INTELLECTUAL PROPERTY INTELLECTUAL PROPERTY ASPECTS OF MERGERS & ASPECTS OF MERGERS &

ACQUISITIONS:ACQUISITIONS:A CASE STUDYA CASE STUDY

Jeanne HamburgJeanne HamburgPartnerPartner

www.nmmlaw.comAttorneys at Law

2Attorneys at Law

A HYPOTHETICAL CASEA HYPOTHETICAL CASE

You have been asked by your client, a sizable publishing You have been asked by your client, a sizable publishing firm, to handle all intellectual property aspects arising firm, to handle all intellectual property aspects arising from the purchase of its assets by a large publishing from the purchase of its assets by a large publishing conglomerate. Fortunately, you are somewhat familiar conglomerate. Fortunately, you are somewhat familiar with the client’s publishing agreements, having drafted with the client’s publishing agreements, having drafted the most recent company forms. You have also worked the most recent company forms. You have also worked on all the company’s IP matters for the past nine years.on all the company’s IP matters for the past nine years.

What is the first thing you do?What is the first thing you do?

3Attorneys at Law

DUE DILIGENCEDUE DILIGENCE

Why?Why?– To aid in To aid in

Determining the advisability of the transaction Determining the advisability of the transaction

Minimizing the risk of exposure for the target client Minimizing the risk of exposure for the target client

Formulating a proposal for the transactionFormulating a proposal for the transaction

Structuring, negotiating and drafting representations and Structuring, negotiating and drafting representations and warranties that do not expose the client to risks and warranties that do not expose the client to risks and exposure identified during the processexposure identified during the process

– Determining if closing conditions can/will be metDetermining if closing conditions can/will be met

4Attorneys at Law

DUE DILIGENCE:DUE DILIGENCE:INFORMATION GATHERINGINFORMATION GATHERING

What are we looking for?What are we looking for?– Anything that could materially affect the value of the Anything that could materially affect the value of the

client or its IP position:client or its IP position:

Potential or actual litigations that could result in Potential or actual litigations that could result in exposureexposure

Agreements material to the company’s business Agreements material to the company’s business that may be affected by change of controlthat may be affected by change of control

5Attorneys at Law

DUE DILIGENCE:DUE DILIGENCE:INFORMATION GATHERINGINFORMATION GATHERING

Specifically, what are we looking for?Specifically, what are we looking for?– Types of agreementsTypes of agreements– Provisions in agreementsProvisions in agreements– Company policies and practicesCompany policies and practices– IP portfolioIP portfolio– Litigation/arbitration/mediationLitigation/arbitration/mediation– Claims/threats of infringementClaims/threats of infringement

6Attorneys at Law

DUE DILIGENCE:DUE DILIGENCE:HOW TO GATHER THE INFORMATIONHOW TO GATHER THE INFORMATION

Personnel InterviewsPersonnel Interviews

Document ReviewDocument Review

Independent InvestigationIndependent Investigation

7Attorneys at Law

DUE DILIGENCE:DUE DILIGENCE:PERSONNEL INTERVIEWSPERSONNEL INTERVIEWS

Identify the right people. In our hypothetical, Identify the right people. In our hypothetical, who?who?

Rights and PermissionsContracts Department

MIS/Technology Officer

Senior Executives

Inside & Outside Counsel

Charged with web site development/sales/subscriptions?

CFO (liens, security interest)

LicensingLitigationCompany PolicyPeople

8Attorneys at Law

DUE DILIGENCE:DUE DILIGENCE:PERSONNEL INTERVIEWSPERSONNEL INTERVIEWS

You are interviewing the President and the CEO of your client. You are interviewing the President and the CEO of your client. They disclose to you that they showed some recent forms of They disclose to you that they showed some recent forms of publishing contracts to the purchaser. The purchaser was publishing contracts to the purchaser. The purchaser was very pleased with the recent forms, of course, because you very pleased with the recent forms, of course, because you drafted them. Among other things, they contain clear grants drafted them. Among other things, they contain clear grants of exclusive rights, including digital and electronic rights and of exclusive rights, including digital and electronic rights and are assignable in the event of a change in control. In fact, are assignable in the event of a change in control. In fact, your client tells you that the purchaser entered into the deal your client tells you that the purchaser entered into the deal with the understanding that these were the forms the with the understanding that these were the forms the company had used since inception of the business in 1965.company had used since inception of the business in 1965.

