01/01/2003
Buying Intellectual Property from Troubled Companies
Litigation
A. Corporate Approvals
Outside of bankruptcy, the buyer must make certain that the seller has taken any required corporate actions necessary to authorize the sale. If the intellectual property and related assets to be acquired represent substantially all of the seller's (remaining) assets (which may well be the case with a failed start up in liquidation), shareholder approval may be required.[45]
In other circumstances, the buyer might look to seller's counsel to orchestrate the necessary corporate approvals, and provide an opinion that they have been obtained, but a distressed seller may not have counsel willing to be responsible for these tasks. In some cases, the membership of the Board itself may in flux or the Board may be divided, so even Board approval may not be straightforward. The buyer, as part of its due diligence, should seek to determine as early in the process as possible what corporate approvals will be required and whether any problems are to be expected in obtaining them prior to close.
B. Issues Affecting Title
Assignments of patents, copyrights and federally registered trademarks and service marks are subject to federal recording statutes. Thus, in addition to other, more general transfer documents, the buyer should obtain assignments, in recordable form, of these intellectual property assets.
Patents. The closing documents should, of course, include assignments of all purchased patents and patent applications. The assignment of U.S. patent and patent applications should be promptly recorded with the U.S. Patent and Trademark Office.[46] There is a three-month grace period to record patent assignments after the closing.[47] If an assignment of U.S. patents and patent applications is not recorded within that grace period, it will be void as against a subsequent "purchaser or mortgagee for a valuable consideration, without notice" who acquires the patents before the assignment is recorded.[48] The Ninth Circuit recently held that a bankruptcy trustee – at least in its status as a hypothetical lien creditor – does not qualify as such a "purchaser or mortgagee."[49] However, a subsequent purchaser of the patents, including a purchaser in bankruptcy proceedings, for value without notice of the prior unrecorded assignment, would qualify, so the buyer from a troubled company has a strong incentive to record its assignment's within the statutory grace period.
Copyrights. Assignments of registered copyrights must be recorded with the U.S. Copyright Office to be effective against a subsequent bona fide purchaser or other transferee for value without notice of the prior assignment.[50] The grace period is only one month[51] (compared to three months for patents). Whether assignments of unregistered copyrights must also be recorded to be effective against subsequent purchasers or lien holders is less clear. And this distinction can be significant, since it is not uncommon to find that copyrights, sometimes even in important software, have not been registered. The issue with respect to assignments of unregistered copyrights arises from the fact that recording of a copyright assignment will constitute constructive notice and therefore be effective under the Copyright Act, only if the copyright has been registered. [52] Recording the assignment serves no purpose, unless the copyright is also registered. However, if the buyer does not record the assignment, its rights in the purchased (but unregistered) copyrights may be cut off by a subsequent purchaser for value without notice of the prior assignment who does register the copyright and record its assignment. Thus, to be certain that its rights are secure against subsequent transferees, the prudent buyer should both register the copyrights (or at least any significant copyrights) and record the assignments in the Copyright Office within the grace period allowed by the Copyright Act. The buyer should secure sufficient information to be able to complete the registration process.[53]
Mask Works. Assignments of all registered mask works should be included in the closing documents and should be promptly recorded with the U.S. Copyright Office. Mask works are similar to patents in that the owner must submit an application for registration of a claim of protection to obtain exclusive rights in a mask work. Such application must be submitted to the U.S. Copyright Office within two years after the date on which the mask work was first commercially exploited anywhere in the world.[54] Although an owner may transfer its exclusive rights in a mask work by any written agreement, such transfer will be void as against a subsequent transfer if the subsequent transfer is made for a valuable consideration and without notice of the prior transfer. To avoid conflicting transfers, an assignment of the mask work must be recorded with the U.S. Copyright Office within three months after the date of assignment, but in no case later than the day before any subsequent transfer.[55]
Trademarks; Domain Names. If federally registered trademarks or service marks are part of the acquired assets, the closing documents should include assignments in recordable form, and should also be recorded with the U.S.P.T.O. As with patents, there is a three-month grace period.[56] If domain names are being acquired, the buyer will need to follow the transfer process specific to the registrar for the domain name.
