IP DUE DILIGENCE Mark I. Feldman DLA Piper US LLP (312) 368-7084 mark.feldman@dlapiper.com
Mark I. Feldman Mark I. Feldman is a partner at the Chicago office of DLA Piper US LLP where he was the national chair of the intellectual property practice group for many years. He is the immediate past president of the Intellectual Property Law Association of Chicago. His practice focus on trademarks, patents, copyrights, trade secrets, and Internet and technology law. Mr. Feldman has extensive experience counseling clients on domestic and international intellectual property registration, enforcement and licensing. He was responsible for implementing the worldwide branded ingredient strategy for the famous NutraSweet trademark. Mr. Feldman has written a chapter on Trademark Law for The Franchisor in a course book from the Practicing Law Institute and has published various articles on trademark law in the Franchise Legal Digest. He has been a panelist and speaker on licensing, acquisitions, trademarks and trade regulation issues at a number of legal conferences. Mr. Feldman was ranked by Chambers USA: America s Leading Lawyers for Business-Intellectual Property (2006); nominated by his peers to appear in An International Who s Who of Trademark Lawyers (Law Business Research. Ltd. 2003-2006) and the Guide to the World s Leading Trademark Lawyers (Euromoney, 2002-2006); selected as a Leading Lawyer in intellectual property law by the Leading Lawyers Network in 2003-2006; designated an Illinois Super Lawyer (2005-2006), as the result of research projects conducted jointly by Law & Politics and Chicago magazines; and listed in the 2005 Who s Who Legal: The International Who s Who of Business Lawyers, and the 2007 edition of The Best Lawyers in America-Intellectual Property. 2
INTRODUCTION IP is often the most valuable asset Intangible nature IP often makes it difficult to analyze Gap between IP and corporate law practices complicates the legal transaction Corporate lawyers often lack detailed knowledge of IP law IP lawyers may lack a deep knowledge of corporate transactions for evaluating the IP issues in the context of the overall deal 3
GOALS OF DUE DILIGENCE Due diligence is about identifying, assessing and managing risk Customize the investigation Importance of the IP to the transaction Types of IP and products involved Budget Timing Addresses freedom to operate and exclusivity Helps allocate risk between parties through the negotiating and drafting of the agreement 4
GOALS FROM BUYER S PERSPECTIVE Does target company have any IP problems? Confirm what you are getting (IP audit) Is there anything affecting the target s title in or enforceability of the IP? What third-party rights affect the target s IP? Does anything affect the value of target s IP Due diligence analysis allows buyer to: Draft transaction documents appropriately Restructure deal Re-negotiate price Back out of deal 5
GOAL FROM TARGET S PERSPECTIVE Make sure the agreement you are signing has accurate reps and warranties Seller must represent and warrant that it owns the designated IP But what if copyright was created by an independent contractor who did not assign to Seller? 6
REPS AND WARRANTIES Allocation of risk Qualifiers To its knowledge To the best of its knowledge Material Except as would have a material adverse affect 7
IDENTIFY THIRD-PARTY IP ASSETS Outbound rights Inbound rights Assignability Are IP rights owned by employees or independent contractors Works made for hire Shop rights 8
DUE DILIGENCE STRATEGIES (I) Develop a plan adapted to the facts, business goals, value, and time constraints Prepare Inventory of IP Assets Categorize the IP Assets Wholly owned Encumbered Licensed in or out Third-party IP infringed by Seller Public domain IP used by Seller 9
DUE DILIGENCE STRATEGIES (II) Conduct IP audit to see if target owns its IP, adequately protected it, has rights to use it, and the liability risks Search public records for IP assets Research litigation Internet research Review public filings Request documents for each category of IP Tailored to the transaction Confirm receipt of all documents requested Send follow-up requests if necessary 10
DUE DILIGENCE STRATEGIES (III) Produce final report Explain factual basis for report Data sources Findings Potential issues if transaction proceeds Remedial actions that can lessen or eliminate risks 11
TARGET COMPANY AGREEMENTS Employment agreements Independent contractor agreements Was ownership transferred? 12
FOREIGN PROTECTION Are the IP assets being exploited in other countries? If so, is the IP protected in other countries? Foreign counsel as part of due diligence team Are there licenses outside the U.S.? 13
