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This material is reproduced from the CEBblog™, Illegal Contracts Are Enforceable, Sometimes, (http://blog.ceb.com/2014/03/21/illegal-contracts-are-enforceable-sometimes/) copyright 2014 by the Regents of the University of California. Reproduced with permission of Continuing Education of the Bar – California. (For information about CEB publications, telephone toll free 1-800-CEB-3444 or visit our Web site, CEB.com).

Illegal Contracts Are Enforceable. Sometimes

The following is a guest blog by Alan M. Goldberg (Alan M. Goldberg) of the Law Office of Alan Goldberg. Alan’s practice includes Appeals, Civil Trials, and Family Law. You can follow Alan on Twitter @AlanMGoldberg.

We learn in law school that illegal contracts aren’t enforceable. But that’s not precisely true. Some illegal contracts may be enforced, depending on the "realities of the situation."

The court in Johnson v. Johnson, 192 Cal. App. 3d 551 (1987) took some colorful facts and laid out for us the factors that govern judicial enforcement of illegal agreements.

In that case of family drama, the apple didn’t fall far from the tree. The parents had asked their son to submit false information on a U.S. Government GI loan application so the parents could buy a house. Of course the house had to be in the son’s name, so the son lied and wrote that he would be living in the house. With the house in his name, can you guess what the son did next? Yep, he tried to sell it out from under his parents; after all, the house was in his name. The parents then sued to quiet title. The son audaciously argued that the contract couldn’t be enforced because his actions with regard to the loan application were illegal.

Although the general rule is that illegal contracts are unenforceable, this isn’t always true. Here are the factors that make even illegal agreements enforceable:

  1. Contract has been performed. If the contract has been performed, the public can’t be protected by the rule except by example. In Johnson, the parties had already changed positions and the parents had moved into the house and had given up their old house, so there was no possibility of protecting them by finding the agreement to be illegal.
  2. No moral turpitude by the party seeking enforcement. Courts will consider the absence of serious moral turpitude (bad acts) on the part of the party against whom the defense is asserted, and will look at who has the greatest moral fault. In Johnson, the parents weren’t as guilty of wrongdoing as the son: they didn’t falsify the documents even though they participated in the transaction. Id. at 556-57.
  3. Unjust enrichment by party claiming illegality. The likelihood that enforcement of the rule will permit the party asserting the illegality to be unjustly enriched at the expense of the other party is an important factor. In Johnson, the son would make out like a bandit by getting the house and the sales proceeds when it’s really the parents’ home. Id. at 557.
  4. Impact of forfeiture outweighs illegality. Disproportionality of the impact of forfeiture is weighed against the nature of the illegality. That is, will enforcement cause a forfeiture that is more severe than the illegality. In Johnson, the question is whether throwing the parents out of their house is disproportionate to the son’s fraud in obtaining the loan.

The Johnson court gave us sound advice in approaching any case involving an illegal contract:

"courts should not be so enamored with the Latin phrase ‘in pari delicto’ that they blindly extend the rule to every case where illegality appears somewhere in the transaction." Id.

Courts temper general rules with practical considerations. But even though courts will sometimes grant relief for illegal contracts, don’t rely on obtaining this relief, because it may not come. In fact, your reliance on illegal terms may invite a lawsuit against your client and a resulting malpractice claim against you.

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All aspects of contract formation, including issues around illegality, are covered in CEB’s California Law of Contracts (California Law of Contracts), chapter 3.

This materialis reproduced from the CEBblog™, Get Intellectual Property Counsel In on Your M&A Deal, (http://blog.ceb.com/2012/05/30/get-intellectual-property-counsel-in-on-your-madeal/) copyright 2012 by the Regents of the University of California. Reproduced with permission of Continuing Education of the Bar – California. (For information about CEB publications, telephone toll free 1-800-CEB-3444 or visit our Web site, CEB.com).

Get Intellectual Property Counsel in on Your M&A Deal

Despite Zuckerman’s decision1 to go it alone on the Instagram deal, intellectual property counsel play an increasingly important role in mergers and acquisitions (M&A). M&A used to be the domain of corporate lawyers, and corporate lawyers still typically lead M&A transaction teams, but it’s now common to see intellectual property counsel from both sides working as part of the team to draft and negotiate the intellectual property aspects of the agreement. That is as it should be.

Even outside the technology sector, technology and intellectual property assets are a significant part of nearly every company’s value. Intellectual property claims also pose some of the most serious risks faced by modern business enterprises.

A merger, acquisition, or asset sale will itself give rise to intellectual property risks that can disrupt a company’s ongoing operations in several ways. For example, as a result of the transaction, companies can lose their rights to use mission critical software or technology licensed from third parties. Former employees and contractors may claim rights to key intellectual property assets, and competitors and patent trolls may attempt to exploit the transaction by raising claims of patent infringement after the deal is announced.

Buyers rely on their intellectual property counsel:

  • to help assess the value and strength of a company’s intellectual property assets,
  • to identify and evaluate the risk of intellectual property claims against the company,
  • to evaluate the effect that the transaction itself will have on the company’s ongoing operations, and
  • to help ensure that they receive unencumbered title to the intellectual property assets that they acquire.

Sellers in turn rely on their intellectual property counsel:

  • to ensure they have made adequate disclosure of any known intellectual property issues,
  • to help assuage any concerns raised by the buyer, and
  • to reduce the risk that the buyer will either refuse to close the transaction after it is announced or bring indemnification claims against the seller after the deal has closed.

