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IP LICENSING AND DUE DILIGENCE:TIPS OF THE TRADE AND PITFALLS TO AVOID

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IP as an Asset

Leverage your IP to increase revenues, drive capital formation, or resolve related or unrelated IP disputes.

Leveraging your IP independently through litigation may not always be possible or profitable.

Identify IP assets: active trade secrets, trademarks, service marks, copyrights, patents, patentable technology, know how

Assess your IP assets: active, value, remaining life, risk-litigation, market trends and future potential, licensing trends

Identify optimal opportunities and related cost-benefit analysis: license, sale/assignment, joint venture/alliance, donation, abandonment

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IP Licensing: McDermott-Gegg License

McDermott Corp. is engaged in research and development of highly specialized semiconductor manufacturing technology utilized in numerous products in the electronics industry. McDermott has built a significant patent portfolio and brand presence both in the method of manufacturing and the end products in the electronics industry.

Gegg Corp. desires to develop and market products in the electronics industry that incorporates the McDermott Corp. technology, in North America and Europe.

Gegg Corp. will engage vendors in China to manufacture the equipment that incorporates the semiconductor technology.

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McDermott-Gegg License: Terms of the Deal

McDermott Corp. agrees to grant to Gegg Corp. an exclusive license to the patented semiconductor technology (and associated technical information and know-how) for the manufacture, sale, and distribution of its equipment and the resulting products.

McDermott Corp. also agreed to grant Gegg Corp. a right to use McDermott Corp. trademarks in connection with Gegg’s distribution and marketing of the equipment and resulting products.

WHAT DO MCDERMOTT CORP. AND GEGG CORP. NEED TO CONSIDER IN FORMALIZING THEIR DEAL?

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License Grant: Clearly Specify & Define Licensed IP

"Licensed Patents" means those patents listed on Exhibit A attached to this Agreement, together with all continuations or continuations-in-part, divisionals, reissues and re-examinations and any rights in any other patents of Lina Corp. resulting from or claiming a priority from the patents listed in Exhibit A.

Note about being over-inclusive re damages/valuation in other matters

“Licensed Trademarks” means the trade names, trademarks, service marks, and other indicia listed on Exhibit B, and any other trade names, trademarks, service marks, or other indicia as may be designated in writing by the parties.

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License Grant: Scope of Rights

What are the rights (exclusive or non-exclusive) that are granted to Gegg Corp.?

Licensed Patents - Right to “use, make, have made, offer for sale, sell and import.”

Licensed Trademarks – Right to use the Licensed Trademarks solely in connection with the manufacture, sale, offer for sale, marketing and distribution of the semiconductor manufacturing technology and/or end products in the electronics industry during the term in the licensed territory.

What rights does McDermott Corp. need to retain?

Does McDermott Corp. need to retain any rights to use the Licensed Patents or Licensed Trademarks itself? If so, what’s the scope of the retained rights?

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License Grant: Exclusive or Non-exclusive

Implications of an Exclusive License

Obligations of Gegg Corp. to use best efforts to market semiconductor manufacturing technology and/or end products in the electronics industry when granted exclusive license to Licensed Patents.

Guaranteed Minimums – (minimum royalties, license fees, quantities, etc.)

Obligations of McDermott Corp. to enforce patent rights against potential infringers and/or rights of Gegg Corp. to sue for third party infringement.

Exclusivity for a limited period of time

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License Grant: Additional Issues to Consider

Term

“this Agreement shall become effective from the Effective Date and shall continue in full force and effect, unless terminated by either party as provided under this Agreement, through the life of the last to expire of the Licensed Patents.”

Perpetual license v. initial/renewal terms with respect to Licensed Trademarks

Territory

Scope of Patent License - Right to use, make, have made, offer for sale, sell in North America and Europe with right to import; right to have subcontractor in China manufacture the equipment.

