Intellectual Property Library

Assets & Finance: Audits and Valuation of Intellectual Property

Internal Controls, Materiality, and Investment

Lisa M. Brownlee

For Customer Assistance Call 1-800-328-4880

Mat #41123349

 2012 Thomson Reuters

This publication was created to provide you with accurate and authoritative information concerning the subject matter covered; however, this publication was not necessarily prepared by persons licensed to practice law in a particular jurisdiction. The publisher is not engaged in rendering legal or other professional advice and this publication is not a substitute for the advice of an attorney. If you require legal or other expert advice, you should seek the services of a competent attorney or other professional.

ISBN #978-0-31-4608536

Dedication
This book is dedicated to my family.

iii

About the Author

Lisa M. Brownlee is presently in private consulting practice. In addition to this treatise, she authored and regularly updates Intellectual Property Due Diligence in Corporate Transactions: Investment, Risk Assessment and Management with West, and Federal Acquisition Regulations: Intellectual Property and Related Rights with Law Journal Press, a division of ALM. She also presents live CLEs for West and for its related company, Federal Publications, and has presented webcasts for WestLegal Ed Center: Intellectual Property Due Diligence and Ethics: Avoiding Ethics and Securities Violations (together with Andrew J. Hollander); How to Chase Down and Defeat Cyber Criminals; Patent Law Update: In re Bilski and Progeny; and Intellectual Property Due Diligence and Audit Boot Camp. Ms. Brownlee earned her B.A. degree from Pennsylvania State University in 1983, an M.A. degree in English in 1986 from the University of Washington and her J.D. degree from the Seattle University School of Law, where she was Lead Articles Editor of the Law Review. Upon graduation, Ms. Brownlee associated with one of the (then) top three Seattle rms, where she developed expertise in international intellectual property and computer law, and advised on international trademark, copyright, and trade secret protection and enforcement. In 1993 Ms. Brownlee was awarded a fellowship at the Max Planck Institute for Intellectual Property, Competition and Tax Law in Munich. In 1994 Ms. Brownlee relocated to Amsterdam, The Netherlands, where she associated with one of the major Dutch law rms (now dissolved) and commenced writing this treatise. She founded, developed, and managed the rms intellectual property due diligence practice, assisting the corporate nance/M&A department, and managed all aspects of legal due diligence. She also founded, developed, and managed the rms international Internet/e-commerce law practice. As account manager, Ms. Brownlee managed the rm-wide service of multinational
v

computer, E-commerce, merchandising, entertainment and nancial industry clients. She has experience advising on all aspects of European e-operations, including e-sales and distribution, and best e-practices. In addition, Ms. Brownlee has developed and negotiated a full range of computer hardware, software, and Internet contracts, including license/shrink-wrap and click-through agreements, ASP agreements, on line communications policies, distribution and VAR agreements. Another important aspect of her practice was advising on Benelux, European and international trademark protection and enforcement and on international registration, management and protection of domain names. She also advised on complex patent licensing and dispute matters. In 2001 Ms. Brownlee became Of Counsel to Morrison Foerster, LLP in their Brussels Oce. In 2003 Ms. Brownlee completed a sabbatical in Belize, where she consulted on implementation of new intellectual property laws in accordance with GATT TRIPs, with the rm of Glenn D. Godfrey & Company, the ndings of which were published in the Trademark Reporter. Ms. Brownlee has served on numerous international professional association editorial, advisory, and directorial boards, including the Board of Directors of the Computer Law Association, the BNA E-Commerce Law Report Advisory Board, and the Editorial Board of the Trademark Reporter.

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Acknowledgements
The Author is pleased to introduce four contributing authors, whose contributions have been instrumental in ensuring that this text presents the most insightful, comprehensive, and state of the art view on each of their specialized aspects of IP/business practices.
ROBERT F. REILLY

Mr. Reilly contributed Chapter 6, Valuation of Intellectual Property. He is a managing director of Willamette Management Associates. His practice includes valuation consulting, economic analysis, and nancial advisory services. He specializes in the valuation, lost prots/damages analysis, and transfer price estimation of intellectual property for transaction, taxation, nancing, bankruptcy, accounting, litigation, and planning purposes. Mr. Reilly earned an MBA degree in nance and a BA degree in economics both from Columbia University. He is a certied public accountant/accredited in business valuation/certied in nancial forensics, certied management accountant, chartered nancial analyst, and certied business appraiser. He can be reached at (773) 399-4318 or rfreilly@willamette.com
DAVID GAUNTLETT

