Intellectual property

business builder intellectual property  

When buying
intangible assets,
examine carefully

by John Dragseth  

The fortunes of yesterday were built on tangible assets — rail cars, real estate and widgets. The fortunes of today are built on the intangible — intellectual property such as patents, trade secrets and branding protected by trademarks.

When businesses are bought and sold, the attention paid to the deal often fails to keep up with this shift from real property to intellectual property. When it comes to analyzing and closing a deal, small-business owners that understand and can navigate potential intellectual property due diligence issues will find success. Here’s what you need to know:

Ownership, ownership…
When it comes to real property, “location, location, location” is what matters. In intellectual property, the key issue is “ownership.”

In the tangible world, it is fair to assume that, absent criminal action, the person who holds an asset actually owns the asset. There is no such possession of intellectual property — it floats over the top of your tangible assets. As a result, it is critically important that ownership be clearly documented with a written chain of assignments.

More often than not, a company will have at least one ownership problem with its intellectual property (sometimes many), and the company may need to find it before the deal closes to ensure it isn’t a deal breaker.

Many problems arise because the dealmakers misunderstand the fundamental nature of intellectual property. In short, intellectual property is a negative right (a stop sign) and not a positive right (a ticket to ride).

Specifically, a patent allows you to stop others from practicing your invention (with an injunction) and to get money for any infringement you could not stop in time (damages). But it does not give you the right to do anything because it is not a ticket: You don’t need a patent to start selling your invention (though you need it for protection), and if you have a patent, you can still be stopped, such as by FDA or import restrictions, or by another company that has its own patent that covers your product or process.

Bottom line: Intellectual property can be extremely powerful, but you need to understand what you’re buying and how it can be turned into profit.

Make sure your patents and business goals are aligned. Oftentimes, a company’s intellectual property protection strays from its business goals or vice-versa.

In the due diligence process, you need to make sure that the intellectual property and business strategy align in at least two ways: The patents and trademarks actually cover the products and services you and/or your competitors offer (technical alignment); and the intellectual property covers areas of importance to the company (such as areas of future expansion or areas in which you want to block competitors) even if you and your competitors are not there yet (strategic alignment).

For example, a good patent strategy will produce patents directed at the core of a company’s technology, and also produce a “picket fence” protection of patents at multiple points around the technology.

Go for quality over quantity. Companies like IBM can tote up their total granted patents in annual lists because they engage in massive intellectual property “mutually assured destruction” with other giants, and thus tend to license entire portfolios. Big companies like to look at quantity because it’s easy to measure and negotiate with.

However, small companies should not act like IBM — they have to be more selective and pay attention to the quality of the intellectual property owned. Any company can get a patent from the U.S. Patent Office if they make it excessively narrow and worthless, just as any real estate agent can sell a house quickly if the price is low enough. When doing a deal, make sure that the intellectual property you are buying brings real value and is not just filler for a schedule to the sales contract.

You have to dig
Companies typically schedule their intellectual property at the back of a contract (which is a good practice), but they do not always consider the intellectual property that cannot be scheduled.

Such nascent intellectual property includes property that has not yet been protected, such as brands for which a trademark has not been registered or an invention for which the company has not yet received a disclosure (especially those developed in the past year), or property for which formal protection cannot be sought at all, such as trade secrets and intellectual capital still in the minds and experience of employees.

To find this property, you have to dig: into corporate processes to determine whether you can protect trade secrets, into employment agreements to determine whether the property can walk out the door when some employees inevitably leave after the deal, and into various agreements to make sure you have adequate rights vis-à-vis your business partners.

Two distinct issues bear emphasis here. First, absent an agreement, the number of employees who are obligated to assign inventions to their employers is probably much smaller than you think. Thus, if you do not have good agreements with everyone who thinks for you, seek counsel.

Second, absent an agreement, non-employees (such as consultants or contractors) own the copyright in the work they do for you. As a result, software vendors can (if they want) prevent you from updating your systems and can also sell “your” software to all your competitors, even if it was custom-designed for you.

Intellectual property is too complicated to be fully tamed in any deal. But, if you focus on the points above, you should be well on your way to avoiding the most egregious mistakes, and you will definitely be well ahead of the curve.

[contact] John Dragseth is a principal at Fish & Richardson in Minneapolis, an intellectual property law firm: 612.337.2550; dr******@**.com; www.fr.com