Is there an obligation to disclose to the purchaser that these Is there an obligation to disclose to the purchaser that these are not the only forms of publishing contracts?are not the only forms of publishing contracts?

9Attorneys at Law

DUE DILIGENCE:DUE DILIGENCE:HYPOTHETICAL-INTERVIEWSHYPOTHETICAL-INTERVIEWS

When you receive from purchaser’s counsel a copy When you receive from purchaser’s counsel a copy of the draft asset purchase agreement, there is a of the draft asset purchase agreement, there is a representation by the seller that the 1995 forms are representation by the seller that the 1995 forms are the only publishing forms the company has ever the only publishing forms the company has ever used. used.

Do you have an obligation to inform the purchaser’s Do you have an obligation to inform the purchaser’s counsel that your client cannot make this counsel that your client cannot make this representation?representation?

If so, do you have an obligation to tell your client that If so, do you have an obligation to tell your client that you are going to do this?you are going to do this?

10Attorneys at Law

DUE DILIGENCE:DUE DILIGENCE:DOCUMENT REVIEWDOCUMENT REVIEW

So you’ve conducted your client interviews, and have So you’ve conducted your client interviews, and have or will straighten out the form of agreement issue with or will straighten out the form of agreement issue with counsel for the seller at the appropriate time.counsel for the seller at the appropriate time.

However, in addition to learning that there are However, in addition to learning that there are thousands upon thousands of publishing agreements, thousands upon thousands of publishing agreements, you have also discovered dozens of software licenses, you have also discovered dozens of software licenses, web site development agreements, software web site development agreements, software development agreements (none of the client’s systems development agreements (none of the client’s systems were innovated in-house) and a few co-distribution and were innovated in-house) and a few co-distribution and co-publication agreements.co-publication agreements.

What do you do first?What do you do first?

11Attorneys at Law

DUE DILIGENCE:DUE DILIGENCE:DOCUMENT REVIEWDOCUMENT REVIEW

Make a wish list of what you’d like to reviewMake a wish list of what you’d like to review

Select a team of client representatives and attorneysSelect a team of client representatives and attorneys

Make sure the team understands the context, purpose Make sure the team understands the context, purpose and key terms of the intended business dealand key terms of the intended business deal

Establish a timeline for collecting and reviewing Establish a timeline for collecting and reviewing documents and a “data room”documents and a “data room”

Be selective but thorough: consider review of Be selective but thorough: consider review of representative documentsrepresentative documents

Communicate and coordinate with attorneys who Communicate and coordinate with attorneys who specialize in other areas working for the clientspecialize in other areas working for the client

12Attorneys at Law

DUE DILIGENCE:DUE DILIGENCE:DOCUMENTING THE DOCUMENTSDOCUMENTING THE DOCUMENTS

Once key documents are identified, and you Once key documents are identified, and you have gathered them, obviously you review them. have gathered them, obviously you review them. But how do you document what you learn? But how do you document what you learn? Ideas?Ideas?

Charts (after selected doc review, team feedback) E.g. charts for contract review: parties, subject matter, red flags

Target key clauses for team members to review (e.g. grant, change of control)

Alert the client immediately if an area of exposure is spotted

13Attorneys at Law

DUE DILIGENCE:DUE DILIGENCE:KEY AGREEMENTS TO REVIEWKEY AGREEMENTS TO REVIEW

What sorts of agreements would these be?What sorts of agreements would these be?

Publishing

Assignments

Licenses

Subscription (print, web site, digital, etc.)

