Using IP to Position Your Company for Sale

When your company is just getting started, there are several simple and cost-effective things you can do to protect your company’s intellectual property, to increase its value and to expedite the process of a future sale.

A trademark search and application are simple and inexpensive necessities before selecting a name for your company or any product. While you may not yet matter to a competitor, a potential purchaser will know that they will be seen much differently by anyone with a claim on your trademark.

IP ownership will be central to the initial diligence procedure for the potential purchaser. Use and copies of employment contracts and nondisclosure agreements (NDAs) will give the purchaser faith in your business practices and faith in your IP ownership.

Specifically, your employment contracts need to contain an appropriate IP section. These contracts provide clear guidelines for IP ownership and protect the ownership of your IP after an employee leaves your company and in the event that an employee becomes disgruntled. During the sale, employment contracts and assignments of your IP will be some of the first things requested by the potential purchaser.

If an outside manufacturer or engineer for the design or production of a product becomes necessary, it is imperative that an NDA with an IP section is signed between you and the manufacturer before any know-how of your business is disclosed. The NDA with an IP section preserves your company’s rights to file a patent on your products and ensures that any modifications are owned entirely by you.

In most cases, patenting early and often is the best strategy for protecting your products and services and could increase the value of your company. However, a limited budget during the start of your company may prevent this strategy. If budget is an issue, candid discussions with your IP counsel about the direction of your business and products are key to getting the most bang for your buck. For example, your IP counsel may be able to recommend the use of provisional patent applications, patent searches, design patent applications, or trade secrets to mitigate or delay costs based on this shared knowledge.

When patenting products and services, it is always beneficial to educate your employees about the patent system. Employees who understand the importance of patents and patent laws will be less likely to make improper public disclosures and more likely to identify patentable subject matter. In some instances, these patents may be crucial to the reason why a potential purchaser is interested in buying your company.

New Product Launch and Growth

After the initial startup phase, companies begin to mature, launching new products and growing in revenue and personnel. While many of the same IP considerations remain important during this phase, attention to IP due diligence moves to the forefront. When you start to affect bigger companies’ markets and profits, these companies will evaluate their IP portfolios and determine if there is anything they can use against you, especially in litigation-prone industries.

Now that you are a player in your market, you need to be able to predict when the launch of a product or service could set you up for a lawsuit. Your IP due diligence provides you with information about your competitors’ IP and ready defenses for any potential lawsuits. During the sale negotiations, the purchaser may ask you if you have considered the IP of the relevant competitors and maybe, even, about some specific patents. Your IP due diligence allows you to say that you have considered these items and to provide logical reasons why each item is a nonissue. While the purchaser will do their own analysis, your perspective will have to be considered and evaluated.

As your company becomes more financially viable, the defensive aspects of IP become more important. Such defensive efforts include freedom-to-operate investigations, patent analyses and opinions of counsel. The object of these defensive efforts is to establish your company’s awareness and reasonableness with respect to the intellectual property held by others.

The question becomes: What are the steps that a company should take to avoid infringement? It comes down to “reasonableness”—although reasonableness may take many forms. First, the patent landscape relevant to your company’s products should be investigated. This investigation generally involves conducting a patent search to identify similar patents. Second, the patent search results should be evaluated for infringement. At this stage, it is advisable to have a patent practitioner evaluate the patent claims before ruling out infringement. In some cases, a patent practitioner is able to easily eliminate a patent; in other cases, reviewing the specification and file history is necessary. When a nonfrivolous argument may be made for infringement of a patent, it is reasonable to seek an opinion of counsel regarding the patent.

As noted above, there is no affirmative obligation to obtain an opinion of counsel. Moreover, an opinion of counsel does not prevent one from being sued or from being found to infringe a patent. However, an opinion of counsel can prevent an award of enhanced or treble damages for infringement. A noninfringement opinion provides a comparison of the product and the patent claims, and then provides a legally sound basis for why the product does not infringe the patent. An invalidity opinion evaluates the patent and establishes why the patent should not have been granted and is invalid.

With regard to timing, it is reasonable to conduct a patent search during the design phase of new product development. In this case, modifications can be made to the product before manufacture, and particularly before the product is sold. Many clients find that in “designing around” the patents of others, they conceive of their own innovations and improvements—many worthy of patent protection in their own right. As no infringement can occur before making, using, offering to sell, selling or importing a product, taking such steps early is clearly prudent if not essential. Similarly, it is reasonable to conduct a patent search (or reevaluate a previous patent search) when any modifications are made to a product. Depending on the modifications, new opinions may be required or previous opinions may need to be revised based on the design modifications.

During the growth phase of your company, formulating a defensive IP strategy is highly advantageous. Working closely with patent counsel allows defensive efforts to be integrated with product development, clearing the way for your company to become firmly established in the marketplace.

What to Expect in the Purchase Negotiation