Integrating acquired intellectual property into company operations
August 2013 | PROFESSIONAL INSIGHT | INTELLECTUAL PROPERTY
Financier Worldwide Magazine
The global economic climate of the past five or so years, has taken its toll on cash hungry companies, many with insufficient revenue streams or other capital sources. Technology companies, characterised typically by those with discovery and development stage products and operations, as a class have been hit particularly hard by current economic circumstances and the past five years have forced many to close their doors or seek partners in order to survive. Accordingly, merger and acquisition opportunities and activity over the same time period has been robust. In most cases, the business logic that drives the acquisition includes various intellectual property considerations: trade secrets, know-how and patents protecting products and industrial processes, trademarks and domain names supporting branding and marketing operations, customer access and third-party contracts, etc.
Integrating acquired intellectual property into company operations is a multifaceted challenge. While the systematic integration of intellectual property assets into the current operations of the acquirer is very much dependent on the particular circumstances of the acquisition and the business plans of the company, there are certain universal practices. A common first step, general to all types of acquired IP, involves securing the assets into the company. All patents and patent applications, trademarks, domain names, and other IP are property rights, and title to these assets should be updated with the recordation branches of appropriate entities (e.g., the European Patent Office, the US Patent and Trademark Office, WIPO, etc.). This can be a lengthy and expensive process, and it may be complicated in that the target company may have neglected record-keeping and maintenance. Acquisition of IP in connection with a company involved in a bankruptcy or restructuring proceeding may provide further complications and restrictions. Hopefully, any pre-acquisition due diligence would have either corrected or required post-closing correction of defects in title, and identified any pertinent restrictions. Nevertheless, while an acquirer should never close a deal without warranties or similar guarantees of title, many deals proceed with IP ‘as is’ which may require assistance of counsel in resolving. However, recording the change in ownership is an essential first step in integrating the IP into the acquirer’s operations. Resist the temptation to divest what may be seen as non-core assets by not recording title change and thereby saving money, unless you know with certainty that these assets are of absolutely no ongoing value. In many cases, their value isn’t fully appreciated until they have been thoroughly investigated, and valuable business development opportunities might be inadvertently lost.
In terms of integrating trademarks and domain names/websites, these are likely to be the clearest choices, in view of known business goals. If the acquirer is buying a direct competitor, the decision to maintain or abandon trademarks will track to the interest of the acquirer in maintaining or abandoning certain product lines. Since trademarks identify the source of a product in commerce, there is no value to selling or licensing the trademarks that the acquirer intends to abandon, unless the product line is part of the transaction. However, the acquirer may wish to consider the implications of any immediate abandonment of trademarks, or more particularly domain names, since it may be useful to preserve these assets in the short term as a deterrent to third parties looking to ride off of the goodwill of the now defunct target company, especially if there is a wind-down of an existing product. It is important to remember that trademark rights derive from usage in connection with product sales. In contrast, domain names can be renewed irrespective of the status of trademark rights, and the DNS can be re-pointed to the address of the successor product for as long as the acquirer maintains the registration.
Trade secrets, patents and patent applications present a more difficult challenge to integration. The first challenge is frequently just gaining a comprehension of the scope of the assets. Initially, an inventory of the technical manuals, laboratory notebooks and patents must be obtained. This is a critical step to any future decisions regarding the disposition of individual technology families. Patent portfolios oftentimes are acquired with time-sensitive decisions that must be made, including annuities and prosecution deadlines. Where extensions of time are still available, it makes sense to delay making critical decisions until the nuances of the portfolio are appreciated in better detail. But patents are time sensitive assets, and patent fees and annuities are expensive, and when you look at the accumulative costs associated with acquired intellectual property, it makes sense to prioritise the acquired patent families and harmonise the territories where patents are maintained as early as possible in the post-acquisition process.
