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Tech & Sourcing @ Morgan Lewis

TECHNOLOGY, OUTSOURCING, AND COMMERCIAL TRANSACTIONS
NEWS FOR LAWYERS AND SOURCING PROFESSIONALS

In most transactions involving the sale or license of intellectual property, a buyer or licensee will request that a seller or licensor represent and warrant that such intellectual property does not infringe or misappropriate the intellectual property rights of a third party. This representation and warranty is often heavily negotiated in a license or purchase agreement because the seller or licensor wants to limit its obligations for breach of this representation to limit its liability under the agreement, whereas the buyer or licensee wants to keep this provision as broad as possible to ensure that it receives appropriate protection from third-party claims for the intellectual property it licenses or buys.

One way for a seller or licensor to limit its obligations under this clause is to qualify the IP representation and warranty to its “knowledge.” If a buyer or licensee agrees that the IP representation and warranty can be qualified by the seller’s or licensor’s knowledge, it is important for the parties to delineate the scope of such knowledge. Knowledge can be limited to actual knowledge, which is information that the seller or licensor actually or consciously knew about, or constructive knowledge, which is knowledge that a prudent individual should have under the circumstances (i.e., information that the individual would be expected to learn after some reasonable level of diligence, or information the individual would be expected to know based on his or her capacity as a director, officer, or employee of the company). Often, the definition of “knowledge” in an agreement will include both the actual and constructive knowledge of certain individuals who have control over and knowledge of the relevant facts.

In addition to defining the scope of knowledge, from the buyer’s or licensee’s perspective, it is important that the knowledge qualifier should only apply to certain types of intellectual property. For certain types of intellectual property rights, such as patents and trademarks, infringement liability attaches regardless of whether the accused infringer knew that the intellectual property at issue was protected by the intellectual property right. Therefore, one can be liable for infringing a patent without knowing it exists. However, in order to prove infringement of a copyright or misappropriation of a trade secret, the intellectual property owner must prove that the alleged infringer actually copied the work for copyright infringement or wrongfully acquired the work for trade secret misappropriation. Because of the inherent requirement for knowledge and access for copyright infringement and trade secret misappropriation, it is reasonable for a buyer or licensee to insist that the IP representation and warranty should not be knowledge-qualified as to copyrights and trade secrets. On the other hand, it is not unreasonable for a seller or licensor to knowledge-qualify its representation and warranty as to patents and trademarks. Below is an example of such a provision in a stock purchase agreement:

The company owns or possesses sufficient legal rights to all company intellectual property necessary for its business as now conducted and as currently proposed to be conducted without any violation or infringement of the rights of others, provided however that the foregoing representation is made to the company’s knowledge with respect to third-party patents, patent applications, trademarks, trademark applications, service marks, or service mark applications.

Depending on the type of transaction (e.g., a knowledge qualifier for patents and trademarks is more common in an asset purchase or M&A deal rather than a technology license deal) and the negotiating leverage of the parties, knowledge qualifiers for IP representations and warranties may be appropriate for facts or matters that are outside of the seller’s or licensor’s control. However, in all such cases, counsel must carefully craft the definition of knowledge and decide which types of intellectual property such knowledge qualifier should apply.

This post is part of our recurring Contract Corner series, which provides analysis of specific contract terms and clauses that may raise particular issues or problems. Check out our prior Contract Corner posts for more on contracts, and be on the lookout for future posts in the series.