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Now that the dot-com bubble has burst, many Internet companies are dissolving and attempting to sell their remaining assets. As a result, both personal and intellectual property assets are now abundantly available, often at steep discounts. Internet companies that are weathering the current dot-com storm will be tempted to take advantage of these opportunities. When doing so, surviving dot-coms should take steps toward the following three goals: (1) achieving the expected ownership interest in the targeted assets; (2) ensuring the delivery and transfer of the targeted assets; and (3) avoiding the assumption of obligations or liabilities that were not supposed to be part of the deal. The excitement of gaining a new web site and domain name at a discount will diminish quickly if your company doesn’t wind up acquiring what it expected or if it inadvertently assumes the seller’s crippling liabilities and contractual obligations. Dot-com asset purchase agreements should begin with an audit of all desired intellectual property, including all trademarks, domain names, copyrights, patents, trade secrets, proprietary software and databases, and off-the-shelf software and databases. The actual assignment of the aforementioned intellectual property should be addressed via an intellectual property schedule and separate assignments, which should be executed contemporaneously with the main asset purchase agreement. This separate schedule and related exhibits provide a clean method for addressing the subtleties and intricacies of multiple intellectual property assignments and transfers. Also, the agreement should provide that the seller will execute any additional assignments that may be needed in the future. As the web site itself is often the most coveted of the seller’s assets, obtaining legal and complete ownership of the web site and all its underlying components should be a top priority. In the simplest terms, a web site is merely composed of text, images and “software.” It is essential to have accurate information relating to the seller’s ownership of the underlying copyrights and warranties for these three items. If the web site was created in-house, then the copyright likely would vest in favor of the seller’s company. If, however, a web site developer or any other third party created the site, the developing party may own the copyright. Without a work-for-hire agreement or an explicit written assignment of copyright, the seller would have no actual authority to transfer ownership of the web site. This could expose the buyer to copyright infringement claims. Therefore, when effectuating the transfer of any copyrighted material, it should be represented and warranted in the agreement that the seller is the owner of the copyright and has full power and authority to make the assignment and transfer. Based on the Internet’s current level of sophistication, it is extremely rare for a web site to operate without some form of this third-party software (that is, software purchased from companies such as Microsoft, Oracle and IBM). As software of this type is often an integral part of the purchased site, the buyer must be certain to obtain a valid license to use the software. To ensure the proper transfer of such licenses, the buyer should be sure to obtain from the seller all pertinent license documentation and, once again, representations and warranties against any restrictions on transfer. If the seller’s license agreements cannot be produced and assigned, the buyer may have to incur the additional expense of acquiring its own licenses to use the software. The domain names associated with a web site often are almost as important as the web site itself. Due to the new unregulated top-level domains — such as “.cc,” “.tv” and “.ws” — a domain name transfer form must be prepared and executed for each individual domain. Moreover, prior to recording the transfer, each domain name registry may require use of its own proprietary form. To ascertain which forms are required, a buyer should consult the applicable registry’s web site. [FOOTNOTE 1] The seller likely also will have some form of trademark rights in and to the web site. Because trademark rights are paramount to retaining and acquiring domain names, the asset purchase agreement should include an assignment of trademark rights. If the seller has any pending or issued federal trademarks, the parties should address the assignment of these marks in a separately executed trademark assignment that meets the formal requirements of the U.S. Patent and Trademark Office. For a trademark assignment to be recorded with the USPTO, the assignment agreement must reference the following items specifically: (1) the name of the trademark; (2) the trademark’s registration or serial number; and (3) in the case of registered marks, the date of the trademark’s registration, or, in the case of marks for which holders have applied for registration, the date the application was filed. [FOOTNOTE 2]Irrespective of federal trademark registrations or applications, the agreement, at a minimum, also should provide for the assignment of any and all common-law trademark rights in and to the domain names, as well as the name of the business. In addition to trademark rights and copyrights, many sites own patent and trade secret rights. Examples include software patents such as Amazon’s One Click Patent (U.S. Patent No. 5,960,411) or business method patents such as Priceline’s Reverse Auction Patent (U.S. Patent No. 5,960,411) or business method patents such as Priceline’s Reverse Auction Patent (U.S. Patent No. 5,794,207). Although site-based patents have come under fire, they presumably are still valid and have