Marriages of Convenience
Mergers and acquisitions can present a compelling, albeit ironic, solution to litigation.
September 22, 2009
Mergers aren't always borne out of goodwill. On occasion, new combinations will spring forth from two warring parties, as an acquisition or sale can sometimes present the easiest path to end litigation.
In the third week of August, for instance, Danaher Corp.’s Ormco unit acquired a 10% stake in Align Technology as part of a settlement to end a patent infringement lawsuit. The two sides, which had been fighting over orthodontic patents, also entered a seven-year collaboration agreement to create a product that pulls from each company’s technology. On top of everything else, Align also agreed to a $13 million cash payment. Align’s CEO, Thomas Prescott, in a statement following the settlement, said the company was “pleased” to resolve the litigation and begin the new relationship. One would assume he made the statement through clenched, Invasalign-straightened teeth.
Ropes & Gray partner Steven Wilcox, who founded the law firm's life sciences practice group, cites that idea of merger is often tossed around out of desperation in a lawsuit. He notes, however, that on the rare occasion a transaction will materialize. "It's much easier said than done," he describes.
With that said, there have been more than a few deals to come out of litigation in recent years. In mid-July, for instance, Nasdaq-listed AuthenTec acquired the assets of Atrua Technologies, a rival in the fingerprint sensor market. The deal added more than 30 issued and pending patents to AuthenTec's IP library, but more importantly, it ended a lawsuit between the two sides that had been ongoing for more than a year.
Last year saw Saint-Gobain acquire J&J Scientific Products, a deal that preceded the buyer’s decision to drop J&J from a lawsuit claiming patent infringement. The acquired assets were ultimately integrated into the fluid systems division of Saint-Gobain Performance Plastics. A few months later, in July, International Business Machines acquired Platform Solutions Inc. (PSI) in a deal that consolidated the mainframe market and put an end to litigation between the two.
The motivations can differ. In some cases, the deal is designed to end the litigation, whereas in others, the litigation may be initiated as a way to loosen up a target. In the case of AuthenTec, it would seem to be the former, as the company – in accounting for the acquisition – recorded almost half of the $4.9 million purchase price as a charge related to the dismissal of claims between the buyer and the target. Meanwhile, one source speculates that IBM’s lawsuit against Platform Solutions, filed in 2006, was levied as a way to wear down the venture capital-backed company ahead of a bid to buy the business.
In most cases, however, deals by way of settlements are usually designed to put to rest the litigation headaches. In one of the more celebrated transactions, Medtronic, Inc. paid $1.35 billion to acquire the intellectual property assets of Karlin Technology, the licensing firm of spine surgeon Dr. Gary Michelson. Published reports reveal that Michelson had spent more than $60 million in legal fees, while Medtronic had spent between $25 million and $30 million a year from the time the company initially sued Michelson, in 2001, to the acquisition/settlement in 2005.
Even as both sides may share a common interest, which is to cut legal costs, executing these types of deals is not easy. Ropes & Gray’s Wilcox, who worked on the Medtronic transaction, notes that emotions, generally, present the biggest obstacle. Unlike a typical merger or acquisition, these deals aren't grounded on the basis of trust.
"Sellers can't take anything at face value. Every change to the agreement, every concession, they’ll ask, 'So how are they trying to get us now?'" Wilcox says, adding, "You don't negotiate these agreements, you litigate them."
For this reason, many of these deals are scuttled before they ever get off of the ground. Precision-cutting tool manufacturer Flow International, for instance, had agreed to acquire rival OMAX after four and a half years of litigation, but abandoned the deal this past May. The company opted instead to pay OMAX the $35 million owed as part of patent litigation.
While the Flow International/OMAX deal never reached completion, the transaction, as it was originally conceived, still underscores the advantages of using M&A as an option in litigation. After baking in the price of the settlement, Flow would have been paying less than 1x trailing 12-month revenues.
It would have been a bargain by any standard. Of course, others would argue that forced marriages rarely work.
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