US Supreme Court will hear Google v. Oracle Copyright Suit

The United States Supreme Court has just granted review of the Google v. Oracle Copyright law suit.  This is a huge case concerning copyrightability and the scope of fair use of software.  Additional information, including briefs, can be found at the SCOTUS blog, here.  Hat tip to Dmitry Karshtedt.  

IP Issues in Mergers and Acquisitions: Any Recent Examples of Due Diligence Failures Involving IP?

Corporate Counsel has published a pair of informative articles concerning due diligence and intellectual property.  The first article is titled, “Identifying IP Risks in M&A and Tech Joint Ventures: Beyond the Data Room”, by Anne Cappella, Charan Sandhu and Brian Chang of Weil, Gotshal and Magnes.  The second article is titled, “The Financial Impact of IP Issues in M&A,” by Steve Ball and Jon Winter of St. Onge Steward Johnston & Reens.  Both articles provide useful advice designed to help counsel avoid missing intellectual property issues during due diligence.  The overarching message is that corporate counsel should include intellectual property specialists in any due diligence of a potential target.  Both articles raise specific points that should be considered such as: proactively examining a target’s competitors to ascertain whether patent trolls have litigated against the target’s competitors to determine if your target is next; considering potential trade secret misappropriation actions by competitors of the target based on new hires by the target; ensuring that third parties who have worked with the target have not improperly claimed intellectual property possibly owned by the target; having clear title to intellectual property; and properly recording title.  The second article provides a couple of examples where intellectual property counsel were not consulted or there were intellectual property issues missed in the due diligence.  One problem involved Rolls Royce and BMW:

[I]n 1998 the Volkswagen AG Corporation purchased the automobile assets of the bankrupt Rolls-Royce Motor Cars Limited for $790 million, with the value of the physical assets estimated at $250 million. Volkswagen was unaware that Rolls-Royce’s trademark rights were subject to a nontransferrable license from Rolls-Royce Aircraft. Volkswagen purchased the plant, the machinery and the automobile designs from Rolls-Royce, but only learned after the deal that the purchased assets did not include the Rolls-Royce® trademark. So while Volkswagen was able to build the car, it could not brand it with the famous trademark. BMW then acquired the trademark rights for $65 million from the bankrupt Rolls-Royce Aircraft and forced Volkswagen to concede the brand, resulting in a huge windfall for BMW.

The most recent example included Apple’s acquisition of Beats Electronics:

Apple Inc. agreed to acquire Beats Electronics for $3 billion. In doing so, Apple purchased an infringement suit by Bose Corporation, which owns a number of patents directed to noise-cancelling headphones. After the deal was announced, Bose filed infringement suits in district court as well as at the International Trade Commission seeking to ban imports of the Beats headphones into the U.S.

I have to imagine that Apple’s counsel knew they were likely to be sued by Bose Corporation.  Are there any more recent public examples of IP failures in the due diligence before merger or acquisition with a target company? 

Ruminations on the Pfizer-Wyeth Merger

Amidst all the economic doom and gloom coming out of Washington, London and Davos (I think they had to do without Sharon Stone and Angelina Jolie this year), this week's announcement of the Pfizer-Wyeth merger was notable. If consummated, the $68 billion merger will be the largest business wedding of its kind in the pharmaceutical industry. The fact that deal is being made in the current economic climate is all the more remarkable. Based principally on a New York Times podcast of the proposed transaction, the principal reasons for the merger seem to be driven by three main factors.

First, patent protection for Pfizer's main product, LIPITOR, the cholesterol drug, is set to expire in 2011. LIPITOR is reported to constitute 25% of Pfizer's revenues. While the lapse of patent protection does not necessarily mean that sales of LIPITOR will totally then cease, it appears that Pfizer will face significant competition from generic competitors. We like our MBA students to consider that a powerful brand may enable a patented drug to successfully withstand the loss of patent protection. If the LIPITOR mark cannot accomplish this in a big way, then maybe it is time to stop relaying the story how the NutraSweet saved the post-patent day for Aspartame, since it will be no longer relevant.

