Buying and Licensing Intellectual Property Assets from Troubled Companies-part Ii

• Jurisdiction: United States,Federal
• Citation: Vol. 33 No. 9 Pg. 105
• Pages: 105
• Publication year: 2004

33 Colo.Law. 105 Colorado Lawyer 2004.

2004, September, Pg. 105. Buying and Licensing Intellectual Property Assets from Troubled Companies-Part II

Vol. 33, No. 9, Pg. 105

The Colorado Lawyer
September 2004
Vol. 33, No. 9 [Page 105]

Specialty Law Columns
Intellectual Property and Technology Law
Buying and Licensing Intellectual Property Assets from Troubled Companies - Part II
by Gary H. Moore

This column is prepared by the CBA Technology Law and Policy Section. 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

Nathaniel T. Trelease, WebCredenza, Inc., Denver - (720) 937-9930

ntrelease@webcredenza.com; Jim Brogan, Cooley Godward, LLP, Broomfield - (720) 566-4190,

jbrogan@cooley.com

Gary H. Moore

About The Author:

This month's article was written by Gary H. Moore, Palo Alto, California. He is a partner in Cooley Godward LLP's Technology Transactions Group - (650) 843-5438, gmoore@ cooley.com.

This two-part article discusses, from the buyer's perspective, the purchase of intellectual property assets from a financially troubled seller. Part I addressed liability issues, bankruptcy, fraudulent transfers, and successor liability. Part II focuses on due diligence, practical matters involving acquisition, and bankruptcy effects on intellectual property licenses.

This article covers issues for buyers involved in purchasing or licensing intellectual property ("IP") assets from a financially troubled seller. Part I,1 which was published in this column in August 2004, discussed liability issues, bankruptcy, fraudulent transfers, and successor liability. Part II focuses on due diligence, certain practical matters involving acquisitions, and the effects of the licensor's bankruptcy on IP licenses.

Importance of Due
Diligence

Due diligence takes on added importance when acquiring IP assets from troubled companies. The nature and scope of the due diligence inquiry will depend on the nature of assets being acquired. The Appendix at the end of this article contains a non-exhaustive list of due diligence issues to consider.

More extensive due diligence may be appropriate if the buyer is acquiring the assets for offensive purposes than if the buyer's objectives are only defensive. The amount being paid by the buyer also may influence how extensive the due diligence needs to be. However, the buyer always should undertake sufficient due diligence to: (1) know what it is getting; (2) determine that there are no significant problems with the assets or, if there are problems, that the purchase price appropriately reflects them; and (3) be certain that it is not unwittingly subjecting itself to potential claims.2

Unfortunately, the very condition of the seller that creates the opportunity to acquire the assets sometimes impedes the buyer's ability to undertake due diligence. For example, a financially strapped seller may have only sketchy documentation or incomplete files, and employees with relevant institutional knowledge may have left and be unavailable.

Securing Good Title
And Possession

In an acquisition from a troubled company, the buyer should take particular care to obtain good title and delivery of any key deliverables at closing. It is prudent to include in the acquisition documents "further assurances" provisions, in which the seller agrees after closing to sign additional documents or take steps requested by the buyer to complete and confirm the transfer. However, such provisions may afford limited protection with a troubled seller, which may not be either available or able to stand behind them after closing.

If possible, the buyer should hold back, or place in escrow, a portion of the purchase price pending resolution of any open issues affecting the title of the assets, as well as to provide funds for indemnification for breach of any representations and warranties included in the acquisition agreement. In some cases, the buyer also might seek to obtain third-party guarantees to bolster the value of representations and warranties, in addition to post-closing contractual commitments. However, it often is difficult to obtain guarantees in this context. The shareholders of the seller may be receiving little or nothing from the proceeds or, in any event, be unwilling to encumber proceeds distributed to them.

