Another important aspect of intellectual property (“IP”) due diligence is evaluating how the target company has managed its relationships with third party technologist or university professors, and whether infringement claims could possibly arise from those relationships. Requesting and reviewing documents that memorialize the terms and conditions under which the target company has worked with third party technologists or university professors is a crucial step when evaluating the legal risks posed by these relationships. An equally important step is to talk with the technologists and professors whenever possible. This may allow you to identify more clearly the work they’ve done on the project and what they expect from their contribution. Legal risks can loom large when the target company mismanages strategic alliances or joint development projects.
If the due diligence you undertake indicates the target company’s technologists have collaborated with a third party’s technologists or university professors to develop a new technology, and proper documentation does not exist, there is a strong likelihood you will confront co-ownership issues. The problem with co-ownership of intellectual property is that the legal rules that govern joint ownership of patents and copyrights are different, and frequently technology projects possess both patentable and copyrightable technology. Frequently the default legal rules under the patent and copyright statutes must, or at least should, be changed by contract between the parties. Even if the parties change the default rules by agreement, they can still end up with impaired IP rights, which are not as valuable as they could be to either party.
It is crucially important to keep in mind that whether co-ownership issues exist is initially determined by the rules of the patent or copyright statute.
The default rule of co-ownership under patent law is that each co-owner has an unrestricted right to use the invention and license it non-exclusively without consulting with, receiving consent from, account to or in any way deal with the other co-owners. The co-owner can, in effect, act as the sole owner of the patent. The only thing he cannot do is grant exclusive licenses or bring a claim of infringement without the other co-owners participating. The co-owners end up being competitors of one another. It can drive a wedge between the two parties. Co-owners cannot bring a suit for infringement without joining all other co-owners and those co-owners are not required to join. This fact can effectively destroy the value of the patent.
The default rule of co-ownership under copyright law is different. Each party that is a co-owner must contribute copyrightable expression (not just ideas) and they must have the specific intent that their contributions be merged into a unified whole. The co-owners must account to each other and share proceeds from the exploitation or licensing of the copyrighted subject matter. Each co-owner can separately sue for infringement because he must share the recovery with the other co-owners.
What happens if you have co-owned IP that embodies patentable inventions and copyrightable expression (i.e., software)? The default rules create a total mess because no one knows what rules apply in that instance. When you’re conducting an IP investigation of a company that has entered into strategic alliances or joint development projects with another company’s technologists or university professors, and the target company does not have a written agreement in place to deal with these issues, it is a disaster waiting to happen.
When conducting due diligence on joint development projects undertaken by the target company always review letters from third parties that offer to license or allege or allude to infringement claims. They can lead to big problems. Find out what the target company has done about these letters. Have they taken them seriously? Have they investigated the allegations? Have they analyzed the merits of the claim? Have they done absolutely nothing? The answers to these questions will help you evaluate the potential scope of the problems that could arise from co-ownership of intellectual property assets of the target company.
Finkel Law Group, with offices in San Francisco and Walnut Creek, has assisted many technology company’s and investors conduct due diligence on the intellectual property assets of a target company in an acquisition or strategic investment. When you need intelligent, insightful, conscientious and cost-effective legal counsel to assist you with an intellectual property transaction or investment you may be contemplating, please contact us at (415) 252-9600, or info@finkellawgroup.com to speak with one of our attorneys about your matter.