In a recently filed lawsuit, a small California company called Olaplex alleges it is living every startup's worst nightmare. Olaplex says it revealed its intellectual property to an industry giant interested in acquiring it, but then talks fell through and the larger rival launched suspiciously similar products.
While it remains to be seen if Olaplex's claims have merit, intellectual property lawyers say the case highlights some of the risks associated with mergers and acquisitions.
Olaplex brought a patent infringement case on Nov. 22 against cosmetics giant L'Oréal USA Inc. Olaplex alleges that L'Oréal approached it in 2015 to discuss a possible acquisition. L'Oréal was given access to confidential information, including a then-unpublished patent application related to hair bleaching, the lawsuit says. But when the acquisition fell apart, L'Oréal "took and copied Olaplex's technology without authorization," according to the complaint Olaplex filed in U.S. District Court in Los Angeles.
The fact pattern is all-too-common, says Eliot Williams, a partner at Baker Botts. "It's not uncommon that when you have failed M&A activity, you end up in a dispute or a series of disputes," he says. "There is a very difficult dynamic, particularly for big public companies, because they have an obligation to shareholders to do due diligence and that may mean they need to put their best people on the due diligence, but then you later might face these IP infringement claims."
There are things in-house counsel can do, however, to put the company in the best position throughout the M&A process. For instance, before the deal is even underway, "you want to look at the target company to see if they are likely to sue," Williams says. "Some companies have a track record of being litigious in general and that would sort of be a red flag."
Proper nondisclosure agreements should also be in place at the outset of the deal, says Edward Black, a partner at Ropes & Gray. And there should be a staging of the disclosure, he adds, meaning certain information is discussed right away, some if given throughout the process and other information is only given at closing. This way, "you can avoid letting the crown jewels out the door until the last minute," he says.
During a M&A deal, in-house counsel should see themselves as the information police. They should dictate who sees confidential information and when, Black says. "This is a place where in-house counsel can really play a big role by making sure people understand the basic rules," he says. "If people know the rules, my experience is that they follow them."
And there are things that can be done throughout the deal that will help maximize the chances of winning a lawsuit if it comes to that, Williams says, such as identifying potentially problematic IP to get an opinion of counsel. This opinion, which can document the validity of the patents held by the company to be acquired as well as any infringement issues, can be helpful in defending a willful infringement violation, Williams explains.
Additionally, it should be provable that, if the decision is made not to pursue the merger or acquisition, the company can show a good reason for it, Williams says. "The best advice I can give to in-house counsel when they are considering these M&A deals is to be as above board and ethical as you can because if that deal falls apart, you might be hauled in front of a jury to explain your actions and you need to be prepared to do that."