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Pressed for time and short on resources, mid-market executives often approach a merger or acquisition with a limited understanding of their own intellectual property and patent assets, let alone those of the company with which they are dealing, experts said.
The consequences of that deficit of knowledge can be disastrous to the health of the deal, if not the company itself. As merger and acquisition activity in the middle market continues to trend upward, experts say the number of businesses not doing enough to shield themselves from hazards when it comes to the transfer intellectual property and patent rights is likely to increase as well.
“As long as you have more companies doing deals, you're going to see more issues with (intellectual property),” said Jura Zibas, a partner at the White Plains, N.Y.-based Wilson Elser Moskowitz Edelman & Dicker L.L.P. law firm. “That's largely just because they lack the experience.”
One of the fundamental mistakes midsize companies often make when entering into a merger or acquisition, Ms. Zibas said, is failing to account for the full breadth of intellectual property holdings on both sides of the deal. She said midsize companies tend to focus only on revenue-generating properties such as formulas, product designs, recipes and software coding, leaving behind the rights to other copyrighted or trademarked material like former and current marketing plans, trade secrets, printed materials and Web content.
“There are so many things that can be intellectual property that you don't think about,” Ms. Zibas said. “You might not realize that you have something of value that you're overlooking.”
For companies planning to acquire a competitor or business partner, a thorough examination of the target's intellectual property and patent assets is crucial, experts said. Karl Pedersen, a senior vp of Willis North America's errors and omissions and information risks practice in Los Angeles, said mid-market executives and in-house attorneys too often rely on boilerplate checklists to guide their inquiries into a target's holdings. Doing so, he said, ignores many of the intricacies of intellectual property and patent ownership and use that can affect the actual worth of a particular property, or worse, expose either or both parties to infringement litigation.
“Because of timing concerns, literally all they're checking is, "What is it, when does it expire if it's a patent, and who ultimately owns the rights?'” Mr. Pedersen said. “They don't have the time or the resources to examine the possible infringement issues or design-around issues. For a mid-market company, that's where the greatest issue lies.”
In particular, Mr. Pedersen said, midsize companies seldom take into account properties and patents that were developed using the licensed assets of another firm. Those licenses often contain exclusions on the right of use in the event of a merger or acquisition, especially those that occur between industry competitors.
“We've seen that time and time again,” Mr. Pedersen said. “Those licenses can be critical to the deal, because they complement whatever it is that you're trying to buy. If you don't do the proper due diligence, you suddenly find out that you can't use the technology or property you've acquired because it's dependent on another company's asset.”
Another common shortfall for midsize firms, experts said, is a failure to understand the very nature of patent ownership and protection. John Brosnan, a senior vp of Aon Risk Solutions' media liability and intellectual property practice in Chicago, said many mid-market companies think of patent ownership as a positive right, as opposed to a negative one. Companies often assume the acquisition of a target's patent grants them exclusive utilization or manufacturing rights to a particular product or technology. However, Mr. Brosnan warned, several patents may exist simultaneously for the same basic technology or product, and ownership of a patent doesn't necessarily protect a firm from infringement allegations.
“A patent doesn't mean you have the right to exploit that product or that technology, it just means you can prevent others from exploiting that product using that exact same patent information,” Mr. Brosnan said. “It's not a get-out-of-jail-free card. If that invention is covered by other patents, there can still be a lot of issues.”
Acquisition targets can easily jeopardize their ability to capitalize on a deal if they haven't properly inventoried and evaluated their intellectual property and patent holdings, experts said. Particularly for private middle-market companies that do not have the benefit of public earnings statements to demonstrate their monetary worth, the value of intellectual property and patent holdings often is one of the central rubrics by which a sale price is negotiated. Absent an accurate valuation of all of its intellectual property assets, a company is likely to struggle to get a fair price for its portfolio.
“There's a lot of embedded value in companies that can get overlooked, especially during the process of a merger or acquisition,” said Josh Cohen, a senior vp for Marsh Risk Consulting's valuation services practice in New York.
“That happens more in the middle market because of limited resources and the inability to generate that detailed portfolio of intellectual property and patents from the seller's standpoint.”
To avoid messy intellectual property and patent disputes during and after an acquisition or merger, all roads must pass through extensive due diligence and disclosure, according to several attorneys and insurance advisers.