Acqui-hires Take Hold in Valley

, The Recorder

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Craig Jacoby, Cooley Godward partner..Photo by Jason Doiy.6-22-12.058-2012...
Craig Jacoby, Cooley Godward partner..Photo by Jason Doiy.6-22-12.058-2012...

"We've been acquired! And by the way—we're shutting down."

It's the kind of announcement that seems ubiquitous in Silicon Valley.

The so-called acqui-hire—a talent buy, dressed up as an acquisition—has become the transaction du jour since it first emerged at the end of the downturn.

At the time, some entrepreneurs and investors were eager for any deal, even one that offered little financial gain, and established companies were hungry for experienced engineers.

But as the economy rebounds, the practice seems to be sticking around—a by-product of the Valley's glut of start-ups and shortage of technical talent, according to attorneys who advise such businesses. And though the transactions are now commonplace, the legal underpinnings of acqui-hires are still being hashed out.

Critics of the approach contend that it essentially allows an acquirer to take on the assets of a company, like its IP and employees, without incurring its liabilities. Traditionally, the only way for an acquirer to accomplish that would be to scoop a target out of bankruptcy.

Legal questions around acqui-hires came up recently in a Northern District privacy case. Plaintiffs in In Re: Apple iDevice Address Book Litigation, 13-453, accuse a stable of tech companies of improperly collecting user data. 

One issue in the case has been a 2011 transaction between Facebook Inc. and Gowalla, a location-based ap developer. Facebook's lawyers call the deal an "unremarkable" transaction which involved hiring some employees and transferring IP rights. They've moved to dismiss the case on the grounds that Facebook isn't legally a "successor" to Gowalla.

But plaintiffs attorney David Given of Phillips, Erlewine & Given calls it a "disguised merger aimed at stripping Gowalla of its assets thereby avoiding the consequences of a merger … and frustrating the ability of creditors like our plaintiffs and the putative class from recovering for the alleged wrong associated with invading their privacy and taking their contact data without the requisite permission."

The litigation is unlikely to disrupt acqui-hiring. However, it does highlight the legal gray area that may surround the practice.

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