On this episode of the R&G Tech Studio, intellectual property transactions and technology counsel Emily Karlberg sits down with technology, media & telecommunications co-lead Andrew Thomases to discuss the critical role intellectual property plays in carve-out transactions.
Transcript:
Andrew Thomases: Hello, and welcome to the latest episode of the R&G Tech Studio podcast. I'm Andrew Thomases, one of the co-chairs of the technology, media & telecom industry group here at Ropes & Gray. Today, we have with us Emily Karlberg who's counsel in Ropes & Gray's intellectual property transaction specialty group, and she's resident in our San Francisco and Silicon Valley offices. Welcome, Emily—thanks for joining us today. We'd love to have you tell a little bit about your practice to our listeners: What areas do you focus on?
Emily Karlberg: As you mentioned, I am the intellectual property transactions sub-group, which sits underneath our strategic transactions practice group. In my career, I have really advised clients in every different stage of their life cycle from very early-stage start-ups with no funding to companies who are very mature and doing acquisitions or sales. But at this current point, I focus primarily on representing private equity investors and strategic inquirers in structuring and negotiating technology acquisitions and complex carve-outs and divestiture transactions. So, when a business wants to break off a piece of its business lines, product lines, or assets, and sell them, I help with structuring that.
Andrew Thomases: How does intellectual property play in those kinds of transactions, and what services do you offer the clients with respect to intellectual property?
Emily Karlberg: Intellectual property can be really critical in those types of carve-out transactions. A lot of times, companies have what we like to call "commingled assets," so they're using their IP trademarks, for example, across all their businesses. So, my primary function is to determine what assets are being sold, what assets are being retained, and how we're going to split those up.
Andrew Thomases: What are some examples of the intellectual property that might be split up or acquired in such a transaction?
Emily Karlberg: It really depends on how the transaction is being structured. If you're selling a full business line or if a company is selling off a complete subsidiary of itself—often, companies have IP holding companies that house all of their IP assets—you have to look at what IP is going to be sold, what's going to be retained, and if there's licenses between the acquirer and the seller that need to be put into place. There are all sorts of things. We recently have been doing a lot of software divestitures out on the West Coast, where a company will sell off part of its software. Often, it can get a little hairy when you're doing what's called a "software fork" where you're separating the software into basically two copies of itself—a retained entity will keep using the software, and an acquiring entity will start using the software, so that division of assets is particularly interesting.
Andrew Thomases: Great. What kind of industries do you work with mostly or frequently?
Emily Karlberg: Mostly clients within some realm of the tech industries. Out on the West Coast, tech is really big here, so I've done quite a few educational technology companies and some FinTech companies. We're seeing a lot of people in the software and AI space recently selling and doing acquisitions.
Andrew Thomases: Now, you've mentioned your practice on the West Coast, but you've also practiced on the East Coast, isn't that right?
Emily Karlberg: Yes, that's right. I've gone back and forth three or four times now. I started my career in New York and then came out to the West Coast. My family is from out here, so thought that would be a nice place to land, but wound up heading back East for several years. And then, right before the pandemic, we moved back to the East Bay.
Andrew Thomases: Great. So, are there any differences or similarities in the tech IP transaction space from the East Coast to the West Coast?
Emily Karlberg: When I was working on the East Coast, tech was in its heyday out there, which was really interesting because the East Coast is known for having more old money—they have a lot of financial institutions and a lot of banks. Those old money institutions were really interested in new emerging technologies as opposed to the West Coast, which Silicon Valley has seen a tech boom for some time now. So, it was a new frontier on the East Coast for a while where large banks were investing in new companies and new technologies. And then, out on the West Coast, we have all the venture capital firms who have been doing this for some time and who are a little bit more mature in their investing strategies.
Andrew Thomases: When you're working with a client on these types of transactions, who primarily from the client do you work with, or from either the acquirer or the target?
Emily Karlberg: Yes, that's a great question. I do a lot of work with the operations team and the legal counsels to integrate different products, especially for our acquirers when they're buying important technology products or software. We work pretty closely with the operations folks to determine how that technology can be incorporated into a buyer's property that they already own and function, or if it needs to be phased out, how that's going to work. I also work quite closely with legal counsel at both acquirers and targets just in terms of structuring and making sure that proper ownership is transferred, or intellectual property rights don't have any encumbrances on them. We like to check all of the boxes in our diligence, and you necessarily need legal counsel to help you do that.
