Vol. 10, No. 3 Fall 2000

This newsletter is provided with our compliments. Its purpose is to inform our readers of developments within the firm and in the legal field of intellectual property law. We invite your comments, questions, and opinions.

Intellectual Property Due Diligence in a Business Transaction by Christopher Lewis and Kevin Goldstein an acquisition from an acquiring show the board members and the company's point of view, a number public his trade secrets used to of the considerations discussed make the watch. Sir John Harrison below are equally important in complied and ultimately was award- other types of business transactions ed the prize. and may also be used by a target In today's world, business trans- company in marketing itself. actions occur much more rapidly An example of IP due diligence than the nearly forty years which it can be found in the story of one of took Sir John Harrison to satisfy the the greatest technological advances Board of Longitude. Given today's Intellectual property (IP) due of the 18th century. That advance accelerated time frame for business diligence can be defined as the resulted from Sir John Harrison's transactions, it is even more impor- process undertaken by an acquiring efforts to develop a timepiece accu- tant to initiate the IP due diligence company to evaluate a target com- rate enough to aid in correctly exercise early in the negotiations pany's IP assets. In a transaction determining a ship's longitude. He and thereby gain certain advantages. involving the sale of a business, IP was motivated by the Longitude Act First, an early assessment might due diligence involves a review of a of 1714, in which the British Parlia- allow more time for an acquiring target company's patents, trade- ment pronounced that a "king's ran- company to identify any shortcom- marks, copyrights and trade secrets som," £ 20,000 at the time, would ings in a target company's IP portfo- pertaining to that business. As be granted to anyone who solved lio. Uncovering certain facts might shown in the illustration, the ulti- the problem of determining longi- improve the bargaining position of mate end result of business transac- tude to within one-half of a degree. the acquiring company. In addition, tions is an acquiring company's pur- The Longitude Act specified only an early start to the process is more chase of a target company's IP. that a "practicable and useful likely to permit the acquiring com- Although the focus of this article is means" of determining longitude be pany to focus on the key areas in created for the Board of Longitude the target company's IP assets. IN THIS ISSUE: to grant the reward, but did not Thus, a greater percentage of the expressly require that the "means" available resources can be devoted Intellectual Property Due be reproducible. Towards the end to those areas of consideration most Diligence in a Business of Sir John Harrison's efforts, how- important to the acquiring company. Transaction ...... 1 ever, the Board of Longitude took In conducting an IP due dili- great pains to ensure that the new gence study, a checklist can be a Speaker’s Forum...... 5 timepiece could be reproduced, ask- helpful starting point. Table I is a Announcing...... 5 ing him for a written description of checklist of selected action items how to make the watch and hiring according to one approach that an Publications ...... 5 another watchmaker to replicate it. acquiring company might undergo The board recognized the value of in its IP due diligence study. A Win Your Domain Name Dispute being able to make the watch and, more expansive checklist can be Without Suing ...... 6 in effect, asked Sir John Harrison to (continued on page 2) Intellectual Property and common law), copyrights, cal personnel of the acquiring com- Due Diligence in a Business copyright registrations and trade pany should review all products secrets. The status and geographi- and identify any trade secrets which Transaction cal scope of each of these IP assets would be needed to continue the (continued from page 1) should also be included. Along business, such as processes for obtained by contacting Ratner & these lines, the acquiring company making certain products or interme- Prestia. As with any form or check- should ask itself when certain diates to certain products. list, the checklist of Table I must be patents might expire and whether The next action item listed on used with appropriate considera- the target company has protected Table I refers to ensuring that the tions. In some cases, given certain certain IP assets in the most impor- target company holds clear title to budgetary constraints for both tant markets. the IP assets. With the completion money and time, this checklist may The acquiring company should of this step, any outstanding liens or be too extensive. In other cases, it then confirm the completeness of security interests in the IP assets might not include entire topics criti- the initial listing provided by the tar- should be uncovered. A check of cal to a certain business transaction. get company to better define the only the records of the Library of Nonetheless, a checklist is a helpful boundaries of the pool of informa- Congress should uncover any such starting point, and it is worthwhile tion. For example, an acquiring liens or security interests against to elaborate on the action items list- company should conduct a search registered copyrights. With respect ed in Table I. by assignee of the patent and trade- to patents and federally registered A logical due diligence first step mark offices of the relevant coun- trademarks, however, it is worth- is for the acquiring company to have tries. A related entities search, a while to review the results of the the target company list all of its IP search by inventor and a subject Assignment Branch search of the assets to be sold so that the acquir- matter search might uncover addi- U.S. Patent and Trademark Office ing company can identify the pool tional IP assets which should have and a search of the relevant UCC of IP assets. This list might take the been included in the initial listing offices to identify the filing of any form of appendices identifying all of or, if owned by third parties, which security interests. This is true the patents, patent applications, might adversely impact the ability to despite a recent case by a Bankrupt- invention disclosures, trademarks commercialize certain products. cy Appellate Panel of the Ninth Cir- and service marks (both registered With respect to trade secrets, techni- cuit which concluded that filing in the relevant UCC state office was sufficient to perfect rights in a secu- rity interest of a patent. United States Patent and Trademark Office The next two action items on Table I, identifying licenses, permit the acquiring company to identify any expansions or contractions to the pool of information. For a license of a third party’s property, PATENTS the acquiring company should Library of Congress United States Patent and Trademark Office review the terms and ensure that they are consistent with the envi- TARGET sioned use of the licensed assets. It COMPANY'S is important to ensure that any IP ASSETS trademark license includes the required quality control provisions TRADEMARKS COPYRIGHTS and that these provisions are fol- lowed. In addition, in the event of a trade secret license, the acquiring company should confirm that the license agreement obligates all par- TRADE SECRETS ties involved to take reasonable measures to keep the information secret. The transfer of money from an acquiring company to a target company in Having undertaken a review of exchange for the intellectual property (IP) of the target is the impetus for due the first five action items shown in diligence activity. The most prevalent forms of IP are patents, trademarks and Table I and now having a better service marks, copyrights and trade secrets. IP due diligence by an acquiring sense of the target company's IP company allows evaluation of a target company's IP assets which are often asset pool, the next due diligence critical to the decision of whether to purchase the target company. task is to focus the review to obtain

