Digital Health Bootcamp February 22, 2016

Brad Schoenfeld Partner

Kendall, Koenig & Oelsner

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• If possible, Acquirer will want to do as much due diligence as possible under an NDA before the parties sign a letter of intent or definitive agreement.

• Generally due diligence should be completed before definitive agreement is signed.

Diligence impacts and defines terms of definitive agreement – including scope of reps & warranties.

Completion of “satisfactory” due diligence typically is not a condition to the closing.

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Intellectual Property Due Diligence Timing

Intellectual Property Due Diligence Purpose

• Ownership. • Does Target own all of the rights to the technology it uses?

• Protection/Liability Issues. • What IP protection has the Target secured, or will be able to

secure? How effective will that protection be in keeping competitors away?

• Identification of risks that need to be minimized under definitive agreements

• Freedom to Operate. Can the Target commercialize its technology without infringing

third party IP rights?

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Type of investor (e.g., strategic/financial) and stage of Target will impact scope of diligence. Increasing bank diligence on transactions.

Structure of transaction (asset purchase, merger, stock purchase, new joint venture)

Nature of target’s business and products The scope of due diligence also is influenced by the

Acquirer's objective(s) for the acquisition: To acquire employees and know-how. To acquire a critical piece of technology. To eliminate a competitor.

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Intellectual Property Due Diligence Scope

Purpose #1 – Acquiring Employees/Know-How. Have all employees signed employee invention

assignment and proprietary rights agreements? Who are the key employees and what’s been done to get

them to stay (e.g., employment contracts, equity awards, stock vesting)?

Are the key employees willing to continue to work for Acquirer, and if not, can they be precluded from competing against Target and from using Target’s confidential information?

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Intellectual Property Due Diligence Scope

Purpose #2 -- Acquiring a Critical Piece of Technology. What IP protection is available for the technology, and

has Target taken appropriate steps to perfect its intellectual property rights in the technology?

Does the technology infringe upon the intellectual property rights of any third parties?

Acquirer may want to negotiate a license to the technology so that Acquirer will have future access to the technology even if the acquisition is not completed.

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Intellectual Property Due Diligence Scope

Intellectual Property Due Diligence Scope

Purpose #3 – Elimination of a Competitor. Are covenants not to compete enforceable in the

relevant jurisdiction? Even in some states where non-competes are generally unenforceable, exceptions exist for competitive restrictions agreed to in connection with the sale of a business.

Colorado law permits noncompetition covenants in certain circumstances. Assignment issues

Patents. • Request list of all patents (both U.S. and foreign) which are

issued and applied for, together with copies of the patents and patent applications.

• Independent search of issued patents may be conducted using online databases, including searching PTO files.

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Intellectual Property Due Diligence Identification of IP Assets

Trademarks/Servicemarks. • Request list of all trademark registrations and pending

applications. • Independent search of federal trademark registrations,

as well as most state and many foreign trademarks may be conducted using online databases, including searching PTO files.

• Request list of URLs if material to business.

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Intellectual Property Due Diligence Identification of IP Assets

Copyrights. • Obtain list of all U.S copyright registrations. Most foreign countries do not require registration of

copyrights. Obtaining a list of all copyrighted works usually is

impractical and potentially burdensome. • Independent search of copyright registration may be

conducted using online databases, including searching Copyright Office files.

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Intellectual Property Due Diligence Identification of IP Assets

Trade Secrets. Obtaining a list of all trade secrets usually is

impractical and potentially burdensome. More important to investigate the practices and

procedures used by Target to protect its trade secrets. Obtain relevant agreements (e.g., Non-analysis

agreements).

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Intellectual Property Due Diligence Identification of IP Assets

Title Issues. • Have all relevant employees signed invention and proprietary rights

agreements? • Who is the owner of record of all patents, copyright registrations,

trademark registrations? Have all inventors and authors executed assignments? Have all assignments in the chain of title been properly recorded? Are there any joint owners? In certain cases, review of PTO and Copyright Office records may be

necessary. • Have any adverse claims of ownership been asserted?

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Intellectual Property Due Diligence Ownership of IP Assets

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Independent Contractors. • Have independent contractors contributed to development of

copyrighted works, including software or websites? • Are contributions of contractors considered “works for hire”? Signed agreements with non-employee contractors

stipulating that work is a “work-made-for-hire”? Does work fall within one of the statutory categories that

qualify as a work-made-for-hire under 17 U.S.C. Section 101? • Have contractors assigned copyrights or other intellectual

property rights to Target?

