Getting what you pay for—and then some

More companies looking to keep pace with the fast-changing mobile market are busily buying up app developers. Google spent almost $1 billion in June to acquire traffic app developer Waze. Apptopia is a growing online marketplace for the buying and selling of rights to apps.

But companies should know that if they acquire an app developer, they may inherit all sorts of consumer data collected by its apps. That can lead to scrutiny from regulators and the media over how that data is used, says D. Reed Freeman Jr., a Morrison & Foerster partner who focuses on privacy and data security. How this data should be used and protected is a new area of law, and there are few statutes to go by, he says. So companies need to follow enforcement decisions by regulators, primarily the FTC, to get a sense of where enforcement is heading.

There have been few major enforcement actions taken so far against companies for improperly using consumer information, but there is reason to believe that this will change, Freeman says. In California, for example, websites that collect personal information from consumers are required to have a privacy policy, and the state AG has taken the position—through litigation—that the law applies to mobile apps. “It has surprised me that some apps we’ve looked at on behalf of clients have no privacy policy on their website or on the app,” Freeman says.

Technology is so sophisticated that it may not be immediately clear what data a startup company has collected or how the data is protected. Companies looking at app developers, therefore, need to collect as much information as possible about what data is collected, with whom it’s been shared, and how data is secured, Freeman says. The possibility of security breaches is very real and needs to be evaluated. The misuse or loss of consumer data will be sure to attract media attention.

“App companies often have products that rise and fall in popularity” says Eric McCrath, a Morrison & Foerster partner who advises buyers and sellers on M&A. It might be that the primary objective of acquiring an app company is less about purchasing a specific app that may be waning in popularity and more about the prospects that the company’s employees will offer in finding continuing success in developing future app hits. This often makes it critical to include incentive arrangements for the employees and making a portion of the proceeds of a sale going to employees contingent upon continued employment.