TOP TEN PITFALLS IN NEGOTIATING AND DRAFTING BUSINESS CONTRACTS – PART VI (INTELLECTUAL PROPERTY)

Welcome to the sixth of my ten-part series that can show you how simple-looking parts of a business deal or, in the case of this installment, overlooked parts of a business deal, can come back to haunt you.  Thank you for visiting, and please also read my other installments about how to avoid getting into trouble in the first place, instead of how to get out of trouble later.  Parts I through V, which can be found elsewhere in this blog, discuss letters of intent, due diligence, noncompetition clauses, automatic renewal clauses, and sales tax.  I have published an abbreviated version of this whole series in the January 2014 issue of Nevada Business magazine. Here is the link, but with fair warning – it is so abbreviated that it only has seven pitfalls, and there is much more to beware of than what you will see in that article! http://www.nevadabusiness.com/2014/01/seven-pitfalls-avoid-negotiating-business-contracts/

Intellectual Property

A potential buyer of a business might be thinking more about the physical condition of the assets and the title to the real property than about who owns the business’ intellectual property (“IP”).  So the due diligence might be concentrated on the former rather than the latter.  Moreover, as discussed below, the complexities of modern-day IP law are beyond the expertise of some general-practice attorneys, so things might just get overlooked.

But what must never be overlooked is that goodwill associated with the name, trademarks and logos of a business might be where the real value and future earning power lie.

IP is an intangible, and often valuable, asset that you cannot inspect the way you inspect a factory, warehouse, fleet of vehicles, head office or title to real estate.  In simplest terms, IP rights exist primarily through contracts and government registrations, and those rights could have limited lives, different legal statuses in different jurisdictions, and possibly scattered ownership among third parties (such as licensees and sub-licensees).  It could turn out that the seller of a business is merely a licensee of the business’ IP, and the license has a limited life or geographical scope, or is just not transferable to you.

If the seller merely holds a limited license to the IP, then depending on the chain of ownership of the IP, you might be unable to get all the rights that you want.  It might be a deal-killer, or it might just be a basis for you to demand other concessions from the seller to offset the less-than-expected value of the IP.  Either way, it is important to review the IP at an early stage of the negotiations, with the assistance of an IP law specialist, and to have the contract specify clearly what the seller owns, what you are getting and how the seller will get it to you.

Another caution:  As the practice of law continues to become more specialized and the field of IP law becomes more complex, some general-practice attorneys just do not have the background to deal with all that needs to be dealt with in a deal that involves important IP.  So if you are acquiring or selling IP as part of a business deal – or if you are not sure whether IP should even be a factor in the deal – let an IP law specialist look things over and leave the rest of the deal to your regular attorney.

And a final caution:  If you are the prospective seller of a business, or if you are working on a future exit strategy with no immediate plans to sell, now is the time for an IP law specialist to see what you have, what you need to protect through registrations or other procedures, or what might be infringing on other persons’ IP rights.  If you have material weaknesses in this area, be sure to remedy them before you expose yourself and your business to a potential buyer.

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