Court Finds No De Facto Merger in Purchase of Bankrupt’s Intangibles-IP



Buyers of manufacturing businesses must always assess product liability risks. Even when buying the assets of the business as opposed to the stock (or LLC membership interests).

The deal

Here, the manufacturing company in this case made lathes. It eventually filed for bankruptcy and its assets were sold to another company.

That company sold the manufacturer’s intangible assets (pricing and customer information as well as intellectual property such as know-how) to the buyer.

The buyer builds machines for a variety of industrial applications; and manufactures and services parts for machines made by other companies, including machines originally made by the manufacturer.

The lawsuit

The manufacturer had sold a lathe to a customer before the bankruptcy. An employee of the customer was injured when a piece of metal was released from a lathe manufactured and designed by the manufacturer.

The injured employee could not find the manufacturer and sued the buyer which ended up in an Oklahoma federal district court; claiming that the buyer was a successor to the manufacturer under Ohio’s de facto merger successor liability doctrine.

The plaintiff argued that it had acquired not only the manufacturer’s intangible assets (including its intellectual property) but also on its website held itself out to be the manufacture using such words as “we are” the manufacturer and “as” the manufacturer. The buyer responded that it made such assertions for many legacy companies, not just the manufacturer; but that it does not claim actual ownership of these legacy companies.

The court rejected the de facto merger claim, because the buyer did not buy the manufacturer’s “brick and mortar office, as well as its inventory.”

This case is referred to as Sowell v. Bourn & Koch, Inc., Case No. 18-CV-0320-CVE-FHM, United States District Court, N.D. Oklahoma (August 15, 2019)  


A de facto merger is a stretch in any case where there is no common ownership between the seller and the buyer. And even the product line exception to the successor liability doctrine requires that the buyer acquire substantially all of the seller’s assets; which apparently did not happen in this case.

By John McCauley: I help companies and their lawyers minimize legal risk associated with small U.S. business mergers and acquisitions (transaction value less than $50 million).



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