Strategies to secure your IP when bankruptcy looms

For many technology companies, intellectual properties (IP) are vital business assets which often transcend the value of the firm’s other material possessions. An organization’s IP impacts business strategy and often establishes the company’s market value.

Risks of theft and legal challenges are always present, but companies facing slowing economic environments or in peril of bankruptcy must be more vigilant in protecting their so-called “abstract properties” because effective management of intellectual property can make or break a business’s ability to bounce back, according to technology and IP specialists.

In legal terms, IP refers to creations of the mind such as musical, literary and artistic works, inventions, source codes, symbols, names, images and designs including trademarks. Under IP laws, the holder of these abstract properties has certain exclusive rights to the creative work covered by it.

“In a sense, a company’s IP is much like other tangible property that belongs to the business. It can be bought and sold,” according to Jon Arnold, principal of J Arnold and Associates, a communications research and analysts firm in Toronto.

“If a company posses rights to a valuable IP but that company is not solvent, the IP can be sold to obtain funding or to pay of creditors,” he said.

Unfortunately, should a company fall into bankruptcy the trustees can sell the firms assets – including IP – free of any legal claims and encumbrances.

Even in the best of times, a company’s IP could still face various risks, Arnold said.

For example, competitors can tie-up a business in costly legal battles over alleged patent infringement. “Many companies sue their competitors alleging their competitor is using technology they had previously patented. In some cases the claims are true, but in others it could be a ploy stymie a rival and gain market advantage.”

Some companies, known as patent trolls, register patents or buy businesses that own patents. The business’s new owners gain control of the IP patents but do not use the patents to manufacture anything but instead sits on the patent.

“Then, they demand royalties or sue a company which uses a similar technology,” Arnold said.

“The key to protecting your company’s crown jewels is to secure it long before bankruptcy proceedings,” says Victor Krichker, a partner specializing in software and intellectual property licensing at Bereskin & Parr a Toronto-based IP law firm.

Here are some of the legal strategies that companies can use to safeguard IP during uncertain economic times:

Protect IP at the get goMake sure your company’s IP is protected by the appropriate patent and copy rights. Get a patent lawyer to advise you and to make sure that all the bases are covered.

Dealing with leaving employeesSomeday employee that had a hand in developing the IP might leave you.

Companies must exert effort in retaining workers that ad value to the organization, but if these employees should need to leave, safeguards to the IP should be considered.

Review employee agreements. Make sure they specify that the IP is owned by the company rather than the employee.

Make sure they have signed a legally binding non disclosure agreement which would ensure the valuable information remains your property.

Prepare for your businesses demiseDon’t wait for angry creditors to come banging at your door. Just as you would write a last will covering your estate, make sure that your IP is safe when your business goes in the red, says Krichker.

Since intellectual property can be sold off to salvage a business, used to acquire a loan or attract larger companies to acquire your business, some IP can benefit by preventing bankruptcy trustees from getting their hands on the IP.

Krichker said some small companies are able to do this by making the IP a personal property of the business owner. This way, the IP is untouched when creditors go after the company.

Industry regulations, however, might prevent larger firms or public traded companies from pursuing this strategy.

“This is something owners have to do before their business goes bankrupt,” said Krichker.

Business owners considering this option should consult tax lawyers to determine the tax implications of this move.

Investigate licensing agreementsTypically, a debtor company cannot sell or transfer non-exclusive licenses without the consent of the license holder.

In some cases, a company that owns the IP can assume or reject licensing contracts based on whether they are favourable to its business. However, laws in some jurisdictions may prohibit the owner from terminating certain licenses that may deprive the licensee of the “benefits of its bargain”.

These laws preserve the licensee’s ability to continue using its rights even after the original owner of the IP enters bankruptcy, said Krichker. “This gives the customer of license holder the assurance that they can still continue their business even when the IP owner is gone.”

With many Canadian firms, the IP goes to an escrow trust or third party that will govern the use of the IP and make sure licensed users are supported.

For example users or a licensed software product could be left without support if the application’s developer files for bankruptcy. In this case an assigned third party can keep the software’s source code and provide license holders access to if for maintenance of existing applications.

Owners looking for more control over their IP should look to getting agreements that will allow them to transfer or resell licenses to prospective buyers should they plan to sell their entire organization or just certain assets.

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Jim Love, Chief Content Officer, IT World Canada

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