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How
to Buy the Assets of a Failed Dot-Com
By
Jay Hollander
Jay Hollander, Esq. is the principal of Hollander and Company LLC, www.hollanderco.com, a New York City law firm concentrating its efforts in the protection and development of property interests relating to real property, intellectual property and commercial interests, as well as related litigation.
The content of this article is intended to provide general information relating to its subject matter. Providing it does not establish any attorney-client relationship and does not constitute legal advice. Personal advice in the context of a mutually agreed attorney-client relationship should be sought about your specific circumstances. Summary: Failed
Internet companies sometimes represent a good buying opportunity,
because they're eager to sell valuable assets quickly.
But, buying those assets -- usually intellectual property,
including web sites -- can be tricky. This article explains
how to buy the assets of a failed dot-com while ensuring
that you really get what you pay for.
Introduction
While the financial pain inflicted on the broader financial
markets by the implosion of so many dot-com companies cannot
be avoided or minimized, one small silver lining for companies
that have survived the debacle is the chance to pick up valuable
intellectual property assets at fire-sale prices.
But,
to avoid getting burned at a fire sale, buyers of these
assets must exercise due diligence in making sure that
they are getting what they underpay for and in protecting
themselves from unintentionally assuming liabilities for
which they never bargained.The scope of assets available
from failed dot-com companies is large, including equipment,
web sites, trade secrets and even copyrighted and patented
works and inventions. Each kind of asset carries its own
method of establishing good title, as well as confirming
a lack of liabilities.While this is an area where comprehensive
legal assistance is definitely recommended, there are some
basic concepts that can be highlighted here to assist you
in narrowing the issues.
Basic Concepts of Buying Intellectual
Property
The first thing to emphasize right off the
bat is the difference between purchasing the assets of
a company and buying the company itself. When you purchase
a company, make sure you're not doing it because you think
it's the same thing as buying its assets or the only way
to do so. Although there are many differences, the biggest
traditional difference between buying a company and buying
assets alone is that buying a company brings all the company's
liabilities with it, too.Unless you are making a deliberate
decision to buy a company outright, make sure you don't
confuse the two different types of purchases. This is especially
true since court decisions in some states have begun ruling
in recent years that taking over all a company's assets
under certain conditions may be tantamount to continuing
the company and, accordingly, exposing the buyer to the
seller's corporate liabilities.So, the initial step here
is to consult with your attorney to check the current status
of the laws of the state in which the target company is
located about the current status of decisions on this issue.Assuming
you intend to purchase some or all of the assets of the
company, and can do so free of undue risk of unintended
liabilities, the second thing to emphasize is that detailed
documentation is key because, presumably, a failed dot-com
will not be easy to sue or collect from if its representations
of intellectual property ownership or other rights are
inaccurate or even false.Third, keep in mind that although
a dot-com company may involve many of the traditional due
diligence measures of a conventional company, the majority
of its assets will be intangible, intellectual property
assets. And, within that environment, some of those assets
will likely contain aspects that may be owned by third
parties and only licensed to the dot-com, especially in
the case of software or images contained on the company's
web site.With all this in perspective, let's explore the
basic differences in approach to different assets.
Web
Site Asssets: Domain Name, Trademarks, Patents, Copyrights
The
most likely object of value of a dot-com will be its web
site. In assuring the proper transfer of intellectual property
assets related to the web site, the big issues will concern
the domain name and associated trademarks, copyright ownership
relating to the content, design and images on the site,
and proper licensing or ownership of the underlying software
that powers the site itself.Because domain names are registered
through a particular registrar, you will want to see registration
documentation confirming current ownership of the domain
name from a particular recognized registrar. Armed with
that information, it's wise to obtain the particular registrar's
forms for transfer of the domain name, because these tend
to differ from one registrar to another. In the likely
event that the company has more than one registered domain
name with more than one registrar, you will have to go
through this process as often as needed to cover all the
bases.A similar process is required in connection with
any associated trademarks held or applied for by the seller.
Here, before executing a proper written assignment, verification
of a registered trademark or an application for same should
optimally be obtained. However, since rights in trademarks
are based on use, be aware that, with certain exceptions,
the U.S. Patent and Trademark Office (PTO) does not allow
assignment of a trademark application alone unless there
has first been a filed statement of use, attesting that the proposed mark is being used in commerce.Moreover, you
will want to do a full federal, state and common-law trademark
search to give yourself an acceptable comfort level that
the mark is not subject to attack and, if the results are
acceptable, get an assignment of those rights as well.
