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Intellectual Property Considerations When Buying a Business

—Daniel M. Levine

Imagine the business deal you have been waiting all your life for lands on your desk. You start scanning the terms, seeing how much it will cost and making plans for the new venture. In your excitement you realize you had better double-check the numbers and terms to make sure everything adds up. It does and you pick up your pen to sign. Then imagine discovering that key pieces of intellectual property are missing from the agreement you just signed. Suddenly your new venture is stalled because it will need to be branded under a different name or critical technology has to be licensed from a third party.

When buying a business, many buyers assume that the intellectual property provisions are valid or they ignore them entirely. However, there are steps you can take to protect yourself and your new business:

1)      Make sure everything is listed-Intellectual property covers a lot of ground, including copyrights, trademarks, patents, and trade secrets. [SEE: WHERE TO START WITH IP Blog Post]. Therefore, all intellectual property intended to be in the deal must be explicitly listed. Absent this list, the assets actually sold and purchased could come in to doubt. Since some intellectual property can only be transferred by written agreement, having it laid out in black and white is crucial.

There are several ways to accomplish this result, the most straightforward and easiest route is to identify the intellectual property by title and application or registration number(s). This information is definitive and verifiable.

For intellectual property that is not subject of a registration, you should include as much details and specificity as possible in the purchase agreement. Use the dates of creation or completion, the name of the work, or even internal reference numbers. If possible, attach a copy of the intellectual property or a representative sampling as an exhibit to the agreement.

2)      Verify the status of all listed intellectual property-You can search registration or application numbers for trademarks, copyrights and patents. The United States Patent and Trademark Office (www.uspto.gov) and the United States Copyright Office (www.copyright.gov) have searchable websites that provide important information about the registration, such as current status, the listed owner, and the use. The websites might also indicate problems with the registration, such as a challenge to its validity by a formidable third party.

In short, All listed intellectual property should be checked and verified.

3)      Determine the geographic scope of intellectual property-Intellectual property is territorial, meaning its protection is limited, generally, to the country where the registration is issued. So, for example, a United States trademark has no effect in Canada.

You want to verify that the intellectual property can be used in planned markets. Gaps in the coverage may indicate potential problems in the future. For example, several trademark registrations throughout Europe but not Germany may be due to a challenge by a third party over the use of the mark or a similar mark there.

ven if no problems surface, investigating the geographic scope of intellectual properties will aid in planning and arranging for later filings.

4)      Get assurances seller owns its intellectual property-It is often difficult to verify ownership of intellectual property since there is no physical object to see in a factory or hand over from seller to buyer. Nonetheless, the seller can affirm its right to ownership and right to transfer the property. This protection can be a simple, concise part of an agreement.

While a buyer’s due diligence in verifying the intellectual property can go a long way, having the seller’s contractual assurances can provide important legal coverage. You should also consider whether your purchase price should be adjusted to reflect an increased risk or whether funds should be held in escrow to see if any claims materialize.

5)      Get assurances and liability coverage for all past uses-Intellectual property can also come with liabilities. For example, the seller may have sold a device with a name infringing another’s trademark or could have used one of its patents in a way as to potentially cause harm to the end-user.

Whatever the case, provisions can and should be included limiting the liability from the seller’s past uses of the intellectual property. After all, while due diligence as to the intellectual property can provide a good picture of the seller’s ownership, rights, and ability to transfer the property, it may not indicate how it used that property.

6)      Have provisions for what to do if you are wrongly sued or contacted-A buyer of intellectual property will likely be a defendant in a lawsuit that alleges misuse even if all the activity occurred prior to the closing. As the party currently using the intellectual property, you often have the most visibility. Your purchase agreement should contain clear indemnification obligations, including funding the cost of defense.

Whether you are buying or selling a business, attorneys at Roberts McGivney Zagotta LLC are available to start working on or reviewing asset purchase agreements, intellectual property transfers and licensing, corporate mergers, or other general corporate work.

The information in this article is for informational purposes only and does not constitute formal, legal advice. Consult with one of the attorneys from Roberts McGivney Zagotta LLC for advice about your particular circumstance.