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Handling Intellectual Property and Information Technology Issues in Mergers & Acquisitions
March 22, 2012
Presented By: Laurence Rickles, Associate Trademark Counsel
Johnson & Johnson New Brunswick, New Jersey www.jnj.com

Daniel Glazer, Partner

Patterson Belknap Webb & Tyler LLP New York, New York www.pbwt.com
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Agenda
Overview of IP/IT Rights Transaction Structure Role of IP Counsel Due Diligence Third-party agreements Owned Intellectual Property Third-party IP disputes Information Technology assets Purchase Agreement Representations and warranties Covenants and licenses Transition services

Intellectual Property and Information Technology

Patents: Trademarks: Copyrights: Trade secrets: Non-US IP: Information Technology: New and useful inventions Brands and logos used to identify goods or services Original works of authorship Confidential information, know how, non-patented inventions Designs, database rights Software, hardware, networks
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Transaction Structure
Stock Acquisition Acquisition of controlling (or non-controlling) interest in target company
1) No assignment of IP assets 2) Target's assets and liabilities follow by operation of law

Asset Acquisition Acquisition of division or product line

1) Assignment of specified IP assets 2) Purchaser acquires only certain assets and assumes only 5 certain liabilities

Transaction Structure
Merger Combination of two companies New company succeeds to both companies' assets and liabilities Less likely to be deemed an assignment if Target survives transaction
1) Reverse subsidiary merger: Purchaser forms an acquisition subsidiary that is merged into Target 2) Forward subsidiary merger: Target is merged into acquisition subsidiary
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Role of IP Counsel
Clarify respective roles of in-house and external counsel
Assess internal resources
1) Are the company's non-IP corporate lawyers familiar with IP issues? 2) Does the company have in-house IP specialists? Familiarity with M&A transactions?

Define external IP counsel's contributions

1) Does external counsel take the lead or support in-house counsel? 2) Different roles may be appropriate at different stages of transaction

Assess need for local counsel in key foreign jurisdictions Identify budgetary or time constraints
1) May shape scope of due diligence

Set expectations for post-transaction assistance

1) Can in-house team handle recordals and other transfer logistics? 2) Will external resources be required to manage new portfolio?
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IP/IT Agreements
Restrictions on assignment or change of control
Non-assignment provisions applicable to licensees
General rule: Transaction is an assignment if Target doesn't survive (e.g., asset sales, forward mergers) Minority view: Non-assignment provisions triggered by reverse subsidiary mergers. SQL Solutions (N.D. Cal. 1991)
Reverse subsidiary merger may violate provision restricting assignment "by operation of law." Meso Scale Diagnostics v. Roche Diagnostics (Del. Ch. 2011)

Change of control provisions typically triggered by asset sales and mergers, as well as sales of sufficient stock to meet the definition of control
Often results in termination, accelerated payments, or springing liens 8 or licenses

IP/IT Agreements
Agreements silent on transfer Non-exclusive IP licenses may not be assigned without licensor's consent (majority view) Split of authority as to whether exclusive IP licenses are assignable without licensor's consent Licensor may assign IP license without licensee's consent Trademark co-existence agreement: No reported decisions Obligations that may apply to Purchaser 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, Purchaser and its affiliates likely will be affiliates of 9 Target, and Purchaser's IP may be "Licensed IP"

IP/IT Agreements
Agreements to which Target's parent or other affiliate is a party Target may have rights in certain in-licensed IP/IT only as a result of its affiliate status, which terminates as of Closing "Divested Entity" provisions
Divested affiliate (Target) may continue using licensed IP/IT for a limited time post-divestiture Seller may use licensed IP/IT for divested affiliate's benefit Licensor often obligated to negotiate new license with divested affiliate

Agreements soon due to expire or terminate Is renewal automatic or can a party terminate at will? Potential uncertainty concerning ongoing rights may be material
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IP/IT Agreements
Bankruptcy considerations
Contractual restrictions on debtor-licensee's assignment typically are ineffective
Look to "applicable non-bankruptcy law" Same rules as if agreements were silent on transferability

