Are Your Corporate Transactional Attorneys Harming Your Future IP Strategy?

Entering into a corporate transaction without a careful review of the intellectual property (IP) involved can have negative consequences on an enterprise’s future IP strategy. This is especially true when IP owners do not adequately supervise the corporate attorneys who are preparing the “customary” documents for a merger, acquisition, joint venture formation, equity investment, bridge loan or any other type of corporate transaction.   Such adequate supervision involves a careful review of the “deal docs” for IP issues.  Why?  Because the corporate attorneys may often not appreciate or be aware of the unintended consequences of the language typically employed in such corporate transactional agreements, an IP-focused review is prudent to avoid such unintended consequences.

  

Invariably, a part of drafting (and negotiating) the deal docs involves preparing one or more IP-related schedules.  That is, the specific patents, trademarks, copyrights, trade secrets, know-how and/or software involved in a transaction will be listed in one or more schedules.  These schedules are then referred to in the transaction (i.e., “main”) agreement as the IP being licensed, acquired, divested, pledged, contributed or exempted – depending, of course, on the particular transaction.

Thus, the potential dangers are at least four-fold:

1. Being over-inclusive in listing certain IP assets in a schedule;
2. Being under-inclusive in the listing of certain IP assets in a schedule;
3. Being imprecise in the definition of certain IP assets in the main agreement or a schedule; and
4. Being imprecise, in the main agreement, as to what occurs (post-closing) to the certain IP assets listed in a schedule.

Of the many cases that illustrate the above concerns, one in particular decided by the U.S. Court of Appeals for the Federal Circuit^[1] is especially illuminating.  The fact pattern of the case was as follows:

• Company A enters into a limited partnership with Company B
• As part of the transaction, Company A transfers tangible and intangible assets to Company B via a “Contribution Agreement”
• The Contribution Agreement defined the transferred assets as including patents, except “any and all patents and patent applications related to any pending litigations involving Company A.”
• Section 4.21 of the Contribution Agreement then stated that “there are no actions pending or threatened by or against, or involving Company A except as set forth in Schedule 4.21.”
• Five years later, Company B sought to enforce certain patents they assumed were obtained from Company A (purportedly via the Contribution Agreement) against Company C.

In the lawsuit, Company C used the defense that Company B did not own the patents-in-suit and thus could not properly enforce them!  Therefore, Company B was forced to prove that the patents-in-suit they sought to enforce were indeed transferred by the Contribution Agreement, and were not part of the exception (i.e., the patents=in-suit did not fall within the exception of “any and all patents and patent applications related to any pending litigations involving Company A”).  Seems easy, right?  Wrong!

It turns out that Schedule 4.21 was never completed and there was no record of what actual litigations Company A was involved in five years earlier when the Contribution Agreement was executed!  Even if there was a record of what litigations were active five years earlier, the phrase “related to” was not precisely defined in the Contribution Agreement!  Given these facts, the trial court was forced to dismiss the lawsuit.  The Federal Circuit affirmed that decision on appeal.

Moral of the story: there are no routine IP provisions in corporate transactional documents!  Care must be taken to make sure that the IP that is being licensed, acquired, divested, pledged, contributed or exempted is clearly identified, and the deal doc’s language creates no unintended consequences that may negatively affect the involved parties’ future IP strategy.

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[1] Tyco Healthcare Group v. Ethicon Endo-Surgery, 2008-1269, – 1270 (Dec. 7, 2009).

This post reflects my current personal views and should not necessarily be attributed to my current or former employers, or their respective clients or customers.