Security Interests/Liens. If the intellectual assets are subject to security interests, delivery of releases of these security interests executed by the affected creditors at or prior to closing should be a condition of closing. Notice of these releases should be filed in all the states where security interests were filed to clear title (and with the U.S.P.T.O and Copyright Office to the extent the security interests were filed there).
C. Assignment of Contracts
Employee Proprietary Rights Agreements. The buyer will generally want to obtain assignments of the seller's employee proprietary rights and confidentiality agreements, or at least those covering the subject matter of any acquired intellectual property assets.
Inlicenses. To the extent that acquired assets include technology or intellectual property licensed from third parties, the buyer will usually want assignments of these licenses to be included, if feasible, in the deliverables at closing. If the assignments require the consent of the licensors, the buyer may include obtaining and delivery of these consents as one of the conditions of closing. However, obtaining consents by closing may not be feasible. Among other things, the parties may not want to disclose the impending transaction to a third party licensor. If required consents to particular licenses cannot be provided at closing, the buyer will need to assess how essential the affected licenses are and whether it is willing to take the risk of proceeding without them.
D. Tangible Deliverables
Even when the acquired assets are essentially limited to the seller's intangible intellectual property assets, the buyer may also need the seller's records, documentation, physical embodiments or other tangible items to exploit or protect the intangible assets. These items should be included in the purchase agreement. Particularly with a distressed seller, the buyer is usually well-advised to secure delivery of these tangible items at closing to the extent possible.
The tangible items ancillary to the acquisition of intangible technology assets often include:
Prosecution and Enforcement Files. The buyer will generally want to obtain the seller's prosecution and enforcement files for the acquired intellectual property assets. These files, like other deliverables, should ideally be delivered to the buyer at or prior to closing, not only to assure buyer's access to them, but also to permit the buyer and its counsel to obtain relevant dates and avoid missing deadlines in prosecution and maintenance of acquired patents and other intellectual property assets. If physical transfer of relevant files at closing is impractical, the buyer should at least identify who has the relevant files and include appropriate assurances for the delivery of the files after closing. If an escrow or hold-back is being used for part of the purchase price, completion of delivery of these materials may be included among the release conditions, to maintain appropriate leverage after closing.
Physical Embodiments and Documentation. The acquired assets may include physical embodiments of the seller's technology, such as source code, schematics, circuit designs, working prototypes and specifications, as well as technical and user documentation to the extent it exists. Thorough technical due diligence should identify what tangible items of this kind exist and are necessary for the buyer, and the buyer should specify them as deliverables in the purchase agreement.
VI. DEPARTING EMPLOYEES
The distress of troubled companies is usually not lost on its employees. Key employees may have already left or may seek a more secure setting before the acquisition can be completed. The seller's financial pressures may compel it to reduce its workforce to conserve cash. Or key employees of the seller may simply not be interested in working for the buyer after the closing.
The loss or potential loss of key employees complicates the acquisition of intellectual property assets from troubled companies in several ways, and should be carefully considered in structuring and completing the acquisition.
A. Potential Issues
Completing Development. The seller's research and development team, or portions of it, may be key elements in the value of the seller's intellectual property. Retaining the seller's employees may be essential for completing development of the seller's technology or achieving the buyer's time to market goals.
Effective Knowledge-Transfer. Retaining elements of the seller's development team or other employees may be required to transfer know-how or trade secrets necessary to realize full value from the other intellectual property assets to be acquired. This is a particularly important consideration if critical information or know-how is not adequately documented.
Leakage of Confidential Information. Departing employees increase the risk that trade secrets and other confidential information of the seller will leak to third parties.
