Technology has rapidly and intricately developed, becoming the catchword behind many successful businesses and the driving force behind intellectual property (IP) portfolios transactions including trademarks, patents, copyrights, domain names and trade secrets. Many start-ups have been bought by business angels, large companies have merged or acquired other smaller and even large businesses. So, it cannot be deemed far-fetched to say that by 2021, intangible assets have become the new (and more valuable) tangible assets.

Now, whether a start-up or a large company, businesses are (or should be) aware that they must protect their company`s IP, but very few actually have a strategy put in place or fully understand the risks. Even when they do protect their IP rights, some end up making blatant mistakes in terms of managing the IP portfolio and worse, when acquiring assets, they fail to do a proper due diligence of the IP assets. However, if today, buyers have become more prudent, there are many instances when failure to diligently perform an IP audit led to disastrous consequences and financial losses, all lessons that business owners and entrepreneurs should learn about and avoid.

Lesson no.1: Trademark acquisition – ensure that you understand what IP rights are included or excluded from the transaction

IP is fundamental to the M&A deals if not even more relevant than ever, despite of the fact it has not always been the case. As is customary, before any merger or acquisition, a due diligence is performed over the tangible or intangible assets of the business. To showcase how IP can make or break a deal, take the example of Volkswagen`s takeover of Rolls-Royce.

In the spring of 1998, Volkswagen acquired Rolls Royce Motor Cars Ltd from Vickers PLC for a staggering $790MIL, leaving out of the deal one critical asset, the Rolls-Royce trademark. The trademark was under the control of the British jet engine maker Rolls-Royce PLC, that transferred the brand ownership to BMW for $66 MIL. Volkswagen owned the luxury Rolls-Royce car business, but had no right to use the brand, had no remarkable sales, no engines and had inherited an outdated manufacturing facility alongside around 2400 unionized British workers. Basically, Volkswagen owned the Rolls-Royce car business, meaning that it could sell and make Rolls-Royce cars from the Rolls-Royce Motor Cars manufacturing facility, but could not actually use the name. To use the name, Volkswagen had to reach a settlement with BMW, which was acknowledged as one costly error in business judgement and a lesson in never underestimating a diligent due diligence and the value of IP rights, that could literally make or break a business.

To avoid that disastrous outcome, as an acquirer, you should make sure that there are not any existing prior agreements that might potentially bring limitations to the IP rights acquired and that the rights acquired will allow you to use the assets obtained.

Lesson 2: Software acquisition – always run code scan prior to identify any open source or third-party elements in the source code

 Another cautionary tale that made history in the tech area was the acquisition of Linksys by Cisco back in 2003, valued at around $500MIL. In the due diligence process, Cisco omitted the fact that the Linksys router used a Linux software, that was distributed under the General Public License (GPL). At the time, Cisco, despite being a high-end, sophisticated buyer, was not aware of the fact that Linksys had a major issue with open source and, had it run a code scan prior to the Linksys acquisition, it would have avoided the lawsuit filed by the Free Software Foundation (FSF) keen on making the source code available under GPL. This meant that if a GPL software is distributed in a product, the software`s source code must also be made available, alongside the code for any derivative works. Eventually, the case was settled in favour of FSF, Cisco publicly disclosing the IP asset, losing money, reputation and what could have been a valuable transaction.

To make sure that you make the right investment, especially when you are dealing with software, always (but always), check that you are not buying an open-source code, by running a code scan prior to shaking hands for the deal, also checking that there are not any third-party elements in the source code. Failure to do so could lead to making poor transactional decisions, jeopardizing your company`s other assets in the event that you integrate the newly acquired code into an existing (and successful) one.

Lesson 3: Patent acquisition – ensure you have checked the validity and scope of the patent(s) acquired

Back in 2002, Digeo, a Kirkland-based digital communication company, bought a patent related to the distribution of information online from Microtome at a bankruptcy estate sale. When buying the patent for e-readers, Digeo omitted to do a check on the validity and scope of the given patent. Later on, Digeo filed a lawsuit against the Amazon`s Audible online audiobook and podcast tool, prior to which it discovered that the patent purchased was in fact lacking a proper legal title, the court concluding that the documentation was forged, involving an inventor deemed dead but actually alive and no evidence of culpability. Consequently, Digeo­ filed a voluntary motion to dismiss the complaint having to pay prejudice, ending up spending enormous amounts of money on a worthless patent.

Patent-driven M&A activity has been on the rise lately, being regarded as a distinctive and very specifically valued asset target that has caught the eye of many companies. Businesses decide to acquire patents usually do it because they are trying to build a defensive portfolio and protect the company`s already owned patents by acquiring similar technologies, they want to enter new markets or to license new research and development (R&D) programs. As a side note, whenever looking to acquire patents, investors should be wary of the many instances were other companies purchased unusable patents or patents that brought about a series of long-lasting lawsuits, with huge amounts of money pumped by the acquiring company into extremely costly patent litigations. 

Conclusion

When the primary motivation of an acquirer are not IP assets, that is when a more diligent due diligence should be performed in order to avoid another Volkswagen and Rolls Royce situation. In essence, regardless of the motivation behind the acquisition, the value and importance of IP assets should not be underestimated. Thus, when preparing to enter a transaction, be it a merger or an acquisition, take enough time to plan and diligently research the IP assets you are looking into investing. Make sure you identify well in advance to the signing any possible issues related to the IP portfolio, you have a clear understanding of the IP rights included or excluded from the deal, you have checked whether you are buying an open-source code or not and if the patent is valid.