Andrew Thomases: Now, I know you've also done work with open-source software. Can you explain a little bit more about what that is and the work that you do with clients with open source?
Emily Karlberg: Open-source software is a software component that is freely licensed, that virtually any software developer is using in developing their operating systems or proprietary platforms. Now, historically, people felt that there was very little risk of being in compliance with open-source licenses. There's a lot of licenses that we call "permissive licenses—they're easy to operate under, they don't have very strict terms, and they were generally unenforced. However, now, there are some entities that have been beginning to look more closely at how companies are utilizing open source. There have been a few new litigation matters that have been filed that are beginning to open the door to the potential for further enforcement of more viral copyleft licenses that do have restrictions that often times software developers are not paying attention to. So, as an advisor for some of our acquirers, we've seen a real uptick in the diligence that acquirers want to do on a target company's use of open source, including things like full code scans to ensure that the target is in complete compliance with all of its open-source licenses.
Andrew Thomases: I have a question which is: What is viral code or copyleft software?
Emily Karlberg: Viral software is open-source software subject to a license that may require a developer—if you incorporate the code into your own proprietary code that you're developing—to redistribute the full proprietary code to the public. So, there's a risk when you are using components that are licensed under viral or copyleft licenses that your entire code could be disseminated to the public as a requirement under the license.
Andrew Thomases: If you have a client who's an acquirer who wants to be sure that that code base is free and clear—you talked about a code scan—how does one do that?
Emily Karlberg: There are different ways. Often, companies that have a huge repository of code will hire out a third-party code scan provider, and then, attorneys who work on open-source issues frequently will have to review the code scan. It basically entails a company going through line-by-line of its code and identifying all of the components that they're incorporating into their software with the applicable licensing and how the code is being used. It's pretty comprehensive.
Andrew Thomases: Sounds like it. It must be hard to do when you have a tight deadline for a transaction to close.
Emily Karlberg: Yes, we actually recommend for companies that are thinking they might see a transaction on the horizon that they get out ahead of that and put together their code scan information at the outset, so they don't have to scramble when they're in the midst of a transaction.
Andrew Thomases: Now, I also know that you do some outsourcing and offshoring IP work. Can you tell us a little bit more about that?
Emily Karlberg: We're seeing a lot of software companies recently offshoring some of their development work, which can be very cost effective for a lot of reasons, but there are also a number of risks when a company has all of their development outside of the U.S. or wherever they're selling their products. In a recent case with a large digital health software provider, they had offshored all of their development to an Indian subsidiary where the Indian entity and employees were a pretty critical mass of software developers. The problem was that those software developers were assigning the rights, ownership, and the IP to the Indian subsidiary, but then, the Indian subsidiary held all the IP, and the U.S. subsidiary was entering into contracts with customers. So, we had this gap in the chain of title from the Indian subsidiary to the U.S. subsidiary that we had to remediate through putting in place an inter-company license where the Indian subsidiary would transfer the IP over to the U.S. subsidiary so it could use it. The problem we ran into there was that the inter-company license triggered some requirements through the Indian tax authorities and a product development tax that wound up being a very significant amount. So, companies really do need to be thoughtful and careful with where they are offshoring their IP development, because in the short-term, it may seem like a cost-effective idea to move development outside of the United States, but there can be serious implications, both in tax and other fees, that you might be incurring from various ex-U.S. jurisdictions.
Andrew Thomases: That sounds like a great lesson learned, and it brings up a question: Do you do some counseling rather than just transactions on the IP side?
Emily Karlberg: Yes, definitely. I work quite a bit on licensing transactions, IP advising, analysis of assets—all sorts of different things once a transaction is done or even before the transaction occurs.
Andrew Thomases: All right, now changing gears a little bit. I'm going to ask you to look into your crystal ball. What are some of the hot topics that are impacting your field as we speak?