Patent Assignments. Under the patent laws, individual inventors own their inventions, unless assigned to their employer (or other third party).[57] In most cases, employees will have signed umbrella proprietary rights agreements in connection with their employment. However, to secure clear record title to a specific patent, the employer-assignee must file a specific assignment, in recordable form, from each inventor.[58] It is not uncommon to find patent applications, particularly recently or hastily filed applications, for which executed assignments have not yet been obtained from the inventors. Without such an assignment, the employer will not have record title to the patent application or the resulting patent.[59] The employer – and its assignee– have more options where a patent has multiple co-inventors. Each co-inventor is presumptively a co-owner of the patent.[60] If the employer (seller) has an assignment from at least one of the co-inventors, the buyer will be able to obtain record title as at least a co-owner of the patent.[61] These partial solutions may be sufficient if the buyer's interests in the acquiring the patents is primarily defensive. In that case, the buyer may be satisfied it has the ability to practice the patent, even if it doesn't have exclusive rights to it. If the buyer wishes to be able to assert the acquired patents against third parties, however, these gaps in its title may substantially reduce the value of the assets.
Moreover, even if patent assignments are available for all previously filed applications, the cooperation of employee-inventors, including assignments, may be needed to prepare and prosecute future applications on patentable subject matter included in the intellectual property assets to be acquired (e.g., inventions, disclosures for which patent applications have not yet been completed). It may be difficult to obtain this cooperation (or even assignments) from inventor-employees who have already departed or will not be employed by the buyer after the acquisition closes.
B. Approaches
In light of these problems, the buyer should identify the key (present or past) employees of the buyer, ascertain the likelihood that the employees can be retained and successfully moved to the buyer, and structure the deal to bring about this result (or address the consequences of not doing so). Approaches and deal structures in this setting include:
1. Generally
Due Diligence. Thorough due diligence by the buyer should enable the buyer to pinpoint what employment agreements are in place, or conversely, what employee agreements may be missing and must be executed for proper deal structuring. Due diligence should also identify the extent to which individual employees of the seller will be necessary to effect necessary knowledge-transfer or complete on-going development projects of interest to the buyer.
Conditions to Closing. The acquisition agreement may be structured to require, as a condition to the buyer's obligation to close, that the seller obtain and deliver missing employee agreements, patent assignments, documentation or other materials to complete the transfer of the intellectual property assets. The closing conditions might also include a requirement that specified members of the development team be retained and employed by the buyer as of the closing.
Incentives to Retain Employees. To encourage employees to remain with the buyer during negotiation and completion of the sale of intellectual property assets, the seller may well have to offer bonuses or other special compensation to the key employees – particularly if the company is failing or the employees fear that their jobs will disappear when the intellectual property assets at issue are sold. The seller should generally discuss this strategy with the buyer in advance, both to avoid running afoul of representations or covenants in the purchase agreements requiring it to maintain compensation structures as represented in the due diligence documents, and to focus on the set of employees that are important for retention from the buyer's perspective.
Transfer of Employees at Closing. The purchase agreement may be structured so that the seller's employees or a subset of them will be terminated by the seller as of the closing and become employees of the buyer. As an incentive for the successful transition of employees to the buyer, the purchase price may include added consideration to the seller to the extent that the buyer is successfully able to employ the seller's employees (or conversely, a reduction in the purchase price to the extent it is not).
Assignments of Employee Proprietary Agreements. The buyer should obtain assignments of pertinent employee proprietary rights and confidentiality agreements. Depending on the nature and scope of the intellectual property assets being acquired, these assigned agreements may include all such employee agreements or only a subset relating to the subject matter of the acquired intellectual property assets. These assignments should include assignments of any proprietary rights agreements of employees to be employed by the buyer after closing, and those of any prior employees who worked on relevant subject matter.
