Pitfalls and Related Traps in Intellectual Property Transactions
By Kim Nobles,
Irell & Manella, LLP
Companies may extract value
from their ideas or technology by initially identifying, protecting
and managing their Intellectual Property (IP). Thereafter, IP
may be licensed, sold or bartered for even greater value. With
the current downturn in the technology-sector market, it is critical
to avoid the common pitfalls and traps in IP transactions.
In particular, although the
protection of IP through filing of patents, trademarks and copyrights
is important, companies should be aware that many transactions
involving technology may prompt a review of the companys
IP portfolio and related policies. Accordingly, companies should
understand what such an investigation, called due diligence, entails.
Due diligence can best be
described as taking all reasonable steps to investigate potential
problems in the business, legal and financial affairs of a company
in connection with securities offerings or other corporate transactions.
This process typically involves, among other things, a thorough
examination of records related to the IP assets in question.
Due diligence IP issues typically
arise during the formation of technology-based joint ventures
or alliances, mergers and acquisitions of technology companies,
technology-company private placements, public offerings and company
Due diligence, when conducted
properly, greatly reduces the risk of IP-related "surprises" and
helps clarify the scope of the IP assets and the value they present.
In particular, effective due diligence enables one to evaluate
the transaction in light of the strength of the IP assets and
ensure that a fair price is paid. It helps an entity identify
any problem areas, obstacles or deal breakers so that informed
decisions can be made and negotiations properly prepared for.
Remember, it is your IP that often determines your companys
value to your customers, shareholders, potential partners, and
of course, the financial world as a whole.
Due diligence also ensures
that accurate and complete disclosure is made in the relevant
documents, including securities offering documents. In addition,
it provides support for legal opinions that are given at the conclusion
of the transaction.
the scope of the investigation. In short, understand what
will and will not be investigated. In addition, in determining
the scope of the investigation, one should determine the cost/benefit
versus the risk of excluding certain tasks from the investigation.
the case of a transaction involving IP, determine the nature
of the IP assets owned or to be acquired. This involves an
uncovering of any problems of ownership, title or validity
of IP assets, an assessment of any limitations in the value
or enforceability of the IP assets and an assessment of any
IP related problems in the proposed transaction. It also involves
a determination of the IP rights necessary to the underlying
business. For example, one should identify any IP rights retained
by the seller that must be licensed to the buyer; identify
and evaluate key licenses with third parties; and consider
the effect of unlicensed third party IP rights.
if key or current technology is covered by patents, trademarks
and/or copyrights. The claims in existing patents may not
cover the current technology that is being practiced, as the
company may have evolved beyond the original patented subject
matter. In addition, U.S. and foreign patents on key technology
may not have been filed.
how much of the IP is in the form of trade secrets. One should
review employee/consulting agreements, NDAs, entrance and
exit interviews, and the companys security procedures
to determine if trade secrets are properly protected. One
should also identify if there are open trade secret issues
in the proposed transaction, and take steps to resolve the
issues through assignments, changes of procedures or other
measures prior to the closing of the transaction.
As an emerging growth technology
organization, it is imperative to value your IP and its critical
worth to your business existence. Besides obtaining protection
of your IP, you should be aware of and be prepared for the due
diligence process, so as to minimize transaction uncertainty and
risk, as well as to set meaningful parameters for your IP transactions.
Nobles is an intellectual property attorney in the Newport Beach
office of the law firm of Irell
and Manella, LLP. She specializes in representing high tech
companies in legal, technical, strategic planning, licensing and
intellectual property matters, including patents, trademarks and
related litigation. Irell and Manella, LLP, is a full-service
firm with a worldwide base of clients.) Kim can be reached at
This discussion is general in nature and is not intended to and
does not create a lawyer/client relationship. This discussion
should in no way be relied upon or construed as legal advice,
particularly since most legal outcomes are highly dependent on
the facts of a particular case or situation.