Co-distribution, co-publication, or other joint venture/teaming

Employment

Consulting

Independent contractor

Supply

Vendor

Service

Non-Disclosure

14Attorneys at Law

DUE DILIGENCE:DUE DILIGENCE:HYPOTHETICAL – DOCUMENT REVIEWHYPOTHETICAL – DOCUMENT REVIEW

You have completed the document review stage of due You have completed the document review stage of due diligence. You are of course happy with the form publishing diligence. You are of course happy with the form publishing contracts you prepared. However, as noted these date back contracts you prepared. However, as noted these date back only to 1995, when you first started working with your client, only to 1995, when you first started working with your client, which was founded in 1965. You and your team have also which was founded in 1965. You and your team have also reviewed representative publishing agreement forms used by reviewed representative publishing agreement forms used by your client before 1995. In fact, several different versions of your client before 1995. In fact, several different versions of each of these contracts exist. Among other issues, you notice:each of these contracts exist. Among other issues, you notice:– none of the agreements grant any rights electronic, digital or “new none of the agreements grant any rights electronic, digital or “new

media” rightsmedia” rights

– all of the agreements are silent on whether they are assignable in the all of the agreements are silent on whether they are assignable in the event of a change of controlevent of a change of control

– there are no executed agreements for contributions to periodical there are no executed agreements for contributions to periodical publications prior to 1995 and in one third of the cases after 1995publications prior to 1995 and in one third of the cases after 1995

15Attorneys at Law

DUE DILIGENCE:DUE DILIGENCE:HYPOTHETICAL – DOCUMENT REVIEWHYPOTHETICAL – DOCUMENT REVIEW

You alert your client to these issues and it asks you for You alert your client to these issues and it asks you for recommendations and creative ways to address each of them.recommendations and creative ways to address each of them.

– How would you recommend the agreement be structured to How would you recommend the agreement be structured to address:address:

Failure to capture new media rights?Failure to capture new media rights?

– Exclude pre-1995 rights from transferExclude pre-1995 rights from transfer

Potential assignability problems?Potential assignability problems?

– Limit representations and warranties as to assignability of pre-1995 Limit representations and warranties as to assignability of pre-1995 agreements and rights granted thereunder. See agreements and rights granted thereunder. See Gardner v. Nike, IncGardner v. Nike, Inc., 279 ., 279 F. 3d 774, 61 U.S.P.Q. 2d 1529 (9F. 3d 774, 61 U.S.P.Q. 2d 1529 (9thth Cir. 2002) Cir. 2002)

Lack of exclusivity and assignability issues?Lack of exclusivity and assignability issues?

– Disclose the undocumented arrangements. Disclose the undocumented arrangements. Caveat emptorCaveat emptor!!

– Limit the representations and warranties (and consequent obligations to Limit the representations and warranties (and consequent obligations to indemnify) as to assignability of undocumented arrangementsindemnify) as to assignability of undocumented arrangements

– Limit reps and warranties by time period and/or rights granted (e.g. rep Limit reps and warranties by time period and/or rights granted (e.g. rep assignability of all rights only after 1995)assignability of all rights only after 1995)

16Attorneys at Law

DUE DILIGENCE:DUE DILIGENCE:INDEPENDENT INVESTIGATIONINDEPENDENT INVESTIGATION

You have completed your review of documents but want to be sure You have completed your review of documents but want to be sure there aren’t any issues you haven’t uncovered.there aren’t any issues you haven’t uncovered.

To assess other areas of potential exposure—and also the scope of To assess other areas of potential exposure—and also the scope of the client’s ownership rights in IP -- what documents are accessible to the client’s ownership rights in IP -- what documents are accessible to you that you might review independently and buyer’s counsel surely you that you might review independently and buyer’s counsel surely will?will?

• U.S. and foreign patent, trademark and copyright rights and filings

• PTO, WIPO web sites• Assignment records and

maintenance fee/annuity records for patents

• Commissioned Copyright Office searches with chain of title information and information on any security interest (e.g. lien) or other encumbrance

• UCC filings (security interest)

• Internet/news database searches

• Westlaw/Lexis or other databases re: litigations

• Prosecution files and assignment records

• If your client’s public, SEC filings

17Attorneys at Law

DUE DILIGENCE:DUE DILIGENCE: THE ANALYSISTHE ANALYSIS

Once you’veOnce you’ve

interviewed the relevant people, interviewed the relevant people,

conducted your own investigation, conducted your own investigation,

reviewed the documents and “documented” reviewed the documents and “documented” them,them,

what is the next step?what is the next step?

– Prepare a report addressing major areas Prepare a report addressing major areas of exposure or concern.of exposure or concern.

18Attorneys at Law

DUE DILIGENCE: DUE DILIGENCE: THE ANALYSISTHE ANALYSIS

What are some typical provisions that might raise a red What are some typical provisions that might raise a red flag from an IP attorney’s perspective?flag from an IP attorney’s perspective?