Chapter 7 (Insuring IP Assets) was authored solely by David A. Gauntlett, the principal of Gauntlett & Associates (http://www.gauntlettlaw.com) in Irvine, California. Mr. Gauntlett is a 1979 graduate of Boalt Hall School of Law, University of California at Berkeley, where he served as a member of the California Law Review. He received his B.A. from the University of California at Irvine, magna cum laude. Mr. Gauntlett represents policyholders in insurance coverage disputes regarding complex business litigation and intellectual property matters presently pending in 30 states. Mr. Gauntlett also serves as an expert witness for policyholders on insurance coverage for intellectual property lawsuits. He
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was Chair of the Special Committee on Insurance for the IP Section of the ABA, newsletter editor and Chair Emeritus for the IP Committee of the Torts and Insurance Practice Section of the ABA, and Vice-Chair of the IP Owners Associations Insurance Committee. Mr. Gauntlett is a highly recognized published author in the area of insurance coverage.
ANDREW J. HOLLANDER

Mr. Hollander contributed substantial material to the Securities and Exchange Commission regulations discussions in Chapter 1 and to the patent law discussions in Chapter 5. Mr. Hollander is of counsel at K & L Gates LLP. He represents clients on issues relating to patents, trademarks, copyrights, trade secrets, e-commerce, the Internet, licensing, and launching and managing brands. Mr. Hollander also advises on portfolio management strategies, IP due diligence, and mergers and acquisition transactions. A former chief IP counsel of a multibillion dollar company, he manages several global trademark portfolios comprising trademarks in more than 140 countries. His diverse industry experience includes computer software and hardware issues, and online services, travel, health and beauty aids, consumer packaged goods, and nancial institutions. He is registered to practice with the U.S. Patent and Trademark Oce. He earned a J.D. from Cornell University, B.A. from Wesleyan University, and M.S. from Fordham University.

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Preface
When I started practicing intellectual property law two decades ago, the Internet was essentially non-existent and biotechnology law was in its infancy. In intellectual property law, some things have changed tremendously, and much has stayed the same. I have provided domestic U.S. as well as international (EU/NL) legal counsel to scores of multinational companies in nearly every major IP-intensive industry, from entertainment, merchandising/famous branding, and e-commerce/edistribution/telecommunications, to privacy/encryption companies and biotech/GMO concerns. What is remarkable to me about the evolution of the intersection of IP and business is this: nearly every aspect of IP law, on essentially the same topics, is as in-ux today as it was in the late 1990s. Protection of famous marks, disputes over and registration of domain names, international copyright duration and protection in the e-environment, rst to invent, rst(inventor)-to-le, and prior user rights: all of these are but examples of where the law was and remains in incredible ux. What has changed considerably is the volume of laws governing these rights, the ever-increasing intensity of Supreme Court and Federal Circuit focus on cases involving these laws, and the increase in the stakes involved in properly protecting, exploiting, and enforcing these rights. Even setting aside the volumes of EU and member country laws on IP and related topics passed in the last two decades, the expansion of intellectual property laws domestically and worldwide is vast. Reasonable minds can dier about the effects of the proliferation of laws and regulations governing these rights. From a practical standpoint, the intangible nature of these rights, coupled with the increasingly volume and complexity of laws and regulations governing them, compels corporate and banking/nance lawyers as well as non-lawyer advisors and the stakeholders themselves, to become fully educated on these topics in this vast category of
ix

invaluable assets. Despite laws attempts to tame these rights into something intangible, if not tangible, these rights can best be described as consistently, if not predictably, amorphous. They are products of the human mind. As such, these rights will always be recalcitrant to denitive delineation, quantication, and valuation. This is not to say the task is impossible, just a bit complex. The more our clients know about the indenite, evolving nature of these rights, the better it is for us and them: IP is as risk-fraught today as two decades ago. It is also as interesting and rewarding. The purpose of this book is to educate business and nance professionals on the key aspects of intellectual property law, and discuss how these rights are treated from an asset perspective: how they are created, exploited, litigated, valued, insured and reported. The book also aims to highlight key changing areas of intellectual property law, in particular patent law, and assess how those changes will impact investments in several key intellectual property-driven industries. Understanding the fundamental principles of intellectual property assets is critical to understanding the contexts in which they function. This book strives to aid in these understandings. I value your input and suggestions on topics you think are helpful and/or otherwise in this book. All views expressed in this book are the authors and reect her personal views in her individual capacity. Nothing herein shall be deemed to represent the views of her clients.

