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  2. A HYPOTHETICAL CASE • You have been asked by your client, a sizable publishing firm, to handle all intellectual property aspects arising from the purchase of its assets by a large publishing conglomerate. Fortunately, you are somewhat familiar with the client’s publishing agreements, having drafted the most recent company forms. You have also worked on all the company’s IP matters for the past nine years. • What is the first thing you do?

  3. DUE DILIGENCE • Why? • To aid in • Determining the advisability of the transaction • Minimizing the risk of exposure for the target client • Formulating a proposal for the transaction • Structuring, negotiating and drafting representations and warranties that do not expose the client to risks and exposure identified during the process • Determining if closing conditions can/will be met

  4. DUE DILIGENCE:INFORMATION GATHERING • What are we looking for? • Anything that could materially affect the value of the client or its IP position: • Potential or actual litigations that could result in exposure • Agreements material to the company’s business that may be affected by change of control

  5. DUE DILIGENCE:INFORMATION GATHERING • Specifically, what are we looking for? • Types of agreements • Provisions in agreements • Company policies and practices • IP portfolio • Litigation/arbitration/mediation • Claims/threats of infringement

  6. DUE DILIGENCE:HOW TO GATHER THE INFORMATION • Personnel Interviews • Document Review • Independent Investigation

  7. Rights and Permissions Contracts Department Charged with web site development/sales/subscriptions? MIS/Technology Officer CFO (liens, security interest) Senior Executives LicensingLitigationCompany PolicyPeople Inside & Outside Counsel DUE DILIGENCE:PERSONNEL INTERVIEWS • Identify the right people. In our hypothetical, who?

  8. DUE DILIGENCE:PERSONNEL INTERVIEWS • You are interviewing the President and the CEO of your client. They disclose to you that they showed some recent forms of publishing contracts to the purchaser. The purchaser was very pleased with the recent forms, of course, because you drafted them. Among other things, they contain clear grants of exclusive rights, including digital and electronic rights and are assignable in the event of a change in control. In fact, your client tells you that the purchaser entered into the deal with the understanding that these were the forms the company had used since inception of the business in 1965. • Is there an obligation to disclose to the purchaser that these are not the only forms of publishing contracts?

  9. DUE DILIGENCE:HYPOTHETICAL-INTERVIEWS • When you receive from purchaser’s counsel a copy of the draft asset purchase agreement, there is a representation by the seller that the 1995 forms are the only publishing forms the company has ever used. • Do you have an obligation to inform the purchaser’s counsel that your client cannot make this representation? • If so, do you have an obligation to tell your client that you are going to do this?

  10. DUE DILIGENCE:DOCUMENT REVIEW • So you’ve conducted your client interviews, and have or will straighten out the form of agreement issue with counsel for the seller at the appropriate time. • However, in addition to learning that there are thousands upon thousands of publishing agreements, you have also discovered dozens of software licenses, web site development agreements, software development agreements (none of the client’s systems were innovated in-house) and a few co-distribution and co-publication agreements. • What do you do first?

  11. DUE DILIGENCE:DOCUMENT REVIEW • Make a wish list of what you’d like to review • Select a team of client representatives and attorneys • Make sure the team understands the context, purpose and key terms of the intended business deal • Establish a timeline for collecting and reviewing documents and a “data room” • Be selective but thorough: consider review of representative documents • Communicate and coordinate with attorneys who specialize in other areas working for the client

  12. Charts (after selected doc review, team feedback) E.g. charts for contract review: parties, subject matter, red flags Targetkey clauses for team members to review (e.g. grant, change of control) Alert the client immediately if an area of exposure is spotted DUE DILIGENCE:DOCUMENTING THE DOCUMENTS • Once key documents are identified, and you have gathered them, obviously you review them. But how do you document what you learn? Ideas?

  13. DUE DILIGENCE:KEY AGREEMENTS TO REVIEW • What sorts of agreements would these be? • Publishing • Assignments • Licenses • Subscription (print, web site, digital, etc.) • Co-distribution, co-publication, or other joint venture/teaming • Employment • Consulting • Independent contractor • Supply • Vendor • Service • Non-Disclosure

  14. DUE DILIGENCE:HYPOTHETICAL – DOCUMENT REVIEW • You have completed the document review stage of due diligence. You are of course happy with the form publishing contracts you prepared. However, as noted these date back only to 1995, when you first started working with your client, which was founded in 1965. You and your team have also reviewed representative publishing agreement forms used by your client before 1995. In fact, several different versions of each of these contracts exist. Among other issues, you notice: • none of the agreements grant any rights electronic, digital or “new media” rights • all of the agreements are silent on whether they are assignable in the event of a change of control • there are no executed agreements for contributions to periodical publications prior to 1995 and in one third of the cases after 1995

  15. DUE DILIGENCE:HYPOTHETICAL – DOCUMENT REVIEW • You alert your client to these issues and it asks you for recommendations and creative ways to address each of them. • How would you recommend the agreement be structured to address: • Failure to capture new media rights? • Exclude pre-1995 rights from transfer • Potential assignability problems? • Limit representations and warranties as to assignability of pre-1995 agreements and rights granted thereunder. See Gardner v. Nike, Inc., 279 F. 3d 774, 61 U.S.P.Q. 2d 1529 (9th Cir. 2002) • Lack of exclusivity and assignability issues? • Disclose the undocumented arrangements. Caveat emptor! • Limit the representations and warranties (and consequent obligations to indemnify) as to assignability of undocumented arrangements • Limit reps and warranties by time period and/or rights granted (e.g. rep assignability of all rights only after 1995)

  16. U.S. and foreign patent, trademark and copyright rights and filings • PTO, WIPO web sites • Assignment records and maintenance fee/annuity records for patents • Commissioned Copyright Office searches with chain of title information and information on any security interest (e.g. lien) or other encumbrance • UCC filings (security interest) • Internet/news database searches • Westlaw/Lexis or other databases re: litigations • Prosecution files and assignment records • If your client’s public, SEC filings DUE DILIGENCE:INDEPENDENT INVESTIGATION • You have completed your review of documents but want to be sure there aren’t any issues you haven’t uncovered. • To assess other areas of potential exposure—and also the scope of the client’s ownership rights in IP -- what documents are accessible to you that you might review independently and buyer’s counsel surely will?