Non-Competition Agreements. During due diligence, the buyer should determine whether the seller has non-competition agreements with any of its employees, and, if so, provide for agreements with relevant (past or present) employees to be assigned upon closing. Post-termination non-competition agreements generally are not enforceable in California[62] and certain other states, but they are enforceable with reasonable limits in other states.[63]
Pre-Closing Recruiting. The buyer may want, and may in many cases feel it needs, to begin recruiting the seller's employees before closing, and even before a definitive agreement has been signed, in order to ensure the continued service of key employees. In doing so, the buyer should careful not to violate the terms of any non-disclosure agreements or non-solicitation agreements that the buyer has signed with the seller. Depending on the seller's circumstances, the seller may or may not object to pre-closing recruiting efforts. If the buyer's successful recruitment will enhance the value of the seller's intellectual property assets to the buyer, the seller may not object, especially if the seller's intellectual property position is strong enough that the buyer will not be able to use the employees for the buyer's intended purposes without also acquiring the seller's intellectual property rights.
2. Delays Between Signing and Closing
Some acquisitions can be signed and closed simultaneously. In other cases, there may be a delay – potentially a lengthy one – between signing the definitive asset purchase agreement and closing of the transaction. These delays may be caused by the need for regulatory approval or the waiting period after a Hart-Scott-Rodino filing; the time required for shareholder approval, or, in the case of bankruptcy proceedings, court approval. Delays may be introduced by securities law compliance if the purchase price includes stock of the buyer. These delays introduce additional challenges to retain employees important to the transaction. The deal may be structured address the delay in a variety of ways:
Covenants Not to Fire. The buyer may require the seller to covenant in the purchase agreement not to fire key employees prior to closing, and to maintain their compensation or provide other incentives to retain them. As noted above, successful retention of key employees may also be a condition to the buyer's obligation to close.
Interim Funding Arrangements. The financially distressed seller may be unwilling, or financially unable, to fund the continued employment of key employees during a lengthy pre-closing interval, to continue prosecuting pending patent applications (or pay required maintenance fees), to release liens, or take other steps necessary to preserve the value of the acquired assets for the benefit of the buyer. To address these issues, the seller may require some form of interim funding arrangement. Such a collateral agreement can be used to enable the buyer to provide funding to the seller that would be used for the specific purpose, such as providing payroll payments to designated employees or funding specified purposes or projects. The interim funding might be applied toward the purchase price, or it might be paid as separate consideration for the seller's agreement to keep these employees employed or to fund specified projects. If such an interim funding arrangement is established, the funding agreement will generally need to address what will happen if the transaction does not close: for example, whether the seller will be entitled to retain the funds or must repay them as a breakup fee; and whether the seller or the buyer will own intellectual property rights resulting from the interim funding.
VII. CONCLUSION
The acquisition of intellectual property assets from an insolvent or financially distressed seller presents special issues and risks that need to be carefully considered in valuing the assets and structuring the deal. If properly managed, however, these issues and risks should not diminish the opportunities for active buyers to use the current turbulence in the high technology industry to acquire strategic intellectual property from weaker players.
[1] The discussion is not intended as a comprehensive review of relevant bankruptcy procedure.
[2] See discussion at pp. 12 –21 below.
[3] 11 U.S.C. § 363(n).The later reversal or modification of an authorization for sale of the property does not affect the validity of the sale under the authorization to an entity that purchased the property in good faith, unless the authorization or sale is stayed pending appeal.
[5] 11 U.S.C. § 363(f). See p. 31 below.
[6] 11 U.S.C. § 365(n). For purposes of these protective provisions, "intellectual property" does not include trademarks. 11 U.S.C. § 101(35A).
[7] The Uniform Fraudulent Transfer Act (UFTA), which was promulgated in 1984 to reflect passage of the Bankruptcy Reform Act of 1978, has been adopted in 40 states, including California, Colorado, Delaware, and Washington. It replaces the Uniform Fraudulent Conveyance Act (UFCA), originally promulgated in 1918, which is still in effect in New York and a small number of other states. For purposes of this discussion, we will focus on the UFTA.
[8] The following discussion relates to a sale of intellectual property assets. However, the definition of "transfer" under the UFTA, and the corresponding provisions of the Bankruptcy Code discussed below, is not limited to sales of assets. The UFTA defines "transfer" to mean "every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset, and includes payment of money, release, lease and creation of a lien or other encumbrance." UFTA § 1(12). See 11 U.S.C. § 101(54).