Emily Karlberg: I think the biggest one that probably everybody can't go a day without seeing a new headline about is AI, and particularly how AI is being used in businesses. A lot of clients are coming to us for counseling on how they should put up any guardrails around the use of AI within their business, what they should be telling their employees to do, and whether they want to start onboarding certain AI products that might increase efficiencies in some aspects of their business. We've put together focus groups and we have a working group that is tracking all of these various developments, but unfortunately, I don't think anyone quite knows yet—we're going to have to wait and see how AI plays out. I think it's a really exciting time because there's a lot of opportunity with generative AI and AI being used to develop new data, but there are also a lot of risks. So, we're thinking through how to best comply with data privacy law in respect of using AI, how to just ensure that employees are properly trained and educated on the use of AI in the workplace, and how to evaluate whatever your AI product spits out.
Andrew Thomases: I know that the Ropes & Gray IP transactions team has worked on some AI policies for some of our clients. Is that right?
Emily Karlberg: Yes, we've worked on quite a few. But, again, I think they're a bit more restrictive than they might end up being at a future date. Right now, we're generally advising clients to wait and see, and to use AI as needed, but not to go too nuts with it.
Andrew Thomases: I know we continuously update our clients on evolving AI issues with client alerts and the like. Is that right?
Emily Karlberg: Yes, that's right. We're doing quite a few client alerts. We're trying to keep everyone apprised of any new updates, whether legal or new products on the market, and how those are being used.
Andrew Thomases: I want to step back a little bit and get to know you a little bit more as a person. I know you started out in education and worked for Teach For America. How did you go from that to being a lawyer?
Emily Karlberg: That's a great question. When I graduated from college, I got into the Teach For America program. I was a seventh grade English and language arts teacher at a school on the South Side of Chicago, which was a really fascinating experience. Obama was President, and he had appointed Arne Duncan—who was his buddy and the former head of the Chicago Public Schools—to be the Secretary of Education, so the Chicago area was really an interesting place to be an educator. My school, though, had a number of problems, and I wasn't set on being a teacher for the rest of my life, so I went to law school initially thinking I might get into education law, but really didn't like it. We took some tours to the juvenile detention center, and that really rubbed me the wrong way, so I did a big switch and moved into transactional law pretty quickly and have been here ever since.
Andrew Thomases: Great—I love hearing about the paths people have taken to where they currently are. Speaking of paths, from a former New Yorker who's now been in the Bay Area for 28 years, I certainly have my preference. But what is your preference—East Coast or West Coast?
Emily Karlberg: That's tough. I think I am a West Coaster. I was born in Oregon, so I know the West Coast a little bit better. But there are some things about New York, Boston, and the East Coast that I really miss—mostly things being available at any hour in New York City.
Andrew Thomases: We don't have that necessarily in the East Bay, right?
Emily Karlberg: No, not so much.
Andrew Thomases: I know that you are a bit of a basketball fan. What's your team?
Emily Karlberg: We live right up the street from St. Mary's College, and the head coach of St. Mary's actually lives a couple houses down from me, so we have become huge Gaels fans. I have three little boys and they are basketball obsessed. But I am never going to give up my love of the Portland Trail Blazers—I remember Clyde Drexler back in the day, so that's my team.
Andrew Thomases: How about sports you play or hobbies you do yourself?
Emily Karlberg: I am a former tennis player. I still like to get out on the court as often as I can, which is less frequent these days, but I also love watching. It's one of my goals to go to all four of the big USTA Tournaments. I've been to Wimbledon and the US Open, but I've never done Roland-Garros or the Australian, so hopefully soon.
Andrew Thomases: Now, if you had your dream vacation, where would it be?
Emily Karlberg: My husband is Swedish, so every summer, we jet off to Sweden for a couple weeks to get our fill. I think probably sitting on one of the islands outside of Stockholm in the summertime is really lovely.
Andrew Thomases: That sounds great. I've never been to Sweden, so I am very jealous. It's so great to hear more about your practice and your personal background. To all of our listeners, thanks for joining the discussion today. You can go to the Ropes & Gray website for more information about Emily and her practice. This podcast will be posted on the external Ropes & Gray website, but it will also be available where you normally get your podcasts, like Apple, Google, Spotify, and the like. Emily, thanks so much for joining me, and thanks to all of our listeners for listening.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
