Copyright Due Diligence

• Author: Edward Klaris
• Pages: 143-224

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I. Introduction

Effective due diligence will enable you to clearly determine the

target’s intellectual property (IP) landscape. A target’s copyrights

constitute one of its most valuable assets. Carrying out careful

and complete IP due diligence is crucial to permit the acquiring

party to benet from the immense value of the target’s IP. The

goal of this chapter is to identify the things counsel should ask

for, do, and pay attention to in the process of undertaking IP due

diligence for copyrights.

Section II begins by outlining the materials needed to under-

take due diligence properly on a company’s copyrights. It provides

a helpful list of copyrighted assets that counsel should ask for,

as well as material assets that are not protected by copyright

but are necessary to achieve comprehensive due diligence. This

section further sets out the questions that counsel should ask to

Chapter

Copyright Due Diligence

By Edward Klaris*

5

*I would like to thank Cindy Hong, Luke Budiardjo, and Emily Borich for their

remarkable, diligent, and intelligent contributions to the copyright, trademark, and

technology chapters of this book. In particular, Cindy Hong led the writing and re-

searching team, staying on schedule, and drafting and redrafting where appropriate,

all while holding down a rigorous federal clerkship. I am forever grateful to Cindy,

Luke, and Emily for their contributions.

144 CHAPTER 5

understand how the target has been monitoring, protecting, and

(where necessary) defending its IP in disputes.

Sections III and IV go through some fundamental concepts of

copyright law, namely, ownership (who owns the copyright in an

asset) and validity (which assets are copyrightable).

Identifying copyrightable assets and identifying their ownership

and validity are only the rst steps in the due diligence exercise.

Understanding exactly what rights the Copyright Act confers on the

target is crucial as well. Section V lists and explains the ve funda-

mental exclusive rights that are held by a copyright owner under

§ 106 of the Copyright Act (reproduction, preparation of derivative

works, distribution, performance, and display). These rights are all

qualied by statutory limitations. The most signicant of these,

“fair use,” is analyzed in greater detail at the end of Section V.

Section VI discusses the formalities involved in registering a

copyright. It traces the development of the “publication” doctrine,

explains the different treatment accorded to works published

before or after 1978, and describes the registration process for a

copyrighted asset.

If identifying copyrighted assets is Act I of the due diligence

process, Act II is monitoring the exploitation of such assets. This

can be done by requesting a freedom-to-operate opinion and moni-

toring Internet dissemination, both discussed in greater detail in

Section VII.

Sometimes close monitoring is not enough. A target may have

had to resort to litigation to protect its assets. A list of all previ-

ous disputes, whether resolved via settlement or litigated in the

courtroom, should be obtained from the target. To help you better

appreciate the nature of such disputes, Section VIII sets out in

detail the essential elements of a cause of action for copyright

infringement and the defenses that may be available. This section

is not only helpful in understanding the target’s previous disputes

but also can serve as a roadmap for future enforcement actions

that may have to be brought to protected acquired IP assets.

Finally, although this book is aimed at due diligence carried

out in the United States, comprehensive due diligencing requires

Due Diligence Materials 145

an understanding of how the target’s IP is protected abroad. Thus,

Section IX outlines international copyright treaties between the

United States and other nations. It outlines the key features of

and the differences between the Berne and Rome Conventions

and the TRIPs agreement. Choice-of-law issues—the rules that

determine which country’s laws apply to a dispute (in this case,

IP disputes)—are also explained in Section IX.

II. Due Diligence Materials

This section outlines the materials needed to properly under-

take due diligence on a company’s copyrights. As a preliminary

matter, any due diligence should be done in partnership with the

seller’s counsel. Before launching into the due diligence process, a

plan should be made that takes into consideration various factors

of the transaction, including the structure of the transaction, the

target company’s industry and the geographic scope of its opera-

tion, and the materiality of copyrights to the value of the company.

Counsel should be aware of whether the transaction is strategic

or a purchase by a private equity buyer. Different buyers may

have different goals for the transaction. Consider the nature of

the target’s business. Film production companies and publishers

may have different concerns when it comes to copyright infringe-

ment and licensing. In addition, counsel should note any process

constraints, such as an expedited transaction timeline, and any

budget constraints. This section supplies a glossary of terms used

and materials that should be collected for due diligence purposes.

A. Transaction Structure

The rst step in initiating a due diligence plan for any transac-

tion is to identify the type of structure. Mergers typically fall into

three categories:

Asset purchase: An acquisitional transaction in which

one company purchases all the assets of another company.

This type of transaction is more suitable for smaller deals.