Representations & Warranties

Definition

"Intellectual Property" means all intellectual or industrial property, including all patents, inventions, trade-marks (whether registered or not), trade names, copyrights (whether registered or not), design registrations, trade secrets, mask work and semiconductor rights and plant breeder's rights.

Schedule X contains a true and complete description of all the intellectual property used by the seller which is material to the conduct of the business.

OR

Schedule X is a list of all patents (issued and pending applications), trade-marks (registered and pending applications), registered copyrights... [etc.]

The buyer often tries to expand the definition, in order to broaden the scope of the warranties. The seller will then try to narrow the definition. The result is unnecessary negotiation over the definition, when the focus should be on the warranties.

An alternative approach is to separate the definition of the intellectual property from the related warranties:

Definition: "Intellectual Property" means all intellectual property used in the purchased business, including without limitation....

Warranty: Schedule X lists all Intellectual Property registrations and pending applications.

Ownership

The seller is the sole owner of the intellectual property.

The seller is registered as the sole owner of the intellectual property in Schedule A. There are no licences of, or security interests in, any of that intellectual property, except as specified in Schedule X.

There is no central registry of all interests in intellectual property. So one of the parties must assume some risk of defects in title.

The buyer seeks the broadest possible warranty to reduce that risk. The seller seeks to limit its representations and warranties to facts which it knows to be true, or can be independently verified.

Validity and Enforceability

The intellectual property rights are valid and enforceable.

To the knowledge of the seller, the intellectual property rights set out in Schedule X are valid and enforceable.

None of the intellectual property rights have been held to be invalid or unenforceable. [Except as set out in Schedule X, the validity or enforceability of the intellectual property has not be challenged in any jurisdiction.]

The buyer seeks an absolute warranty. The seller tries to limit the warranty to known facts.

One never knows if intellectual property rights are valid or enforceable until they have been challenged. The seller should try to limit its representation to stating that none of the rights have been challenged, or if they have, that the challenge was not successful.

Negotiating issues often relate to the extent of the seller's investigations and implied knowledge. It is debatable whether adding the qualifying phrases "knowledge, information and belief" or "after due inquiry" give either party much comfort.

Infringement

The conduct of the seller's business does not infringe any intellectual property rights of any third party.

The seller has not received any notice, claim or a threat of any claim that the conduct of its business has infringed the intellectual property rights of any third party.

What constitutes notice of a claim or potential claim?

If warranty is limited to the seller's knowledge, what inquiries is the seller required to conduct? Searches of public registries are not conclusive.

If there are known infringement claims, it is necessary to identify them in detail, so that the purchaser has full disclosure. The following warranty identifies the claim and describes the seller's position that the claim is without merit:

The seller has received a letter dated May 1, 1996 from Acme Co., claiming infringement of its Canadian patent number 1,234,567, by the manufacture and sale of widgets. The seller first sold widgets to the public on July 15, 1990, before the priority and application date for the Acme patent.

Definition of "Regulatory Approvals"

"Regulatory Approvals" means all approvals licenses and permits (whether sought or obtained) to make, use, market or sell the product in the territory or to import or export the products to or from the territory.

Schedule X contains a true and complete description of all the Regulatory Approvals required for the conduct of the business.

"Regulatory Approvals" means the applications, approvals, licenses and permits described in Schedule X.

Schedule X contains a true and complete description of all the Regulatory Approvals currently held or applied for by the seller. The seller is not aware of any other Regulatory Approvals required for the conduct of the business.

A broad definition of "regulatory approvals" will ensure that all related representations and warranties have a broad scope, as well.

The seller will seek to limit its representations and warranties to a defined list of regulatory approvals.

Ownership and Transfers

The seller is the sole owner of the Regulatory Approvals. The Regulatory Approvals are fully transferable to the buyer without restriction.

Except as set out in Schedule X, there are no restrictions on the transfer of the Regulatory Approvals to the buyer.

In many cases there will be restrictions on the transfer of licenses, permits and approvals. These clauses are usually just a way to bring those restrictions to light. Then the parties will have to deal with the more difficult issues or who obtains transfer approvals and what happens if they are not forthcoming.

Validity

The Regulatory Approvals comply with all applicable laws and guidelines of all regulatory authorities within the territory.

To the best of the seller's knowledge, after due inquiry, the Regulatory Approvals comply with all applicable laws and guidelines of the regulatory authorities within the territory.

The buyer is assuming a rather large risk, by accepting a statement qualified by the seller's knowledge, as it may be impossible to prove that knowledge later.

The buyer should avoid this qualification for warranties which relate to externalities, such as legal compliance. The business either complies or it doesn't. It does not really matter what the seller knows.

