Case study June 20, 2022

Transaction liability claims case study: Patent predicament in M&A

A newly acquired tech start-up faces patent litigation

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A management team based in Silicon Valley recently sold their technology start-up for $10M to a larger company interested in branching into wearable tech. Twelve months after the acquisition, the management team - who then moved on to a new project - were notified there had been a significant patent litigation regarding the proprietary software involved with the wearable technology.

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The management team made clear and comprehensive representations regarding intellectual property. These included representations that there had been no notifications regarding patent infringement claims. However, unknown to the management team, the legal department had received two emails from a company based in Japan eighteen months prior to the acquisition. These emails had not been identified as legitimate and were promptly discarded without notification to the management team.

After the acquisition, the buyer of the business received further and more comprehensive contact from the Japanese company which resulted in patent litigation. The litigation from the Japanese company was not successful but the buyer incurred over $200k in defence costs.

Luckily, the management team purchased CFC’s transaction liability private enterprise (TLPE) policy, which paid the full sum of defence costs. Without TLPE, the management team would not have had access to CFC’s award-winning in-house claims team and would have spent a considerable amount of time and money defending the claim against their buyer.

TLPE allowed the management team to recover from a moment of crisis without having to pay out  a significant portion of their sale proceeds to litigation. Similarly, by purchasing TLPE, SME sellers can now exit their business and move on to their next venture with complete peace of mind.

If you have any questions regarding M&A insurance for small business sellers, get in touch at tlpe@cfcunderwriting.com.

*The companies and circumstances in this case study are fictional, but the scenarios are realistic and reasonable based on our experience.

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