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Intellectual property deal makers, breakers

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The fortunes of today are built on the intangible -- intellectual property such as patents, trade secrets and branding protected by trademarks. However, when businesses are bought and sold, attention is typically paid to real property instead of intellectual property. The ability to navigate potential intellectual property due diligence issues -- deal makers and breakers -- will go a long way in helping you to make successful deals.

Dragseth

In the tangible world, typically the person who holds an asset actually owns the asset. In the intangible world of intellectual property, there is no such possession -- it floats over the top of your tangible assets. As a result, it is critically important that ownership be clearly documented with a written chain of assignments. More often than not, a company will have at least one ownership problem with its intellectual property, and the company may need to find it before the deal closes to ensure it isn't a deal breaker.

The nature of intellectual property is often misunderstood, which can lead to problems during deal making. Intellectual property can be extremely powerful, but you need to understand what you're buying and how it can be turned into profit. It's important to know that intellectual property is a negative right (a stop sign) and not a positive right (a ticket). Your patent allows others from practicing your invention (with an injunction) and to collect damages for any infringement to your patent that you couldn't stop in time.

Your patent, however, does not give you the right to do anything, because it is not a ticket: Though you need it for protection, you don't need a patent to start selling your invention, and if you have a patent, you can still be stopped, such as by FDA or import restrictions, or by another company that has its own patent that covers your product or process.

Your business goals and your company's intellectual property protection must be aligned. In the due diligence process, you need to make sure that the intellectual property and business strategy correspond in at least two ways: (1) the patents and trademarks actually cover the products and services you and/or your competitors offer (technical alignment); and (2) the intellectual property covers areas of importance to the company (e.g., areas of future expansion or areas in which you want to block competitors) even if you and your competitors are not there yet (strategic alignment). For example, a good patent strategy will produce patents directed at the core of a company's technology, and also produce a "picket fence" protection of patents at multiple points around the technology.

When doing a deal, make sure that the intellectual property you are buying brings real value -- think quality over quantity. Big companies like to look at quantity because it's easy to measure and negotiate with. Corporate giants can tout total granted patents in annual lists because they engage in massive intellectual property, or "mutually assured destruction" with other giants, and thus tend to license entire portfolios. Smaller companies should not act like the big guys -- they have to be more selective and pay attention to the quality of the intellectual property owned. Any company can get a patent from the U.S. Patent Office if they make it excessively narrow and worthless, just as any real estate agent can sell a house quickly if the price is low enough.

Companies typically schedule their intellectual property at the back of a contract, which is a good practice. You must also consider the intellectual property that cannot be scheduled. Such "nascent" intellectual property includes property that has not yet been protected, such as brands for which a trademark has not been registered or an invention for which the company has not yet received a disclosure (especially those developed in the past year), or property for which formal protection cannot be sought at all, like trade secrets and intellectual capital still in the minds and experience of employees. To find this property, you have to dig into corporate processes to determine whether you can protect trade secrets, into employment agreements to determine whether the property can walk out the door when some employees inevitably leave after the deal and into various agreements to make sure you have adequate rights vis-Ă -vis your business partners.

It's important to consider two distinct issues. First, absent an agreement, the number of employees who are obligated to assign inventions to their employers is probably much smaller than you think. Talk to your attorney as soon as possible, if you do not have solid agreements with everyone who thinks for you. Second, unless you have an agreement, nonemployees (i.e., consultants) own the copyright in the work they do for you. As a result, software vendors can, if they want, prevent you from updating your systems and can also sell "your" software to all your competitors, even if it was custom-designed for you.

Intellectual property is too complicated to be fully tamed in any deal. Focusing on these deal makers and deal breakers should help you avoid mistakes and put you well ahead of the curve.


Dragseth is a principal at Fish & Richardson, focusing his practice on patent prosecution, licensing and litigation for a wide range of technology companies.

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