4 Steps to Prepare an IP Portfolio for Sale
Transactions involving software companies may raise some unique intellectual property issues. Knowing these issues in advance is important to preventing a potential deal-stopper from emerging and delaying a closingor preventing it altogether.
Here are four steps companies can take (based on issues a seller will likely consider and inspect in connection with its due diligence) to prepare an intellectual property portfolio with significant software assets for a sale. This list is not inclusive, but rather focuses on some key considerations that may be easy to correct or address.
1. Understand The Use Of Open Source Code
Buyers are becoming more and more aware of the risks and potential liabilities associated with open source codeand the increasing use of open source code as developers cut and paste code from various projects.
Open source code is freely distributed but still subject to certain license terms, and some open source licenses contain terms that a potential buyer will consider unfavorable. For example, some open source license agreements require that all software incorporating its code must be licensed or distributed in a way that makes it part of the free software/open source community. Open source licenses may also include requirements for distribution of source code to licensees or third parties, patent license requirements on distribution, restrictions on future patent licensing terms, or other restrictions of the exercise or enforcement of intellectual property rights related to the software containing the open source code. Other licenses have more acceptable terms, such as an attribution requirement to acknowledge the author/creator.
A prospective buyer may require representations and warranties that the companys proprietary software does not contain any open source code. Alternatively, the buyer may propose a representation that the companys proprietary software does not incorporate, link to, interface with, or otherwise interact with any open source code in any manner that would require disclosure of the proprietary source code to the public. Even in transactions where software is not a critical asset, a buyer may focus on the use of open source code in proprietary software and delay the deal based on any uncertainties or questions that the seller cannot answer.
Avoid this potential pitfall by understanding how (and if) your company uses open source code. Decide whether your company will permit the use of open source code in its proprietary software. Establish a robust process for keeping track of all open source code, how it is used, and the licenses that apply. Have a written policy regarding the use of open source code that all developers (including outside consultants) must sign. Consider requiring all developers to list all open source code incorporated into the software and identify which license applies.
It may be difficult to determine if open source code is used in certain software, particularly if the software developers were outside consultants or terminated former employees. In this situation, consider conducting an audit/scan of the software (with a company like BlackDuck) to determine what open source code is used and the applicable open source license that applies.
2. Know Your Brands
Product names, brands, logos, and other trademarks are likely to be key assets in a software transaction. Expect that any potential purchaser will run a trademark search to confirm that the critical brands and other marks are available for use and registration post-closing.
Confirm that no third party has any grounds to challenge the use of the companys key trademarks, especially if the marks are not registered. In the U.S., a company may have common law rights in a mark, based on its use of the mark, even if it never obtained a registration. If there are any third parties using similar marks in connection with arguably related goods and services, consider consulting with a trademark attorney to assess the risk associated with the third partys use of the mark.
3. Confirm Ownership
Some companies are better than others at filing ownership transfer documents with the appropriate authorities, recording the release of liens, and requiring assignments from all third-party contractors. It is easy to assume that a company owns all of its crucial intellectual property assets, but the devil, as always, is in the details.
Assume that a buyer will want a clean chain of title for all intellectual property assets. Check the assignment history for any issued patents, copyright registrations, trademark registrations, and pending applications to make sure that the chain of title is clear. Potential purchasers will review this information (in many countries, including the U.S., it is available online) and may scrutinize any discrepancies. In particular, lenders are very particular about the details in a companys name, state of incorporation, and type of corporate entity. Correcting mistakes is relatively simple, so consult with an intellectual property attorney upon the discovery of any inconsistent information.
In addition to ownership of registered intellectual property assets, ownership of software code and other design elements may become an issue. Many software companies outsource code development to third parties. In the U.S., the author of a work (such as source code) will own the work unless it is assigned in writing to another party. Review all consulting/service agreements from anyone who contributed to the software development to confirm that the work was assigned to the company. If necessary, track down the developers to assign all prior work to the company. Where the developers are overseas, this can become more complicated because the law may differ about who owns the code, whether it is assignable, and whether the author will always retain certain rights. Consult with an intellectual property attorney to obtain the appropriate documents.
4. Review Employee/Consultant Documents
Nondisclosure agreements and employment agreements may also raise issues related to a companys intellectual property assets. Review these agreements to confirm that they have actually been signed, and determine if there are specific carve-outs or exceptions to an individuals agreement. Make sure that you can locate all exhibits, schedules, or other attachments to these agreements. Verify the actual term of each agreement -- including when nondisclosure agreements will expire.
Preparing for a sale includes knowing about potential issues and planning for how to address them before the buyer raises them. It may not be possible to correct every potential issue, but these steps can help a company understand and plan for potential issues before they arise and become showstoppers in a proposed transaction.
Jennifer M. Mikulina is a partner in the law firm of McDermott Will & Emery and is based in the firm's Chicago office. She focuses her practice on trademark and copyright counseling, prosecution, licensing, and litigation.