2 potential assertion of the target's IP Table I Table II against infringing third parties. For Selected Action Items in an IP Four Important Dues and example, a patent infringement law- Due Diligence Study Don'ts suit or potential claim against a tar- get company's competitor may 1. Identification of IP Assets • Early intervention of due dili- gence analysis may add value result in an injunction against the 2. Confirmation of IP Asset to your business transaction competitor or an advantageous Identification and may augment the acquir- license arrangement. On the other hand, given the uncertainties of liti- 3. Confirmation of Clear Title ing company's negotiation position gation, the target company's patent 4. Licenses to Target Company may be found invalid or unenforce- • Always give due consideration able. If that occurs, and the assert- 5. Licenses from Target to the critical aspects of the ed patent was a key property right Company acquisition (why is this "deal" in the acquisition, then the value of 6. Focus on Key IP Assets good for the company?) the target company would be signif- • Always be cognizant of, and icantly diminished. 7. Identification of Other Third give due consideration to, the In the trade secret area, it may Party Rights practicalities of budget, includ- be critical to review how the target 8. Liability to Third Parties ing both time and money company develops its products and technology. If technology is "creat- • Do not approach a due dili- 9. Claims Against Third Parties ed" through the hiring of employees gence analysis with a narrow 10. Evaluation of Target from the target company's competi- mind tors, who may be under confiden- tiality agreements, the target compa- a more detailed understanding of property, including either diminish- ny may be facing a charge of misap- the key IP assets. This entails a ing or augmenting the IP value. First, propriation of trade secrets. Similar- more discriminating review of any research should be undertaken to ly, as noted above, a review of the key patents, trademarks, copyrights determine if any other third party restrictive covenant and confiden- and trade secrets and should be rights exist in relation to the IP. tiality agreements of the target com- undertaken to ensure that the impor- Such rights may take the form of pany's key personnel may identify a tant assets are valid, enforceable, agreements, including those with potential problem of critical tech- maintained and generally protected universities or government agencies, nology and knowledge leaving the as necessary to maintain the value of such as SBIR agreements. With target company after the acquisition. the asset. respect to copyrights, an area of The third area of research is For patents and trademarks, this heightened importance in recent directed to understanding the target may entail confirming the validity years is whether software or website company's policies and procedures and enforceability of the key IP. In developers who have created com- for protecting its IP. Often the pro- the patent area, if there is a particu- puter code for use by the target cedures, or the lack thereof, relating larly significant product being com- company may have retained copy- to patents, trademarks, copyrights mercialized by the target company, right ownership of the work. Such or trade secrets become apparent as the acquiring company should con- restrictions in copyright could a consequence of undertaking the firm that one or more of the listed severely restrict use and exploitation earlier due diligence tasks. Even if patents cover the product and can- of the IP by the acquiring company. the target company appears to have not be easily designed around. For The value of the target company valid and enforceable patents, it is trade secrets, this task may require may also be affected if any liability helpful to ensure that maintenance identification of the critical person- to third parties exists. This liability fees and annuities are appropriately nel who have knowledge of any key may manifest itself as the purchase docketed and timely paid. Similar- trade secret and whether appropri- of an infringement or misappropria- ly, if the target company has ate restrictive covenants are in place tion lawsuit asserted by such third research laboratories, it is helpful to to protect the loss of that knowl- parties. The target company should review whether researchers' note- edge. Similarly, it may be advanta- be required to disclose all actual and books are properly maintained. geous to determine if the trade potential liabilities of which the tar- The value of a business today secret knowledge can be transferred get company is aware. In addition, has clearly expanded beyond the to other personnel in case the identi- the acquiring company should also tangible "bricks and mortar." The fied critical personnel decide to consider analyzing the results of the value of a company's intangible IP leave the target company. searches referred to above to assess often far exceeds the value of its The next three tasks listed further whether any liability exists. tangible property, and is, in many in Table I are a review of some mat- Similarly, the target company's transactions, the reason for the ters that may affect the value of the value may be influenced by the acquisition. As such, a proper due

