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Handling Intellectual Property and Information Technology Issues in Mergers & Acquisitions

March 22, 2012

Presented By:

Laurence Rickles, Associate Trademark Counsel Johnson & Johnson

New Brunswick, New Jersey www.jnj.com

Daniel Glazer, Partner

Patterson Belknap Webb & Tyler LLP New York, New York

www.pbwt.com 2

Agenda •  Overview of IP/IT Rights •  Transaction Structure •  Role of IP Counsel •  Due Diligence

–  Third-party agreements –  Owned Intellectual Property –  Third-party IP disputes –  Information Technology assets

•  Purchase Agreement –  Representations and warranties –  Covenants and licenses –  Transition services

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Intellectual Property and Information Technology

Patents: New and useful inventions

Trademarks: Brands and logos used to identify goods or services

Copyrights: Original works of authorship

Trade secrets: Confidential information, know how, non-patented inventions

Non-US IP: Designs, database rights

Information Technology: Software, hardware, networks 4

Transaction Structure •  Stock Acquisition

–  Acquisition of controlling (or non-controlling) interest in target company 1)  No assignment of IP assets 2)  Target's assets and liabilities follow by operation of law

•  Asset Acquisition –  Acquisition of division or product line

1)  Assignment of specified IP assets 2)  Purchaser acquires only certain assets and assumes only

certain liabilities 5

Transaction Structure •  Merger

–  Combination of two companies –  New company succeeds to both companies'

assets and liabilities –  Less likely to be deemed an assignment if Target

survives transaction 1)  Reverse subsidiary merger: Purchaser forms an

acquisition subsidiary that is merged into Target 2)  Forward subsidiary merger: Target is merged into

acquisition subsidiary 6

Role of IP Counsel •  Clarify respective roles of in-house and external counsel

–  Assess internal resources 1)  Are the company's non-IP corporate lawyers familiar with IP issues? 2)  Does the company have in-house IP specialists? Familiarity with M&A

transactions? –  Define external IP counsel's contributions

1)  Does external counsel take the lead or support in-house counsel? 2)  Different roles may be appropriate at different stages of transaction

–  Assess need for local counsel in key foreign jurisdictions –  Identify budgetary or time constraints

1)  May shape scope of due diligence –  Set expectations for post-transaction assistance

1)  Can in-house team handle recordals and other transfer logistics? 2)  Will external resources be required to manage new portfolio? 7

IP/IT Agreements Restrictions on assignment or change of control •  Non-assignment provisions applicable to licensees

–  General rule: Transaction is an assignment if Target doesn't survive (e.g., asset sales, forward mergers)

–  Minority view: Non-assignment provisions triggered by reverse subsidiary mergers. SQL Solutions (N.D. Cal. 1991)

•  Reverse subsidiary merger may violate provision restricting assignment "by operation of law." Meso Scale Diagnostics v. Roche Diagnostics (Del. Ch. 2011)

•  Change of control provisions typically triggered by asset sales and mergers, as well as sales of sufficient stock to meet the definition of control –  Often results in termination, accelerated payments, or springing liens

or licenses 8

IP/IT Agreements Agreements silent on transfer •  Non-exclusive IP licenses may not be assigned without licensor's

consent (majority view) •  Split of authority as to whether exclusive IP licenses are assignable

without licensor's consent •  Licensor may assign IP license without licensee's consent •  Trademark co-existence agreement: No reported decisions

Obligations that may apply to Purchaser or its affiliates •  "Licensed IP" may be defined as "all IP (in a certain field) owned by

licensor [i.e., Target] or any of its affiliates" •  After Closing, Purchaser and its affiliates likely will be affiliates of

Target, and Purchaser's IP may be "Licensed IP" 9

IP/IT Agreements Agreements to which Target's parent or other affiliate is a party •  Target may have rights in certain in-licensed IP/IT only as a result of

its affiliate status, which terminates as of Closing •  "Divested Entity" provisions

–  Divested affiliate (Target) may continue using licensed IP/IT for a limited time post-divestiture

–  Seller may use licensed IP/IT for divested affiliate's benefit –  Licensor often obligated to negotiate new license with divested affiliate

Agreements soon due to expire or terminate •  Is renewal automatic or can a party terminate at will? •  Potential uncertainty concerning ongoing rights may be material

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IP/IT Agreements Bankruptcy considerations •  Contractual restrictions on debtor-licensee's assignment

typically are ineffective –  Look to "applicable non-bankruptcy law" –  Same rules as if agreements were silent on transferability