In targeted acquisitions, the acquirer has likely identified, in a general sense, the particular patent families that are desirable, perhaps because they track particular products or technologies. Even in these situations, the acquirer must still evaluate the individual applications that comprise the patent family. Typical families cover the product or composition of matter and associated manufacturing processes, and it should be reasonably apparent how the individual cases provided barriers to the target company’s competition. But it requires a fairly deep understanding of engineering or science to extrapolate these same cases to determine if they can be adapted to cover the acquirer’s products. If there is apparent overlap, a determination of the respective filing dates of the newly acquired IP compared to existing company IP, should be undertaken to establish the best position relative to known prior art. Following this analysis, one can begin to assess the gaps between the two IP portfolios, and derive an optimal strategy to shore up any deficiencies, using one or both sets of patent applications. In some situations, new applications can be created that merge components of both, however this is a relatively complex strategy and advice of experienced patent counsel is encouraged.
For assets that are not mission-critical, in that they are reflective of non-core products or technologies, or they represent geographical operations that are no longer desirable, companies have widely different approaches. For those companies with business development units, acquired intellectual property can be evaluated internally for out-licence, sale or perhaps some kind of joint venture. In cases where a company lacks in-house business development capability, outside advisers are widely available. Many of these organisations are willing to structure compensation based at least in part on commissions, so the financial risk to the company can often be minimised in the event the technology is disposed at a lower than expected value. It is worth mentioning that the valuation of intellectual property is a very difficult task in many instances, but two guiding considerations apply: first, that the value of most technologies over time will likely decrease, and the carry-cost of maintaining IP rights will almost certainly increase over time as government agencies continuously increase fees. Both considerations point toward expediency in pursuing business development activities.
In many instances, even non-core programs can produce improved revenues when sold (or licensed) by taking certain steps to advance the products or enhance the relevant intellectual property. For example, an acquired patent portfolio may include some filings covering early development stage or even discovery stage technology. For cost control reasons the target company might not have sought patent coverage for its more recent technical improvements. Shoring up patent coverage by filing updated applications or by prosecuting existing applications to issuance would enhance the market-exclusionary position. In a similar manner, reviewing third party business agreements, ensuring these are updated and all reporting requirements have been fulfilled, is another area that should be explored. These are small investments in company time and money that could yield larger dividends in the context of any subsequent deal. But a more aggressive strategy is to create the most favourable climate for deal-making, using these acquired assets.
It requires no small effort to target business development efforts,but for those companies with the time and resources to do so, a review of the IP holdings of potential deal partners, as well as a deliberate effort to cultivate items from the acquired patent portfolio that might be seen as deal drivers with a third party, can produce very large returns. The key to this strategy requires identifying the intellectual property weaknesses of the third party, coupled with a delicate approach that one has the solution for the third party in their possession, which solution is for sale. Nevertheless, a company pursuing this strategy walks a fine line, and getting greedy in one’s demands is a sure way to encourage patent litigation as a response. However, fortune tends to favour the bold.
Following any acquisition, there are myriad post-closing items that occupy the attention of the acquirer. Intellectual property is a significant factor in most deals, and the sheer size and complexity of most IP portfolios provides a barrier to the quick and efficient merger of these assets into company operations. However, focusing on first securing these assets and then undertaking a deliberate and systematic analysis of their fit as well as potential, provides a company with a structured methodology for advancing protection around existing products, as well as unlocking and realising the value inherent in these assets.
John M. Garvey is a partner, James Culverwell is an associate and Pei Wu is a staff lawyer at K&L Gates LLP. Mr Garvey can be contacted on +1 (617) 261 3117 or by email: firstname.lastname@example.org. Mr Culverwell can be contacted on +1 (617) 951 9052 or by email: email@example.com. Ms Wu can be contacted on +1 (617) 951 9095 or by email: firstname.lastname@example.org.
© Financier Worldwide
John M. Garvey, James Culverwell and Pei Wu
K&L Gates LLP