CHAPTER 10 Intellectual Property With respect to intellectual property assets, the purchaser's acquisition review should follow three steps: (1) confirm ownership or other rights of the target company (Company) in the intellectual property assets; (2) determine whether the intellectual property rights of the Company are of sufficient strength and scope to prevent exploitation of the rights by third parties; and (3) ascertain whether exploiting the intellectual property assets of the Company would infringe the intellectual property rights of third parties. In the case of an acquisition of a business heavily dependent on intellectual property, a specialized intellectual property lawyer may be useful in evaluating the adequacy of existing formal protections, the potential risks of any deficiencies in protection, and the feasibility and relative benefits and costs of obtaining additional protection.1 In each acquisition in which intellectual property is significant to the value of the Company, the seller should furnish to the purchaser a schedule of the Company's trademarks, patents, and copyrights (and, in many cases, the officers of the purchaser will be familiar with the Company's intellectual property rights and possibly will have instructed counsel to include specific requirements as to certain intellectual property in the acquisition agreement). The lawyer in charge of the acquisition review should in all cases discuss the seller's intellectual property disclosures with the appropriate officers of the purchaser so that the lawyer can devote the required attention to those intellectual property rights that are significant and avoid wasting time on assets with which the purchaser is not concerned. The following outline is directed primarily to the analysis of intellectual property rights of the Company that are claimed by the seller. If, however, the seller fails to assert that the Company has any rights with respect to intellectual property that the purchaser believes to be important to the Company's business, the purchaser's counsel should (1) bring that omission to the attention of the purchaser's officers, (2) attempt to determine the Company's position with respect to such asset, and (3) if appropriate, make or obtain an independent determination whether the Company has protectible rights and whether the Company's activities infringe the rights of other parties. TRADEMARKS, SERVICE MARKS, AND TRADE NAMES A trademark, service mark, or trade name is a name, term, phrase, or design used in commerce to identify the origin of specific goods and services. Trademark rights are obtained through registration and use, or through prior use, in which case the Company's records should establish first use of the marks in commerce in a product market in a geographic area. In determining the strength of the Company's trademark rights, purchaser's counsel should ascertain whether the marks have been registered to the extent allowed by law and whether sufficient policing of infringement has been undertaken to prevent abandonment of the mark. The following outline identifies the procedures appropriate for acquisition review of trademark issues: ___ 1. Identify all registered and unregistered trademarks, service marks, and trade names used by the Company; if appropriate, search the records of the Patent and Trademark Office to identify registrations and pending applications. ___ 2. Review all trademark, service mark, and trade name registrations and renewals and pending registrations to determine whether the Company's registrations are effective or need supplementation; in determining the strength of the marks, analyze whether the Company is using the marks in the same form and product line as registered. ___ 3. Review the Company's correspondence with the U.S. Patent and Trademark Office and any foreign and state registration office. ___ 4. Check for evidence of trademark, service mark, or trade name symbols on the Company's products, documentation, brochures, and advertising. ___ 5. Review the Company's procedures for policing use of trademarks, service marks, and trade names to determine whether marks have been "abandoned." ___ 6. To analyze potential infringement claims, check whether any trademark searches have been conducted by the Company, and obtain and review copies of the trademark search reports. Examine any infringement claims of third parties. ___ 7. Identify any impediments to use or transfer of any trademark, service mark, and trade name. ___ 8. Review all agreements pursuant to which any trademark, service mark, or trade name has been sold or transfered by or to the Company and evidence of recording thereof. PATENTS A patent grants the holder the right to prevent others from using the holder's invention. Conversely, a patent held by a third party may preclude the Company from use of technology vital to the Company's operations. The purchaser's acquisition review should address (1) the strength and enforceability of the Company's patents and patent applications, (2) whether any patents exist that can preclude the use of the Company's technology, and (3) whether ownership of the patent is properly vested with the Company. ___ 1. Identify all patents and patents applications; determine whether it is appropriate to engage patent counsel to make a validity examination or to comment on the likelihood that a patent will issue on a patent application. ___ 2. Identify any inventions considered patentable by the Company, whether or not patent has been applied for. ___ 3. Review all prior-art searches to determine the potential for infringement claims. ___ 4. Review correspondence with the U.S. Patent and Trademark Office and any foreign and state registration office. ___ 5. Review license agreements to identify any impediments to use or transfer. ___ 6. Identify details concerning filing date(s) expiration, continuation, and renewal; review license agreements for options, reversions, and territorial limitations. ___ 7. Review employment agreements and written invention assignment agreements to determine ownership of patents (certain states have statutes regulating the scope of agreements relating to inventions by employees). ___ 8. Review agreements pursuant to which any patent has been sold or licensed by or to the Company and evidence of proper recording thereof; determine whether the Company has the rights to sue and recover for infringement of patents it has acquired. COPYRIGHTS Copyright ownership initially belongs to the "author" of the work. If an employee creates work capable of being copyrighted in the course of employment at the direction of his or her employer, the "author" is the employer. Uncertainty as to authorship generally arises when the work is created by an independent contractor. The independent contractor will own the copyright unless (1) there is a written "work for hire" agreement, and the work is one of nine types of work listed as "works for hire" in 17 U.S.C. § 101; or (2) there is a written agreement of the contractor assigning the copyright to the Company. Once authorship is established, the reviewing counsel should determine whether adequate copyright protection was established and maintained by the Company. Counsel should consider (1) whether published, copyrighted work contained adequate copyright notice; (2) the practicability of enforcing copyright protection, particularly in cases of mass-marketed