You will also want to confirm that no disputes have arisen
over use of the mark and that to ensure that, if registered,
the mark has not been abandoned through lack of use.Closely
related to trademarks are patents, such as the patented
one-click system utilized by Amazon.com. Here, too, a review
of the status of any pending patent applications, as well
as a formal assignment of either any pending or granted
patents, complying with all of the formalities imposed
by the PTO is required. Bear in mind that patent assignments
are inherently risky because even granted patents are subject
to attack after the fact by lawsuit.Copyrights are the
next hot-button issue requiring careful scrutiny. Because
original creative works fixed in a tangible medium of expression
generally qualify for copyright, you can imagine how many
copyright issues exist in a sophisticated web site. All
the more so, because web sites are usually the products
of various collaborators, who have worked on its different
aspects such as text, images, animations, database scripts,
etc.Because copyright law doesn't require registration
to obtain copyright protection, merely checking out formal
copyright registrations won't be enough. You will need
to check company records about who actually provided the
services that resulted in the web site content, look and
feel. Were they employees or independent contractors? If
employees, was the work within their scope of employment?
In other words, did the work qualify as a "work for hire," resulting
in copyright vesting in the company? If not, were valid
written assignments of copyright in place?Answering these
questions aren't always easy, but they are imperative if
there is to be any comfort level in avoiding infringement
issues.In a similar manner, if the site relies on third-party
vendor enabling software or application service provider
(ASP) services, you need to inspect the licenses and make
sure they are proper and assignable.
Getting What You
Pay For
Assuming you have jumped all these hurdles,
you still have to make sure you're getting the actual goods
that you think you're buying. How can you tell, for instance,
if you're being given all the components of the web site?
How do you know you've been given every image, every database,
every piece of underlying code?The devil here is definitely
in the details, so you'll need to assemble your technical
team, as well as your lawyers, to engage in due diligence
on a piece-by-piece level if you're to ensure complete
receipt of the goods in complete and working order, including
source code and other enabling technologies that make the
site run and allow it to be enhanced or modified over time.The
problem with this is that dot-com fire sales often happen
in a hurry. In a world of rapidly changing technologies,
there simply isn't time for purchase procedures to drag
on as many aspects of a web site's competitive allure lose
their value as competing or superior alternatives come
out.So, how do you reconcile the need for patient and thorough
due diligence with the marketplace need for speed? Usually,
this is done with an escrow of part of the purchase price,
which will only be released when proper verification is
made.But saying this is not as simple as it sounds, either.
It's fine to withhold money in escrow, but what do you
do if there's a dispute? Because the technology train pulls
out of the station quickly and often, the last thing you
want is protracted litigation about whether the seller
delivered everything properly and completely. For this
reason, any escrow agreement made in these circumstances
must have a reliable and acceptable method of quick and
binding arbitration.While all of these intellectual property-related
issues are necessarily implicated in dot-com asset purchase
scenarios, don't forget that there are still regular "hard" assets
that may be included in the deal that require the same
due diligence that they have always required in the traditional
business asset purchase context.Most times, the opportunity
to pick up office furniture, computers and other high-tech
equipment as part of the fire sale can prove irresistible.
But, here, you also need to be careful. As many purveyors
of high-tech equipment, such as Cisco and others, "sold" products
to start-ups by actually loaning them the money to buy
them through different credit or investment vehicles, traditional
investigation of any liens on purchased assets is, of course,
just as important as ever.
In
the end, the biggest differences between high-tech asset
purchases and traditional purchases are in the relatively
larger value attributable to intellectual property components
and in the particular methodologies of due diligence appropriate
to these components. When added to the "Internet time" pace
in which dot-com fire sales often occur, a thorough understanding
of the tricks and traps inherent in these sales, together
with a legal and information technology team knowledgeable
in how to spot and deal with them, can give a savvy asset
purchaser the advantage needed to get the most fuel from
the ashes of a fast burning dot-com flame. Copyright © Jay Hollander, 2007. All Rights Reserved.
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