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 financial problems?
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 improve.
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@example.com.