3 diligence review of the IP assets of a sider when commencing an IP due true value of the target company. proposed target is not just helpful diligence review. Of these four Although a thorough due diligence but may be critical to ensure that the points, the most important in many analysis will always provide more acquiring company is in fact pur- cases is that a proper due diligence information about the target compa- chasing what it believes the target review of IP should not be under- ny, due consideration should be has to offer. taken at the last minute, but should given to the always present limita- As explained in this article, and be commenced early in the review tions of time and money. as highlighted in Table II, there are of the target company. Such early at least four important "do's" to con- review may assist in refining the

Your Professional Team at Ratner & Prestia ATTORNEYS Robert L. Andersen [email protected] Valley Forge Lawrence E. Ashery [email protected] Valley Forge Louis W. Beardell [email protected] Valley Forge Daniel N. Calder [email protected] Valley Forge Erik H. Carter [email protected] Valley Forge Kevin R. Casey [email protected] Valley Forge Joshua L. Cohen [email protected] Valley Forge Matthew I. Cohen [email protected] Valley Forge Rex A. Donnelly [email protected] Wilmington Jacques L. Etkowicz [email protected] Valley Forge Kevin W. Goldstein [email protected] Wilmington Christopher I. Halliday [email protected] Valley Forge Jack J. Jankovitz [email protected] Valley Forge Costas S. Krikelis [email protected] Wilmington Benjamin E. Leace [email protected] Valley Forge Christopher R. Lewis [email protected] Valley Forge Scott A. Mckeown [email protected] Valley Forge Bruce M. Monroe, Ph.D. [email protected] Wilmington Andrew L. Ney [email protected] Valley Forge Kenneth N. Nigon [email protected] Valley Forge Aekta Patel [email protected] Valley Forge Paul F. Prestia [email protected] Valley Forge Allan Ratner [email protected] Valley Forge James C. Simmons [email protected] Allentown Jonathan H. Spadt [email protected] Valley Forge