Anti-assignment

Silence on assignment

Non-exclusive rights grants to or from your client

Ambiguous or ineffectual rights grants

Termination

Loss of rights

Indemnification (especially if not limited)

19Attorneys at Law

DUE DILIGENCE:DUE DILIGENCE: THE ANALYSISTHE ANALYSIS

More red flagsMore red flags

Covenants not to sue (any covenant!)

Automatic reversion/transfer of rights

Government licenses

Sublicenses

Assignments

Non-compete

Source code escrow

Unusual jurisdiction

20Attorneys at Law

DUE DILIGENCE:DUE DILIGENCE:THE ANALYSISTHE ANALYSIS

Significant Copyright Issues:Significant Copyright Issues:

– Scope of Rights (exclusive, non-exclusive)Scope of Rights (exclusive, non-exclusive)

– Grants EffectiveGrants Effective

– Rights TransferableRights Transferable

– Assignments in Proper OrderAssignments in Proper Order

– WMFH or assignment where appropriateWMFH or assignment where appropriate

– Registrations in Proper OrderRegistrations in Proper Order

– No Encumbrances/LiensNo Encumbrances/Liens

21Attorneys at Law

DUE DILIGENCE:DUE DILIGENCE:THE ANALYSISTHE ANALYSIS

Significant Trademark Issues:Significant Trademark Issues:

– Assignments in proper orderAssignments in proper order

– Federal versus common law rightsFederal versus common law rights

– Renewals timely filedRenewals timely filed

– Opposition/cancellation proceedingsOpposition/cancellation proceedings

– ClassesClasses

– Third party useThird party use

– Policing/LicensingPolicing/Licensing

– ProtestsProtests

– No encumbrances/liensNo encumbrances/liens

22Attorneys at Law

DUE DILIGENCE:DUE DILIGENCE:THE ANALYSISTHE ANALYSIS

Significant Trade Secret Issues:Significant Trade Secret Issues:

– Confidentiality/security precautions and proceduresConfidentiality/security precautions and procedures

– Proper markings/legendsProper markings/legends

– Employment agreementsEmployment agreements

– Non-disclosure agreementsNon-disclosure agreements

23Attorneys at Law

DUE DILIGENCE:DUE DILIGENCE:THE ANALYSISTHE ANALYSIS

Significant Domain Name Issues:Significant Domain Name Issues:

– Verification of record ownersVerification of record owners

– Assignments in proper orderAssignments in proper order

– Status of registration and renewalStatus of registration and renewal

24Attorneys at Law

DUE DILIGENCE:DUE DILIGENCE:THE ANALYSISTHE ANALYSIS

Significant Litigation Issues:Significant Litigation Issues:

– Assess risks, exposure of actual and threatened Assess risks, exposure of actual and threatened litigation:litigation:

Indemnification (both ways)Indemnification (both ways)

Worst case scenario if client is defendant: Effect on businessWorst case scenario if client is defendant: Effect on business

Likelihood of successLikelihood of success

– The claim not brought The claim not brought byby the client may be as the client may be as important as the one brought by or against the clientimportant as the one brought by or against the client

25Attorneys at Law

FINAL STAGE:FINAL STAGE:DOCUMENTING THE TRANSACTION DOCUMENTING THE TRANSACTION

DRAFTING TIPSDRAFTING TIPSRelevant Sections of Purchase Agreement:Relevant Sections of Purchase Agreement:

– DefinitionsDefinitions

AssetsAssets

Intellectual PropertyIntellectual Property

– Scope of TransferScope of Transfer

– Representations and WarrantiesRepresentations and Warranties

26Attorneys at Law

FINAL STAGEFINAL STAGE::DOCUMENTING THE TRANSACTION DOCUMENTING THE TRANSACTION

DRAFTING TIPSDRAFTING TIPS

Some typical representations and warranties:Some typical representations and warranties:– Here are some lists of all the IP seller owns, has licensed from Here are some lists of all the IP seller owns, has licensed from

someone else and has licensed to someone else (see disclosure someone else and has licensed to someone else (see disclosure schedule)schedule)

– Seller hasn’t given any IP or rights away unless it’s disclosedSeller hasn’t given any IP or rights away unless it’s disclosed

