Due diligence for intellectual property during mergers and acquisitions varies deal to deal, depending on the business being acquired and the structure of the transaction. One type of transaction—where the target company is a start-up or in its developing stages—presents unique issues when dealing with ownership of IP created by founders and employees.
By understanding these issues, a buy-side lawyer can perform more effective due diligence on start-ups and developing companies and mitigate key areas of potential risk related to IP ownership.
Universities and Government
Many times, the target company may have been created by founders coming out of academia or who were involved in government-funded projects. In this instance, the buy-side lawyer should confirm whether the start-up’s development was part of a research project, sponsorship, grant, or collaboration that’s governed by an agreement, or a grant document assigning founder-developed IP to the university, corporate partner, or government entity.
If the IP isn’t subject to such an agreement or grant document but was made with substantial use of an educational institution’s facilities, equipment, or other resources, the IP also may be owned by or subject to a license in favor of the institution.
The buy-side lawyer therefore should ask about the target company’s history and, where applicable, review the IP policies of any educational institutions attended by the founders, and any relevant agreements and their IP ownership provisions.
Ideally, the buy-side lawyer should understand the target company’s development and be able to confirm that all IP underlying the potential transaction is solely owned by the target company or identify any ownership gaps.
Employees and Contractors
Buy-side lawyers in start-up diligence can encounter target companies that haven’t obtained IP assignment agreements from all employees and contractors involved in IP development.
Other times, a target company may have obtained defective IP assignment agreements that are missing key terms. For example, form agreements may state that the company owns developed IP, but they fail to include the type of active assignment language preferred under current case law, such as “I hereby assign,” or may include only a promise to assign.
This missing language can greatly affect the target company’s IP ownership position, especially if its personnel helped develop patent applications or inventions that one day could be patentable. This misstep typically occurs when start-ups fail to engage legal counsel at their founding or repurpose IP assignment forms found online.
To identify these issues in diligence, the buy-side lawyer should review any available IP ownership documentation from the target company and evaluate whether it sufficiently transfers ownership in all employee and contractor work product to the target.
If the documentation is defective, the buy-side lawyer may consider remediating the situation by requiring the target company to obtain executed IP assignment agreements through a covenant in the purchase agreement or, where less material, drafting form IP assignment agreements to be used on a going-forward basis.
If the target company has obtained executed IP assignment agreements, the buy-side lawyer should review them carefully to identify any exceptions and consider whether they are applicable to the target company’s business.
Many form IP assignment agreements include an exhibit for employees and contractors to list excluded inventions that won’t be assigned to their employer or client, typically for IP that the employee or contractor created for a different company or educational institution prior to their involvement with the target.
We see this more often with start-ups than developed companies, because start-up personnel are often affiliated with, or recently graduated from, universities where they participated in research and development activities related to the target’s business.
When any IP assignment agreement lists exceptions, the buy-side lawyer should consider whether they apply to the target’s business and confirm that the target doesn’t use, or have any expectation of using, such excluded inventions. This can easily be completed through diligence questions to the target company and learning more about its projected business plans and future inventions.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Paisley Piasecki is a corporate associate in Debevoise & Plimpton’s intellectual property and technology transactions group.
Henry Lebowitz is corporate partner at Debevoise & Plimpton intellectual property and technology transactions group.
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