MRJ Presentation and Notes

7/28/2019 MRJ Presentation and Notes

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1133 Avenue of the Americas New York NY 10036-6710 212.336.2000 www.pbwt.com

Presentation to Visiting Members

of the Chinese State IntellectualProperty Office Delegation

Jeffrey I.D. Lewis

Michael Ridgway Jones

Jo Backer Laird

November 3, 2010


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1133 Avenue of the Americas New York NY 10036-6710 212.336.2000 www.pbwt.com

Intellectual Property Due Diligence Issues inAcquisitions of U.S. Companies

Michael Ridgway Jones


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IP Due Diligence

IP Agreements

Owned Intellectual Property

IP Disputes

Information Technology


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IP Agreements: Transferability

Effect of mergers and other business combinations on non-

assignment provisions

General rule: Transaction is an assignment if Target doesn't

survive

Minority view: Non-assignment provisions triggered by reverse

subsidiary mergers. SQL Solutions (N.D. Cal. 1991) Agreements silent on transferability

Non-exclusive IP licenses may not be assigned without

licensor's consent (majority view)

Exclusive licenses are assignable without licensor's consent(majority view)

Licensor may assign IP license without licensee's consent


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IP Agreements: Rights of Affiliates

Obligations that may apply to Buyer or its affiliates

"Licensed IP" may be defined as "all IP (in a certain field) owned by licensor [i.e.,

Target] or any of its affiliates"

After Closing, Buyer and its affiliates likely will be affiliates of Target, and Buyer's

IP may be "Licensed IP"

Agreements to which Target's parent or other affiliate is a party Target may have rights in certain in-licensed IP only as a result of its affiliate

status, which terminates as of Closing

"Divested Entity" provisions

Divested affiliate (Target) may continue using licensed IP for a limited time

post-divestiture

Seller may use licensed IP for divested affiliate's benefit

Licensor often obligated to negotiate new license in good faith with divested

affiliate


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IP Agreements: Bankruptcy Considerations

Contractual restrictions on debtor-licensee's assignment are

ineffective

Same rules as if agreements were silent on transferability

Debtor-licensor or its trustee can unilaterally reject an unfavorable

trademark license and terminate licensee's trademark rights

US bankruptcy law (Section 365(n)) protects licensees of other IP1) Non-US licensor may avoid Section 365(n) if primary bankruptcy

proceeding based outside US. In re Qimonda (E.D.Va. 2009)

Grant of license for source code escrow materials must be a

present grant of license

Bankruptcy court may not enforce license grant that is contingent on licensor'sbankruptcy


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Employee/Contractor Agreements

Invention assignment and confidentiality agreements

Present transfer of rights ("hereby assign") vs. promise to transfer("will assign")

"Work for hire" only applies to copyrights, not all IP

Software code is not one of the nine enumerated categories of work for hire

Inadequate confidentiality measures could threaten proprietarystatus of trade secrets

Confidentiality obligations should be perpetual for trade secrets

Some U.S. states will not enforce perpetual confidentiality obligations for non-

trade secret information


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IP Agreements

Defective trademark assignments and licenses

Assignments of trademarks must include associated goodwill

(business reputation)

Trademark license agreements should include quality control

provisions

Target should be exercising appropriate quality control for all

licensed-out trademarks


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Owned Intellectual Property: Patents

U.S. patent applications are not published (and cannot be

searched) for at least 18 months after filing Review filing records and consult patent counsel to determine scope and

filing status

Patents or patent applicationsfor which Target's employee

or contractor is the record owner Confirm assignment from inventor to Target was recorded with USPTO

Business method patents

Bilski(S. Ct. 2010): Confirmed that business methods are patentable;standards for patentability and validity remain unclear


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Owned Intellectual Property: Trademarks

International trademark registrations (and national extensions)

issued by the World Intellectual Property Organization (WIPO) onlycan be owned by/assigned to entities based in countries that are

members of the Madrid Protocol (83 countries) and/or Madrid

Agreement (56 countries)