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License Grant: Additional Issues to Consider

Scope of trademark license – use in North America and Europe

Right to sublicense

Right to assign/transfer

Rights extended based on acquisition of the licensee

Patent exhaustion

Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008)

Keurig, Inc. v. Sturm Foods, Inc. (Fed. Cir., October 17, 2013)

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Ownership and Protection of IP

Ownership

Recognition of ownership rights

Covenant by Licensee not to challenge validity and enforceability, ownership of licensed property and license; see Medimmune, Inc. v. Genetech, Inc., 549 U.S. 118 (2007) – impact on doctrine of licensee estoppel.

Protection

Responsibility for prosecution and maintenance of IP (patents, registrations, etc., as applicable)

Requirement of licensee to cooperate and execute necessary documents to protect licensor’s rights in IP

Joint development issues

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Infringement of IP

Duty of Licensee to provide notice of any third party infringement

Obligations of Licensor to enforce rights in IP

Alternative provisions

Cost sharing provisions

Rights of licensee to enforce rights in IP against alleged infringer

Standing issues

Cost sharing provisions

Award of Damages

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Representations and Warranties

General mutual warranties

Specific IP Warranties

Non-Infringement

Ownership

No adverse judgments or claims

Validity and enforceability of IP (and patents, registrations, etc., as applicable)

Implied Warranties (merchantability, fitness for particular purpose and non-infringement)

Disclaimer of Warranties

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Indemnification and Limitation of Liability

Allocation of Risk

Indemnification by Licensor

Failure to provide adequate rights

Infringement claims

Indemnification by Licensee

Unauthorized use / breach

Failure to meet quality control standards/ product liability, etc.

Indemnification Procedure

Cap on Damages/ Exclusion of certain damages

Survival

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Additional Considerations

Trademark License

Goodwill inures to benefit of licensor

Quality Control

Notice of License / Proper TM/® requirements

Restrictions regarding adoption or use of similar or variation of mark by licensee

Patent License

Patent marking requirements; virtual marking

General License Requirements

Effects of Termination / Sell-Off

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Additional Considerations

Tax Implications

Antitrust Concerns

Bankruptcy Concerns

International Considerations

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IP Due Diligence

Many contexts for due diligence of intellectual property

1. Acquisition

2. Sale / Divestiture / IPO / VC or Loan

3. Licensing In/Out

4. Identify and Assess Value and Risk

5. Third Party Searching and Analysis / Investigation

6. IP Creation / Joint Ventures

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IP Due Diligence

Common Action Outline:

1. Determine the goal for the IP due diligence

2. Identify the IP issues, IP rights (IPR), and IP assets

3. Understand the IP rights and IP assets

4. Analyze the IP rights and IP assets

5. Assess the IP rights and IP assets

6. Modify / Manage the IP rights, IP assets, and risks

7. Create new IP rights and IP assets

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IP Due Diligence

1. Determine the goal for the IP due diligence• What do you want to accomplish?

• What do you need to know?

• Why do you need the information?

Examples: Gegg Corp. buying McDermott Corp.

1. What is important to the deal? E.g., IP and/or operation?

2. What type of transaction? E.g., equity or asset?

3. Ownership/Exclusivity of IP by McDermott Corp.

4. Value / Strength (or weakness) of McDermott Corp. IP

5. License problems in/out for McDermott Corp.?

6. Potential litigation risks for McDermott Corp. with 3rd party IP?

1. Is this a litigious industry / competitive market?

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2. Identify the IP issues, IP rights (IPR), and IP assets•Patents, Trademarks, Copyrights, Domains

•Trade Secrets

•Source Code / Escrow / Open Source

•License Agreements (In and Out)

•Confidentiality / Employment Agreements

Examples: Gegg Corp. buying McDermott Corp.

•Fail to review all of the above. Limited searching (e.g., search McDermott Corp., but not RMM, Ltd., Richard’s Garage, Inc., or Richard McDermott)

•Identify IP, but do not consider ownership (i.e., assignments from inventors)

• Consider IP laws of local jurisdiction (i.e., who owns the IP)

•Identify and consider IP assets, but not also IP rights (Trade Secrets, TM, ©)

•Fail to consider IP rights (and royalties) associated with joint venture and/or existing licenses.

