The Role of Intellectual Property in Mergers and Acquisitions

Intellectual property (IP) plays a significant role in many corporate mergers and acquisitions (M&A). Trademarks, patents, and copyrights can hold substantial value, and this value can account for a substantial portion of the price of the deal. As a result, when pursuing a merger or acquisition, it is imperative to engage an experienced Florida intellectual property attorney who can assist with not only identifying all pertinent IP assets but also identifying (and finding ways to overcome) any IP-related concerns.

7 Key IP-Related Considerations for Corporate Mergers and Acquisitions

As with all aspects of pursuing a complex corporate merger or acquisition, addressing the IP-related issues involved requires an informed, structured and systematic approach. With this in mind, here are seven key considerations for ensuring that the M&A process does not have unintended or undesirable outcomes:

1. Identifying Pertinent IP Assets During Mergers and Acquisitions

One of the first IP-related steps involved in pursuing a merger or acquisition is to identify the intellectual property assets to be involved (or potentially to be involved) in the transaction. This is often easier said than done.

There are a couple of reasons why. First, companies don’t always devote the effort and resources to managing and protecting their IP portfolios that they should. With this in mind, for prospective buyers and sellers alike, it will often be necessary to conduct a deep dive into the target entity’s operations in order to determine where IP rights exist.

Second, even if the target entity maintains a comprehensive and well-documented IP portfolio, it may be the case that not all of the entity’s IP assets are (or should be) on the table. The prospective seller or its parent company may want to keep certain IP assets (or may need to keep certain IP assets if it will be continuing to operate), or the prospective buyer may not need (or want) to include certain IP assets for which it has no use in the overall price of the deal.

2. Conducting Thorough IP Due Diligence

After identifying all pertinent intellectual property assets, then one of the next critical steps for prospective purchasers is to conduct thorough IP due diligence. This itself is a multi-faceted process that involves steps including (but not limited to):

• Examining all current U.S. registrations
• Examining all pending U.S. registration applications
• Examining any international IP registrations and applications
• Identifying relevant work-for-hire and employment agreements
• Identifying relevant license and assignment agreements
• Assessing any pending IP infringement litigation
• Assessing any risks for IP infringement litigation

When conducting IP due diligence, it is important to keep in mind that not all IP assets are eligible for registration in the U.S. and abroad. For example, trade secrets—which can hold immense value—are not eligible for registration in the U.S. and many other jurisdictions around the world. Similarly, innovations that are currently in the research and development phase may not yet be eligible for registration, but they could still hold immense commercial potential (and thus immense value) as well. As a result, an informed and nuanced approach is required, and prospective buyers and sellers alike will want to ensure that they are relying on the advice and insights of an experienced Florida intellectual property attorney.

3. Identifying (and Overcoming) Any IP-Related Concerns

Through the due diligence process, parties to potential M&A transactions should be able to identify any IP-related concerns. Then, they should be able to work with their IP counsel to address these concerns proactively—well before their anticipated closing date arrives. While some concerns in heavily IP-focused mergers and acquisitions may warrant reconsideration of the deal in its entirety, in most cases there will be less drastic means of resolution available.

What are some examples of potential IP-related concerns? Along with pending and potential IP infringement claims, some of the issues that a prospective buyer’s IP counsel might uncover during the due diligence process include:

• Patent registrations that are on the verge of expiring
• Pending challenges to patent or trademark registration applications
• Intellectual property rights that are subject to non-transferable license agreements
• Inability to register IP rights due to prior art or prior trademark rights
• Uncertainty surrounding the current or future protectability of IP
• Prior enforcement failures that raise concerns about abandonment
• Lack of clarity surrounding ownership of IP assets developed in-house or by independent parties

Again, these are just examples. The potential issues associated with IP assets in M&A transactions are as varied as these assets themselves. As a result, to avoid unnecessary last-minute complications (or complications post-closing), parties on both sides of these transactions need to ensure that they have a comprehensive understanding of any IP issues involved as early in the process as possible.

4. Placing a Value on Intangible IP Assets

Once the parties to a proposed merger or acquisition have identified all pertinent IP assets and addressed any IP-related concerns, then they can shift their focus to placing an appropriate value on the intangible assets involved. This, too, is a process all on its own.

Several factors go into determining the value of an IP asset. Along with the asset’s potential for monetization, these include its registration status (if applicable) and any potential threats to exclusive ownership, among many others. Different types of IP assets present different financial considerations; and, ultimately, placing an appropriate value on a target entity’s IP portfolio requires a careful assessment of the value of each individual IP asset involved.

There are multiple well-established methods for valuing IP assets in M&A transactions; and, while each of these methods is valid (or can be valid under the right circumstances), they can lead to disparate valuations. As a result, it is not unusual for parties to disagree about the price of IP assets during the negotiation process. In this scenario, moving forward is often a matter of negotiation itself, with one potential solution being for the parties to establish procedures for selecting a neutral valuation expert who then renders a binding decision.

5. Planning for the Transfer of Registrations, Licenses and Other Assets

If you have been through a merger or acquisition previously, you know that closing the deal is, in many respects, just the start of the process. This is certainly true with regard to the IP assets involved.

After closing, the seller will need to transfer all relevant registrations, licenses, and other assets to the purchaser. This can involve filing forms with the U.S. Patent and Trademark Office (USPTO) and U.S. Copyright Office, filing forms with international registrars, executing assignments with licensees, and various other steps. While these steps can be tedious and time-consuming, they are essential for ensuring a clean separation that avoids unnecessary issues for both parties.

With this in mind, planning ahead can go a long way. During the deal-making process, both parties (and their counsel) should work to ensure that they have a clear framework and timeline for conducting all necessary transfers post-closing. Planning ahead can help to identify any potential roadblocks or other concerns as well—which can also help prevent unnecessary costs and complications down the line.

6. Planning for the Post-Closing Integration Process

Along with planning for post-closing transfers, parties pursuing mergers and acquisitions should also plan for the post-closing integration process. How much support will the seller provide for proprietary software and hardware? For how long? What level of access will each party have to the other’s information technology systems during the integration phase? These are critical questions that will likely require negotiation during the dealmaking process as well.

7. Being Prepared to Effectively Manage and Protect an Enlarged IP Portfolio

Finally, for prospective purchasers, it is essential to ensure that they are prepared to effectively manage and protect their enlarged IP portfolios. Letting registrations lapse, failing to respond to pending Office Actions, and failing to identify and address third-party infringement can all have very costly consequences. After going through the process of ensuring the appropriate transfer of all pertinent IP assets and including their value in the deal, it is imperative not to let this time and investment go to waste.

With this in mind, just as the parties need to plan for post-closing transfers and integration, prospective purchasers also need to plan for effective IP portfolio management from day one. Prospective purchasers should ensure that they have a clear understanding of what protection and enforcement mechanisms are necessary, and they should work with their IP counsel to ensure that they are prepared to begin protecting their newly acquired IP assets immediately.

Request an Appointment with a Florida Intellectual Property Attorney at Lott & Fischer, P.L.

We have extensive experience serving as IP counsel for complex and large-scale mergers and acquisitions in the United States and abroad. If you would like to speak with one of our attorneys about a proposed or pending deal, we invite you to get in touch. To request an appointment with a Florida intellectual property attorney at Lott & Fischer P.L., please call 305-448-7089 or inquire online today.