As technology fuels the growth of new sports-related products and ideas, the need for knowledge about intellectual property abounds. The following is a guest post produced by Aaron L. Parker and Daniel G. Chung of Finnegan LLP, a leading intellectual property law firm, for the benefit of SportTechie readers who are looking to acquire assets from another company or launch their own product ideas in the sports tech space.
Innovation and cutting-edge technology drive much of the sports and fitness industry. A current example is the tremendous growth experienced by the fitness and athletic performance tracker market. As a result, sports and fitness companies may consider acquiring technologies or intellectual property (IP) to keep pace with thriving product and service offerings within the industry or to advance other business goals.
Under Armour’s acquisition of MapMyFitness, MyFitnessPal, and Endomondo and Adidas’ acquisition of Runtastic, are some examples. On the other hand, sports and fitness companies may consider selling technologies or IP to advance business goals. Adidas’ plan to sell parts of its golf division, including the TaylorMade, Adams, and Ashworth brands, is an example of such a potential transaction. The complex nature of the assets, however, raises a number of critical IP concerns companies should investigate and evaluate when executing these transactions. We highlight and address some of those concerns that are specific to the sports and fitness industry.
One of the most important issues a company should consider is how the acquisition will advance its business goals. Technology and IP transactions serve many business purposes. For example, companies may purchase IP, such as patents, as a monetization or investment opportunity. Companies may generate licensing revenue from the IP or later sell the IP after its market value has increased. Technology and IP purchases may also provide growth opportunities for companies seeking to enter a burgeoning space or to boost their presence in an established market.
On the other side of the spectrum, companies may purchase IP for defensive or protective measures. For example, a company may be embroiled in a patent infringement suit against a competitor and may acquire patents or other IP to countersue, fight back, or gain leverage. Companies may also procure IP to strengthen their bargaining position in future negotiations on IP agreements or to resolve disputes. Whatever the technology or IP opportunities may be, it is important that they align with the ultimate business goals of the company. Identifying these needs and goals impacts the strategies for approaching and executing a potential transaction, including its scope, timing, targets, and valuation.
Key preliminary steps for any IP or technology acquisition include selecting the relevant technical area, evaluating the competitive landscape, and identifying acquisition targets. Selecting the relevant technical area or target technology is vital and will shape the entire IP transaction. After selecting a technical area of interest, a company can evaluate the competitive landscape and identify acquisition targets through a variety of overlapping techniques. For example, searching publicly-accessible databases, like that of the U.S. Patent and Trademark Office (USPTO), for potential IP targets within a technical area may help identify competitors and key players in the market. The search may encompass certain technical keywords, technical classes, or targeted entities. After identifying competitors and key players in the market, monitoring their IP activities, such as patent application filings and portfolio developments at the USPTO, will provide additional information about the scope of a potential target’s IP portfolio, and ultimately the relative strength of the target.
This evaluation of the competitive landscape is important for identifying and assessing the opportunities and risks associated with the IP or technology acquisition. For example, a company may determine what current and future products and services the targeted IP or technology encompasses, who the consumers are for those products and services, and who the competitors are for those consumers. Other sources for discovering acquisition targets and evaluating the competitive landscape in a particular technical area include technology brokers or IP sales and auctions.
Below is an example of this landscaping analysis in the sports and fitness industry. The first graph identifies the volume of U.S. patents and patent application publications in certain USPTO technology classes related to the sports and fitness industry. For example, the Fitness Tracking category covers technology classes related to diagnostic testing, body-contacting electrodes, and wearables for the electrodes. The Exercise Device category covers technology classes related to exercise equipment like treadmills and trampolines. This paints a picture of how crowded particular markets within the sports and fitness industry are in terms of IP. 
The second graph below charts the patent holders in a particular sports and fitness market based on the related USPTO technology classes. In this example, the graph organizes U.S. patent assignee data from USPTO technology classes covering baseball bat technology. This helps identify the key patent players and potential targets in that market.
The third graph below charts when U.S. patents and patent applications were filed for a particular sports and fitness market based on the related USPTO technology classes. The exemplary graph identifies filings by year for those U.S. patents and published applications in USPTO technology classes covering baseball bat technology. To give a more accurate illustration of the trend, the graph omits data from 2014-2016, as many filings from that period may not have been published or issued as patents yet. This helps identify whether technology in that particular market has become stale or is expanding. 
Once a company targets a potential IP or technology acquisition, it is crucial that the company conduct due diligence on the IP or technology to identify and evaluate any legal and business issues associated with the asset. The outcome of the due diligence investigation should ultimately reveal whether the transaction is worthwhile in advancing the company’s business goals.