– Here are all the co-publication and electronic distribution dealsHere are all the co-publication and electronic distribution deals

– Seller owns or has acquired sufficient rights to exploit the works Seller owns or has acquired sufficient rights to exploit the works in the way it is doing so currentlyin the way it is doing so currently

– Good and marketable titleGood and marketable title

– No liens or judgmentsNo liens or judgments

27Attorneys at Law

FINAL STAGE:FINAL STAGE:DOCUMENTING THE TRANSACTIONDOCUMENTING THE TRANSACTION

DRAFTING TIPSDRAFTING TIPS

More Reps and Warranties:More Reps and Warranties:– All registrations and applications to government entities All registrations and applications to government entities

with respect to IP are valid and in full force and effect and with respect to IP are valid and in full force and effect and all registration and renewal fees due up to closing are paid.all registration and renewal fees due up to closing are paid.

– Right to use computer systems and softwareRight to use computer systems and software

– No pending, threatened claims against seller unless No pending, threatened claims against seller unless discloseddisclosed

– Seller not violating any third party rights unless disclosedSeller not violating any third party rights unless disclosed

– Third party not violating any Seller’s rights unless disclosedThird party not violating any Seller’s rights unless disclosed

28Attorneys at Law

FINAL STAGE:FINAL STAGE:DOCUMENTING THE TRANSACTIONDOCUMENTING THE TRANSACTION

DRAFTING TIPSDRAFTING TIPS

Yet MORE typical reps and warranties:Yet MORE typical reps and warranties:– No pending, threatened claims asserted by seller unless No pending, threatened claims asserted by seller unless

discloseddisclosed

– Domain names and trademarks are still in full force and effect as Domain names and trademarks are still in full force and effect as of closing and no pending or threatened challenge to domain of closing and no pending or threatened challenge to domain names, opposition, cancellation, etc. as to trademarksnames, opposition, cancellation, etc. as to trademarks

– Assignability of contracts, rights thereunderAssignability of contracts, rights thereunder– Owns rights to customer information, supplier information or Owns rights to customer information, supplier information or

other lists included in the IP assets being soldother lists included in the IP assets being sold

29Attorneys at Law

FINAL STAGE:FINAL STAGE:DOCUMENTING THE TRANSACTION DOCUMENTING THE TRANSACTION

DRAFTING TIPSDRAFTING TIPS

Qualifying reps and warranties:Qualifying reps and warranties:

– As to time periodAs to time period

– As to materialityAs to materiality

As to seller’s businessAs to seller’s business

As to particular agreements’ effect on the seller’s As to particular agreements’ effect on the seller’s business “taken as a whole”, or “Individually”business “taken as a whole”, or “Individually”

Disclose, disclose, disclose!Disclose, disclose, disclose!

30Attorneys at Law

FINAL STAGE:DOCUMENTING THE TRANSACTION DOCUMENTING THE TRANSACTION

DISCLOSURE SCHEDULESDISCLOSURE SCHEDULESYou have discovered that a number of the contracts You have discovered that a number of the contracts you’ve reviewed, in particular the software development you’ve reviewed, in particular the software development agreements and licenses, contain a requirement that agreements and licenses, contain a requirement that your client obtain a consent to their assignment to a third your client obtain a consent to their assignment to a third party.party.

How do you recommend that the agreement deal with How do you recommend that the agreement deal with this?this?

– Disclosure schedulesDisclosure schedules– Itemize all the contractsItemize all the contracts– Seller will exercise “reasonable best efforts” to obtain consentsSeller will exercise “reasonable best efforts” to obtain consents

31Attorneys at Law

DUE DILIGENCE:DUE DILIGENCE:FINAL STAGEFINAL STAGE

GOOD LUCK!GOOD LUCK!

32Attorneys at Law

Jeanne Hamburg, Esq.Jeanne Hamburg, Esq.

Specializing in:Specializing in:– all aspects of copyright all aspects of copyright

and trademark law, and trademark law, – both in litigation and in both in litigation and in

the transactional area the transactional area

Norris McLaughlin & Marcus, P.A.220 East 42nd Street30th FloorNew York, NY 10017(212) 808-0700jhamburg@nmmlaw.comwww.nmmlaw.com