With business failures and bankruptcies on the rise, boards of directors
and management teams are under intense pressure to stem eroding sales and
preserve the value of company assets, including intellectual property.
Smart Business learned from Kevin D.
DeBré, who leads the Intellectual Property
and Technology Transactions Practice Group
at Stubbs Alderton & Markiles, LLP, what
business owners and managers need to
know about preserving the value of intellectual property assets in these turbulent times
and what they can do today to increase the
marketability of these assets when the economy rebounds.
How do businesses use intellectual property?
Businesses use IP to distinguish their products and services from others and to block
competitors. IP not only protects businesses,
but it also fuels the expansion of product
offerings and the entry into new markets and
territories. Typical uses of IP include licensing software and other technology, selling
branded products and developing new features to meet customers’ needs. In addition,
sharing IP assets with business partners
through licensing, manufacturing, distribution, joint venture and other relationships is a
common business practice. When a business
partner suffers financial problems, the value
of IP it has licensed is at risk.
What could happen to a company’s intellectual property when a business partner has
If precautions are not taken, a company can
be stripped of IP it shares with a business
partner that suffers a severe financial downturn. In a worst-case example, a company
can lose ownership of its trademarks if a
financially troubled business partner uses the
trademarks to market inferior quality goods.
Failing to control the use of trademarks that
are licensed, a requirement under trademark
law, not only can harm the good will and
value of the trademarks but also can leave
the trademark owner without rights.
Another concern: a cash-strapped licensee
of patents or copyrights may be unable to
commercialize this IP, allowing the licensor’s
competitors to enter the market. If the
license is exclusive and, again, if precautions
are not taken, the licensor would be precluded from commercializing the patents or copyrights. The resulting lost market opportunity
could destroy this licensed property’s value.
What happens to intellectual property when a
company enters bankruptcy?
If a company files for bankruptcy, all of its
property, including its IP, is consolidated
within the ‘bankruptcy estate.’ The unique
rules of bankruptcy then control how, and if,
the bankrupt business may continue using
this property. A company entering bankruptcy may be deprived of using licensed software that is critical to its operations. This
could make it impossible for the company to
reorganize and exit bankruptcy and instead
drive the company into dissolution. Companies need to ensure critical licenses remain
available to them in bankruptcy.
Before a business partner lands in bankruptcy court, the IP owner should anticipate
what could happen to the IP it shares. If the
bankrupt business partner is allowed to
retain the licensed IP, this valuable asset can
end up in the hands of the owner’s chief competitor in a bankruptcy sale of the business
partner’s assets. To avoid this, an IP owner
will want the license agreement to restrict all
transfers of the licensed property.
Companies that license IP need to ensure
that they will be able to use this IP if the licensor ever files for bankruptcy. Although a 1988
amendment of the bankruptcy law provides
this assurance for patent and copyright
licenses, the amendment does not apply to
trademarks. This means that an apparel distributor with a license to use a designer’s
name or brand in marketing the designer’s
products is at risk of losing the license and
being unable to sell branded products in its
inventory if the designer files for bankruptcy.
How can intellectual property owners and
licensees avoid these problems?
Unfortunately, conducting due diligence of
a prospective business partner’s financial
health is not enough to ensure against the
risk of bankruptcy. Licensors and licensees
of IP, when negotiating license agreements,
must anticipate the possibility of the other
party’s, or its own, bankruptcy. Including specific provisions in license agreements can
help preserve the value of IP if the licensee’s
business falters or, in the case of the licensor’s bankruptcy, ensure continued access to
IP that the licensee needs to run its business.
What should businesses do today to prepare
for the economic recovery ahead?
Companies that own IP or rely upon the IP
of others should use this time to shore up
their IP position. Developing a plan for cultivating and safeguarding IP rights can
strengthen a company’s competitive advantage, enhance shareholder value and
increase marketability to potential buyers
and investors when business conditions
A good place to start is to conduct an IP
audit, which identifies a company’s IP assets
and helps management rank these assets
according to their importance in the company’s operations. An audit can also be used to
identify present and future IP needs, new
potential revenue streams and IP maintenance costs that can be eliminated.
KEVIN D. DEBR⊃ is the chair of the Intellectual Property and Technology Transactions Practice Group at Stubbs Alderton & Markiles,LLP. Reach him at (818) 444-4521 or [email protected].