclusive licenses generally are regarded as creating a property right that can be freely transferred, unless such an assignment is explicitly prohibited.22 In contrast, non-exclusive licenses generally are regarded as personal to the licensee and are not assignable unless expressly permitted in the agreement.23 The law usually treats a non-exclusive license as containing such a restriction without provisions to the contrary.

When a licensee sells assets or attempts to...