When two companies enter into a business combination, an often overlooked, yet crucial undertaking is examining the transferability of license agreements. After all, intellectual property — in the form of patents, copyrights or trademarks — is often a target’s most valuable asset.
Whether it’s a merger, or another form of change in control transaction, careful detail should be paid to assignability, or the ability to transfer an asset from one party to another.
The assignability for certain types of intellectual properties is much more restricted than others, explains Tom Cleary, a partner in Alschuler Grossman Stein & Kahan LLP’s Transactional Department. “Patent and copyright licenses, especially when they involve nonexclusive rights, are generally treated as personal contract rights,” he explains. “On the other hand, trademarks, whether exclusive or nonexclusive, are generally treated as property rights, the assignment of which is much less restricted.”
Smart Business spoke with Cleary about analyzing license agreements, the factors that determine the transferability of such agreements, and the role that jurisdiction plays.
Why is it so important for a company to understand license agreement transferability if there is a change in control situation?
One concern involved in every acquisition, that sometimes escapes the notice of the business parties involved, is the transferability of license agreements. This should not be overlooked, because it affects timing, cost and the ability to consummate the transaction. In change of control situations, there is often a need to obtain consent to the assignment of certain contracts from a target to a buyer. In particular, certain types of contracts — specifically, agreements for the license of intellectual property — may be treated differently in certain circumstances than the target’s other contracts, and should require additional focus.
What should a business or their counsel look for when analyzing license agreements?
When reviewing any licenses for intellectual property that may be transferred from a target to a buyer, the analysis should address the law that governs the license agreement, the type of intellectual property being licensed (patent, copyright or trademark), and whether the license is exclusive or nonexclusive.
The exact language in the license agreement should be studied, especially the license granting provision. Provisions regarding the change in control of the licensee and whether the buyer or the surviving entity is in direct competition with the licensor should be analyzed. Finally, any potential adverse impact on the licensor (such as the buyer’s ability to continue to pay royalties) should be taken into account.
What factors determine the transferability of a contract?
Normally, the transferability of contracts depends upon the type of contract and the form of the change in control. For example, contracts that are treated as property rights are treated somewhat differently than contracts that involve personal rights. Also, it is important to determine whether the form of the change in control actually results in an ‘assignment’ of the contract.
Are license agreements treated differently in connection with such transactions?
Yes. It depends upon the type of license agreement — whether exclusive or nonexclusive — and the nature of the rights involved, whether they be patent, copyright or trademark. The jurisdiction which governs the assignability of the contract also plays a role.
Generally speaking, nonexclusive patent and copyright licenses are treated as personal rights (the transferability of which is fairly restricted), whereas trademark licenses are treated as property rights (the transferability of which is much less restricted).
How should a business determine the assignment status of their contract?
The first question is whether an ‘assignment’ has actually occurred. Generally speaking, an asset sale will almost always involve an assignment. In some jurisdictions a forward merger would involve an assignment, because the entity that is a party to the contract does not survive the merger. On the other hand, reverse triangular mergers and stock sales are not deemed to involve an assignment, in most jurisdictions.
What role does the jurisdiction in which the company is located play?
The Ninth Circuit Court is uniquely protective of licensors in connection with a change in control of the company that acts as licensee. In the Ninth Circuit, in the case of certain intellectual property licenses, federal policies favor a licensor’s ability to control the identity of its licensee and retain the benefit of its original bargain. This has persuaded California courts to treat such license agreements as analogous to personal service contracts.
TOM CLEARY is a partner in Alschuler Grossman Stein & Kahan LLP’s Transactional Department. Reach him at (310) 255-9072 or [email protected].