PATENT AGENT William P. Hauser, Ph.D. [email protected] Wilmington

TECHNICAL SPECIALISTS Lowell L. Carson [email protected] Valley Forge Camille Jolly-Tornetta, Ph.D. [email protected] Valley Forge Pamela D. Politis, Ph.D. [email protected] Wilmington Christopher M. Spletzer [email protected] Valley Forge Thomas M. Sossong, Ph.D. [email protected] Valley Forge

VALLEY FORGE ALLENTOWN WILMINGTON Suite 301 Suite 265 Suite 209, Webster One Westlakes, Berwyn Commerce Plaza II 3411 Silverside Road P.O. Box 980 5100 Tilghman Street P.O. Box 7228 Valley Forge, Pennsylvania 19482 Allentown, Pennsylvania 18104 Wilmington, Delaware 19803 610-407-0700 610-530-8100 302-479-9470

www.ratnerprestia.com

4 Speaker’s Forum

• Costas Krikelis lectured at the University of Delaware on IP pro- tection of computer software, with an emphasis on the process and mechanics of obtaining patent coverage. Costas is the managing shareholder in R&P's Wilmington office.

• At the Spring Meeting of the Licensing Executives Society (U.S.A. and Canada) (LES) in New York City, Chris Lewis and Kevin Goldstein led a workshop which was moderated by Andy Ney. The workshop, entitled "Intellec- Ken Nigon is the third R&P shareholder to be elected to the Presidency of tual Property Due Diligence in the Philadelphia Intellectual Property Law Association. Both Paul Prestia Preparation for Business Transac- (right) and Allan Ratner (left) have served in this honored position. Congratu- tions," used three hypothetical lations to Ken. business acquisition scenarios to highlight various important steps that an acquiring company may undertake as part of an IP due Announcing diligence investigation before Kevin Casey appeared on CNN® to to discuss the case in which the firm purchasing a business. That discuss a trademark and unfair com- represents Nancy Stouffer who has workshop led to the lead article petition case against the author and authored a number of children's of this issue of INSIGHT. LES is publisher of the popular Harry Pot- books. Kevin is lead counsel in that an association of nearly 5,000 ter series of books. This is one of case. members involved in the licens- many appearances Kevin has made ing and transfer of intellectual property and is part of Licensing Executives Society International.

• Kenneth Nigon and Joshua Publications Cohen conducted a Claims Draft- ing Workshop as a part of the • As reported in the last issue, The • One of R&P’s newest scientific Patent Prosecution Basic Training Bureau of National Affairs, Inc. advisors, Camille Jolly-Tornetta, PhD, seminar hosted by the American (BNA) has published a treatise titled has co-authored two recent papers. Intellectual Property Law Associa- Electronic and Software Patents: Law In the June 27, 2000 issue of Bio- tion (AIPLA) in Arlington, Vir- and Practice. In addition to the chemistry, Dr. Tornetta co-authored ginia. The Claims Drafting Work- work of Allan Ratner and Kevin the article, Regulation of Amyloid shop provided interactive training Casey, Ken Nigon wrote Chapters 1 Precurser Protein (APP) Secretion by for the drafting of patent claims and 5. The book was written to help Protein Kinase C in Human Ntera 2 for electrical, software, and not only the patent prosecutor and Neurons (NT2N). A second article mechanical inventions and was the patent litigator, but to aid the has been approved for publication attended by about 90 practition- general practitioner, the corporate in an upcoming issue of Biochem- ers. Joshua is currently Chair of executive, the corporate counsel, or istry, entitled, Protein Kinase C Reg- the Patent Legislative Committee any other person who needs a ulation of Intracellular and Cell Sur- of the Philadelphia Intellectual resourse on electronic and software face Amyloid Precursor Protein Property Law Association. ■ patents. (APP) Cleavage in CHO695 Cells.