PATENTS A right to exclude others from making, using, selling, importing For a limited term - 20 years after filing Invention must be NOVEL, USEFUL, NON-OBVIOUS 14
U.S. PATENT Application must be filed within one year of first: Acts in U.S. Public use Sale or offer to sell Acts anywhere Printed publication describing invention Invention patented 15
FOREIGN PATENTS For most of the rest of the world, application must be filed before any public disclosure or use of invention BEST POLICY: FILE FIRST, if possible, to preserve foreign filing rights. Paris Convention priority 1 year from priority application. PCT - delay up to another 18 months 16
TRADEMARK Word, symbol, device, sound or smell which identifies a product/service as coming from a certain source. Also signifies quality level Strength of mark: Arbitrary or coined Suggestive Descriptive Not confusingly similar to third party s mark Other issues: Lawful use FDA issues 17
TRADEMARK RIGHTS Types of Rights: Common law (limited to areas of use) State law (similar to common law) Federal law Foreign Prevent use of confusingly similar marks Term: potentially forever if mark is in use 18
LOSS OF TM RIGHTS Aggressively police use of the mark Abandonment by uncontrolled third party use License with quality control Naked licensing Genericide (from use as noun) Use TM and symbols Lawful use 19
TRADE SECRETS Information which: Is not generally known to others Confers an economic or business advantage Is the subject of reasonable efforts to maintain secrecy Term: potentially perpetual Examples: formulas, manufacturing processes, customer lists Rights Prevent misappropriation Reverse engineering permitted unless contractually prohibited 20
HOW TO SECURE AND MAINTAIN TRADE SECRETS Maintain trade secrets in confidence. Catalog your trade secrets Implement secure procedures for facilities and computer systems Mark information confidential Have nondisclosure agreements signed by third parties before providing sensitive information Require employee nondisclosure agreements, hold training sessions and use an exit interview process 21
Famous IP Protection Mistakes or Problems Patents Monoclonal Antibodies: Failure by British Technology Group to file for patent protection Cohen-Boyer: Patent limited to US because of publication (filed in two weeks to avoid statutory bar in US) Failure to pay maintenance fees Prosecution problems Public use or disclosure Freedom to operate Do they cover current products/business? 22
Trademarks Infringement: ALTOCOR (Andrx) and ADVICOR (Kos) 60 cases of confusion out of 650,000 prescriptions Court found confusingly similar despite PTO and FDA approvals Preliminary injunction ordered. Kos v. Andrx, 369 F.3d 700 (3 Cir. 2004) FDA Approval: Searle s CELEBRA changed to CELEBREX because FDA first approved CELEXA for unrelated product even though Searle s PTO and FDA filings for CELEBRA predated CELEXA Volkswagen: VW paid almost $800 Million to acquire Rolls Royce but learned, after closing, that they did not acquire the ROLLS ROYCE trademark (BMW acquired it) Inadvertent Franchise: Too may controls in trademark license may create a franchise as a matter of law 23
IP Mistakes (II) Ownership: chain of title Ownership: assignability of licenses Ownership: prior employers and corporate opportunity Copyrights: ownership of works by independent contractors 24
IP Bankruptcy Values Trademark: Pan Am $1 million Patents: VPL Labs Sun paid $4 million for virtual reality patents Copyrights: Rhythm and Blues Legend Ronald Isley Financier paid $4.8 Million for Isley s right to receive royalties from Isley Brothers recordings (e.g., Twist and Shout ) 25
Bankruptcy Procedures Automatic stay DIP decision to accept or reject executory contracts Accept: must bring performance current and have reasonable ability to continue to perform Reject: licensee becomes creditor (generally unsecured) 26
IP Licenses as Executory Contracts in Bankruptcy A trustee or DIP must assume or reject any executory contract of the debtor (Bankruptcy Code Section 365(a)) Intellectual property licenses are generally executory contracts: both licensor and licensee usually have continuing obligations 27
Assignment Recordals: Priority Rules Patent (35 U.S.C. 261) and Trademark (15 U.S.C. 1068) First transfer prevails if recorded in PTO within 3 months of its execution or prior to second transfer Second transfer prevails if it is for: Valuable consideration Without notice Prior to recordation of first transfer (except for grace period) 28
Conclusion Start due diligence early It is a critical investment It identifies issues so both parties can best assess the deal, its risks and value Helps avoid future litigation 29 Chgo1\30905648.1