What to look for when acquiring a company with IP licensing agreements
Acquiring a company can be done for numerous reasons, and may be driven in part by a desire to acquire valuable intellectual property rights. These intellectual property rights may include patents, trademarks, and copyrights that are owned by the company you are acquiring. But they also may include license rights.
However, simply because the company you are acquiring enjoys such rights may not necessarily mean that those same rights can be transferred to you. The magic of whether these rights are transferrable lies in the underlying licenses themselves. Hence, it is important to study those out to ensure that (i) you are receiving what you expect to receive, and (ii) you aren’t inadvertently creating a risk of litigation by practicing intellectual property that may not transfer to you in an acquisition.
Exclusive v. Non-Exclusive
It is important to carefully review any underlying patent license agreements that may have an impact on the intellectual property rights that you are acquiring. Generally, intellectual property licenses may be exclusive, meaning that only the licensee is the only party that is licensed to practice the intellectual property, or they may be non-exclusive, meaning that the licensor may license the underlying intellectual property to many parties.
Whether a license is exclusive or non-exclusive may have a significant impact on the value of the license. And if you are acquiring a company that has licensed its intellectual property, it will be important to review whether those licenses are exclusive or non-exclusive, as these provisions will govern whether you can license that same technology to other parties.
Additionally, licenses may have various restrictions associated with them. Examples of such restrictions include territorial restrictions, product restrictions, and even restrictions related to channels of commerce. Again, understanding whether any restrictions are associated with a license, and if so, the scope of those restrictions, will pay dividends in properly valuing intellectual property as a component of an acquisition.
Licenses may also have restrictions on whether they can be freely transferred or assigned, or whether such transfers require permission from the licensor. If such anti-assignment clauses are contained, the licensee may need to first obtain the permission of the licensor before the license may be transferred to you, even if the license is being acquired as part of an acquisition of the licensee itself.
Ultimately, the language of the license itself will be most dispositive of whether it can be assigned or transferred without the licensors’ consent. But even if the language seems clear, the governing law controlling the license (or in some cases the acquisition) may impose hurdles (or provide benefits) to otherwise plain language that may restrict a license.
For example, in some states, even in the face of language that prohibits assignment of a license, an assignment of licensed patents may nevertheless be valid if the license does not also contain language stating that any assignment of patents licensed under the agreement would be invalid or void. Thus, an understanding of the language of any licensing agreements, along with an understanding of the law that governs those licenses, is critical.
Most Favored Licensee Status
Another clause to be aware of when acquiring a company, particularly if the target company has entered into licenses that allow others to use its technology, are clauses called “most favored licensee” clauses. Generally speaking, these clauses work like this: Licensor grants a non-exclusive license to third-party A to practice certain intellectual property. This license to third-party A contains a most favored licensee clause. Later, Licensor licenses that same intellectual property to third-party B, but with better terms than third-party A received.
As a result of the most favored licensee clause, third-party A can demand that its license be modified to have the same terms as the license given to third-party B. Thus, when acquiring a company that has licensed its intellectual property, it will be important to review those licenses to determine whether they contain most favored licensee clauses, which may have a financial impact on the decision to license that same intellectual property to a third-party.
Licensing intellectual property can be a lucrative endeavor. But it is also rife with potential pitfalls, particularly when acquiring a company that has licensed its intellectual property previously. Navigating these potential pitfalls is often a fact-specific inquiry and analysis. When doing a deal, this is an additional “box” you need to ensure has been vetted and “checked” to fully understand what you are acquiring. Engaging counsel to “check” these boxes may cause some delay and increased cost before closing, but that investment can pay significant dividends and avoid costly lawsuits or decisions in the future.