Debtor-licensor can unilaterally reject an unfavorable trademark license and terminate licensee's trademark rights
U.S. Bankruptcy Code (Section 365(n)) protects other IP licensees
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Owned IP: Issues Common to Patents, Trademarks and Copyrights

Schedules of federal, state and foreign registrations and applications
Patents, trademarks, copyrights, domain names

Items missing from or incorrectly included on Target's IP schedules

Search U.S. and foreign public databases to confirm accuracy Confirm the significance of IP schedules
Asset acquisitions: Define the scope of IP being transferred Stock acquisitions: Ensure due diligence was thorough
Accuracy is less crucial in stock acquisitions because IP follows with control of Target by operation of law

Items due to expire or for which maintenance fees are due

Key concern in asset acquisitions, where Purchaser is responsible for 12 maintaining IP portfolio immediately after Closing

Owned IP: Issues Common to Patents, Trademarks and Copyrights

Recorded and unreleased security interests
May reflect existing lien or simple failure to record release Revival may be possible after failure to pay fees Damages can be recovered for pre-expiration infringement

Abandoned or expired items

Record owner is an affiliate of Target that is not part of the contemplated transaction
Arrange to provide Target with ownership or license

Gaps or other inconsistencies in record chain of title Record owner is unrelated third party, or former name of Target, or entity to which Target is a successor-in-interest 13
Ownership issue or failure to record transfer or name change?

Owned IP: Issues Common to Patents, Trademarks and Copyrights

Material changes in IP filing strategies
May indicate infringement concerns or change in business strategy Joint ownership rules vary by type of IP and by jurisdiction U.S. law: Joint copyright owners can each exploit the copyrighted work freely, subject to a duty of accounting for licensing royalties received and a duty to not destroy the value of the work UK law: Joint copyright owners cannot exploit without the other's consent

Jointly owned IP

IP developed using government/university/military resources or as part of a standards-setting organization or patent pool

Arrangements often restrict transfer, mandate an approach to exploitation, or require licensing, joint ownership or other mandated sharing of proprietary rights with third parties
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Patents
U.S. and most foreign patent applications are not published (and cannot be searched) for at least 18 months after filing
Review Target's filing records and consult Target's patent counsel to determine scope and filing status

Patents or patent applications for which Target's employee or contractor is the record owner
Confirm assignment from inventor to Target was recorded with USPTO

Business methods and specialist fields

Bilski (S. Ct. 2010): Confirmed that business methods are patentable; standards for patentability and validity remain in flux
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Trademarks
Intent-to-use (ITU) trademark applications cannot be assigned prior to amending the application to reflect the mark is in use
Exception: Assignment permitted in connection with the transfer of the entire business to which the applied-for mark pertains If necessary to avoid improper assignment, Purchaser can take an exclusive license to the applied-for mark

Only entities based in countries that are members the Madrid Protocol or Madrid Agreement may own international trademark registrations and national extensions
Example: A UK company (Protocol only) cannot assign to a Canadian company because Canada is not a party to Madrid system Example: A U.S. company (Protocol only) could own an extension of a registration to France (Protocol and Agreement), but not an extension to Algeria (Agreement only)

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Domain Names
Domain names for which employee or contractor is the record owner
An uncooperative employee or contractor can "ransom" a domain name to hold up the contemplated transaction

Some jurisdiction-specific domains only can be owned by/assigned to persons or entities based in the applicable jurisdiction
Examples: European Union (.eu), Canada (.ca), Germany (.de)
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Copyrights
Registration of material copyrights
For copyrighted works created in the U.S., registration is required to sue for infringement under the U.S. Copyright Act.
Statutory damages available if work is registered before the infringement commences or within three months of publication

Material copyrighted works previously assigned to Target

Author/creator retains irrevocable right to terminate any assignment within a five-year window beginning 35 years after the assignment
56 years from the date of copyright for pre-1978 assignments Does not apply to "works made for hire"
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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
When prepared by a contractor, software code not a work made for hire

Inadequate confidentiality measures could threaten proprietary status of trade secrets