[10] UFTA § 9(b). The statute of limitation for claims based on actual fraud (see discussion below) is the later of 4 years or 1 year after the transfer was or could reasonably have been discovered. UFTA § 9(a). The statute of limitation on certain insider transactions is 1 year. UFTA § 9(c). However, the applicable period varies from state to state.
[11] A number of states (including California) still have "bulk sales" laws (contained in Article 6 of the UCC) that require the parties in an asset purchase transaction involving the bulk sale of inventory and certain related assets to notify the seller's creditors of the transaction prior to the closing of the transaction, and making the purchase voidable if those requirements are not satisfied, even if the transfer does not qualify as a fraudulent transfer and even if the buyer pays adequate consideration. The majority of states (including New York and Delaware) have repealed Article 6 and no longer have such "bulk sales" laws. Moreover, even in the few states that still have bulk sales laws in effect, the laws only apply if there is a sale of inventory and would not apply to acquisitions of intellectual property rights alone. However, if the acquisition of intellectual property assets also includes the transfer of the seller's inventory, the buyer should check whether bulk sales laws may be applicable to the sale.
[15] 11 U.S.C. § 548(c). The UFTA also provides protection to good faith transferees for value. See UFTA § 8. "Value" for purposes of this good-faith-transferee-for-value defense includes the transfer of property or satisfaction or securing of a present or antecedent debt of the seller, but does not include an unperformed promise to furnish support to the seller.
[16] UFTA § 4(a); 11 U.S.C. § 548(a)(1)(A).
[18] As noted above, however, the buyer's good faith gives it the benefit of certain protective protections if the transfer is determined to be fraudulent. See p. 14 above.
[19] UFTA § 5(a); 11 U.S.C. § 548(a)(1)(B). The UFCA's test is "fair consideration" rather than reasonably equivalent consideration.
[20] UFTA § 4(b); 11 U.S.C. § 548(a)(1)(B)(ii)(II) and (III).
[21] UFTA § 2; 11 U.S.C. § 101(32). Although insolvency is defined by a balance sheet test, under the UFTA, a debtor is "presumed" to be insolvent if it is not paying its debts as they become due. However, this is not the test of insolvency, but merely a presumption.
[22] Both the Bankruptcy Code (11 U.S.C. § 548(a)1(B)) and the UFTA (UFTA §§ 4, 5) employ the "reasonably equivalent value" test, and, indeed, as noted in the official comments to UFTA, the test employed by the UFTA was adopted in order to conform it to the Bankruptcy Code. Cases decided under the UFTA are considered to be persuasive authority for similar issues arising under 11 U.S.C. § 548. Collier on Bankruptcy (Lawrence King Ed., 15th Ed. Revised, 2001). Similarly, decisions under Section 548 of the Bankruptcy Code are considered by the courts in interpreting the corresponding provisions of the UFTA. Leibowitz v. Parkway Bank & Trust Co.(In re Image Worldwide, Ltd.), 139 F.3d 574, 577 (7th Cir. 1998). The corresponding provision of the UFCA requires "fair consideration" be paid. UFCA § 3.
[23] 11 U.S.C. §548(d)(2)(A).
[24] It is measured objectively; the good faith of the buyer is not a component. This is a departure from the UFCA, whose "fair consideration" test does examine the good faith of the buyer. Even under the UFTA and the Bankruptcy Code, however, the buyer's good or bad faith is not entirely irrelevant. The buyer's bad faith might be imputed to the transferor and bring the transaction under the actual-intent-to-defraud provisions, and the buyer's good faith is relevant in the remedy phase. See p. 14 above.
[25] 511 U.S. 531, 545 (1994).
