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Recycled Intellectual Property - Phoenix from the Ashes
This article appeared in substantially the same form in the Boston Law Tribune, June 3, 2002 edition.
Dots may com and dots may go but what happens to the underlying concepts, or intellectual property, behind the dots? Presumably within each Internet and e-commerce venture that has come and gone there was some kernel idea or core technology that ignited initial investment and development. But when a company goes down in flames, does its intellectual property (I.P.) go up in smoke, or can it provide the fuel for another venture? That is a question many entrepreneurs, investors, employees, stockholders and other interested parties have asked themselves as they contemplate how best to get value from a venture heading south.
Each party to a venture brings a unique perspective and objective when calculating the best way to dispose of a company's assets. Investors may want instant liquidity, no matter what return, to close the books and move on to the next investment. A founding entrepreneur may want something a little different: perhaps a chance to start over and not make the same mistakes twice. Employees may want to leave with certain marketable skills and know-how that will enhance their value to their next employer. The question from a legal perspective is the following: when a company goes out of business, what I.P. can a party take from the company for personal use?
You may wonder who would police such activity or who would care about a company's assets after it has gone out of business. The answer, in part, lies in a technicality of most states' corporate statutes. The corporate law of both Delaware and Massachusetts, under which most Massachusetts ventures are organized, states that a company survives for three years after its dissolution for the purpose of settling and closing its affairs. In addition, corporate statutes empower the secretary of state to revive a corporation after the three year limit if a legitimate reason for revival is presented. Numerous cases brought under these statutes demonstrate that a defunct company by way of its shareholders, creditors or officers, can take action against other parties. Thus word from your company president that your company has gone out of business is not license to grab company technology. Big brother may still be watching.
If a company has spent millions of dollars developing proprietary computer programs that now no longer support a viable business model, the programs themselves may have residual value. That it is the proposition that has given rise to companies like Website Recycling Company, Inc. (WebReCo.com) in Boston. WebReCo is a joint venture of the Screen House, a Boston Internet development firm, and the Gordon Brothers Group, LLC., a long-time auctioneer and liquidator of corporate assets of distressed companies. WebReCo president, Gage Andrews, says Gordon Brothers realized that the I.P. assets could be liquidated differently than physical assets. For example I.P. assets can be licensed multiple times, whereas physical assets are sold once. Moreover, kicking the tires of I.P. requires a different type of scrutiny than inspecting physical assets.
WebReCo has been helping companies find a buyer or licensee of their I.P. for approximately one year. Business is brisk. Andrews believes many companies make a mistake by defining their I.P. too narrowly, only in terms of the conventional categories of trademarks, patents and licenses. Valuable I.P. can often be extracted from the proprietary technology developed by a company. A major function that WebReCo performs is to help businesses "repurpose" their assets, namely find lucrative functions for technology other than that for which it was originally designed. Andrews further notes that many times WebReCo helps structure deals whereby company insiders are able to cleanly acquire a company's software for future exploitation.
Think creatively. If you are starting up a new venture, perhaps you can give the old company an ownership interest in the new venture. Or rather than commit to spending precious cash, perhaps you can work out a royalty arrangement with the old company, such that it receives a certain percentage of revenues your new venture gets from exploitation of the technology. If you do acquire the rights to I.P. via a transaction structured by a liquidator, be sure you fully explore the prior ownership history of the I.P. and take appropriate steps to safeguard against third party claims of infringement.
Doing nothing is probably your worst course of action. The investment and technology communities are small. If word gets out to a disgruntled investor that technology from his worthless company is now being exploited by a different company, you will receive a call. Better to pay the recycling fee at the time of collection than at the time of redemption.
Copyright 2002, Peter Kelman, Esq. All rights reserved.