Lisa M. Brownlee February 2010

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Computer and Related Law

Computer and Information Law Digest Kurtis A. Kemper Computer Software Agreements: Forms and Commentary John H. Ridley, Peter C. Quittmeyer, and John Matuszeski Computer Software: Protection, Liability, Law, and Forms L.J. Kutten Information Law Raymond T. Nimmer Internet Law and Practice International Contributors Law of Computer Technology Raymond T. Nimmer State Computer Law Virginia V. Shue and James V. Vergari Law and Business of Computer Software 2nd Edition Katheryn A. Andresen Information Security and Privacy: A Practical Guide to Federal, State and International Law Andrew Serwin

Copyright xi

Patry on Copyright William F. Patry Copyright Law in Business and Practice John W. Hazard Jr. Copyright Litigation Handbook Raymond J. Dowd Copyright Registration Practice James E. Hawes and Bernard C. Dietz The Law of Copyright Howard B. Abrams

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Art, Artifact & Architecture Law Jessica Darraby Cable Television and Other Nonbroadcast Video Robert Brenner, Monroe Price, and Michael Myerson Entertainment Law Robert Fremlin and Michael Landau Entertainment Law; Legal Concepts And Business Practices Robert Lind et al. Film and Multimedia and the Law James Sammataro Fundamentals of Sports Law Walter Champion Law of Defamation Rodney A. Smolla Law of Professional & Amateur Sports Gary Uberstine Lindey on Entertainment, Publishing, and the Arts Alexander Lindey and Michael Landau Media, Advertising & Entertainment Law Throughout the World Andrew B. Ulmer & MULTILAW International Contributors Rights and Liabilities of Publishers, Broadcasters, and Reporters Len Nieho and Slade Metcalf updated by Rodney A. Smolla The Rights of Publicity and Privacy, 2d J. Thomas McCarthy Smolla and Nimmer on Freedom of Speech

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Rodney A. Smolla

General Titles
Assets & Finance: Audits and Valuation of Intellectual Property Lisa M. Brownlee Calculating Intellectual Property Damages Richard B. Troxel and William O. Kerr Franchise and Distribution Law and Practice W. Michael Garner Intellectual Property: Due Diligence in Corporate Transactions Lisa M. Brownlee Intellectual Property in Commerce Prof. Thomas M. Ward Intellectual Property in Mergers and Acquisitions David Klein Intellectual Property Law for Business Lawyers Kinney & Lange, P.A. IP Strategy: Complete Intellectual Property Planning, Access and Protection Howard C. Anawalt

Licensing
Eckstroms Licensing in Foreign and Domestic Operations: The Forms and Substance of Licensing Robert Goldscheider Eckstroms Licensing in Foreign and Domestic Operations: Joint Ventures Terence F. MacLaren Eckstroms Licensing in Foreign and Domestic Operations: Text David M. Epstein Forms and Agreements on Intellectual Property and International Licensing David de Vall and Peter McL. Colley Licensing and the Art of Technology Management Robert Goldscheider Licensing Law Handbook Melvin F. Jager Modern Licensing Law Raymond T. Nimmer and Je C. Dodd

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Multimedia and Technology Licensing Agreements Gregory J. Battersby and Charles W. Grimes The Law of Merchandising and Character Licensing: Merchandising Law and Practice Gregory J. Battersby and Charles W. Grimes

Patents
Annotated Patent Digest Robert A. Matthews, Jr. Biotechnology and the Law Iver P. Cooper Designs and Utility Models Throughout the World International Contributors Federal Circuit Patent Case Digests Kevin L. Russell Generic Pharmaceutical Patent and FDA Law Shashank Upadhye Guide to European Patents Andrew Rudge Intellectual Property Litigation Guide: Patents & Trade Secrets Gregory E. Upchurch Manual of Patent Examining Procedure, 8th from the U.S. Department of Commerce, Patent & Trademark Oce Moys Walker on Patents R. Carl Moy Patent Applications Handbook Stephen A. Becker Patent Application Practice James E. Hawes Patent Claims Ernest Bainbridge Lipscomb III Patent Damages Law and Practice John Skenyon, Christopher Marchese, and John Land Patent Law Basics John G. Mills III, Donald C. Reiley III, and Robert C. Highley Patent Law Fundamentals John G. Mills III, Donald C. Reiley III, and Robert C. Highley Patent Law Handbook

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Lawrence M. Sung and Je E. Schwartz Patent Law Practice Forms Barry Kramer and Allen D. Brufsky Patent Law: Legal and Economic Principles John W. Schlicher Patents Throughout the World International Contributors Practitioners Manual of Patent Examining Procedure Cheryl H. Agris

