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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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