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The Intellectual Property Considerations in Spin-offs

Condensed from Original Interview posted at

Countless intellectual property issues arise in the creation of a spin-off entity (Spinco) from a parent company, depending upon the business goals and structure of the transaction. This arrangement normally assumes that Spinco and the parent company will no longer be controlled by the same party after the closing date and, accordingly, will have no motivation beyond self-interest to cooperate once the transaction is concluded. It is therefore crucial that the arrangement contemplate as many contingencies as possible from an intellectual property perspective, as these will have ramifications from the first day post-closing and far beyond.

Some of the top intellectual property considerations that arise in a Spinco transaction include:

1) Conduct thorough due diligence before, during and up to closing of the transaction, identifying in detail the universe of intellectual property that will stay with the parent, will be transferred to the Spinco and, in some cases, will be shared by the parties. The intellectual property rights that should be reviewed and itemized includes trademarks, whether registered or common law, slogans, trade dress, domain names, social media user names, email addresses, licenses, software, copyrights in all materials including advertising, brochures and websites, technology, trade secrets, designs and patents;

2) Define how the parent and Spinco will coexist whether based on a distinction in field of business, by brand or by geography – each method of division has its own traps and must be addressed by specific agreement between the parties;

3) Clearly identify and value any encumbrances on the transferred rights including ongoing claims, potential claims, litigation or encumbering agreements or relationships;

4) Clearly define the representations and warranties offered or requested by each party to determine who has responsibility should a transferred asset turn out to be less than expected;

5) Provide a mechanism for contingencies and cooperation, subjecting each party to a continuing and specific duty to assist in resolving any post-closing issues;

6) Budget for the intellectual property transactions created by the deal and include the budget either in the transfer price or the transaction budget;

7) Get input from the business and technical sides of each party tasked with the daily operations post-closing in order to get a complete picture of how the deal will affect the businesses post-closing;

8) Where Spinco will have a new corporate identity from the parent company, involve IP counsel early so that an appropriate new brand is adopted together with a corporate structure that logically, efficiently and cost-effectively supports the new business.
All of these challenges are best navigated by involving specialist IP counsel in the transaction early and often.

If Spinco will retain the parent company house brand, it may be possible to divide ownership of the house brand between the two parties. In such cases the parties must agree on how the brands will coexist, what efforts the parties will make to avoid confusion, what the parties will do to address confusion and what the parties will do vis-à-vis third parties that cause confusion. However, if Spinco and the parent will continue to operate in the same or similar fields in the same geographic area, it may be necessary for the parent to license, rather than assign, its brands to Spinco. Where the spinoff entails carving up rights by geography, agreements must be in place to address any coexistence issues or parallel goods issues.

The above considerations will also apply if the parent company and Spinco plan to use product brands concurrently. Where Spinco develops a new house brand but continues using the parent company’s product brands, the parties must agree on how to separate the house brand from the product brands, providing for transitioning the house brand off products, sell-off periods, labeling and signage changes, transitional licenses, etc. The parties must also determine how to allocate, transfer or share websites and social media accounts.

If these issues are not addressed properly prior to closing, the parties may incur significant time and expense in remediating the problems as they are identified. This can involve paying more for IP counsel’s “remediation” services for cleaning up the transaction than had they been engaged pre-closing; expending internal resources that should otherwise be growing the business; attempting to renegotiate provisions of the arrangement post-closing when the other side has no incentive to cooperate; facing trademark dilution or vitiation issues for major brands absent effective agreements during the transaction; arguing over costs, claims and valuations for issues identified post-closing; incurring substantial costs in the operating budget when the anticipated costs of the transaction were not properly budgeted in the transfer price or the transaction budget; and incurring rebranding or IP ownership reorganization costs if Spinco’s new brand is not created and implemented properly.

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