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Due diligence
What are the typical areas of due diligence undertaken in your jurisdiction with respect to technology and intellectual property assets in technology M&A transactions? How is due diligence different for mergers or share acquisitions as compared to carveouts or asset purchases?
Typically, the due diligence effort from an IP standpoint looks to ascertain the extent of the target company’s IP portfolio, its legal nature and its current and near-future status. This latter point is particularly relevant for those IP rights, such as patents and trademarks, which require regular action to maintain their validity.
As it is generally accepted that the core value of most companies today resides in their intangible assets, the IP due diligence plays a central role in informing the parties to the M&A transaction on the legal strengths and weaknesses of the target company’s IP portfolio. This concern applies equally in situations of contemplated share acquisitions as it does for asset purchases. In this respect, the legal IP due diligence frequently goes hand-in-hand with a prior or parallel technical due diligence of the target’s intellectual property, especially in tech-driven industries.
A sound due diligence method calls for, as a preliminary step, a high-level but clear understanding of the technology at stake. Indeed, this understanding is necessary to determine what IP rights may and should exist. As a reminder, a single technology may be protected by several IP rights, each covering the multiple facets of the same technology. Following this initial step, an overview of the IP rights constituting the company’s portfolio also requires understanding what IP strategy the company follows to protect the technology, and questioning its resilience through time. For instance, many businesses may choose to forsake (wholly or partially) patent protection in favour of trade secret practices. This second step can best be described as a ‘high-low’ approach, in which a detailed analysis of the various IP rights is juxtaposed against a more general understanding of the company’s overarching IP strategy. With that information in hand, a third step involves a review of the various licences on the technology, as well as any past, present or upcoming litigation or claims involving the technology; in this context, depending on the practice area, a more or less extensive regulatory analysis may prove essential (eg, in the medtech area).
The above process may lead to the identification of various issues, such as shortcomings with the registration of IP rights, ill-adapted IP strategies, ownership issues (such as third-party or joint ownership), unfavourable or weak contracts, potentially adverse litigation outcomes, as well as regulatory risks.
As mentioned above, the IP due diligence is not radically different in share deals as it is in asset deals. Given that asset deals might only involve the transfer of certain, but not all, technology assets, the scope of the due diligence may, however, vary.
What types of public searches are customarily performed when conducting technology M&A due diligence? What other types of publicly available information can be collected or reviewed in the conduct of technology M&A due diligence?
It is customary to cross-check the lists of registered IP rights that the target company provides against the information in the matching public registers. This applies in particular to trademarks and patents, but also to designs and (to a limited extent) domain names. As copyright is not a registered right in Switzerland, public search possibilities are limited and the due diligence rather looks to ensure the chain of title is clear and unproblematic.
Though they can rarely be extensive and comprehensive, more general internet searches occasionally help to identify certain issues, such as third-party attempts to duplicate a protected technology, or the unauthorised use of company names or trademarks.
What types of intellectual property are registrable, what types of intellectual property are not, and what due diligence is typically undertaken with respect to each?
Registered rights are patents, trademarks and designs. Domain names are sometimes regarded as registered rights given that they appear in publicly accessible registries. Copyrights are not a Swiss registered IP right, nor are – by definition – trade secrets.
The due diligence effort for registered rights must confirm that the rights are, indeed, properly registered and active, held by the company (eg, not by ex-employers, co-founders, etc), and are not facing short-term obligations such as renewal duties, annuity payments and so forth, which may jeopardise their existence. Occasionally, liens and licences may be publicly recorded on registered IP rights.
As regards unregistered rights, it is important to determine ownership and the measures in place to protect such IP, such as confidentiality duties and practices regarding trade secrets, and non-disclosure of computer source code.
Can liens or security interests be granted on intellectual property or technology assets, and if so, how do acquirers conduct due diligence on them?
Liens can be granted on most IP assets and the underlying mechanisms are primarily set out in general civil law, being specified that specific IP legislation, such as the Federal Trademark Act, occasionally contain additional provisions.
In the case of registered IP rights, the best practice is to register the lien in the relevant registry. This fully mitigates, under Swiss law, risks associated with potential third-party bona fide acquirors of the IP rights at stake. In addition, the process to register liens over registered IP rights in Switzerland is informal, simple and fast. The registration of the lien is, however, not a condition for the lien’s validity.
As liens typically result in the performance of a written pledge agreement, the due diligence process should identify any such agreements. In the case of registered IP rights, a consultation of the relevant registry should also identify those liens that the parties recorded.
What due diligence is typically undertaken with respect to employee-created and contractor-created intellectual property and technology?
The due diligence involves reviewing the employment agreements as well as any work-for-hire, service, consultancy, or other ‘freelancer’ agreements to identify the existence of any employee or contractor-generated intellectual property and technology. The due diligence must then ascertain the ownership rights over such intangible assets.
The by-default position of Swiss statutory employment law is that inventions, designs and (though a scholarly debate exists) computer programmes created by an employee in the course of his work and in the performance of his duties belong to the employer. In the case of inventions and designs created by an employee in the course of his work but not in performance of contractual obligations, the employer may contractually reserve acquisition rights, against appropriate consideration.
In the case of contractor-generated intellectual property, Switzerland – contrary to other jurisdictions – does not have a dedicated work-for-hire doctrine under which the client necessarily acquires the intellectual property rights resulting from contract performance. The due diligence must therefore identify the nature of such contractor agreements and carefully assess their impact on IP and technology ownership.
Are there any requirements to enable the transfer or assignment of licensed intellectual property and technology? Are exclusive and non-exclusive licences treated differently?
For the most part and irrespective of their exclusive or non-exclusive nature, the transfer of licences is not subject to dedicated statutory requirements, though contractual limitations may apply. Sector-specific regulations, such as in the financial sector, may, however, come into play and in effect hinder the transfer of certain licences.
In addition, certain licences, such as those over patents and trademarks, can be recorded in the respective register, and are consequently opposable to third-party bona fide acquirers.
What types of software due diligence is typically undertaken in your jurisdiction? Do targets customarily provide code scans for third-party or open source code?
The due diligence must identify the software belonging to the target company as well as software that it uses, either in conjunction with its own software, or for its business operations. That being done, the due diligence serves to confirm ownership of the target’s claimed software, review any licences in and out and, where applicable, assess the legal viability of the target’s software commercialisation efforts by reviewing the target’s service or product offering documentation.
Targets do not customarily provide code scans for legal due diligence, though a technical due diligence may result in a careful analysis of the target’s code. Moreover, it is customary for the target to precisely list all open source software (OSS) that it uses with an indication of the relevant OSS licences; this is an important step that permits identification of possible copyleft exposure.
What are the additional areas of due diligence undertaken or unique legal considerations in your jurisdiction with respect to special or emerging technologies?
New technologies come with new questions regarding their legal qualification and legal treatment. Evolving regulatory landscapes also mean that new due diligence avenues have opened. This is notably the case with big data for instance, where increased focus on data protection, data security and trade secrecy practices occurred. Other technologies face not only more precise regulations, but also frequently overlap various layers of intellectual property rights. This is the case for autonomous driving technologies, and to a certain extent internet of things, which frequently combine patent-protected inventions, trade secrets and copyrighted software components, while at the same time necessitating a careful telecommunications and (in the case of autonomous driving) road use regulatory review.
In addition, certain fields are particularly broad and, as of now, mostly elude any straight-forward legal analysis. This is notably the case with artificial intelligence, which will remain a hotly discussed topic for the foreseeable future. In a due diligence context, one must be able to identify how the target uses artificial intelligence, to what ends and what kind of results the artificial intelligence generates.
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