value. Therefore, the buyer of a failed site’s assets should secure all of the failed site’s patent and trade secret rights. If any pending or issued federal patents exist, the parties should execute a separate patent assignment. At a minimum, this assignment should reference the following: (1) the patent number; (2) the filing or registration date; (3) the name of each inventor; and (4) the title of the invention. [FOOTNOTE 3] Notwithstanding any separate assignment of patents, the agreement also should provide for a general assignment of any and all patent or trade secret rights related to the site. This general language enables the buyer to apply for patent protection in the future and serves to secure the seller’s date of invention. The purchase agreement should clearly spell out how all web site software and content will be delivered and accepted. For a web site to have any real value, it must be in a form that can be revised, modified and updated readily. The only way a buyer can ensure this is by making sure that it will have possession of all software, source code and images that are incorporated in the site. Therefore, at a minimum, the agreement should provide for delivery of the following: (1) a complete mirror of the web site, including all databases and all software, graphics and html belonging thereto; (2) an archive of all graphics related to the web site in an uncompressed, multilayer format such as PhotoShop Version 5.0 or a more recent version; (3) an archive of all the source code related to the web site, including, but not limited to, all HTML, Java, JavaScript and Flash, stored as uncompiled, readable text files; and, if applicable, (4) all the source code related to the databases, including, but not limited to, all HTML, Java, JavaScript, Flash and SQL, stored as uncompiled, readable text files. Unlike physical property, software cannot be inspected via a cursory examination. Upon delivery of the software, it may take several weeks for the buyer’s engineers to ascertain whether the sellers provided all the components and necessary licenses expected. Therefore, it often is desirable to have a portion of the purchase price placed in escrow. The terms of the escrow arrangement should provide that the proceeds will be released when the buyer’s information services department certifies the software delivered. Finally, the buyer must be well informed about the element of risk in purchasing the assets, specifically in the area of successor liability. As mentioned earlier, the value of the acquired assets decreases drastically if those assets give rise to future conflicts and lawsuits. Generally, a buyer’s liability for the seller’s unassumed debts and obligations will occur if: (1) the buyer expressly or implicitly agrees to assume such liability; (2) the transaction amounts to a de facto consolidation or merger; (3) the buyer corporation is merely a continuation of the seller corporation; or (4) the transaction is entered into fraudulently for the purpose of escaping liability. [FOOTNOTE 4] Buyers of Internet company assets must be particularly conscious of the third way of inadvertently assuming the seller’s debts and obligations: having the purchase be construed as a mere continuance of the seller’s business. It could be argued that, because the public’s only real exposure to a dot-com company is through its web site, a third party’s continued operation of the seller’s site is a mere continuation of the business. The persuasiveness of this argument, however, varies drastically from jurisdiction to jurisdiction. In most jurisdictions, the test for continuation focuses on the continuation of the corporate entity rather than on the continuation of the business operation. [FOOTNOTE 5]For example, the Ohio Supreme Court has refused to depart from, or expand upon, this traditional reasoning. See Welco Industries v. Applied Companies, 617 N.E.2d 1129 (Ohio 1993). New Jersey courts, however, have expanded successor liability to include situations in which the buyer assumed substantially all assets and employed substantially all of the seller’s employees. See Woodrick v. Jack J. Burke Real Estate Inc. 703 A.2d 306 (N.J. Court of App., 1997). A similar result has also been reached in Michigan, which increased the scope of successor liability by utilizing an “expanded mere-continuation theory.” See Turner v. Bituminous Casualty Company, 244 N.W. 2d 873 (Mich. 1976). Because the issue of successor liability is often a question of fact, buyers must educate themselves prior to entering into transactions. They should perform due diligence, review the assets they intend to purchased and review the jurisdictions of the buyer, seller and potential claimants. Even after considering each of the above issues, buyers must keep one general truth in mind: Purchasing the assets of a dot-com company is no different than investing in one; if the investment seems too good to be true, it probably is. FOOTNOTES FN1“.com,” “.net” and “.edu” forms can be found at www.networksolutions.com; “.cc” forms can be found at www.nic.cc; “.tv” forms can be found at www.tv; and “.ws” forms can be found at www.ws. FN25-28 Gilson — Trademark Protection & Practice � 28.04. FN3Patent Law: A Practitioner’s Guide, � 21:4 Assignment. FN4Note: “Ohio Upholds Traditional Exception to General Rule of Corporate Successor Nonliability,” 28 Akron L. Rev. 333, 335 David R. Langon (Fall/Winter, 1995). FN5Id. at 336. Jason L. Berk is an associate in the Intellectual Property Group in the Cleveland office of Arter & Hadden LLP. He focuses his practice on corporate and intellectual property issues specific to Internet and related businesses. He can be reached at Jason L. Berk.

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