work; and (3) whether the Company registered copyright ownership with the U.S. Copyright Office and registration was timely. Registration within five years after first publication is prima facie evidence of the validity of the copyright (17 U.S.C. § 410(c)); also, registration before an infringement or within three months after first publication of the work will enable the copyright owner to collect statutory damages and lawyers' fees in an infringement action (17 U.S.C. § 412). The following procedures are appropriate for acquisition review of the Company's copyright status: ___ 1. Review seller's disclosure of the Company's registered copyrights and, if appropriate, search the records of the U.S. Copyright Office for registrations and pending applications. ___ 2. Review correspondence with the U.S. Copyright Office and any foreign and state registration office to determine whether registrations are effective or need supplementation; also identify details of expiration, continuation, and renewal of all copyrights. ___ 3. Check for evidence of copyright notices on copyrighted work; ascertain whether the rights being purchased are in the public domain without proper copyright protection. ___ 4. Review agreements pursuant to which any copyright has been sold, transferred, conveyed. or assigned by or to the Company and evidence of proper recording thereof. ___ 5. Review information as to the Company's "works for hire" and responsible employees and/or independent contractors; review all employment agreements and other contracts to establish copyright ownership. ___ 6. Review the Company's list of all derivative works, whether or not registered as such, and works from which they were derived. ___ 7. Review all requests for permission to copy or reprint copyrighted material and responses thereto to determine how the Company has policed and preserved its copyrights. ___ 8. Identify any impediments to transfer of any copyrights; a third party's consent may be required if the Company is a joint owner in a copyrighted work. COMPUTER SOFTWARE Computer software is generally owned by its creator. The Company will hold title to the software it uses only if the software was (1) created by employees of the Company, (2) created pursuant to a written agreement assigning the software to the Company, or (3) purchased by the Company pursuant to a written agreement assigning all rights. If the Company is not the owner of software, the Company may possess certain limited rights to the software pursuant to a license agreement. In addition to the question of ownership, purchaser's counsel should also be concerned with whether the Company's software (1) has been adequately protected by means of patent, copyright, or trade secret principles, or some combination thereof; or (2) infringes the rights of third parties. The following outline identifies the inquiries relevant to purchaser's counsel's examination. ___ 1. Identify all computer software configurations and rights used or owned by the Company and agreements pertaining to the same; computer software is not subject to "work for hire" rules. ___ 2. Identify the natural persons who are authors of, or who made a substantial contribution to the development of, the software and identify any such person's then-employer. Where the authors are employees of the Company who were previously employed by competitors of the Company, trade secret infringement claims by the former employer may be possible. ___ 3. Review agreements under which any computer software rights were sold, transferred, conveyed, licensed, or assigned by or to the Company and any other documents establishing the complete chain of title to such rights; consider any problems created by bankruptcy of lessors or assignors to the Company. ___ 4. Review agreements with any government agencies or academic institutions that provided research and development funds to the Company in connection with the development of software to determine whether any restrictions are imposed on the Company. ___ 5. Examine all leases, servicing agreements, development plans, and operating manuals relating to any computer hardware and software configuration and rights used or owned by the Company. ___ 6. Where possible, review employment, noncompetition, and invention assignment agreements between each person identified in IV.B and prior employer(s); review nondisclosure agreements between the Company and its employees prohibiting such employees from improper use or disclosure of information. TRADE SECRETS The definition of a trade secret differs throughout the states. Restatement of Torts § 757 defines a trade secret as "any formula, pattern, device or compilation of information which is used in one's business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it" (Restatement (second) of Torts § 757 (1982)). The key issue to trade secret protection is the degree to which the proprietary information has been maintained as a trade secret. ___ 1. Identify and review the procedures the Company employs for trade secret protection. ___ 2. Review the list of all persons, whether or not employed by the Company, to whom any trade secret information has been disclosed. ___ 3. Review all confidentiality agreements for: a. employees b. third parties (consultants, suppliers, beta test customers, licensees, etc.) INFRINGEMENT CLAIMS The ability of the Company to continue its business may be impaired as a result of claims that the Company's conduct infringes the intellectual property rights of others. Purchaser's counsel should carefully review any pending or threatened infringement claims against the Company as well as any actions brought by the Company to protect its intellectual property rights. ___ 1. Analyze all intellectual property litigation and claims that have been settled or concluded by the Company within the last five years. ___ 2. Analyze all pending or threatened litigation and claims involving the Company as plaintiff or defendant. ___ 3. Describe and determine consequences of all outstanding or prospective judgments, decrees, or orders of any court or governmental authority against the Company or any employees or consultants of the Company relating to the ownership, use, or assignment of intellectual property rights. ___ 4. Review all opinion letters issued to the Company by its counsel relating to possible infringement claims. OTHER INTELLECTUAL PROPERTY RIGHTS The Company may have acquired important intellectual property rights through arrangements and agreements not expressly denominated as intellectual property licenses or assignments. Counsel reviewing any of the following documents--which may provide for the ownership, use, development, or acquisition of intellectual property assets--should be sensitive to the intellectual property implications of such documents. ___ 1. Joint venture and partnership agreements ___ 2. Distribution agreements ___ 3. Supply and technology development contracts ___ 4. Confidentiality and nondisclosure agreements ___ 5. Dealer and sales representative agreements ___ 6. Beta test agreements ___ 7. Warranties ___ 8. Noncompete agreements ___ 9. Employment or consulting agreements NOTES 1. For an excellent overview of the intellectual property review process, see David L. Hayes, Acquiring and Protecting Technology: The Intellectual Property Audit, THE COMPUTER LAW., Vol. 8, No. 4 (Apr. 1991) (Prentice Hall Law and Business Publication).