Tech & Sourcing @ Morgan Lewis

Contract Corner

The purchase of applications (or apps) is a comprehensive arrangement that includes the transfer of a variety of rights and assets, including intellectual property (IP) rights, software, human resources, equipment, and infrastructure, as well as the transfer of related contracts, accounts, and data. In this Contract Corner, we highlight key considerations for developing an application purchase agreement.

Acquisition Strategy

In order to develop a successful acquisition strategy, it is key to understand the “essence” of the application that the buyer intends to purchase, i.e., the most valuable part of the application. For example, it could be proprietary software that forms the core of the product, a top-notch development team, or a great user base.

As a first step, the buyer is advised to both conduct an IT audit to determine the application architecture, dependencies, and data flows and perform legal due diligence of IP rights related to the application. Such audits allow the buyer to identify all components and relevant functionality, both essential and ancillary to the operation of the application, and to make an inventory of all such components and IP rights that it will later include in the purchase agreement.

Based on the results of the audits, the buyer and the seller should agree on the transfer strategy. Will the seller transfer all assets directly to the buyer or to a special purpose vehicle that the buyer will subsequently acquire? Who will be responsible for pre-completion restructuring and post-completion integration to the buyer’s systems? Will the seller continue to provide certain support services to keep the application running for some time after the deal is closed, and if so, what will the required service level obligations be?

Transfer of IP Rights

Mobile applications are complex products that usually include the following types of intellectual property: software (both proprietary and open source), databases, designs, content, logos and brands, commercially sensitive information, and other types of data.

Based on the results of the IT and IP rights audits, the buyer should identify all intellectual property that is relevant to the application. Sometimes the buyer will be able to secure full assignment of all IP rights to it or to its special purpose vehicle. However, sometimes, particularly where the seller is looking to dispose of a noncore asset, the seller will only assign IP rights that are core to the product and will retain the IP rights in components that it uses in its other products. In this case, the buyer will either need to license such components from the seller or replace them with its own (or a third-party) product.

The buyer must pay special attention to formalities that may be required to properly record the transfer of each piece of intellectual property. This is especially relevant in cross-border deals, as different rules may apply in different jurisdictions.

Transfer of Data

Ownership of historical data, i.e., any data generated by and in connection with the application prior to the transfer (for example, user activity, payment, and sales data), is the next important issue to consider. If the parties agree that historical data will be transferred to the buyer, they should determine (1) how such data will be transferred, whether in the existing original format or in a specific alternative format; (2) whether historical data will include data related to third-party services, such as advertising accounts; and (3) whether any privacy rules or restrictions may be triggered by the transfer of historical data to the buyer.

Transfer of IT Infrastructure

The buyer would typically want to take control of the application as soon as possible. To make the transfer of the application run smoother, the parties will need to spend some time discussing the migration process, such as whether hardware will be purchased from the seller and who will bear the responsibility for the migration to the buyer’s, or to an independent third party’s, infrastructure. It may be prudent to cover these issues in a project roadmap. A service level agreement for migration activities is also a huge benefit to ensuring a seamless transition.

The buyer will need to consider whether any third-party services would be required to keep the application up and running upon migration, and whether there is a need to require the seller to provide these services (at least temporarily) alongside any post-transition support, as applicable.

Transfer of Publishing Rights

The transfer of an application implies the transfer of a publisher's rights in app stores. The parties shall allow enough time for such transfer, which typically takes 2–3 weeks, and agree on a number of points; for example, the relevant accounts to which the publisher’s rights in respect of the application will be transferred and who is responsible for setting these up, as well as who will be responsible for dealing with additional information requests from app stores themselves.

The buyer would typically require that the seller ensures that the application meets the transfer criteria provided by the corresponding online store. Note that the parties should also be mindful of different commission rules, which may be applicable to different types of accounts.

Look out for Part 2 of this Contract Corner, which will focus on transfer of employees, users, and contracts, as well as completion and payment mechanics in app purchase agreements.