•  Debtor-licensor can unilaterally reject an unfavorable trademark license and terminate licensee's trademark rights –  U.S. Bankruptcy Code (Section 365(n)) protects other IP

licensees

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Owned IP: Issues Common to Patents, Trademarks and Copyrights Schedules of federal, state and foreign registrations and applications •  Patents, trademarks, copyrights, domain names

Items missing from or incorrectly included on Target's IP schedules •  Search U.S. and foreign public databases to confirm accuracy

•  Confirm the significance of IP schedules –  Asset acquisitions: Define the scope of IP being transferred –  Stock acquisitions: Ensure due diligence was thorough

•  Accuracy is less crucial in stock acquisitions because IP follows with control of Target by operation of law

Items due to expire or for which maintenance fees are due •  Key concern in asset acquisitions, where Purchaser is responsible for

maintaining IP portfolio immediately after Closing 12

Owned IP: Issues Common to Patents, Trademarks and Copyrights Recorded and unreleased security interests •  May reflect existing lien or simple failure to record release

Abandoned or expired items •  Revival may be possible after failure to pay fees •  Damages can be recovered for pre-expiration infringement

Record owner is an affiliate of Target that is not part of the contemplated transaction •  Arrange to provide Target with ownership or license

Gaps or other inconsistencies in record chain of title

Record owner is unrelated third party, or former name of Target, or entity to which Target is a successor-in-interest •  Ownership issue or failure to record transfer or name change?

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Owned IP: Issues Common to Patents, Trademarks and Copyrights Material changes in IP filing strategies •  May indicate infringement concerns or change in business strategy

Jointly owned IP •  Joint ownership rules vary by type of IP and by jurisdiction

–  U.S. law: Joint copyright owners can each exploit the copyrighted work freely, subject to a duty of accounting for licensing royalties received and a duty to not destroy the value of the work

–  UK law: Joint copyright owners cannot exploit without the other's consent

IP developed using government/university/military resources or as part of a standards-setting organization or patent pool •  Arrangements often restrict transfer, mandate an approach to exploitation, or require licensing, joint ownership or other mandated sharing of proprietary rights with third parties

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Patents U.S. and most foreign patent applications are not published (and cannot be searched) for at least 18 months after filing •  Review Target's filing records and consult Target's patent counsel to determine scope and filing status

Patents or patent applications for which Target's employee or contractor is the record owner •  Confirm assignment from inventor to Target was recorded with USPTO

Business methods and specialist fields •  Bilski (S. Ct. 2010): Confirmed that business methods are patentable; standards for patentability and validity remain in flux 15

Trademarks •  Intent-to-use (ITU) trademark applications cannot be assigned

prior to amending the application to reflect the mark is in use –  Exception: Assignment permitted in connection with the transfer of the entire

business to which the applied-for mark pertains –  If necessary to avoid improper assignment, Purchaser can take an exclusive

license to the applied-for mark

•  Only entities based in countries that are members the Madrid Protocol or Madrid Agreement may own international trademark registrations and national extensions –  Example: A UK company (Protocol only) cannot assign to a Canadian

company because Canada is not a party to Madrid system –  Example: A U.S. company (Protocol only) could own an extension of a

registration to France (Protocol and Agreement), but not an extension to Algeria (Agreement only)

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Domain Names •  Domain names for which employee or contractor is

the record owner –  An uncooperative employee or contractor can "ransom" a

domain name to hold up the contemplated transaction

•  Some jurisdiction-specific domains only can be owned by/assigned to persons or entities based in the applicable jurisdiction –  Examples: European Union (.eu), Canada (.ca),

Germany (.de) 17

Copyrights Registration of material copyrights •  For copyrighted works created in the U.S., registration is required to

sue for infringement under the U.S. Copyright Act. –  Statutory damages available if work is registered before the

infringement commences or within three months of publication

Material copyrighted works previously assigned to Target •  Author/creator retains irrevocable right to terminate any assignment

within a five-year window beginning 35 years after the assignment –  56 years from the date of copyright for pre-1978 assignments

–  Does not apply to "works made for hire" 18

Employee/Contractor Agreements Invention assignment and confidentiality agreements •  Present transfer of rights ("hereby assign") vs. promise to

transfer ("will assign") •  "Work for hire" only applies to copyrights, not all IP