[26] In addition to mortgage foreclosure sales, the rationale of BFP has been applied to forced tax sales, at least where competitive bidding is required. See, e.g. In re Grandote Country Club Co., 252 F.3d 1146, 1152 (10th Cir. 2001); T.F. Stone Co. v. Harper (Matter of T.F. Stone Co., Inc.), 72 F.3d 466, 468-69 (5th Cir. 1995).
[28] The buyer may require releases from creditors and a covenant not to challenge the transaction. If all creditors are not being paid full, however, the parties need to consider that a general release may not be sufficient to release claims based on the fraudulent transfers laws, and a release or covenant-not-to-challenge specifically referencing those laws may be a red flag to the creditors – or a subsequent bankruptcy trustee. The buyer must also proceed with caution if some but not all creditors are being paid, since preferring some unsecured creditors over other unsecured creditors may violate the fiduciaries duties of the Board of an insolvent debtor.
[29] An assignment for the benefit of creditors is not a substitute for bankruptcy in every case, however. Among other things, unlike bankruptcy proceedings, an assignee for the benefit of creditors does not have power to reject executory contracts (e.g. leases); the assignment generally requires shareholder approval; and an assignment is used to liquidate a company's assets not to pursue a reorganization.
[30] See, e.g., Philadelphia Electric Co. v. Hercules, Inc., 762 F.2d 303 (3rd Cir. 1985); Knapp v. North American Rockwell Corp., 506 F.2d 361 (3rd Cir. 1974); In re Acushnet River & New Bedford Harbor, 712 F. Supp. 1010 (D.C. Mass. 1989).
[31] Philadelphia Electric Co. v. Hercules, Inc., 762 F.2d 303, 310 (3rd Cir. 1985).
[32] Mozingo v. Correct Mfg. Corp., 752 F.2d 168, 174 (5th Cir. 1985); Jacobs v. Lakewood Aircraft Service, Inc., 512 F. Supp. 176, 181 (E.D. Pa. 1981).
[33] Golden State Bottling Co. v. NLRB, 414 U.S. 168 (1973).
[34] See, e.g., U.S. v. Carolina Transformer Co., 978 F.2d 832, 838 (4th Cir. 1992); U.S. v. Mexico Feed and Seed Co., 980 F.2d 478 (3rd Cir. 1992).
[35] See, e.g., Ray v. Alad Corp., 19 Cal. 3d 22 (1977); Gee v. Tenneco, Inc., 615 F.2d 857 (9th Cir. 1980).
[36] U.S. v. Carolina Transformer Co., 978 F.2d 832, 838 (4th Cir. 1992). The buyer's knowledge or lack of knowledge of the potential liability has also been held to be a factor. U.S. v. Mexico Feed and Seed Co., above, 980 F.2d at 478 (declined to find successor liability under the substantial continuation" theory under federal environmental laws where a pre-existing company bought assets without knowledge of environmental liability of seller relating to disposal of hazardous substances).
[37] In the fraudulent transfer context, the lack of adequate due diligence has been considered evidence that the transfer was fraudulent. Sunsport, Inc. v. The Gilcom Corporation (In re Sunsport, Inc.), 260 B.R. 88, 44 UCC Rep. Serv. 2d (Callaghan) 1110 (Bkrty Ct. E.D. Va. 2000).
[38] Joint ownership can be quagmire. See, e.g., footnote p.39 below.
[39] Although the law is not entirely settled, it has been held that state UCC filings are effective to perfect security interests in patents without recordation in the U.S.Patent and Trademark Office. In re Cybernetic Services, Inc., 252 F.3d 1039 (9th Cir. 2001), cert. denied, 534 U.S. 1130 (2002) (state UCC filing of a security interest in a patent was effective against the rights of a subsequent trustee in bankruptcy, who has the status of a hypothetical creditor lienholder). In re Cybernetic Services did not address whether that perfected security would be superior to the rights of a subsequent purchaser of the patent without notice of the security interest who records its assignment, and it might well not be. However, the careful buyer will determine whether such a security interest exists and require that it to be released at or prior to closing.