  17. DUE DILIGENCE:THE ANALYSIS Once you’ve • interviewed the relevant people, • conducted your own investigation, • reviewed the documents and “documented” them, what is the next step? • Prepare a report addressing major areas of exposure or concern.

  18. DUE DILIGENCE: THE ANALYSIS • What are some typical provisions that might raise a red flag from an IP attorney’s perspective? • Anti-assignment • Silence on assignment • Non-exclusive rights grants to or from your client • Ambiguous or ineffectual rights grants • Termination • Loss of rights • Indemnification (especially if not limited)

  19. DUE DILIGENCE:THE ANALYSIS • More red flags • Covenants not to sue (any covenant!) • Automatic reversion/transfer of rights • Government licenses • Sublicenses • Assignments • Non-compete • Source code escrow • Unusual jurisdiction

  20. DUE DILIGENCE:THE ANALYSIS • Significant Copyright Issues: • Scope of Rights (exclusive, non-exclusive) • Grants Effective • Rights Transferable • Assignments in Proper Order • WMFH or assignment where appropriate • Registrations in Proper Order • No Encumbrances/Liens

  21. DUE DILIGENCE:THE ANALYSIS • Significant Trademark Issues: • Assignments in proper order • Federal versus common law rights • Renewals timely filed • Opposition/cancellation proceedings • Classes • Third party use • Policing/Licensing • Protests • No encumbrances/liens

  22. DUE DILIGENCE:THE ANALYSIS • Significant Trade Secret Issues: • Confidentiality/security precautions and procedures • Proper markings/legends • Employment agreements • Non-disclosure agreements

  23. DUE DILIGENCE:THE ANALYSIS • Significant Domain Name Issues: • Verification of record owners • Assignments in proper order • Status of registration and renewal

  24. DUE DILIGENCE:THE ANALYSIS • Significant Litigation Issues: • Assess risks, exposure of actual and threatened litigation: • Indemnification (both ways) • Worst case scenario if client is defendant: Effect on business • Likelihood of success • The claim not brought by the client may be as important as the one brought by or against the client

  25. FINAL STAGE:DOCUMENTING THE TRANSACTION DRAFTING TIPS • Relevant Sections of Purchase Agreement: • Definitions • Assets • Intellectual Property • Scope of Transfer • Representations and Warranties

  26. FINAL STAGE:DOCUMENTING THE TRANSACTION DRAFTING TIPS • Some typical representations and warranties: • Here are some lists of all the IP seller owns, has licensed from someone else and has licensed to someone else (see disclosure schedule) • Seller hasn’t given any IP or rights away unless it’s disclosed • Here are all the co-publication and electronic distribution deals • Seller owns or has acquired sufficient rights to exploit the works in the way it is doing so currently • Good and marketable title • No liens or judgments

  27. FINAL STAGE:DOCUMENTING THE TRANSACTIONDRAFTING TIPS • More Reps and Warranties: • All registrations and applications to government entities with respect to IP are valid and in full force and effect and all registration and renewal fees due up to closing are paid. • Right to use computer systems and software • No pending, threatened claims against seller unless disclosed • Seller not violating any third party rights unless disclosed • Third party not violating any Seller’s rights unless disclosed

  28. FINAL STAGE:DOCUMENTING THE TRANSACTIONDRAFTING TIPS • Yet MORE typical reps and warranties: • No pending, threatened claims asserted by seller unless disclosed • Domain names and trademarks are still in full force and effect as of closing and no pending or threatened challenge to domain names, opposition, cancellation, etc. as to trademarks • Assignability of contracts, rights thereunder • Owns rights to customer information, supplier information or other lists included in the IP assets being sold

  29. FINAL STAGE:DOCUMENTING THE TRANSACTION DRAFTING TIPS • Qualifying reps and warranties: • As to time period • As to materiality • As to seller’s business • As to particular agreements’ effect on the seller’s business “taken as a whole”, or “Individually” • Disclose, disclose, disclose!

  30. FINAL STAGE:DOCUMENTING THE TRANSACTION DISCLOSURE SCHEDULES • You have discovered that a number of the contracts you’ve reviewed, in particular the software development agreements and licenses, contain a requirement that your client obtain a consent to their assignment to a third party. • How do you recommend that the agreement deal with this? • Disclosure schedules • Itemize all the contracts • Seller will exercise “reasonable best efforts” to obtain consents


  32. Jeanne Hamburg, Esq. • Specializing in: • all aspects of copyright and trademark law, • both in litigation and in the transactional area Norris McLaughlin & Marcus, P.A. 220 East 42nd Street 30th Floor New York, NY 10017 (212) 808-0700 jhamburg@nmmlaw.com www.nmmlaw.com

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