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What representations and warranties do you include in an IP contract? Do you negotiate differently?

March 2019 - Intellectual Property. Legal Developments by IR Global.

More articles by this firm.

The following article discusses session three in the IR Global Virtual Series on 'Dealing in IP: Successfully transacting IP as part of the M&A Process'

Oklahoma, U.S. – PM It is very different when you're representing the buyer than it is representing the seller. The seller typically wants as many representations and warranties as possible, however, the buyer wants to give as few assurances as possible.

The seller looks for representations regarding title and ownership, and often the buyer must warrant title regardless because a seller typically must warrant what is being sole. There may be some instances when a quitclaim is appropriate.

Sometimes, we can soften the effects of reps and warranties by making them knowledge-based, meaning that the purchase agreement defines what is meant by “knowledge”, for example, the personal knowledge of the executive entities who are handling that aspect of the deal. Typically, a seller must warrant title and ownership, to some extent, but these can be softened with knowledge qualifiers or quitclaim limitations.

There are other IP reps and warranties. For example, some buyers ask for reps that the IP has been prosecuted and is free of defects such that there are no deficiencies that would make the IP invalid or inoperable. That is a very dangerous rep and warranty to make, especially from the seller’s point of view.

The buyer will push for this, but the seller should resist it because there are so many pitfalls in IP prosecution that unfortunately it is easy to do something during prosecution that could result in the inoperability or invalidity of one of the IP assets. This is something that the attorney prosecuting the IP would do and the buyer may not even know about it, or the seller may not even know about it because they don't know what to look for.

The attorney might have done something as simple as not signing the document properly before the patent office or the trademark office. If you get into litigation, the litigation attorney is going to look for irregularities, make an issue of it and try to invalidate the asset. That's when you need to have indemnification.

If its income-producing IP, the buyer should have some kind of indemnification for a period of years following the closing date, to the effect that if there's a major defect in the IP, or if a warranty is breached, the indemnities kick in.

Switzerland – SL I think dealing with IP is pretty similar in the US, Switzerland or Europe. Of course, the seller wants as much on the warranties as they can get, while the buyer wants to get rid of them. That’s the goal.

The clauses in a contract can differ though, and depend on the negotiations you are actually in and on the assets you're selling and in what field.

Sometimes you can get an indemnity clause for ten years, while sometimes it might just be two months. In software development, for instance, indemnities are really short because it's a fast-changing environment. It’s about safeguarding whatever you can as a buyer.

I can’t say anything generally because it depends on the deal and some clauses that would be accepted in one deal would never be accepted on other deals.

Indonesia – JK When we do an IP due diligence, especially in the M&A context, it's very rare to have specific representations and warranties, because usually, all the warranties are about the sale and purchase of the shares themselves. There is usually a very general clause that can also be considered to have covered the representations and warranties for IP.

Even if we have specific IP representations and warranties, I think they are very general, covering issues such as making sure the seller has the proper ownership over the IP, and has all the registrations in place in Indonesia, especially for the registrable IP.

For some cases, we also need them to represent that they have obtained all the approvals, be that corporate approval, or sometimes approval from the authorities, for protection, especially with regard to the IP. For assignment of IP in our company law, we have a threshold for value.

We always ask them to guarantee that there is no dispute over the IP, even though we are also conducting separate searches to find out whether they have IP disputes, whether in court or in the trademark or patent office.

Lebanon – WAF Regardless of the side of the representation, we make sure in such deals to insert typical clauses related to a variety of aspects;

A hold harmless clause, warranting that IP does not infringe upon third-party rights and indemnifies the buyer and its directors and representatives from such liability, reasonable attorney’s fees and court expenses.

Whenever legally accepted, we will add a limitation on the liability, and a clause detailing IP geography and duration; including the legalities under which they are either deposited and/or registered.

Liquidated damages in case of IP infringements are important, as are specific clauses with regards to licenses that may exist.

Specific clauses to maintain and protect a source code are important in technology transactions, while an earn-out clause should be included in the deal’s object is an acquisition with the aim to expand in a specific market through the merged entity.

Italy – MR If I'm representing the buy-side, I am always more adamant in negotiating warranties and representation clauses if the IP rights are at the core of the business my client is trying to buy. If it’s just ancillary, then maybe there are other items in which I should be a little bit tougher.

From the seller’s side, I would ask the management to be very confidential in not disclosing the negotiation. It could happen that some kind of disturbance or torpedo action comes from a competitor who is not happy with the deal. The prospective buyer then knows the important actions that took place during the negotiation. I'd be careful in such a situation and I'd be asking my seller to settle the deal quickly, because of the added risk.

CONTRIBUTORS

Peggy Millikin (PM) Millikin McKay – Oklahoma, U.S. www.irglobal.com/advisor/peggy-millikin

Maurizio Ruben (MR) CDR & Associati – Italy www.irglobal.com/advisor/maurizio-ruben

Justisiari Kusumah (JK) K&K Advocates – Indonesia www.irglobal.com/advisor/justisiari-kusumah

Walid Abou Farhet (WAF) Abou Farhat Law Offices – Lebanon www.irglobal.com/advisor/walid-abou-farhat

Sergio Leemann (SL) Wicki Partners AG – Switzerland www.irglobal.com/advisor/sergio-leemann