[40] Security interests in registered copyrights can only be perfected by recording them with the U.S. Copyright Office. Aerocon Engineering, Inc. v. Silicon Valley Bank (In re World Auxiliary Power Co.), 303 F.3d 1120, 1128 (9th Cir. 2002); In re Peregrine Entertainment, Ltd., 116 B.R. 194 (C.D. Cal 1990). However, the Ninth Circuit recently held that security interests in unregistered copyrights can be perfected by a state UCC filing. Aerocon Engineering, Inc. v. Silicon Valley Bank (In re World Auxiliary Power Co.), 303 F.3d at 1129-1132.
[41] Everex Systems, Inc. v. Cadtrak Corp. (In re CFLC, Inc.), 89 F.3d 673 (9th Cir. 1996); PPG Industries, Inc. v. Guardian Industries Corp., 597 F.2d 1090, 1093 (6th Cir. 1979); Unarco Industries, Inc. v. Kelley Co., 465 F.2d 1303 (7th Cir. 1972), cert. denied, 410 U.S. 929 (1973). These cases all involve non-exclusive licenses. It is not clear whether the same rule would be applied to exclusive patent licenses. The Ninth Circuit has explicitly reserved that question. See Perlman v. Catapult Entertainment, Inc. (In re Catapult Entertainment), 165 F.3d 747, 750 n.3 (9th Cir. 1999).
[42] Gardner v. Nike, 279 F.3d 774 (9th Cir. 2002); Harris v. Emus Records Corp., 734 F.2d 1329, 1334 (9th Cir. 1984) (non-exclusive copyright licensee has no right to sublicense unless expressly authorized by licensor); SQL Solutions v. Oracle Corp., 1991 U.S. Dist. LEXIS 21097 (N.D. Cal. 1991), 1991 WL 626458 (N.D. Cal. 1991) (non-exclusive copyright license for software not assignable in the absence of provision permitting assignment, following Harris);In re Patient Education Media, Inc., 210 B.R. 237 (Bankr. S.D.N.Y. 1997) (non-exclusive copyright license could not be assigned in bankruptcy proceedings, following Everex by analogy). But see Foad Consulting Group, Inc. v. Azzalino, 270 F.3d 821 (9th Cir. 2001) (implied copyright license could be assigned despite contractual prohibition on assignment). The cases are divided on whether an exclusive copyright license is assignable without the consent of the licensor. Compare Gardner v. Nike, 279 F.3d at 774 (not assignable) with In re Golden Books Family Entertainment, Inc., 269 B.R. 311 (Bktcy Ct., D. Del. 2001) (assignable).
[43] Perlman v. Catapult Entertainment, Inc. (In re Catapult Entertainment, Inc.), 165 F.3d 747 (9th Cir. 1999) (non-exclusive patent license not assignable and could not be assumed by debtor-in-possession in Chapter 11 proceeding). Contra: Institut Pasteur v. Cambridge Biotech Corp., 104 F.3d 489, 497 (1st Cir. 1997), overruled on other grounds by Hardemon v. City of Boston, 1998 WL 148382 (1st Cir. (Mass.), 1998). (non-assignable patent license could be assumed by debtor-in-possession in Chapter 11 reorganization in which all stock of debtor was sold to a third party).
[45] See, e.g., Cal. Corp. Code § 1001 (West 2003); Del. Code Ann. tit.8, § 271 (2002).
[46] Assignments of any foreign patents or patent applications must be recorded separately in the appropriate foreign patent offices.
[49] In re Cybernetic Services, Inc., 252 F.3d 1039 (9th Cir. 2001). The Court declined to address, on procedural grounds, whether the trustee might have qualified as a "purchaser" in the trustee's status as a hypothetical "unsatisfied execution creditor," because the trustee had not raised that issue below. But see In re Peregrine Entertainment, Ltd., 116 B.R. 194 (C.D. Cal 1990) (debtor-in-possession, with status of lien holder, cut off rights of prior unrecorded security interest of registered copyright), discussed at footnote [44] below.