–  When prepared by a contractor, software code not a work made for hire

•  Inadequate confidentiality measures could threaten proprietary status of trade secrets –  Confidentiality obligations should be perpetual for trade secrets –  Some states will not enforce perpetual confidentiality obligations

for non-trade secret information 19

Intellectual Property Disputes Key considerations for pending disputes •  Pending or threatened litigations involving Target, an affiliate, or a key

licensee/licensor •  Search for active matters in online databases •  Materiality of dispute; worst-case scenario •  Availability of alternatives in case of injunction •  Potential costs and indemnification obligations •  Likelihood of settlement •  Purchaser's relationship to the adverse party – help or hindrance? •  Possibility of parallel actions in foreign countries •  Opinions of counsel regarding merits of claim or validity of third-party IP

–  Require special treatment in diligence process (delay disclosure; specific NDA identifying parties' common interest; avoid placing in data room) 20

Information Technology Target's proprietary software products •  For code created by or for Target, confirm rights owned

by Target –  "Work for hire" and third-party developers

•  For code licensed to Target, confirm perpetual license for Target's customers and/or Target's right to provide support if license terminates

•  Source code should be sufficiently documented and accurate so a reasonably skilled developer can understand and compile software

•  Worms, viruses, and other defects or bugs 21

Information Technology Open Source Code •  Do Target's proprietary software products incorporate open source code?

–  Risk of viral licensing •  If so, was open source code used in a manner that could jeopardize

proprietary status of Target's software before and/or after Closing? •  Due Diligence:

–  Review terms of open source license agreements (opensource.org) –  Determine whether Target has and complies with internal policies

concerning use of open source code –  If concerns are material:

•  Request code logs •  Perform scan on applicable source code (Black Duck / Palamida) •  Retain software consultant to analyze open source use •  Include representations in Purchase Agreement

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Information Technology Source code escrow for material software licensed to Target •  Ensure present grant of license to escrow materials

–  License contingent on licensor's bankruptcy may be unenforceable

–  Target should be permitted to modify Licensed Software

•  Ensure escrow materials will be released if Licensor ceases operation or fails to provide support for licensed software –  Bankruptcy/insolvency and associated "warning signs"

(e.g., auditors question licensor's operation as a going concern)

Rights granted to third parties in Target's source code •  Determine likelihood and potential impact of release from escrow

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Purchase Agreement: Key IP/IT Representations

•  Schedule of IP

•  Sufficiency of IP/IT Assets

•  Ownership of IP / Right to Use

•  No Liens or Encumbrances

•  Validity and Enforceability

•  Non-infringement

•  Confidential Information / Employee Matters

•  Effect on Purchaser

•  Company IP Agreements

•  No IT Malfunctions / Viruses / Unauthorized Access

•  Accuracy / Completeness of Source Code

•  Open Source

•  Data Privacy and Protection

•  DMCA

•  Research and Development 24

Purchase Agreement: Allocating Infringement Risk

Who bears the risk of unasserted third-party infringement claims?

•  Buyer's position –  "The operation of the business doesn't infringe" –  Seller is in better position to identify, assess and mitigate –  Buyer may be more attractive target (deeper pockets?) –  Consider 6-year "look-back"

•  Seller's position –  Risk of doing business –  Qualify warranties by knowledge and/or materiality –  "Impossible" to assess infringement risk with 100% certainty –  Protect against "back door" non-infringement warranties –  Consider insuring against breach of representations

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Ancillary IP Agreements •  Transitional trademark license

–  "Existing stock" vs. ongoing operation of business –  Exceptions: Fair use? Reference to historical use? –  Typically separate agreements if term longer than 120 days

•  Patent and copyright licenses –  Often perpetual, subject to non-compete and field limitations

•  Assignments of registrations and applications –  Master assignment (at closing) –  Jurisdiction-specific assignments (post-closing)

1)  Coordinate with local counsel on requirements for recording 2)  Seller should obligate Purchaser to record within agreed time period

•  Domain name assignments –  "Further assurances" to coordinate transfer with registrar

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Transition Services Agreement

•  Responsibility for consents: Purchaser or Seller? •  Who provides/receives services? For how long? •  Development of service descriptions and service levels •  Identification of omitted and additional services •  Standard of performance / obligation to perform •  Retention of key employees / sufficient personnel to provide

services •  Calculation of fees / financial incentives for quick transition •  Indemnification / remedies for non-performance •  Dispute resolution / escalation procedures

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Contact Laurence Rickles Johnson & Johnson

732.524.2281 Lrickles@its.jnj.com

Daniel Glazer Patterson Belknap Webb & Tyler LLP

212.336.2523 dcglazer@pbwt.com

Questions?

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