IP Issues in Achieving Business Continuity and Viability in Spin-off and Carve-out Transactions | Practical Law

IP Issues in Achieving Business Continuity and Viability in Spin-off and Carve-out Transactions | Practical Law

A discussion of some of the key intellectual property (IP) transfer issues to address in connection with the divestiture of a subsidiary, division or other part of a business enterprise. This Legal Update contains links to Practical Law resources providing more detailed information concerning IP and other carve-out issues and the drafting and negotiation of transitional IP licenses.

IP Issues in Achieving Business Continuity and Viability in Spin-off and Carve-out Transactions

by Practical Law Intellectual Property & Technology
Published on 30 Jun 2015 • USA (National/Federal)
A discussion of some of the key intellectual property (IP) transfer issues to address in connection with the divestiture of a subsidiary, division or other part of a business enterprise. This Legal Update contains links to Practical Law resources providing more detailed information concerning IP and other carve-out issues and the drafting and negotiation of transitional IP licenses.
A spin-off or carve-out transaction is the sale of a subsidiary, division or other part of a larger business enterprise. These transactions raise critical intellectual property (IP) issues for both the party carving out a segment of its business (seller) and the carved-out entity (buyer). Being prepared to address these issues can determine whether a proposed carve-out is a successful win-win transaction, a blueprint for failure or a deal that never sees the light of day.

Have a Clear Understanding of Needs and Goals

The parties' needs and goals largely determine the issues they must resolve to craft a successful carve-out transaction. The most important of these are:
  • The seller's need to ensure the transaction does not disrupt or impair its remaining operations (business continuity).
  • The buyer's need to obtain all assets and services needed to operate a successful business (business viability).
To achieve these objectives, the parties must:
  • Identify the relevant IP assets and related issues.
  • Allocate or share these IP assets between them.
  • Consider and, if necessary, provide for IP-related transitional services.

Identify the Relevant IP Assets and Related Issues

To meet these core objectives, the parties to a carve-out transaction must identify:
  • The IP assets and related services that are material to their businesses.
  • Obligations and liabilities associated with these IP assets and services.
  • The issues that arise from the transaction concerning these assets and services, for example:
    • transfer of tangible IP;
    • licensing or assignment of rights in IP (including software);
    • use of the seller's trademarks and trade names; and
    • related concerns, including third-party licenses and consents, ongoing IP litigation and rights to recovery of damages, and post-closing IP support and maintenance.

Allocate the Relevant IP

After having done their due diligence in identifying the relevant IP assets and services, and related benefits, obligations and liabilities, the buyer and seller must determine which of these will:
  • Stay with the seller.
  • Be transferred to the buyer.
  • Be shared by the parties.

Arrange for Necessary Sharing of IP

If the parties decide to share any IP resources or liabilities, they must further determine whether this arrangement will be:
  • Permanent.
  • Temporary, either:
    • during a fixed transition period; or
    • until the occurrence of a specified act, occurrence or event.
  • Unlimited for either or both of the parties or restricted, for example, by:
    • markets or fields of use (for example, IP rights "used by," "primarily used by," "exclusively used by" or "necessary for the operation of" the business of buyer or seller); or
    • geographic location.
  • Transferable by either party.

Provide for Required Transitional Services

If the parties agree to a temporary IP sharing arrangement, they must assess whether either of them will need the other to perform, or to cause its service provider to perform, transitional maintenance, support or other services to the other party during the shared-use period. This typically requires that the parties enter into a transitional license and service agreement.
For sample transitional license and service provisions, see:
For a detailed discussion of IP and other carve-out issues, see Practice Note, Carve-out Transactions. For a discussion of outsourcing service transition issues that may similarly arise in carve-out transactions, see Article, Exit management: how to stop the door slamming shut: Key issues to be addressed.