Trademarks
McCarthy on Trademarks CD-ROM McCarthy on Trademarks and Unfair Competition J. Thomas McCarthy Practitioners Trademark Manual of Examining Procedure annotated by James E. Hawes and Amanda V. Dwight Trade Dress Protection William E. Levin Trademark Law Practice Forms Barry Kramer and Allen D. Brufsky Trademark Manual of Examining Procedure United States Patent and Trademark Oce Trademark Practice Throughout the World Mary M. Squyres Trademark Registration Practice James E. Hawes and Amanda V. Dwight Trademark Trial and Appeal Board Practice and Procedure Gary D. Krugman Trademarks Throughout the World 5th Edition International Contributors

Trade Secrets
Trade Secrets Law Melvin F. Jager Trade Secrets Throughout the World Melvin F. Jager

Unfair Competition xv

Callmann on Unfair Competition, Trademarks and Monopolies Louis Altman Federal Unfair Competition: Lanham Act 43(a) Charles E. McKenney and George F. Long III Protecting Intellectual Property Rights Across Borders Timothy P. Trainer and Vicki E. Allums Unfair Competition and the ITC: Actions Before the International Trade Commission Under Section 337 of the Tari Act of 1930 Donald Knox Duvall, Philip J. McCabe and John W. Bateman

If you would like to inquire about these West publications or place an order, please call 18003445009.
West 610 Opperman Drive Eagan, MN 55123

Visit West on the Internet: http://store.westlaw.com

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Table of Contents
CHAPTER 1. CONDUCTING AN IP DUE DILIGENCE AUDIT: AN INTRODUCTION
I. PRELIMINARY MATTERS
Introduction Fundamental issues for all transactions Structure of the transaction 1:1 1:2 1:3

II.
1:4 1:5 1:6 1:7 1:8 1:9

ASSET PURCHASE TRANSACTIONS

Acquisition of assetsGenerally Denition of assets and liabilities Asset acquisitions involving retained or divided rights IP-related employees in asset acquisitions Asset purchases compared with share acquisitions Successor liability in asset acquisitions

III.
1:10

STATUTORY MERGERS AND CONSOLIDATIONS

Statutory mergers and consolidations, generally

IV.
1:11 1:12 1:13 1:14

FINANCING TRANSACTIONS
Financing transactions involving less than complete ownership Fundamental risks Managing risks in the investment document Loans and security interests in nancing IP companies/transactions

V.

TRANSACTIONS INVOLVING PUBLICLY TRADED COMPANIES

Securities-regulated entities and transactionsGenerally Due-diligence standards Disclosure requirements Requests for condential treatment
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1:15 1:16 1:17 1:18

Audits and Valuation of Intellectual Property

VI.
1:19 1:20 1:21 1:22 1:23

OTHER TRANSACTIONS REQUIRING DUE DILIGENCE

Joint ventures Licensing transactions Purchasing assets in bankruptcy proceedings Preparation for sales and other divestitures Internal audits for asset management

VII.
1:24 1:25 1:26 1:27 1:28 1:29 1:30 1:31

SECURITIES REPORTING REQUIREMENTS OF SARBANES-OXLEY

Sarbanes-Oxley and IP management and reporting obligations Sarbanes-Oxley Section 302, Executive Certication of Financial Reports Sarbanes-Oxley Section 404, Internal Controls Sarbanes-Oxley Section 409, Material Events Attorney-client privilege, securities law, and SEC professional conduct rules SEC Attorney Conduct Rules Issued Pursuant to Sarbanes-OxleyAttorneys subject to the rule Appearing and practicing Issuer

CHAPTER 2. INTRODUCTION TO INTELLECTUAL PROPERTY

I. PATENTS
Generally Constitutional basis for rights Statutory provisions Regulations Common law rights 2:1 2:2 2:3 2:4 2:5

II.

TRADEMARKS, SERVICE MARKS, TRADE DRESS, AND TRADE NAMES

Generally Constitutional basis for rights Statutory provisions Regulations Common law rights

2:6 2:7 2:8 2:9 2:10

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Table of Contents 2:11 Trademarks, service marks, and trade names as property rights

III.
2:12 2:13 2:14 2:15 2:16 2:17

DOMAIN NAMES
Generally Constitutional basis for rights Statutory provisions Regulations Common law rights Domain names as property right

IV.
2:18 2:19 2:20 2:21 2:22

COPYRIGHTS
Generally Constitutional basis for rights Statutory provisions Regulations Common law rights

V.