Sufficiency

The conduct of the business does not require any Regulatory Approvals other than those set out in Schedule X.

[Except as noted in Schedule X], the seller has not received notice from any regulatory authority in the territory that any Regulatory Approvals are deficient, inactive or are to be withdrawn or revoked, or that any Regulatory Approvals are needed which have not been sought.

It is impossible for the seller to know for certain that all regulatory approvals are in place. It can only warrant those it knows about.

The buyer will say that any risk should be borne by the seller.

In the end, it is simply a question of risk allocation and relative bargaining power.

Identification of Software Assets

Schedule X describes all of the computer programs ("software") currently used in the Business.

All copies of third-party software used in the business are properly licensed.

Schedule X describes all of the computer programs ("software") material to the conduct of the Business, as it is currently conducted, other than generally available personal computer software.

It may be impossible to list all of the software used by the business, especially personal computer software.

The buyer will want to know that all software used in the business is either owned by the seller or is properly licensed. The seller may have to conduct a software audit, to verify that all software is properly licensed and exclude any unlicensed software from the transaction.

Assignability

All of the software is either owned by the seller or is assignable to the buyer without requirement of any consent or the payment of any fees.

Except as noted in Schedule X, the listed software is either owned by the seller or is assignable to the buyer without requirement of any consent or the payment of any fees.

Most software cannot be assigned without prior written consent of the software owner. Many licensors also charge transfer fees. Depending on the nature of the business and the software being used, this may be a significant cost in the transaction.

Authorship

The software was written by employees of the seller and is an original work. The software does not use or copy the work of any other person. No royalty or other consideration is due to any other person arising out of the creation, copying or distribution of the software.

Each person listed in Schedule X has executed an assignment of copyright and waiver of moral rights in favour of seller with respect to the software written by that person. No other person has asserted any claim of copyright or moral rights with respect to any portion of the software.

Software authorship is often difficult to trace (and is becoming more difficult with current computer programming techniques).

If the seller does not have complete records of authorship, the most it may be able to say is that no one else has asserted any competing claim of authorship.

Source Code

The Seller has not provided the source code for the Software to any other person, directly or indirectly, by license, transfer, sale, escrow or otherwise or permitted any other person to reverse engineer, disassemble or decompile the Software to create such source code.

Except as specified in Schedule X hereto, the Seller has not...[etc.]

Source code is protected as the crown jewel of any software developer.

The buyer wants to know who has had access to the source code and under what terms.

The seller must keep in mind that the source code, like any other trade secret, may unknowingly and inadvertently been disclosed. It must decide whether it will accept the risk of such disclosure. The risk is reduced, but not eliminated by listing in a schedule those known to have had access.

Infringement

Neither the software, nor its use, copying or publication infringes any Intellectual Property Rights or contractual rights or obligations, domestic or foreign, of any person.

The seller has not received any notice, claim or threat of any claim that the use, copying or publication of the software infringes the intellectual property rights of any person.

The buyer seeks an absolute warranty, and expects the seller to accept the risk of unknown claims.

The seller wishes to limit the warranty to claims of which it has actual notice; the buyer will bear the risk of claims which arise after closing.

Export controls

Neither the Software, nor any part thereof, is subject to export or import restrictions in the U.S., Canada, or [other].

Schedule X lists all of the import and export permits or approvals obtained by the seller with respect to the software. Seller has no notice that any other permits or approvals are required for the conduct of the business as it is currently conducted.

Many software products are subject to import and export restrictions. In particular, any software which includes commercial or military grade encryption, is subject to United States export controls. This is true, even if the software is being exported for personal use (for example, security software used on a laptop computer).

Viruses

The software does not contain any viruses.

The Software does not contain any undocumented functions or features, including without limitation any timer, counter or other disabling code that would cause any part of it to be erased or otherwise made incapable of performing in accordance with its documentation or would prevent or prohibit the use thereof by the Buyer.

To the best of the Seller's knowledge, information and belief after due inspection, the software does not contain any viruses.

The seller has no actual notice of any material error or defect in the software, other than those which have been documented by the seller and which have been corrected in the most current release of the software.

The buyer seeks assurance that the software does not contain any unknown code, especially code which would interfere with its future operation.

The buyer may also ask for a warranty that the software is error free -- but it will never get it. All software contains bugs. However, the seller may warrant that it has documented and corrected reported errors.

Warranties regarding viruses are generally limited to the seller's knowledge. New viruses appear all the time and may go undetected for some time. Warranting "due inspection" or "best efforts" to detect and remove warranties may pose a significant risk, because the standard of care changes as new virus scanning processes emerge.