Georgia Bar Journal
GSB Vol. 14, NO. 4, Pg. 16.
A Look at the Law Avoiding the Potholes: A Roadmap for Intellectual Property Due Diligence in Business Transactions
GSB JournalVol. 14, NO. 4December 2008A Look at the Law Avoiding the Potholes: A Roadmap for Intellectual Property Due Diligence in Business TransactionsBradley K. Groff and Lauren Fernandez StaleyROLLS-ROYCE.(fn1) For many, the name alone conjures up images of chauffeur-driven motor coaches with burled walnut and fine leather interiors cruising down the tree-lined lanes of their owners' country estates. Therein lies much of the value of the trademark rights behind the luxury auto mobile brand that Volkswagen AG sought to acquire in the late 1990s, paying over $700 million to outbid rival suitor BMW.(fn2)
In the excitement surrounding the acquisition, however, VW's lawyers apparently failed to notice that ownership of the "Rolls-Royce" name, the "Spirit of Ecstasy" flying lady hood ornament and the distinctive Rolls grille configuration were owned by the Rolls-Royce aircraft company, not the automotive company that VW was purchasing. BMW's lawyers, having checked under the hood of the deal, engineered a purchase of those trademarks from the aircraft company for a fraction of what VW had paid.(fn3) In the end, VW got the factory and equipment, but could not sell the cars made at that factory as Rolls-Royce motorcars (instead they are sold as Bentleys).
More recently, and closer to home for Georgia attorneys, a dispute over ownership of trademark rights resulting from the sale of a propane gas business led to protracted litigation in FerrellGas Partners, Inc. v. Barrow.(fn4) The Barrow family had grown a local propane service in Butler, Ga., from two delivery trucks into a substantial business. The founder of Barrow Propane Gas, Inc., eventually sold the business to a regional distributor in a stock sale. The sales agreement, however, failed to address ownership of the trademarks and trade names of the company, which included the Barrow family name. A dispute later arose when a family member sought to reenter the propane business as Barrow Energies, Inc. Unable to resolve the dispute over the right to use the Barrow name, trademark infringement litigation ensued.
At first glance, the purchase of a propane company might seem to primarily involve tangible "hard property" assets such as delivery trucks, storage tanks, real estate and hardware. But as with the Rolls-Royce trademarks, the name recognition and customer goodwill associated with the Barrow name were extremely valuable assets of the Georgia company. The ensuing dispute over those intangible assets or intellectual property (IP) led to the expense and distraction of litigation. Indeed, one of the plaintiff's primary contentions was that the family's renewed use of the Barrow name in the propane field had caused widespread consumer confusion, billing and payment errors and misdirected deliveries. These problems could have been avoided had the parties recognized the importance of the IP to the business and specifically addressed the transfer of those IP assets in the sale agreement.
These real-world examples underscore the need for business attorneys to identify and address the IP assets involved in the deals that they structure. As we move toward a technology- and information-driven economy, IP rights such as patents, trademarks, copyright, trade secrets and know-how are often the most visible and valuable assets involved in business deals for high-tech clients. Even brick-and-mortar transactions undertaken by relatively low-tech businesses very often involve less visible IP issues that can have a very significant impact on the outcome of a deal. While the extent of IP due diligence that is warranted will certainly vary depending on the transaction, it is unwise to ignore the potential IP issues involved even in a seemingly low-tech or no-tech business deal. This article provides a roadmap of what to look for, where to look and how to evaluate IP issues that are frequently encountered in business transactions. Understanding the Deal
The first step in assessing what level of IP due diligence is warranted is to understand both the scope of the transaction and the client's objectives and expectations. The attorney's challenge is to ensure that clients get the value that they expect out of a transaction and avoid unpleasant surprises after a deal is closed, but to do so cost-effectively and with a focus on those IP issues most likely to impact the client's business. Trademarks, patents and other IP rights can come into play in virtually any business transaction, for example: Mergers and Acquisitions Asset or Stock Purchases Spin-Offs Bankruptcy Reorganizations and Asset Dispositions Joint Ventures Distributorship Agreements Equipment Purchases or Leases Employment Agreements Sale of Goods or Services Technology Licenses Financing and Security Interests
An attorney's understanding of the transaction and the client's goals will help determine how much IP due diligence is reasonable, set timing and cost limitations and direct the focus of the investigation. For example, if the value of the IP assets being transferred is low relative to the non-IP assets, a lesser extent of IP due diligence will generally be warranted. Even if the IP assets being transferred are...