M&A Intellectual Property Assessment: Is Fabrication of a Product Innovation, Replication, Emulation, Enhancement, or Duplication?

Aug 6, 2024

Mergers & Acquisitions transaction facilitation in the manufacturing sector of the economy has been a foundational component of the representation services provided by IBA in the Pacific Northwest since 1975 and one of my personal areas of professional focus for over thirty years.  One element associated with due diligence, negotiation, and legal documentation of manufacturing company sales that has always fascinated me and required a high level of knowledge & skill to facilitate successfully is the element related to the intellectual property associated with the creation of the products and processes necessary to fabricate them at scale.

The scenario where this becomes interesting from a M&A perspective is the assessment of the product to determine if it is in violation of any intellectual property protection laws, so the risks associated with continued operation of a business model after a company sale can be assessed from a risk/reward perspective by the buyer.  Nike recently brought issues related to the ability to protect intellectual property owned by a United States manufacturing company into the public domain when it filed a lawsuit against Dominic Ciambrone, known as the Shoe Surgeon.  Nike is attempting to through the courts help clarify when a business is enhancing a product versus when it is knocking off proprietary designs.  The following articles provide some background information on the lawsuit (https://www.wsj.com/business/retail/nike-paid-him-to-make-gold-dipped-sneakers-for-lebron-now-it-is-suing-him-6ffec7e1, https://news.bloomberglaw.com/ip-law/nike-fires-warning-shot-to-sneaker-artists-with-trademark-suit, and https://www.bizjournals.com/portland/news/2024/07/15/nike-designer-sneaker-custom-trademark-infringemen.html).

It has been my experience that company manufactured products can be categorized into one of five groups:  Innovation, Replication, Emulation, Enhancement, and Duplication.

In the M&A world, the most valuable companies are the ones that created the products and have patent & trademark protection for the items.  These companies (Innovators), in theory, have a safe harbor to manufacture, distribute, and sell their products without competition.  A secondary group in this category are companies that have proprietary designs and processes.  It is sometimes prudent to stay in this secondary category as filing for intellectual property protection domestically and internationally can result in public disclosure of information that can be used by competitors to create variations of products that cannot be prevented.

A collaborative partner in manufacturing to the innovators are the replicators.  These manufacturers take someone else’s designs and fabricate the products to specifications within defined tolerances.  In IBA’s world being corporate based in the Seattle metropolitan area, an excellent example of replicators are the CNC machine operations that manufacture component parts for Boeing locally.  IBA has successfully sold aerospace component manufacturers that have long profitable histories producing parts used in private, commercial, and military aircraft.  This space can provide buyers with quality companies having reoccurring revenue streams from long term committed customers.  Sellers often get premium values for these businesses in the marketplace.

The third group of manufacturing companies are the emulators.  These companies identify a market space with potential, take someone else’s product line, and then manufacture a legally acceptable variation of the product.  Consumable product manufacturers are a good example of a space where this is common and acceptable as a form of competitive business.  How many variations of condiments, alcoholic beverages, or baked goods exist?  No one has the exclusive rights to manufacture and sell mustard, wine, or chocolate chip cookies.  Many manufacturers can thrive in this category of businesses. They simply need to manufacture a product people want to purchase.  A walk through any grocery store can confirm this truism.

The fourth type of manufacturing companies are the enhancers.  This is the group Dominic Ciambrone started in with Nike’s blessing, where he in fact made two custom shoes in celebration of the basketball career of LeBron James and was asked to do a workshop at Nike on enhancing their Air Jordan brand.  Other examples of enhancers are the enhancements done to Ford Mustangs by Steve Saleen (https://www.saleen.com/) and Carroll Shelby (https://performance.ford.com/enthusiasts/newsroom/2021/07/shelby-american-mustangs.html).  The Shelby variation of the Ford Mustang was eventually brought in house by the OEM.  It is important if this type of manufacturing is explored to have open & regular communication with the original equipment manufacturer, so the relationship can be maintained.  It is prudent, when possible, to have the relationship formally established in a legal contract.  This relationship like replication has the potential to form long term positive mutually beneficial relationships.

The final group of manufacturers is the duplicators.  These are the ones who cross the line from being permissible emulators or enhancers to being legally questionable “knock off” artists infringing on intellectual property rights.  In Nike’s lawsuit against Dominic Ciambrone the company released the following statement describing why they sued, “We are left with no choice but to seek a legal solution to address how the Shoe Surgeon is constructing counterfeit “Nike” footwear from scratch and selling it as officially branded merchandise”.  Duplicating popular products by recognized brands as a business model is not new.  Currently the designer handbag space has a serious counterfeit problem as highlighted in this recent news coverage (https://youtu.be/DqRvvHOy1Hk?si=co3EuwEKrHGEuwDR).  Just like with designer handbags bought on the street or online, Caveat Emptor “Buyer Beware”, if you are purchasing a company that manufactures products where they do not own the IP or have permission to replicate or enhance the item.

The intellectual property rights component associated with manufacturing products is just one of a long list of issues that need to be professionally addressed in a mergers & acquisitions transaction involving the purchase and sale of a manufacturing company.  It is always prudent to have an experienced, knowledgeable, highly skilled M&A intermediary to guide the process from valuation to closing.  If you are interested in selling a manufacturing company in Washington or Oregon, the members of IBA’s business brokerage team focused on serving that foundational component of the economy would welcome the opportunity to learn about your company, exit strategy objectives, and provide an overview of our client services.  All conversations with IBA are held in strict confidence.  100% of our fees are payable upon successful deal completion.

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, real estate, legal, accounting, banking, and wealth management communities on subjects relevant to the purchase & sale of privately held companies and family businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.