SEMICONDUCTOR CHIPS
Generally Constitutional basis for rights Statutory provisions Regulations Common law rights Semiconductor chips as property right

2:23 2:24 2:25 2:26 2:27 2:28

VI.
2:29 2:30 2:31 2:32 2:33

TRADE SECRETS
Generally Constitutional basis for rights Statutory provisions Regulations Common law rights

CHAPTER 3. PRELIMINARY MATTERS IN IP AUDITS

I. PRELIMINARY MATTERS
Introduction and checklist of important issues
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3:1

Audits and Valuation of Intellectual Property

II.

CONFIDENTIALITY AND INTELLECTUAL PROPERTY A. IN GENERAL

Background Condentiality pertaining to the fact of the transaction Trade secrets and proprietary information Plant tours, product demonstrations, and interviews; outside experts Condentiality obligations toward third parties

3:2 3:3 3:4 3:5 3:6

B.
3:7 3:8 3:9 3:10

ATTORNEY-CLIENT PRIVILEGE AND WORK PRODUCT DOCTRINE

Attorney-client privilege and work product doctrine, generally Attorney-client privileges and intellectual property Work product doctrine and intellectual property documentation Disclosures resulting in waiver of privilege

C.
3:11 3:12

COMMON INTEREST AND SUCCESSORS IN INTEREST DOCTRINES

Common interest doctrine Successor in interest doctrine

III.
3:13 3:14

LETTERS AND AGREEMENTS BETWEEN THE BUYER AND THE TARGET COMPANY
Letters of intent/memorandums of understanding Condentiality agreements between Buyer and Target Company

IV.
3:15 3:16 3:17 3:18 3:19 3:20 3:21

DUE DILIGENCE TEAM MEMBERS

Due diligence team members, generally Buyer's due diligence team members Domestic counsel Intellectual property counsel Outsourcing of due diligence tasks Target Company due diligence team members Legal control of due diligence teams

V.
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SCHEDULING THE IP DUE DILIGENCE

Scheduling the IP due diligence, generally

3:22

Table of Contents 3:23 3:24 3:25 3:26 3:27 3:28 3:29 3:30 Activity duration estimates Project start and nish times Schedule calculations IPDD schedulingIPDD schedule control IPDD cost planning and performance Project cost estimate Project budgeting Determining actual cost

VI.

IPDD PROJECT COMMUNICATION, DOCUMENTATION, AND RECORDKEEPING

IPDD project communication and documentation, generally Meetings Project documentation and recordkeeping Internal memorandums Interim progress reports Final report

3:31 3:32 3:33 3:34 3:35 3:36

CHAPTER 4. CONDUCTING AN IP AUDIT

I. OVERVIEW AND PROJECT OBJECTIVE
Overview Dening the project objective Organization and production of documents 4:1 4:2 4:3

II.
4:4

INTELLECTUAL PROPERTY DUE DILIGENCE CHECKLIST

Intellectual property due diligence checklist and explanations Checklist denitions Agreement Business Dispute Document Employees Exploit Intellectual property
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4:5 4:6 4:7 4:8 4:9 4:10 4:11 4:12

Audits and Valuation of Intellectual Property 4:13 4:14 4:15 4:16 4:17 4:18 4:19 4:20 4:21 Target company Checklist general items List of relevant company personnel List of Target Company contact individuals Market information Scope of documents produced Intellectual property budget Foreign-language documents Internet considerations

III.
4:22 4:23 4:24 4:25 4:26 4:27 4:28

PRODUCTION AND CONTROL OF DOCUMENTS

IPDD project communication and documentation; document review Target Company's perspective on the due diligence Overview of document procedures Target Company's position on drafting and responding to the intellectual property due diligence checklist Minimizing risk of misplaced and lost documents Data room procedures Virtual data rooms

CHAPTER 5. ANALYZING THE RESULTS OF IP AUDIT

I. PRELIMINARY MATTERS
Introduction and checklist of important issues 5:1

II.

