Intellectual property and failed dot-coms: A new type of law practice
Throughout history, technological advances have generated growth in various sectors of the economy. All during the 20th century, new industries were born and developedmany jobs were created, information was disseminated rapidly through new media, and novel and creative forms of entertainment were introduced. The telecommunications industries arguably led the way in terms of economic growth. From a broad perspective, electronic media (broadcasting, cable, satellites, telephony, and computers) were responsible for most of this growth.
Rapid expansion in the computer and Internet industries has made a major impact on the way we communicate, and people who invested early made a lot of money. Much of this growth took place without viable business models in place. For example, Web sites that relied on banner ads for revenue frequently found themselves short of funds. This led to some chaotic times for the technology sector. Many Internet technology firms have gone out of business, and some investors have lost a lot of money.
What happens to the assets and property of a dot-com company when it goes bankrupt? Office equipment and furniture can be sold, auctioned off, or included in the sale of the business. But what about the intellectual propertypatents, trademarks, or copyrighted material? A new specialty is emerging in the practice of lawa mix of bankruptcy, corporate, and intellectual property law. Its main goal is valuing the intellectual property of Internet firms that are preparing to cease operations.
The present dot-com landscape
Adding fuel to the fire are reports issued in late August that consumer confidence has further tumbled because of the weakening job market (6) and the announcement in early September that Hewlett-Packard is buying Compaq (7)a merger that may lead to more job cuts overseas (8). Some egregious errors have been made. For example, the now-bankrupt company PSINet spent millions of dollars for the naming rights to the Baltimore Ravens football stadium.
Some defunct Web sites seem better known for their advertising than for what they actually offered in services. Who could forget the Pets.com sock puppet dog? Even though this company no longer exists, the puppet remains as a reminder of what might have been. I recently visited the FAO Schwartz toy store in Tysons Corner, VA, with my 3-year-old daughter, and the famous toy was still on the shelves and for sale. Interestingly, items such as the sock puppet have become collectors items for those who are nostalgic for the Internets good old daysironically, less than a decade ago (9).
The anatomy of a dot-coms assets
Intellectual property is generally defined as patents, trademarks, and copyrights. In the Internet world, intellectual property includes patents (issued or pending), domain names (including those that have been claimed but not used), targeted customer lists, customer information databases, trade secrets, trademarks, claimed and unclaimed copyrights, online content, and back-end systemsvirtually anything that has spilled out of an inventors head (16).
For the most part, patents, copyrights, and trademarks are all incorporated into the fabric of a Web site. The tricky part is determining how much its all worth. This can become further complicated when dealing with customer information. The patent aspect could incorporate methods in which customers receive online ads and methods of secure online credit card payments. The trademarks could incorporate the domain name in some way, or be something akin to logos that describe the product or service. Copyright includes any text, computer software, or music. Adding to the difficulty are trade secrets, which include half-finished programs and lists of data and customers.
Users guides for valuing and buying assets
How are assets such as intellectual property valued? Although a dot-com may have accounts receivable, fixtures, and other physical property, intellectual property is its principal asset and investment. This intellectual property, however, is hardly a liquid asset; it is gained through a long, methodical process that eventually creates value for the company (18). The assets are intangible, and therein lies the difficulty in assigning a value to them. Some factors to consider include the number of hours people worked and their hourly pay rates, other costs of the investment, the number of years of development, the further cost of finishing the product, and the patent expiration dates, all adjusted for the perceived risk (19). Additional factors include how much a buyer might have to spend to get the product ready for market or how much the buyer might save by buying instead of developing its own product (11). These factors reflect primarily the patent component found in the failing companys assets.
Recent buyouts in this industry demonstrate the wide range of values assigned to intellectual property.
Essentially, valuing the intellectual property assets boils down to pure haggling, according to technology attorney Joseph Siino of Brobeck, Phleger, and Harrison (San Francisco): An old-world technique meets the new technology (11). The seller wants to sell, so it can pay off its creditors; the buyer wants the best possible price. Siino says a company has a better chance of getting a good price if it acts to find buyers for its technology before it shuts down. Even though this area of law is relatively new, several how to articles have appeared, their goal to give potential buyers some clue as to how to go about purchasing the assets of a failed company. These include How to Buy the Assets of a Failed Dot-Com (23), How To Purchase the Assets of Failed Dot-Coms Without Getting Burned (24), and Yes, Its Brain Surgery Venture Capitalists Are Dissecting Intellectual Property Assets and Strategies Like Never Before (25).
When looking into the possibility of purchasing a bankrupt or almost-bankrupt dot-com, it is natural to think of the Web site as the most coveted of the sellers assets. Obtaining legal and complete ownership of the Web site and all its underlying components should be a top priority. It is essential to have accurate information about the sellers ownership of any text, images, and software with regard to underlying copyrights and warranties (24). For example, it is important to know if there are any third-party agreements to consider. Was the Web site developed in-house or under a work-for-hire agreement, or was the development contracted out? This is key information to have to avoid the risk of a patent or copyright infringement lawsuit. It is wise to obtain legal counsel to ensure a thorough investigation, preferably from an attorney with a background in intellectual property as well as in e-commerce issues.
Picking up the pieces
There is no clear-cut method for valuing the intellectual property found in a failing company. It is a somewhat complicated and cumbersome task requiring painstaking research. Values hinge on the particular assets from a specific company; thus, they must be considered on a case-by-case basis. Market conditions play a large role, as well as how quickly a seller wants to sell or a buyer wants to buy. Readers beware: There are many factors to consider when a dot-com goes out of business and a new party enters the fray to purchase its assets.
Eric S. Slater is the copyright administrator for the ACS Publications Division (1155 16th St., NW, Washington, DC 20036; 202-872-4367; email@example.com).