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IP Due Diligence

3. Understand the IP rights and IP assets•Distinguish the types of IP.

•What protection does each afford?

•What kind of protection do you want/need for different products and IP?

Examples:

•…thought the Trademarks ™ ® would protect the products from being copied (i.e., patent rights)

•Having some kind of IP for a product is not necessarily sufficient.

• Rainbow Loom® (aka Twistz Bandz™) / Choon's Design LLC v. Zenacon LLC (FunLoom) for Copyright © infringement of the C-shaped fastener

•Trademark a name (adidas); Patent a technology; Copyright an artistic work; Trade Secret a formula (Coca-Cola).

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4. Analyze the IP rights and IP assets•Understand the scope of protection (claims) of a Patent.

•Understand the services covered by a Trademark.

•Is your License exclusive or non-exclusive, by market, territory, etc.?

Examples:

•thought a Patent covers what is shown in the figure on the front page and the Abstract … instead of the claims at the end of the patent.

•thought a Patent covers everything described in the patent document, not only the claims

•did not realize that two companies could use the same trademark name, e.g., Red Apple Bakery, Red Apple Brewery, Red Apple School Supply, etc.

•having a domain name does not ensure no trademark infringement

•just because you have a copy of the source code does not mean you can modify it and use it as you want

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5. Assess the IP rights and IP assets•Correlate the IP rights and IP assets to products and services.

•Do you have what you want/need?

•What do the terms of existing licenses mean going forward?

•Have you considered risks?

Examples: Gegg Corp. buying McDermott Corp.

•none of McDermott Corp’s products are covered by any patents, or none of McDermott Corp’s patents cover its products (e.g., are patents worthless?)

•can you assert McDermott Corp’s patents against BadGuyCompetitor Co.?

•none of McDermott Corp’s services have registered Trademarks ®

•none of the third party software developers assigned rights to the software

•no copy of source code, and third party developer no longer exists

•did not calculate potential future royalties based upon much larger market of Gegg Corp, but only based upon smaller market of McDermott Corp.

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6. Modify / Manage the IP rights, IP assets, and risks•Fix what is wrong

•Register unregistered IP rights

•Perform necessary searching, analysis, etc.

Examples: Gegg Corp. buying McDermott Corp.

•Require McDermott Corp. to obtain and record assignments, for full chain of title of IP assets

•Require McDermott Corp. to register TM for all goods and services that apply

•Require McDermott Corp. to escrow P% of purchase price as hold back for IP infringement defense/damages for Y years after transaction.

•Perform and obtain “freedom-to-operate” opinion for key technology, product, or service of McDermott Corp.; Search/clear trademark use and file for trademark registration.

•Require McDermott Corp. to obtain consent from Licensor for transfer and/or amendment of license so that it is transferrable and/or expanded rights that will cover Gegg Corp.’s intended use, which may differ from McDermott Corp

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IP Due Diligence

7. Create new IP rights and IP assets

Examples: Gegg Corp. bought McDermott Corp.

•Gegg Corp. doing invention harvesting and filing new patent applications for IP of McDermott Corp that was not previously considered

•Register additional domain names (e.g., McDCorp.com, McDermot.com, McDermottCorpSucks.com)

•Obtain agreements from employees, third parties (e.g., consultants), joint venture partners that you own any IP rights for any technology or products that are developed

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Questions?

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Thank You

Richard M. McDermottALSTON & BIRD LLP101 S. Tryon Street, Suite 4000 Charlotte, North Carolina 28280U.S.A.

Direct : 704-444-1045 rick.mcdermott@alston.com

Christopher J. GeggALSTON & BIRD LLP101 S. Tryon Street, Suite 4000 Charlotte, North Carolina 28280U.S.A.

Direct : 704-444-1024 chris.gegg@alston.com