[51] Two months for assignments executed outside the United States. 17 U.S.C. §205(d).
[52] Under the Copyright Act, registration is not required for a copyright to exist or be valid, but registration is a prerequisite to suit (17 U.S.C. §411) – and a prerequisite for the recordation of an assignment to constitute constructive notice. 17 U.S.C. §205(c)(2). A debtor-in-possession in bankruptcy or a bankruptcy trustee, in its position as a hypothetical lienholder, can probably also cut off the rights of a prior transferee of a registered copyright who has failed to record its transfer as required by this provision. In re Peregrine Entertainment, Ltd., 116 B.R. 194 (C.D. Cal 1990); see also Aerocon Engineering, Inc. v. Silicon Valley Bank (In re World Auxiliary Power Co.), 303 F.3d at 1130 (adopting Peregrine's holding with respect to registered but not unregistered copyrights). In those cases, the prior transferee was the holder of a security interest, but the courts' reasoning would apply a fortiori to a prior purchaser of a registered copyright.
[53] The registration requires, among other things, the name and nationality or domicile of the author(s); if the work is a work made for hire, a statement to this effect; the year in which creation of the work was completed; the date and nation of the work's first publication; for a compilation or derivative work, an identification of any preexisting work(s) that it is based on or incorporates. See generally 17 U.S.C. § 409.
[57] Banks v. Unisys Corp., 228 F.3d 1357 (Fed. Cir. 2000) ("The general rule is that an individual owns the patent rights to the subject matter of which he is an inventor, even though he conceived it or reduced it to practice in the course of his employment. There are two exceptions to this rule: first, an employer owns an employee's invention if the inventor is a party to an express contract to that effect; second, where an employee is hired to invent something or solve a particular problem, the property of the invention related to this effort may belong to the employer."). This patent rule is in contrast to the copyright law, under which a work of authorship prepared by an employee in the scope of his or her employment is considered to be a "work made for hire," and the copyright belongs to the employer unless there is an express written agreement to the contrary. 17 U.S.C. §§101, 201(b).
[58] 37 C.F.R. §§3.73(a) (The inventor is presumed to be the owner of a patent application, and patent application that may issue therefrom, unless there is an assignment); 3.21 (Patent assignment must identify the patent or patent application by number or other specific identifying information where a number has not yet been assigned); 3.81 (Patent will issue in name of assignee provided assignment has been filed).
[59] Cf. Banks v. Unisys Corp., 228 F.3d 1357 (Fed. Cir. 2000)(Refusal of employee co-inventor to sign umbrella proprietary rights agreement created triable issue as to whether he had assigned ownership to employer even though he had signed specific assignment in connection with patent application). This is not to imply, however, that co-ownership is as desirable as sole ownership. For example, each co-owner has the right not to exploit the patent itself but also to license others to do so, without the consent of or accounting to the other party. 35 U.S.C. §262. And each co-owner must be joined in an infringement suit, and absent an agreement to the contrary, each has the right to veto an infringement by refusing to join. Ethicon, Inc. v. U.S. Surgical Corp., 135 F.3d 1456 (Fed. Cir. 1998), cert. denied, 119 S. Ct. 278 (1998). Unresolved issues concerning the status of co-inventors as owners of the patent may, therefore, complicate efforts to enforce it.
[61] Moreover, if there are umbrella proprietary rights agreements with the remaining co-inventors, these other co-inventors will have difficulty asserting ownership claims in the patent.
[62] Cal. Business & Professions Code §16600. If some of the key employees are significant shareholders of the seller and the good will of the seller is being included as part of the acquired assets, it may be possible to obtain an enforceable non-competition agreement from them as part of the acquisition. Cal. Business & Professions Code §16601.
[63] Non-competition agreements are generally considered enforceable by an assignee if there is an express clause permitting the employer to assign its rights. Even without an express clause granting the employer a right to assign, the non-competition agreement may still be found to be enforceable by the employer's assignee. Milgrim on Trade Secrets §6.01 (Mathew Bender 2001).