The Tangles of Intellectual Property

David Klein is a lawyer because of the end of the Cold War. After graduating from Cooper Union in 1986 with an electrical engineering degree, Klein went to Los Angeles to work for Northrop Corp., which had contracted with the U.S. government to build the B-2 bomber. “At the time, I really loved engineering, and still do,” Klein said. “But in the post-Cold War period, peace was breaking out throughout the world, and I though it best to start looking for a career change.” Intellectual property law was the obvious choice, and Klein enrolled in New York University School of Law and graduated in 1992. Klein began his career at Bryan Cave’s New York office with what he calls “a very conventional IP practice,” and he moved to Shearman & Sterling in 1997 to join what was supposed to be a patent litigation group. Instead, corporate lawyers began calling him to handle the IP issues on their deals. That reflected an increased awareness of the importance of IP, Klein says. “We’ve seen the detechnicalization of IP, which is much less a technical concept than a business concept. If you view it purely as a technologist, you will miss its importance.” Klein now runs the firm’s transactional IP, information technology and outsourcing practice. Early next year, West Law Publishing will publish Klein’s book, “Intellectual Property in Mergers and Acquisitions,” which he wrote along with Shearman of counsel Michael J. Coleman. Klein recently discussed his practice with The Deal‘s David Marcus. The Deal: Why did you write the book, and what approach to the subject do you take in it? David Klein: I believed that there was a lack of sophistication and a lack of consistency in the area. Nobody had ever written a book on how one handles the many different IP issues that can come up in an M&A transaction. The Deal: How is this practice different from the usual practice of an IP lawyer? Klein: M&A and corporate lawyers tend to look at issues from a business standpoint rather than focusing solely on legal principles. A traditional patent lawyer might tend to look at an issue in a transaction on a very technical level. A traditional trademark lawyer might also take a very legalistic approach. M&A work is about finding solutions to business problems and crafting legal solutions to meet the business solutions. You must realize that the business people have reasons for getting the deal done and that they may accept solutions that meet their business needs but that you, as a lawyer, might think contain too much risk. You also don’t necessarily want a litigator doing this sort of work. When you’re doing M&A work, you have to zealously protect the client’s interest, but it’s not adversarial. I’ve never done a lot of litigation, but like the pragmatic approach much better. Work is more fun when you’re trying to find mutually agreeable solutions rather than trying to beat each other into submission. Corporate transactions are not a zero-sum game. The Deal: What sorts of IP issues do M&A lawyers tend to miss in negotiating or drafting an agreement? Klein: M&A lawyers tend to miss the subtlety in the IP language. For example, you may hear things like, “Do any of our patents infringe their patents”? As a matter of IP law, a patent can’t infringe another patent. It is the use, sale or production of a product or process that infringes a patent. A representation and warranty quite commonly seen in the past that we have done away with might have read, “The company’s IP doesn’t infringe any third party’s IP rights.” That representation missed a key infringement risk, because it doesn’t deal with the operation of the business of the company. You’re much better off saying, “The operation of the business doesn’t infringe any third party’s IP rights.” The broad representation encompasses much more than the old representation did. We worked with our M&A group to put together a comprehensive form of purchase agreement, that includes many different types of representations and warranties, and easily deals with most issues that arise in various types of transactions, such as stock transactions, asset transactions and hybrid transactions, the latter being the most complex. In transactions where the IP is not critical, we are comfortable having them work from the form purchase agreement we helped draft, because we know that they are now working with precise language. The Deal: Could you discuss the intersection of IP and bankruptcy? Klein: In bankruptcy-related transactions, there are far fewer title issues, since the bankruptcy court will give you title. From an IP perspective, the issues tend to be simpler if you’re buying out of bankruptcy, with one caveat. There are a bunch of provisions in the bankruptcy code, and in particular those governing IP agreements, that are very complex. IP can fall outside of some of the provisions you take for granted in bankruptcy. It is commonly assumed that a bankrupt party can assign or assume its executory contracts. What is not well known is that there’s an exception. Section 365(c) of the bankruptcy code says that the bankrupt party cannot assign or assume its executory contracts if the bankrupt entity cannot assign the contract under applicable law. As it turns out, many types of IP agreements are not assignable under applicable law. A similar exception is included in � 365(e), which deals with the enforceability of so-called ipso facto clauses, which provide that either party may terminate an agreement in the event of the bankruptcy of the other. You need to ask whether the contract is assignable or assumable under applicable law. If it is not, the bankrupt party may not even be able to keep its own IP contracts, which is a somewhat odd result. If the bankrupt party decides to reorganize and come out of bankruptcy, a fair reading of 365(c), and there’s a split in the circuits, is that the trustee may not even be able to keep its own IP licenses. You’re at the fringes of bankruptcy law where the issue is how is an IP contract handled under bankruptcy law, and it turns out that it’s different than other contracts. The Deal: You worked on the Cadbury-Coca-Cola deal. How does an international overlay affect IP in the deal setting? Klein: In most cases, we are able to handle all the IP issues. In the Cadbury deal, we represented Cadbury Schweppes. There were worldwide trademark issues, many of which the client handled internally with our assistance. The trademark issues were complex, particularly for marks that were sold by Cadbury in one country but retained by Cadbury in another. The bigger issue was how to protect the formulae for the beverages that were transferred to Coke. What resulted was a fairly complex know-how agreement. The Deal: What’s the most interesting IP M&A issue you’ve encountered recently? Klein: We worked on a deal for Deutsche Bank in which it sold substantial parts of its global securities services business to State Street for $1.5 billion. In this deal, IP and IT issues were critical, and there were transition services that were to be done over a multiyear period. We were able to put technically trained lawyers on the deal that were able to handle the computer and IT issues. These days it’s not only IP issues that are important, but also information technology issues. By all current definitions, the State Street transaction would be considered an outsourcing transaction because of the level of interaction between the two companies after closing, yet if you looked at it as a pure outsourcing transaction, you would have missed all the complex issues. Outsourcing is a hot area right now. There are two types of outsourcing transactions: conventional IT outsourcing, where a company brings in a third party to run its data center, and business process outsourcing, or BPO, where a company takes one of its business processes, such as human resources or manufacturing, and outsources it. IT outsourcing has been done for quite a while. The outsourcing people have grabbed onto BPO as a new hot area. The people working in that space don’t realize that a lot of BPO transactions are actually transactions that have been done by M&A lawyers forever. Firms like Shearman have always done business process outsourcing, and we’ve done it at a very sophisticated level because we’ve dealt with tax, human resources, balance sheet issues and so on. We view it in a broader business context that deals with all of these various legal issues. Viewing it as an outsourcing transaction where there’s a service level agreement is an overly narrow way of looking at things. The best people to handle BPO are probably M&A lawyers, but if you said that at a BPO conference, they’d throw eggs at you. The outsourcing groups tend to start with IT lawyers, so you end up with technology lawyers involved. Firms like Shearman provide the technology lawyers, but also provide depth in so many other areas that are important to a transaction.