What is the scope of protection?
For an IP acquisition, one area a company should assess is the scope of protection covered by the targeted asset. The subject matter and breadth of protection may vary with the different types of IP available for acquisition. Patents, for example, provide an exclusive right to make, use, sell, offer for sale, or import (1) apparatuses, such as sports equipment, (2) methods, such as processes for manufacturing sports equipment, and (3) designs, such as apparel and footwear. Trade secrets, on the other hand, encompass any information that derives economic value from not being generally known, and can be useful in protecting innovations that are not easily reverse engineered, such as product designs and manufacturing processes. Trade secrets may also include proprietary business information, including internal marketing data, methods of calculating costs and pricing, and customer and supplier lists.
Who or what are the potential targets?
An acquiring company should consider selectively targeting diverse forms of IP to meet its business needs. In some scenarios, the company may consider whether the scope of the IP, such as patents, covers specifically targeted products and/or is broad enough to keep competitors out of the technical space. An acquiring company should also consider the entities impacted by the IP being acquired. For example, an acquiring company should assess whether these entities (e.g., competitors) are or will directly infringe a patented product or indirectly infringe by inducing or contributing to an act of infringement by others (e.g., customers). An acquiring company should also assess the current and future trends of the market to determine the likelihood potential infringers will practice the technologies covered by the acquired IP and the availability of options for those potential infringers to design around the protected technologies, thereby avoiding infringement.
Is the IP valid and enforceable?
Another set of considerations involves the validity and enforceability of the targeted IP. While the IP may have broad coverage and protection, a closer examination may reveal that it does not meet certain legal requirements. In the patent context, an acquiring company should evaluate whether the patent is novel and nonobvious over prior art and the likelihood that the patent can withstand an invalidity challenge on that basis. An acquiring company should also consider whether the patent covers unpatentable subject matter. For example, a patent covering a method of tracking physiological functions may, under certain conditions, be deemed abstract and ineligible for patent protection, despite the fact that the USPTO granted the patent.
An acquiring company should further confirm that the patent’s term has not, or will not soon, expire and that all requisite government fees have been paid. Other enforcement issues should be examined for different forms of IP. In a trade secret acquisition, for instance, a company should investigate whether adequate care was taken to maintain the secrecy of the confidential information, including assessing internal trade secret practices and procedures of the company owning the IP, as well as non-disclosure agreements and security systems.
Are there any other issues with the IP?
Other considerations for an IP acquisition include ownership issues. An acquiring company should verify that the inventorship for a targeted patent is accurate, and that all rights have been transferred to the selling party. The acquiring company should also identify and verify any encumbrances or licenses and their effect on the scope of rights to be acquired.
What are the IP risks of a technology acquisition and how can they be averted?
For a technology acquisition, an acquiring company’s primary IP considerations should focus on a freedom-to-operate analysis, including identifying and navigating potential infringement risks. This freedom-to-operate analysis involves first collecting and evaluating active patents that may read on the targeted technology. Doing so reveals the level of risk (e.g., many patents with broad and diverse scope of protection versus few patents with narrow scope) and the players (e.g., patent owner is a fierce or litigious competitor in the market versus a non-player) associated with the technology acquisition.
After an acquiring company identifies those patents, it may evaluate strategies to avert those risks. For example, implementing minor design changes to the targeted technology to avoid the infringement risks may be possible or challenging the validity of the identified patents through the courts or the USPTO may be a strong option. Another option may be for the acquiring company to seek a license from the patent holder. Alternatively, the acquiring company may decide to do nothing after assessing the risks, depending on certain circumstances, such as if the patent in question will soon expire.
Does the potential transaction still advance business goals?
After completing a full and accurate due diligence investigation of a targeted IP or technology acquisition, an acquiring company should revisit its business goals and weigh the strength of the acquisition in advancing those goals versus the risks and issues captured by the investigation. As part of that evaluation, the acquiring company may consider the availability of corrective actions and strategies to protect its interests.
Depending on the circumstances, some patent issues, for example, may be fixed. These include incorrect inventorship, unpaid fees, and claim scope (through reissue, reexamination, and/or continuation applications, if available). The acquiring company may also leverage the issues and risks during negotiations, including, for example, modifying the deal with warranties and representations to account for unknown or missing information associated with validity, enforcement, or infringement risks.
IP and technology acquisitions may provide significant value to companies within the sports and fitness industry. And the value of each asset and transaction will vary depending on the business goals of a company, whether they be exploiting growth opportunities or bolstering defensive measures. These asset acquisitions require careful consideration of the IP-related opportunities and risks to enable a company to make informed business decisions.