Morgan Lewis’ technology, outsourcing and business transactions team often advises on transactions in which some form of intellectual property is transferred from one party to another. This may be due to a corporate transaction, a cooperation or joint venture agreement, or any other form of commercial agreement.
In technology transactions, it is often software that is the subject of such transfers, this software being subject to various intellectual property rights, such as copyright or patents.
It is common for the transferring entity to provide warranties regarding the software to be transferred. These guarantees would generally include the following commitments:
- The assignor has the right to transfer the software.
- The software does not violate the rights (including intellectual property rights) of any third party.
- The software is free of charges (for example, securities, fees); In the UK, it is common to use the term “transfers with full title” to refer to the right of transfer and whether the software will be free of encumbrances.
- The software does not contain any open source software on a copyleft/restrictive basis.
- The software is free from hardware defects.
It is also common to see associated compensation to cover any losses suffered by the assignee as a result of third party claims arising out of or in connection with the software infringing third party rights.
On some occasions, the assignor may be unwilling, or unable, to provide sufficient warranties and indemnifications to provide the assignee with the protection it requires. This could be due to a number of reasons, such as inheritance issues, specific nuances of the agreement, or the relative bargaining power of the parties.
In such circumstances, the assignee will need to consider other options to mitigate the risks associated with taking possession of the software without such protections.
One way to mitigate risk is to perform due diligence on the software code. There are many providers of such services, which are becoming more and more popular as the number of software-related transactions increases.
These reviews can check the code for agreed upon potential issues, such as
- third-party components and associated dependencies;
- ·open source code used; And
- evaluate the quality of the code.
The purpose of these checks is to identify potential issues that might otherwise have been covered by certain warranties, so that the assignee can decide whether there are any significant issues. If significant problems arise, the assignee may consider lobbying again for appropriate guarantees and/or compensation or try to manage potential risks in another way, for example by changing advertisements.
There may also be other benefits to undertaking due diligence on software code (depending on the type of review undertaken), including
- assess any security issues;
- predict maintenance efforts; And
- understand the scalability of the software.
Of course, these code checks are not exclusive to situations where the assignor’s guarantees are limited or even non-existent, and assignees may choose to undertake them in addition to contractual protections. This is a smart move, especially for high-value transactions and complex software solutions.
Check but be careful
Software code checks can provide vital information to an assignee and mitigate some risks, but it is important to note that even the most thorough code checks cannot identify all potential problems and, in particular, it is difficult to identify infringement issues, for example in relation to confidential property rights of third parties.
This is why contractual protections should always be the preferred option and any revision of the code should be considered in light of their limitations.