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Intellectual Property Due Diligence Ownership of IP Assets

Intellectual Property Due Diligence

Ownership of IP Assets Employee Issues.

Noncompete/ Nonsolicitation agreements

Confidentiality or proprietary information agreements

Security Interests. • Is Target’s intellectual property subject to any security

interests? • Are there any IP escrow agreements in place? • Have security interests been granted in agreements but

not perfected? • Searches: UCC searches PTO and Copyright Office files

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Intellectual Property Due Diligence Ownership of IP Assets

Inbound Licenses. • Review “license in” agreements for technology used by

Target in the ordinary course of its business, including technology incorporated by Target into its products?

• Potential issues include: Assignability/Change of Control Right to grant sublicenses Exclusive vs. non-exclusive Restrictions on licensed field of use, territory, etc. Royalty obligations Term and termination

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Intellectual Property Due Diligence Prior Agreements

Outbound Licenses. • Review “license out” agreement under which Target has licensed its

technology to third parties. • Potential issues include: Exclusive vs. non-exclusive Scope of license Compensation to Target (e.g., royalties) “Most favored nations” clauses If software, has source code been licensed or escrowed? Scope of indemnity for IP infringement given by Target Term and termination

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Intellectual Property Due Diligence Prior Agreements

Other Agreements. • Review distribution, sales rep, value added reseller (VAR), original

equipment manufacturer (OEM), joint venture and other reseller agreements.

• Potential issues include: Exclusive vs. non-exclusive Territory and restrictions on use Minimum commitments Compensation/Pricing Assignability Right to grant sublicenses Term and termination

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Intellectual Property Due Diligence Prior Agreements

Patents. • Is Target’s critical technology covered by patents or patent

applications? • Are patents valid and enforceable? Have all maintenance fees been paid? When do patents expire? Are there any blocking patents or known challenges to the patent’s

validity or enforceability? • Review issues with Target’s patent counsel and outside experts

(if necessary). • Not recommended for Acquirer to rely upon representations

and warranties instead of conducting due diligence.

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Intellectual Property Due Diligence Validity and Strength of IP

Trademarks/Servicemarks. • Are key marks registered and in force in relevant

jurisdictions? • Potential issues: Have marks become “generic”? Is Target using marks in same form and for same products as

registered? Have marks been abandoned by Target through non-use? Has Target taken action to monitor and enforce marks and to prevent

misuse by other? Has Target licensed marks to third parties, and if so are there adequate

quality control provisions to avoid “naked” license?

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Intellectual Property Due Diligence Validity and Strength of IP

Trade Secrets. • Uniform Trade Secrets Act (adopted by Colorado) • Has Target implemented and followed practices and

procedures to protect its trade secrets? • Internal security procedures. • Disclosures to employees and outsiders. • Has Target granted licenses to its trade secrets?

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Intellectual Property Due Diligence Validity and Strength of IP

Litigation and Infringement Claims. • Target should identify all litigation brought by or

against Target during past 5 years (pending and disposed of) as well as all outstanding or threatened claims related to Target’s intellectual property.

• Has patent counsel provided opinion of non-infringement/invalidity?

• Have any office actions or oppositions/interferences been filed?

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Intellectual Property Due Diligence Potential Liability Issues

Intellectual Property Due Diligence Protecting Against Liability

Representations and Warranties. Specific IP Reps Employee/Independent Contractor Reps Undisclosed Liabilities Rep

Disclosure Schedules. Acquirer/Target (and their counsel) pay particular attention

to certain disclosure schedules and underlying reps. Post-Closing Covenants. Indemnification Provisions.

Survival Periods/Caps/Baskets/Escrows.

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Intellectual Property Due Diligence Biography

Brad Schoenfeld is a Partner in the Technology and Commercial Transactions Group of Kendall, Koenig & Oelsner. Mr. Schoenfeld began practicing law with Troutman Sanders in Atlanta, Georgia and spent more than 6 years in-house with General Electric Company and Siemens Corporation. He served as (i) general counsel for a $1 billion division of GE Energy, (ii) lead sourcing counsel responsible for the legal issues related to GE Energy’s $12 billion worth of purchasing throughout the world, and (iii) lead attorney for more than 10 different business units of Siemens Energy & Automation and Siemens Power Transmission & Distribution. Today, Mr. Schoenfeld represents software, medical device, biotech, professional services, manufacturing and consumer product companies throughout the U.S. Contact info: Kendall, Koenig & Oelsner PC, 999 Eighteenth Street, Suite 1825, Denver, CO 80202; Phone: 303.672.0100; Email: bschoenfeld@kkofirm.com