Corporate Approvals

When IP and related assets to be acquired substantially represent the seller's entire remaining assets,3 shareholder approval will be required in most cases. The buyer should make certain that the seller has taken all required corporate actions necessary to authorize the sale.4 In addition, the seller should be aware that even board approval may not be straightforward, inasmuch as the membership of the board itself may be in flux or the board may be divided. As part of its due diligence, the buyer should determine as early in the process as possible what corporate approvals will be required and whether problems are expected in obtaining them.

The buyer might look to seller's counsel to orchestrate the necessary corporate approvals and provide an opinion that required approvals have been obtained. However, counsel for a distressed seller may not be willing to be responsible for these tasks.

IP Assignments

Patents: Assignments of U.S. patents and patent applications should be recorded promptly with the U.S. Patent and Trademark Office ("PTO").5 There is a three-month grace period to record patent assignments after the closing.6 If an assignment of U.S. patents and patent applications is not recorded within that grace period, it will be void as against a subsequent "purchaser or mortgagee for a valuable consideration, without notice" to those who acquired the patents before the assignment was recorded.7

The Ninth Circuit Court has held that a bankruptcy trustee - at least in its status as a hypothetical lien creditor - does not qualify as such a "purchaser or mortgagee."8 However, a subsequent purchaser of the patents for value without notice of the prior unrecorded assignment, including a purchaser in bankruptcy proceedings, would qualify as such a purchaser. Thus, the buyer of a troubled company has a strong incentive to record its assignment within the statutory grace period.

Under the patent laws, as a general rule, individual inventors and not their employers own their inventions, unless the invention was assigned to the employer.9 In most cases, employees will have signed umbrella proprietary rights agreements in connection with their employment. However, to secure clear record title to a specific patent, the employer-assignee must file a specific assignment from each inventor, in recordable form.10 It is not uncommon to find patent applications for which executed assignments have not yet been obtained from the inventors, particularly if they were recently or hastily filed. Without such an assignment, the employer will not have clear record title to the patent application or the resulting patent.11

The employer and its assignee have more options where a patent has multiple co-inventors, because each is presumptively a co-owner of the patent.12 Even if the employer (seller) has an assignment from only one of the co-inventors, the buyer will be able to obtain record title as a co-owner of the patent. Moreover, if there are umbrella proprietary rights agreements with the remaining co-inventors, these other co-inventors will have difficulty asserting ownership claims in the patent.

These partial solutions to obtaining clear record title may be sufficient if the buyer's interests in acquiring the patents are primarily defensive. In those cases, the buyer may be satisfied as long as it has the ability to practice the invention covered by the patent, even if it potentially lacks exclusive rights. However, if the buyer wishes to assert the acquired patents against third parties, gaps in its title will make it more difficult or even prevent the buyer from asserting the patents and may substantially reduce the value of the assets. For example, each co-owner of a patent not only has the right under U.S. patent law to practice the invention, but also to license third parties to do so, without the consent of or accounting to other co-owners.13 Moreover, absent an agreement to the contrary, each co-owner also has a veto over patent infringement suits.14 Thus, a non-cooperative co-owner can effectively prevent other co-owners from being able to enforce the patent.15

Copyrights: Assignments of registered copyrights must be recorded with the U.S. Copyright Office to be effective against a subsequent bona fide purchaser or other transferee for value without notice of the prior assignment.16 The grace period is only one month17 (versus three months for patents).

Whether assignments of unregistered copyrights also should be recorded is a more complex issue. The distinction between registered and unregistered copyrights can be significant because it is not uncommon to find that copyrights, sometimes even in important software, have not been registered. The issue regarding assignments of unregistered copyrights arises from the fact that recording of a copyright assignment will constitute constructive notice and, therefore, be effective under the Copyright Act,18 only if the copyright has been registered.19 Recording the assignment serves no purpose unless the copyright is also registered. However, if the buyer does not record the assignment, its rights in the assigned (but unregistered) copyright will be cut off by a subsequent...