The intellectual property provisions of the merger agreement are the primary tools that counsel have at their disposal to perform those critical functions. Thus, intellectual property counsel should be thoroughly familiar with, and actively engaged in, the drafting and negotiation of those sections of the merger or acquisition agreement. For the basics an IP attorneys needs to know about M&A agreements, check out my next blog post.

It’s also important that intellectual property counsel understand the context of the transaction, the business justification, and the core issues that are likely to be encountered to tailor the intellectual property representations and warranties appropriately and to avoid inadvertent requests for disclosure that could harm the buyer or seller. For example, a detailed disclosure on known infringement of the seller’s intellectual property rights could be used to support defenses of estoppel and laches if the buyer ever decides to enforce its intellectual property rights. It is therefore important for intellectual property counsel to be intimately involved with and integrated into the transaction team and to take ownership of the intellectual property aspects of the transaction.

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If you are handling an M&Atransaction, you’ll need CEB’s Intellectual Property in Business Transactions (Intellectual Property in Business Transactions), with an entire chapter (Chapter 7) dedicated to intellectual property issues in M&A agreements. This chapter includes and explains the typical intellectual property clauses in the primary forms of M&A agreements and provides practical tools and techniques for drafting and negotiating those clauses from the perspective of intellectual property counsel for both buyers and sellers.

Also check out CEB’s Sales and Mergers of California Businesses (Sales and Mergers of California Businesses) for complete forms of business acquisition and merger agreements and general discussion of M&A transactions, and the article California Law Issues for the M&A Lawyer in the Spring 2012 issue of CEB’s California Business Law Practitioner (California Business Law Practitioner).

This material is reproduced from the CEBblog™, What IP Attorneys Need to Know About M&A Agreements, (http://blog.ceb.com/2012/06/01/what-ip-attorneys-need-to-know-about-ma-agreements/) copyright 2012 by the Regents of the University of California. Reproduced with permission of Continuing Education of the Bar – California. (For information about CEB publications, telephone toll free 1-800-CEB-3444 or visit our Web site, CEB.com).

What IP Attorneys Need to Know About M&A Agreements

Although federal and state corporation, securities, antitrust, and tax laws governing mergers and acquisitions (M&A) are complex and nuanced, and the structure of a given transaction is usually driven by tax and securities considerations that aren’t within intellectual property counsel’s control, it’s useful for intellectual property lawyers to know the basic structures of these deals and the impact on the intellectual property provisions in the agreement. Here’s a crash course on basic types of M&A agreements.

Companies can merge or be acquired through three basic mechanisms:

  1. Stock Purchases. In a stock purchase, the acquiring corporation pays cash to the owners of the target company’s stock, the buyer becomes the parent, and the target entity continues intact as a subsidiary of the buyer. Acquiring companies can also issue their own stock to the shareholders of a target company in exchange for a controlling interest in the target, in a transaction known as a "stock-for-stock exchange." From an intellectual property perspective, stock purchases have some important benefits over other forms of mergers or acquisitions, most importantly, that the target’s corporate identity remains intact as a subsidiary of the buyer. As a result, any liabilities of the target entity remain with that entity and are not transferred to the buyer. Because buyers often have deeper pockets, it can be beneficial to keep the target’s liabilities isolated in the subsidiary, especially if there is pending or threatened litigation or patent infringement claims against the target.
  2. Statutory Mergers. In a statutory merger, the acquired corporation is merged directly into the acquiring corporation, the shareholders of the target company become shareholders of the surviving corporation, and all of the disappearing corporation’s business, assets, contracts, and liabilities are assigned or transferred to the surviving corporation by operation of law. The three primary structures for statutory mergers are "straight-in mergers," "forward triangular mergers," and "reverse triangular mergers." Each of the three structures impacts key intellectual property issues differently, so it is important for intellectual property counsel to be familiar with each structure and to learn early in planning for a given transaction which of the three structures will be involved.
  3. Asset Purchases. By purchasing all or substantially all of the target company’s assets, the acquiring company may avoid acquiring some or all of the target’s liabilities. Asset purchase agreements present several unique challenges for intellectual property counsel. First, it’s important to identify and schedule all of the key assets being acquired. Second, it’s important for the asset purchase agreement to identify any liabilities of the seller that will be assumed by the buyer and any excluded liabilities that will remain with the seller. Finally, in an asset purchase, unlike a statutory merger, the seller’s intellectual property assets will not be transferred to the buyer by operation of law, so it’s important to obtain an express assignment from the seller of all intellectual property rights. Counsel should require separate forms of assignment for patents, copyrights, and trademarks to document and record the transfer with the appropriate governmental agency.

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As explained in my earlier blog post, Get Intellectual Property Counsel in on Your M&A Deal (Get Intellectual Property Counsel in on Your M&A Deal), intellectual property counsel should be thoroughly familiar with, and actively engaged in, the drafting and negotiation of M&A agreements. To do this effectively, they need to educate themselves first.

These three mechanisms are explained comprehensively in CEB’s Intellectual Property in Business Transactions (Intellectual Property in Business Transactions), chapter 7, which covers intellectual property issues in M&A agreements.

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Notes:

1. See "Zuckerman Reportedly Negotiated Instagram Deal Without Lawyers and Board Input", http://www.abajournal.com/new/article/zuckerberg_reportedly_negotiated_instagram_deal_without_lawyers_and_board_i/?utm_source=maestro&utm_medium=email&utm_campaign=weekly_email"%20t.