5 Win Your Domain Name Dispute Without Suing You have been operating your defendant is using your trademark in January of this year. This was small business for 10 years, and as a domain name in bad faith. The one of the first ICANN arbitrations now you decide that you want to be defendant then has 20 days from the held in the United States under the on the web. You contact Netowrk filing of the complaint to respond. new policy, and the first in which Solutions, Inc. (NSI) to register your Once the response is received, a the respondent answered the domain name, SMALLBUSINESS.COM, one or three person panel, depend- complaint and contested the allega- which is identical to the trademark ing on the choice of the parties, will tions. Byer's Choice was success- you have owned for 10 years, review the filed papers and issue a fully represented by Ratner & SMALLBUSINESS. Unfortunately, ruling. The ruling should be issued Prestia through the dedicated work NSI tells you that another party has no longer than 10 days from the of Christopher Lewis and already registered the domain name appointment of the panel, which Matthew Cohen. SMALLBUSI-NESS.COM, so you may should be no more than two months Byer's Choice, located in Chal- not have it, even though it is identi- from the filing date. font, PA, is a highly successful man- cal to your trademark. After check- The remedies are limited. The ufacturer of collectibles such as ing the Internet and discovering that panel can decide to leave the those sold under the "Carolers®" the domain name is not being used, domain name as is, or transfer the trademark. R&P has represented you contact the other party, who domain name to the complainant. Byer's Choice for many years. In quickly offers to sell you the unused The panel has no power to do any- order that they not lose a customer domain name for $5,000. What do thing else, such as order money who innocently misspells their you do? damages or injunctions. name, Byer's Choice registered the On January 1, 2000, The Internet The critical element of the arbi- domain name BUYERSCHOICE.COM Corporation for Assigned Names tration program is that the com- as well as BYERSCHOICE.COM. and Numbers (ICANN), the non- plainant must prove that the defen- Byer's Choice was accused of bad- profit organization that controls dant has acted in bad faith. This faith use of the domain name, BUY- domain name registrations on the can be shown in a number of ways, ERSCHOICE.COM by Buyers Choice, Internet, implemented an arbitration but the most common is to show a real estate services company locat- program for just this sort of conflict. that the domain name registrant has ed in Washington state. Byer's Anyone who discovers that their requested payment for the domain Choice was able to prove to the trademark is being used as a name in excess of his or her out-of- arbitration panel that it registered domain name in bad faith by anoth- pocket expenses in acquiring and BUYERSCHOICE.COM in good faith, er party can take advantage of this maintaining the domain name (i.e. as many people misspelled the word relatively low-cost and speedy has engaged in cybersquatting). "Byer's" as "Buyers". Thus, Byer's quasi-judicial proceeding to attempt There are other acts, however, that Choice retained the registration of to remedy the situation. could be considered bad faith, such the domain name, and Network Solu- The procedure is relatively sim- as registering a domain name that is tions was ordered to reactivate the ple. First, a complaint is filed with identical to a trademark to intention- website for BUYERSCHOICE.COM. an arbitration service provider ally disrupt the business of the A copy of all the rules of the selected by ICANN. Currently, in trademark holder, or to misdirect the ICANN Domain Name Dispute the United States, the only approved trademark holder's customers. Procedure can be obtained from service provider is Arbitration For those on the receiving end of ICANN's website at WWW.ICANN. Forum, but ICANN hopes to an ICANN complaint, a showing of ORG. It is important to note, how- approve more in the future. Filing good faith usage of the domain ever, that this is only one avenue fees are between $750 and $2000. name, such as a legitimate business that can be used to protect your The complaint must contain all the use, can be used to rebut an allega- rights. For example, in appropriate facts pertinent to the case, including tion of bad faith usage. This is situations, litigating in federal court the names and addresses of the par- exactly what occurred in BUYERS may be the preferred choice. ties, proof of ownership of the CHOICE v. BYER'S CHOICE, an trademark, and evidence that the ICANN Domain Name Dispute filed

Ratner & Prestia specializes in patent, trademark, and copyright matters and realizes an obligation to keep its clients, and others, informed in those areas. The articles in this newsletter are intended to provide only a brief, general overview of each subject and are not necessarily the opinion of this firm. R & P recommends that readers seek specific information on particular matters of concern. INSIGHT is published by Ratner & Prestia. The firm welcomes your articles, ideas for articles, comments, and suggestions. Please contact Jonathan H. Spadt, the editor, at our offices: Suite 301, One Westlakes, Berwyn, P.O. Box 980, Valley Forge, PA 19482 Phone: (610) 407-0700 • Fax: (610) 407-0701 Email: [email protected] • www.ratnerprestia.com

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