Second, Pfizer seems to have relatively poor product prospects in its pipeline, so it has to look elsewhere. Much has been written during the last several years over the increasing inability of Big Pharma to come up with a new generation of products. Wyeth appears to provide a partial solution for at least two reasons.

The end of the patent pipeline?

First, Wyeth is reported to be particularly strong in the vaccine area and in biotech (where one report had the company listed as no. 3 in the industry). Second, Wyeth continues to enjoy revenues from the well-known OTC pain reliever--ADVIL. Assuming that there is no patent protection that is about the expire, it would seem that ADVIL promises a continued flow of revenues irrespective of any special IP coverage. Left unclear is whether Wyeth's patent prospects are materially better than those of Wyeth and doubts have been expressed.

Third, there is a view that economic forces are driving Big Pharma towards merger and consolidation. The rationale for this is not fully convincing. I imagine that size and resources may have advantage, at least to some extent in R&D and product development, not to mention marketing and advertising.

Bigger may not be better ...

That view is, however, not universally accepted. On August 24, 2007, an article appeared in Fortune by John Simons entitled "Why a Pfizer-Wyeth Merger is a Bad Idea." Simons concluded as follows:

"The Pfizer/Wyeth merger scenario is far-fetched, particularly because Pfizer would inherit another troubled pipeline and more big-sellers whose patents expire in the same concentrated period of 2010 and 2011. "Would the idea behind the merger be that misery loves company?" queries Standard & Poors pharma analyst, Herman Saftlas. "Most mergers in this sector haven't panned out from an earnings growth perspective. But even worse, these two companies are in the same boat."

Perhaps Simons was wrong in his analysis in 2007. If so, one wonders why the deal did not take place then. Alternatively, if Simons was correct 16 months ago, then what has changed since then, other than financial meltdown, cash flow misery, and the cratering of the real economy, that now makes the merger more compelling? The answer is not clear.

Effect of merger on IP licensees in the US: where state law can't be ignored

In "License to merge: special precautions may be required to preserve IP licensing rights", Cozen O’Connor lawyers Scott B.Schwartz and Justin B.Wineburgh write:

"Despite a long history of case law relating to mergers, one area remains unclear, especially in the entertainment industry: the effect of mergers on intellectual property (“IP”) licensing agreements. Recent case law contributes to this uncertainty and suggests that certain precautions may be necessary to preserve valuable IP licensing rights".

As usual -- and it seems remarkable that this warning should still need to be given -- the reader is reminded of the need for foresight [ie why not think about the risks/benefits of possible mergers before the licence is signed?] and vigilance [ie keep an eye on what goes on after the licence is signed]. The authors then focus on an annoying problem for those of us who like our licence provisions cut-and-dried, or at least predictable in terms of their outcome and effect. They explain:

"... the practice of having contracts transfer as a matter of law, even if prohibited by the express terms of the contracts without consent, may no longer be reliable in the context of transferring IP content and licenses.

While the impact of a merger on the assets of the parties to the merger is governed by state law, IP licenses are also governed by a body of statutory and judicial federal law. More recent case law points to a trend of IP law starting to impact how traditional state merger laws treat IP rights as different than that of other assets. However, the trend is neither uniform nor consistent".

In one 2004 decision-- Evolution, Inc. v Prime Rate Premium Finance Corp., Inc., 2004 U.S. Dist. LEXIS 25017 (D. Kan. 2004) -- a court has concluded that “whether a merger effectuates an automatic assignment or transfer of license rights is a matter of state law.” But other recent federal court decisions have held that the licensing agreement, rather than the applicable state merger statute, determines whether the licence can be transferred to the surviving company without the consent of the licensor. Thus unless the licence agreement clearly permits assignment of the IP rights without the licensor's consent, that licensor may well be able to challenge the right of a surviving company in a merger to operate as the licensee -- even though state merger law transfers all the rights under the licence as a matter of law.

Reading this article, I found myself wondering about the extent to which a prudent licensee -- or anyone seeking to buy his business -- should make an effort to obtain advice concerning the operation of state law as well as federal law, factoring this advice into the structuring of its business transactions.