PATENTS A. ASSETS ELIGIBLE FOR PATENT PROTECTION

Overview Subject matter Utility Priority Novelty Nonobviousness In-use and on-sale bars Enablement under 35 U.S.C.A. 112 Patentability opinions

5:2 5:3 5:4 5:5 5:6 5:7 5:8 5:9 5:10

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Table of Contents

B.
5:11 5:12 5:13

SCOPE OF RIGHTS
Basic rights granted under patent law Duration of rights Limitations on rights

C.
5:14 5:15 5:16 5:17

OWNERSHIP
Overview Joint inventorship Improper attribution of joint inventorship Inventions created by Target Company employees

D.
5:18 5:19 5:20 5:21 5:22 5:23 5:24 5:25 5:26

ADEQUATE PROTECTION
Overview Enforcement and failure to enforce Whether use of inventions depends on preexisting or third-party rights In-bound licenses and cross-licenses Dependent patents and improvements Whether the Target Company's inventions are adequately protected Target Company's invention disclosure and review policies and proceduress Geographic scope of patents Claims in, and prosecution history of, the Target Company's patents

E.
5:27 5:28 5:29 5:30 5:31

PROPER EXPLOITATION
Introduction Licenses and patent misuse Litigation Infringement Misuse in enforcing patents

III.

TRADEMARKS, SERVICE MARKS, AND TRADE NAMES A. ASSETS ELIGIBLE FOR TRADEMARK PROTECTION
Introduction Marks that qualify for U.S. registration
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5:32 5:33

Audits and Valuation of Intellectual Property 5:34 5:35 5:36 5:37 What is not protectable as a federal mark? Rights in unregistered marks Trade names and commercial names State trademark registrations

B.
5:38 5:39 5:40 5:41 5:42 5:43 5:44 5:45 5:46 5:47 5:48 5:49

SCOPE OF RIGHTS
Introduction Strength of marks Famous marks Rights conferred by a federal supplemental registration Rights conferred by state trademark registration Common law rights Trade name rights Duration of rights Exceptions to rights Concurrent use registrations Consent agreements Exemptions from liability

C.
5:50 5:51 5:52 5:53 5:54 5:55 5:56

OWNERSHIP
Introduction Initial ownership Joint ownership Marks created by employees Marks created by independent contractors Assignments Recordation of assignments and liens

D.
5:57 5:58 5:59 5:60 5:61 5:62 5:63

ADEQUATE PROTECTION 1. Administrative Matters

Introduction Registrations, applications, and related documents Federal and state registration Statements of use/incontestability Intent-to-use applications Oppositions, cancellations, and interferences Statute of limitations, laches, estoppel, and acquiescence

2.
5:64
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Is Use of Mark Dependent on Third-Party Rights?

Introduction

Table of Contents 5:65 5:66 5:67 5:68 Scope of license and exclusivity Change of control, assignability, and rights of termination Enforcement and defense of marks Options

3.
5:69 5:70

Does Scope of Mark Adequately protect the Target Company's Actual Use?

Overview Prosecution history of the Target Company's mark registrations

4.
5:71 5:72 5:73 5:74 5:75

Proper Exploitation

Overview Naked licenses Genericness and changed use of mark Use of the and symbols Abandonment

5.
5:76 5:77 5:78

Is Mark Likely to Become Subject of Litigation?

Introduction Trademark clearance and infringement searches Trademark watching services

IV.

COPYRIGHTS A. ASSETS ELIGIBLE FOR COPYRIGHTS PROTECTION

Overview Denition of rights Works protectable under copyright Requirement of originality: qualitative and quantitative Whether the work is xed in a tangible medium of expression Works and information excluded from copyright protection Internet considerations

5:79 5:80 5:81 5:82 5:83 5:84 5:85

B.
5:86 5:87

SCOPE OF RIGHTS
Introduction Right to reproduce the copyrighted work in copies or phonorecords
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Audits and Valuation of Intellectual Property 5:88 5:89 5:90 5:91 5:92 5:93 5:94 5:95 5:96 5:97 Right to prepare derivative works based upon the copyrighted work Right to distribute copies by sale or other transfer, or by rental, lease, or lending Right to perform or display works publicly Right to authorize or license the doing of any exclusive right Moral rights Duration of rights Limitations on rights The fair use doctrine Exhaustion of rights Additional limitations

C.
5:98 5:99 5:100 5:101 5:102 5:103 5:104 5:105 5:106

OWNERSHIP
Overview Initial authorship Joint authors Assignments Recordation of assignments and conicting assignments and transfers Assignment of jointly authored works Scope of assigned rights and the copyright divisibility principle Termination of assignments Priority between conicting transfer of ownership and nonexclusive license

D.
5:107 5:108 5:109 5:110 5:111 5:112 5:113 5:114 5:115 5:116 5:117 5:118
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ADEQUATE PROTECTION
Introduction Registration of copyrights Registration formalities Maintenance of copyrights Statute of limitations, laches, and estoppel Customs recordation Derivative works and compilations Use of copyright notices: the and symbols Proprietary markings: sales to the U.S. government Whether use of Target Company's copyrights is dependent on preexisting or third-party rights Derivative works of preexisting works Collective works, compilations, and contributions thereto

Table of Contents 5:119 5:120 5:121 5:122 5:123 5:124 Inbound licenses and cross licenses Rights of termination Whether the scope of the copyrights suciently protects the products of the Target Company Whether the copyrights have been properly exploited Shareware, freeware, and open source distribution Whether the copyrights are, or are likely to become, the subject of litigation

V.

