Over many years the legal profession has perfected the contractual structure for embodying IP, but too often relies on post-transaction remedies, rather than building in processes for successfully transferring IP as part of the transaction.
The contracts we see often lack the pragmatic technical and commercial expertise to maximise and accelerate the value of such IP transactions.
With an increasingly developed global pool of IP, organisations are recognising the value of their own intangible assets and seeking to develop partnerships with others. With IP being one of the key areas of growth for companies, transaction activity is becoming more and more dependent on identifying value-adding IP and then importing it.
IP transactions typically include technology transfer, mergers and acquisitions (M&As), out-sourcing and investment and financing. While the legal contract in these transactions seeks to provide protection and certainty over IP transfer, successfully taking on IP is not simply a legal transfer of title – it requires a number of other factors for success:
A solid understanding of technology, science and product development to recognise what is a ‘good’ embodiment of IP and what is ‘bad’ or incomplete;
Excellent stakeholder and project management as, in addition to patents and trademarks, it is often the underlying ‘know-how’ that makes the IP attractive, and much of this ‘know-how’ is intangible – in peoples’ heads; and
A pragmatic, risk-based approach to focus on the key elements of the IP embodiment and make sure that they are of the right quality and value.
In the absence of an overarching IP assurance process any deficiencies in the IP transfer typically lead to project recovery exercises, and potentially costly legal disputes. IP assurance has grown out of a history of providing technical assistance to project recovery exercises and in many cases acting as experts supporting disputes.
This experience has led to the development of an arm’s length IP assurance process that focuses on the three areas described above in order to ensure that the acquirer is able to take on the IP and benefit from it as quickly as possible.
When looking at importing (licensing, acquisition, technology transfer or M&A) third party IP, parties have specific expectations and requirements to generate the value from the IP. These are predominantly based on the claims that the third party is making of the IP. These claims will be based on three factors:
The actual development status of the IP and therefore the additional cost and time to take to production post-transaction;
The specific technical, scientific and value proposition claims to measure the suitability and market potential of the IP; and
The remaining technical and commercial risks for development of the IP, technology and product or service.
A challenging evaluation of these claims allows acquirers to make the best decision about the risk/reward in importing the IP and the negotiating position to take. A combination of skills is needed to work with the third party to uncover the facts underpinning the IP and the technical expertise and product development experience to challenge any assumptions, risks or claims in detail. An arm’s length, independent IP assurance process supports parties making critical decisions on importing IP.
An independent arm’s length IP assurance service should commence as part of the initial due diligence process and ideally directly influences the contracting process to ensure that the embodiment of the IP, and the best way to transfer it, is captured and included in the legal contract.
IP assurance may also provide significant negotiating leverage at the appropriate time, either as a demonstration that the IP is complete and hence worthy of a premium price from the acquirer; or in the case where gaps are identified, used to negotiate concessions from the target. Since there is potential for bias or conflict of interest, IP assurance is best performed by an independent party at arm’s length from both target and acquirer.
An IP assurance process contain five stages: exploration; prioritisation; measurement for completeness; measurement for quality; and closure.
As part of an engagement, a technical team providing the IP assurance process ideally works with both acquirer and target to set up an acceptable governance structure that provides a win-win scenario for all parties. The IP assurance team maintains this positive governance throughout the remainder of the engagement.
In this first phase the IP assurance team explore the core elements of the IP including claims, components, products and project status. Pulling this together, the team is able to construct a picture of what IP is the focus of discussion. In particular, looking at the best way of aggregating the IP into common components – for example creating a systems architecture or module breakdown structure.
The technical team providing the IP assurance works with the acquirer to prioritise the different elements of the IP. The team categorises the next level of detail of the IP (eg a group of products) to understand the criticality of that element to the business (eg strategic importance) and also the likelihood of that element ‘failing’ to transfer. The technical team uses this to assign a risk profile to each element which drives the prioritisation and level of detail to assign to each element.
By way of example, a critical component would likely have a very high priority, whilst an obsolete one a low. But it may also be appropriate to prioritise an apparently unimportant module because it is little understood, or to de-prioritise a vital module because it is anecdotally well understood or off-the-shelf.
The technical team providing the IP assurance measures the completeness of each element against a predefined ‘gold standard’ template of what would be expected to be in a particular kind of element.
PA has developed four such ‘gold standard’ templates – for a product; a piece of process automation; an enterprise software application; and a business operations process.
The technical team uses such predefined templates to identify whether the embodiment of the IP contains all of the elements that are considered to be vital to designing, building, maintaining and developing the element going forward. Where possible, access to the target’s engineering team to explore the intangible elements of IP is of great value.
The technical team providing the IP assurance measures the quality of each element by reviewing the detail of the embodiment of the IP for each technical discipline involved (eg software, mechanical engineering, etc) against both expert subjective opinion and expert objective templates of the quality expected to be present. The team then comes to a conclusion as to the quality of the IP embodiment.
In many cases this may involve replicating the embodiment. For example it is not sufficient to simply have a copy of the software source code or source code repository. Detailed build instructions, guides to the tools and configurations necessary to build the software and test suites must be present. The technical team performing the IP assurance may be required to actually build final applications for comparison with deployed systems.
The technical team reviews the quality and completeness and produces a report for each element of the embodiment that identifies risks and gaps in the IP and recommendations for closing those gaps.
The team works with acquirer and target to close the gaps identified and bring the IP assurance to a close. Ideally this involves modifications to the pre-transaction contract to ensure the necessary and sufficient IP is transferred in a suitable form avoiding any downstream project recovery or transaction disputes.
Commercial contracts that rely on remedies rather than building in processes for successfully transferring IP lack the pragmatic technical and commercial expertise to maximise and accelerate the value of IP transactions. The IP assurance process described significantly enhances the value of IP, by demonstrating the completeness of the package of IP, including patents, trademarks, and know-how; IP assurance also accelerates the utilization of the IP, post transaction. IP transactions such as technology transfer, mergers and acquisitions, out-sourcing and investment and financing can benefit from rigorous IP assurance as an overarching framework for the transaction.
Transport for London (TfL) entered into an arrangement with the supplier of its Oyster smartcard ticketing service to transfer the intellectual property involved in delivering this highly complex service. TfL did this so they can conduct a more competitive re¬tendering process at the end of the current contract. TfL needed to be satisfied that the IP transferred was sufficiently comprehensive and of the right quality for a third party to be able to take on the service in future.
PA worked with both TfL and the supplier to analyse and improve the quality of the IP delivered. The process required strong technical expertise in enterprise and embedded software, electronics and mechanical engineering as well as diplomatic stakeholder management. After a successful pilot project PA has been applying the verification process to over 100 modules that comprise the whole Oyster system.
Graham Bell is an expert intellectual property in wireless technology and Steve Carden is technology and innovation expert at PA Consulting Group