Confidentiality obligations should be perpetual for trade secrets Some states will not enforce perpetual confidentiality obligations for non-trade secret information
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Intellectual Property Disputes

Key considerations for pending disputes
Pending or threatened litigations involving Target, an affiliate, or a key licensee/licensor Search for active matters in online databases Materiality of dispute; worst-case scenario Availability of alternatives in case of injunction Potential costs and indemnification obligations Likelihood of settlement Purchaser's relationship to the adverse party help or hindrance? Possibility of parallel actions in foreign countries Opinions of counsel regarding merits of claim or validity of third-party IP
Require special treatment in diligence process (delay disclosure; specific NDA identifying parties' common interest; avoid placing in data room) 20

Information Technology
Target's proprietary software products
For code created by or for Target, confirm rights owned by Target
"Work for hire" and third-party developers

For code licensed to Target, confirm perpetual license for Target's customers and/or Target's right to provide support if license terminates Source code should be sufficiently documented and accurate so a reasonably skilled developer can understand and compile software Worms, viruses, and other defects or bugs 21

Information Technology
Open Source Code
Do Target's proprietary software products incorporate open source code?
Risk of viral licensing

If so, was open source code used in a manner that could jeopardize proprietary status of Target's software before and/or after Closing? Due Diligence:
Review terms of open source license agreements (opensource.org) Determine whether Target has and complies with internal policies concerning use of open source code If concerns are material:
Request code logs Perform scan on applicable source code (Black Duck / Palamida) Retain software consultant to analyze open source use Include representations in Purchase Agreement

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Information Technology
Source code escrow for material software licensed to Target
Ensure present grant of license to escrow materials
License contingent on licensor's bankruptcy may be unenforceable Target should be permitted to modify Licensed Software

Ensure escrow materials will be released if Licensor ceases operation or fails to provide support for licensed software
Bankruptcy/insolvency and associated "warning signs" (e.g., auditors question licensor's operation as a going concern)

Rights granted to third parties in Target's source code

Determine likelihood and potential impact of release from escrow
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Purchase Agreement: Key IP/IT Representations

Schedule of IP Sufficiency of IP/IT Assets Ownership of IP / Right to Use No Liens or Encumbrances Validity and Enforceability Non-infringement Confidential Information / Employee Matters Effect on Purchaser Company IP Agreements No IT Malfunctions / Viruses / Unauthorized Access Accuracy / Completeness of Source Code Open Source Data Privacy and Protection DMCA Research and Development
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Purchase Agreement: Allocating Infringement Risk

Who bears the risk of unasserted third-party infringement claims?
Buyer's position "The operation of the business doesn't infringe" Seller is in better position to identify, assess and mitigate Buyer may be more attractive target (deeper pockets?) Consider 6-year "look-back"

Seller's position
Risk of doing business Qualify warranties by knowledge and/or materiality "Impossible" to assess infringement risk with 100% certainty Protect against "back door" non-infringement warranties Consider insuring against breach of representations

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Ancillary IP Agreements
Transitional trademark license
"Existing stock" vs. ongoing operation of business Exceptions: Fair use? Reference to historical use? Typically separate agreements if term longer than 120 days

Patent and copyright licenses

Often perpetual, subject to non-compete and field limitations

Assignments of registrations and applications

Master assignment (at closing) Jurisdiction-specific assignments (post-closing)
1) Coordinate with local counsel on requirements for recording 2) Seller should obligate Purchaser to record within agreed time period

Domain name assignments

"Further assurances" to coordinate transfer with registrar

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Transition Services Agreement

Responsibility for consents: Purchaser or Seller? Who provides/receives services? For how long? Development of service descriptions and service levels Identification of omitted and additional services Standard of performance / obligation to perform Retention of key employees / sufficient personnel to provide services Calculation of fees / financial incentives for quick transition Indemnification / remedies for non-performance Dispute resolution / escalation procedures
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Questions?
Contact
Laurence Rickles Johnson & Johnson 732.524.2281 Lrickles@its.jnj.com Patterson Belknap Webb & Tyler LLP 212.336.2523 dcglazer@pbwt.com
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Daniel Glazer

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