The U.S. is a party to the Madrid Protocol, but not the Madrid Agreement. China is a party to both the Madrid Protocol and the Madrid Agreement

Example: A Chinese company cannot assign an international registrationto a Canadian company; Canada is not a party to either the Madrid Protocolor the Madrid Agreement

Example: A U.S. company could receive as assignee an internationalregistration that has been extended to France (a party to both theAgreement and Protocol), but not an extension to Algeria (a party to theAgreement only)


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Owned Intellectual Property:

Trademarks/Domain Names

"Intent-to-Use" trademark applications cannot be assigned prior to

amending the application to reflect the trademark is in use

Exception: Assignment permitted in connection with the transfer of

the entire business to which the applied-for trademark pertains

Some jurisdiction-specific domains only can be owned by/assigned to

persons or entities based in the applicable jurisdiction

Examples: United States (.us), Canada (.ca)

Information on jurisdiction-specific top level domains available at:

http://www.iana.org/domains/root/db/


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Owned Intellectual Property

IP developed using U.S. government/military resources

Arrangements may prohibit transfer to entities based outside United States

Abandoned or expired items

Revival may be possible for U.S. patents/trademarks after failure to pay fees

Damages can be recovered for pre-expiration infringement

Jointly owned IP

Joint ownership issues vary by type of IP and by jurisdiction

Example: Under U.S. law, each joint owner of a copyright owes the other aduty of accounting for licensing royalties received and is obligated to the

other to not destroy the value of the copyrighted work


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IP Disputes

Active U.S. IP litigation matters can be searched online

Most U.S. IP administrative actions can be searched online

Trademark and patent office actions

Trademark oppositions and cancellations

Patent interferences

Patent re-examinations and invalidation actions "Cease and desist" and "invitation to license" letters

Possibility of declaratory judgment action


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Patent Opinions (e.g., non-infringement, invalidity)

"Common interest" doctrine: Parties with a common legal interest

may share privileged communications without waiving privilege Inconsistent jurisprudence requires parties to assume waiver is possible

Take affirmative steps to limit disclosure and maintain confidentiality

Avoid pre-Closing disclosure if practicable

Provide representations and/or non-privileged background information

Delay disclosure until late stages of transaction

Execute an agreement identifying the common legal interest (e.g.,

anticipated joint litigation) and detailing confidentiality procedures

Avoid placing opinions in data room with other due diligence materials,particularly in an auction setting

Restrict access to external counsel or jointly retain neutral counsel


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Open Source Code

Do Target's proprietary software products incorporate open source code?

If so, was open source code used in a manner that could jeopardizeproprietary status of Target's software?

Due Diligence:

Review terms of relevant open source license agreements

Determine whether Target has and complies with internal policiesconcerning use of open source code

If concerns are material:

Request code logs

Perform scan on applicable source code

Retain software consultant to analyze open source use

Include representations in Purchase Agreement


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Websites

Terms of use and privacy policy

Change of control may trigger notice obligations in website privacy

policy concerning transfer of personal information

Sufficient rights to display pictures, text and other content

Compliance with DMCA "safe harbor" provisions (if websitepermits user-posted content)


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Committee on Foreign Investment in the United States (CFIUS)

Federal body that evaluates the effect on US national security of transactions that

could result in control of a US business by a non-US entity

Includes representatives from US government agencies, e.g., Departments of

Treasury, Justice, Defense, Homeland Security, Commerce and State

30-day initial review for CFIUS to clear a transaction. If not cleared, additional 45-day

review that concludes with recommendation to President, who issues order to clear,

prohibit or suspend transaction

Filing notice for CFIUS review is voluntary, but transactions not voluntarily

notified to CFIUS can be investigated or even un-wound post-closing

Companies can modify transaction to respond to CFIUS concerns

"National security" is broadly construed

Transfer of IP/technology-intensive company with government contracts may

trigger heightened scrutiny

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