TRADE SECRET AUDIT A. ASSETS ELIGIBLE FOR TRADE SECRET PROTECTION

Overview Value Not generally known and not readily ascertainable through proper means Subject of reasonable eorts to maintain secrecy

5:125 5:126 5:127 5:128

B.
5:129 5:130 5:131

SCOPE OF RIGHTS
Introduction Duration of rights Exceptions to rights

C.
5:132 5:133 5:134 5:135

OWNERSHIP
Initial ownership Joint ownership Trade secrets created by employees Assignment

D.
5:136 5:137 5:138 5:139 5:140 5:141 5:142

ADEQUATE PROTECTION
Overview Use of nondisclosure/noncompete agreements with employees Special circumstances Misuse of trade secrets Statute of limitations, laches, and estoppel Whether use of the trade secrets is dependent on preexisting or third-party rights Whether the scope of trade secret law suciently protects the products of the Target Company
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Audits and Valuation of Intellectual Property 5:143 5:144 5:145 Whether the trade secrets have been properly exploited Whether the trade secrets are, or are likely to become, the subject of litigation Internet considerations

CHAPTER 6. VALUATION OF INTELLECTUAL PROPERTY ASSETS

6:1 6:2 6:3 6:4 6:5 6:6 6:7 6:8 6:9 6:10 6:11 6:12 6:13 6:14 6:15 6:16 6:17 6:18 6:19 6:20 6:21 6:22 6:23 6:24 6:25 6:26 6:27 6:28 6:29
xxviii

Overview Identication of intellectual property Patents Trademarks Copyrights Trade Secrets The intellectual property commercialization process, goodwill, and intellectual properties generally Common terms of intellectual property license agreements Common terms of other intellectual property contracts Typical parties to the intellectual property commercialization process Factors that the valuation analyst should consider Factors related to whether the subject intellectual property is valuable Reasons to analyze commercial intellectual property-general Reasons to value commercial intellectual property-specic Generally accepted intellectual property valuation approaches and methods Market approach valuation methods Market approach valuation principles The market approach valuation process Cost approach valuation methods Denition of intellectual property cost Intellectual property cost components Cost new less depreciation Income approach valuation methods Measures of commercial intellectual property income Income approach valuation methodsSummarized Direct capitalization procedures Yield capitalization methods Income tax amortization adjustment Remaining useful life analysis

Table of Contents 6:30 6:31 6:32 6:33 6:34 6:35 6:36 6:37 6:38 6:39 6:40 6:41 6:42 6:43 6:44 6:45 6:46 6:47 6:48 6:49 6:50 6:51 Expected eect on the income approach value indication Expected eect on the cost approach value indication Expected eect on the market approach value indication Common factors inuencing intellectual property expected RUL Valuation synthesis and conclusion Illustrative example of the cost approach and the income approach Illustrative example fact set and analysis assumptions Selection of valuation approaches and methods Cost approach analysis Cost approach valuation variables Income approach analysis Valuation variables Income approach valuation analysis Value conclusion Illustrative example of the market approach Illustrative example fact set and analysis assumptions Market approach valuation variables Guideline intellectual property license search procedures Guideline patent license agreement royalty rates Illustrative example of a royalty rate adjustment grid Market approach valuation analysis Summary and conclusion

