Intellectual Property
What is Intellectual Property? In this section, the Seller provides information regarding the intellectual property used by the Business. It is part of the Representations and Warranties of the Seller section.
The Representations and Warranties of Seller portion of the Agreement is used to save the Buyer time and money. Rather than require the Buyer to go through third parties to find certain information, the Seller provides the information and must reimburse the Buyer for any Losses it suffers if the information is false or misleading.
The Middle Ground: This section requires the Seller to make a number of disclosures and representations relating to the Intellectual Property (“IP”) used in the Business. Specifically, the Seller will be asked to provide lists in the Disclosure Schedules of:
Registered IP;
Unregistered IP Assets;
All IP Agreements; and
All joint owners of IP Registrations and/or IP Assets;
The Seller will be asked to represent that:
All required filing fees and administrative tasks relating to the Registered IP have been taken care of;
It has provided all documentation relating to the Registered IP to the Buyer;
Each IP Agreement is valid, binding, and is currently in full force and effect;
It is not in breach or default of any IP Agreement and, to its knowledge, neither is any other party to those agreements;
No party to the Seller’s IP Agreements have indicated a desire to terminate those agreements;
No events have occurred that would cause default of, result in termination of, or otherwise alter the rights of any party to any of the Seller’s IP Agreements;
It is the sole owner of all IP Registrations and IP Assets used in the Business, other than those disclosed in the Disclosure Schedules;
It has the right to use the IP disclosed in the Disclosure Schedules in the Business, free and clear of Encumbrances other than Permitted Encumbrances;
It has entered into written agreements with every current and former employee and independent contractor to (i) assign to the Seller any rights related to IP used in the Business, and (ii) acknowledge the Seller’s exclusive ownership in any such IP;
The IP Assets and the IP licensed under the IP Agreements, taken together, constitute all the IP necessary to conduct the Business as previously conducted;
The transaction does not create additional requirements for the Buyer to use the IP as it is currently used to conduct the Business;
Its rights in the IP Assets are valid and enforceable, and it has taken all reasonable steps to protect the confidentiality of all IP Assets, including requiring all Persons with access to trade secrets to sign written non-disclosure agreements;
The Business’s use of IP does not violate the IP rights of any Person, and no Person has violated the Business’s IP rights;
There are no settled, pending, or threatened Actions (i) alleging infringement by the Seller of third party IP, (ii) challenging the validity or enforceability of the IP Assets or the Seller’s rights to the IP Assets, or (iii) brought by the Seller alleging infringement or any other violation of the IP Assets; and
There is no outstanding or prospective Governmental Order restricting the Seller’s use of the IP Assets in any way.
Purpose: Much like real property, intellectual property can drive the value of a business or it can be next to irrelevant. Without its famous trade secret protections, Coca-Cola would have lost its main competitive advantage (its distinctive taste) long ago. Disney relies heavily on copyright protection to maximize the profits from its most famous characters, which is why they have repeatedly sought to extend the term for copyright protection. Any company that relies on its brand name or logo as a source of competitive advantage is enjoying the protections of trademark law, even if their trademark is not registered. On the other hand, some businesses rely almost entirely on product or service quality to succeed. If their quality drops for any significant period of time, their competitors will simply eat up their share of the market. Therefore, in some transactions the parties will rightly spend extensive time and money to make sure the Seller’s IP is protected and properly transferred. In others, the topic will be an afterthought.
Buyer Preference: The Buyer wants these representations to be as broad as possible to encompass all IP used by the company. On the whole, and particularly with respect to infringement, the Buyer also wants to exclude knowledge or materiality qualifiers. If the Seller’s statements and disclosures are qualified, the Buyer either has to expend extra resources to verify ownership and/or non-infringement, or it has to live with a significant amount of additional risk. From the Buyer’s perspective, the risk of IP infringement or non-ownership should rest with the one who created and/or has controlled the IP.
Seller Preference: The Seller wants to include a materiality qualifier for these disclosures, and it may also want its representations in this section to include a knowledge qualifier. Both approaches help the Seller limit its costs, while providing the Buyer with the information necessary to operate the business. As a minimum precaution, the Seller wants to limit the third-party infringement representation using a knowledge qualifier, as conclusively verifying that no third-party infringement has occurred may be practically impossible.
Differences in a Stock Sale Transaction Structure: The representations relating to intellectual property will not be as extensive in a stock sale as in an asset acquisition. For example, the Seller’s ability to assign the IP it uses is not an issue in a stock sale because there is no need to transfer the IP to a new entity.