CHAPTER 7. INSURING IP ASSETS

7:1 7:2 7:3 7:4 7:5 7:6 7:7 7:8 Overview Buyer's rights to acquire coverage under the policies of target company Coverage for intellectual property and business tort claims When does buyer obtain the benets of target company's insurance coverage? Benets available to a buyer under target company's policy When should buyer add target company as an additional insured under its policies? Target company's interests in analyzing its potential coverage for pre-acquisition activities Retention of target company coverage that may respond to present liability exposure
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Audits and Valuation of Intellectual Property 7:9 7:10 7:11 7:12 7:13 7:14 7:15 7:16 7:17 7:18 7:19 7:20 7:21 7:22 7:23 7:24 7:25 7:26 7:27 7:28 7:29 Target company's opportunities to pursue insurance that will cover post-acquisition claims for preacquisition activities Insurance coverage opportunities where a target company has licensed intellectual property and assumed indemnity obligations thereunder Types of intellectual property claims that may fall within target company's insurance coverage Evaluating policies to gauge potential coverage for intellectual property torts Insurer denials should be scrutinized and challenged Advertising injury coverage must be analyzed in light of a three-part test Patent infringement coverage Copyright infringement coverage Trademark infringement coverage Trade secret misappropriation coverage Pertinent exclusions and their impact on coverage First publication exclusion Knowledge of falsity exclusion Exclusion for advertisers, broadcasters, or publishers Intellectual property exclusions Events that may trigger coverage under a third-party liability or intellectual property defense policy Receipt of demand to cease and desist from infringement or to license under asserted intellectual property rights Receipt of complaint Receipt of a counterclaim or third-party claim Entry of judgment An insurer's denial of its insured's tender extinguishes insured's duty to provide further information about additional developments in the underlying action Events that may trigger coverage under a third-party liability or intellectual property defense policyNotice of appeal Courts have held that where facts originally tendered to the insurer are incompletely alleged but later claried with more specicity, the insurer's defense duty is triggered and relates back to the original tender When assessing oense-based coverage, courts have held it of no moment that the facts tendered to the insurer were raised in dierent forums How to pursue IP litigation in conjunction with coverage Whom to pursue coverage litigation against

7:30

7:31

7:32

7:33 7:34
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Table of Contents 7:35 7:36 7:37 7:38 7:39 7:40 7:41 7:42 7:43 7:44 7:45 7:46 7:47 7:48 7:49 7:50 What to pursue relief for in a coverage action Events that present an opportunity to aid client's intellectual property enforcement strategy through a pursuit policy Ten questions intellectual property owners and attorneys should ask regarding insurance coverage Analysis of insurance coverage products that address intellectual property disputes Procuring insurance coverage for pursuit of infringers Policy providers Procuring insurance for defense of intellectual property lawsuits Advertising liability policy Directors and ocers insurance coverage Errors and omissions policies Selecting the coverage that suits the company New opportunities to address risks from mergers/acquisitionsRegulations and warranties insurance Documents typically required for representations and warranty insurance Issues raised by representations and warranty insurance Checklist for negotiations Conclusion

CHAPTER 8. TRANSACTIONS INVOLVING IP ASSETS

8:1 8:2 8:3 8:4 8:5 8:6 8:7 8:8 8:9 8:10 8:11 Overview Intellectual property due diligence report Intellectual property-related conditions to closing Postclosing contractual obligations Security interests and other contingent rights in subject intellectual property Intellectual property management participation Technology cooperation and escrow agreements Short-form intellectual property assignments, legalization, and recordation Schedules of assets and liabilities IP Representations, warranties, and disclosures Post-transaction intellectual property audit

CHAPTER 9. IP ASSET MANAGEMENT

9:1 Overview
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Audits and Valuation of Intellectual Property 9:2 9:3 9:4 9:5 9:6 9:7 9:8 9:9 Intellectual property compliance committee Preserving current assets Litigation activities Portfolio organization Prioritization of assets Intellectual property legal budgeting Internal policies and procedures Promoting the growth of the intellectual property assets

FORMS
Form A. Nonbinding Letter of Intent (Buyer to Target Company) Form B. Buyer-Target Company Condentiality Agreement Form C. Intellectual Property Due Diligence Checklist Form D. Checklist of Trade Secret Protection Measures Form E. Intellectual Property Due Diligence Report Outline Form F. Target Company Representations and Warranties Pertaining to Intellectual Property

Form G. Intellectual Property-Related Conditions to Closing Form H. Checklist for Court Acceptance of Defendant Reliance on Validity/Infringement Opinions as Defense to Willful Infringement Form I. Factors Used in Determining Applicability of AttorneyClient Privilege to Communications with Patent Agents Checklist of Key Rules for Insurance Policyholders in Coverage Disputes

Form J.

Form K. Intellectual Property Attorney's Checklist for Communications with Insurance Carriers Form L. Insurance Policy Forms Checklist: Target Company Insurance Coverage

APPENDICES
Appendix 1. Appendix 2. Appendix 3.
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Key Provisions of Statutes Relating to SarbanesOxley Act Laws and Regulations Governing Intellectual Property Ownership and Transfers U.S. Patent Reform An Analysis of H.R. 1908 and S. 1145

Table of Contents Appendix 4. Industry Impact of Proposed Patent Law Reform: A War Without Winners?

Table of Laws and Rules Table of Cases Index

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