Knowing your own Intellectual Property - Intellectual Property Due Diligence in the Sale of Businesses

Intellectual property rights must be identified in order to be exploited. They must also be owned to add value to the bottom line of a business. In a recent survey by the UK Patent Office, 70% of UK businesses are unaware that they may not actually own the intellectual property that they use in their business.

What is Due Diligence

Due diligence is a reference to the process to ensure that intellectual property rights exist and title is owned by a person wishing to sell or otherwise deal with intellectual property.

In order to deal with property, a vendor must own the rights to be transferred.

Registered Intellectual Property Rights

Maintenance of registered intellectual property requires the payment of renewal fees in the jurisdictions in which registration is maintained. The exercise is geared to revealing defects in title and the seriousness of the defect. The process commences with the identification of the intellectual property that the purchaser wishes to acquire, followed by an investigation into the documents that affect the vendor’s ability to convey good title to the purchaser. The final aspect of the exercise is to assess the relative strength of the intellectual property rights that vest in the goods or service to be conveyed.

The End Game

The ultimate objective therefore is to ensure that what a vendor offers for sale may actually at law be transferred to the purchaser, and ascertaining what rights the purchaser will actually receive. The exercise may reveal for instance that renewal fees have not been paid on a trade mark, which would have the effect that the trade has been allowed to lapse, and therefore no longer in force.

The precursor to receiving ownership is the existence of ownership of the rights and secondly whether good title is held by the vendor.

Patents and Confidential Information

Suppose a process that has been patented also includes elements of confidential information. A transfer of patent rights and confidential information is quite different to a straight purchase of patent rights. This because different intellectual property rights and know-how owe their existence to different criterion, and licensing others to use or otherwise exploit the different types of intellectual property must cater for those idiosyncrasies. We describe the differences between know-how and different areas of intellectual property here. The confidentiality in know-how must be maintained in order to assert rights over it. If confidentiality has been lost, a licensee has no commercial reason to continue licensing the know-how as it forms part of the public domain, unless support services are vital for its exploitation. Suppose that during a joint venture intellectual property is not managed. More than one party may have rights to particular information which is confidential. However if one party discloses the information and confidentiality is lost, it is lost for both parties and the world at large is able to make use of the previously confidential information. Joint ownership of copyright may also arises in such circumstances and present difficulties at later date, which may cause an intended dealing with the property to be frustrated.

In addition, t he due diligence exercise also assists businesses identify which intellectual property rights may be infringed and the prospects of recovery in the event that it is infringed. It may be that the proposed model of exploitation does not leave the rights owner in a position to make it commercial viable to pursue and enforce intellectual property rights due to a prospectively meagre damages claim. In such circumstances, the exploitation model could be rethought.

Registered Intellectual Property

A search of public registers is the starting point for ascertaining whether registered rights exist in respect of patents, trade marks and designs. Although a Register does not exist in the UK for copyright, the US has had a register in place for many years for copyright owners to obtain some assurance that their rights are known to the public. Changes of ownership may take place since the registration of the intellectual property. Third party interests may exist over the registered rights, and not appear on the register. When unexpected results are received from such searches, in order to establish the current owner, documents will need to be obtained to show the passage of title through legal entities to the expected owner, or otherwise. The inability to show that the current owner is not the desired party may lead to the purchaser to withdraw from the transaction; and rightly so, as the person purporting to be in a position to transfer ownership of expected assets is not in a position to do so. It should be noted that the existence of the Register creates a presumption that the party on the register is the owner of the intellectual property rights. If a party enters into a transaction and subsequently learns that the person listed as the owner on the Register is not in fact the true owner, provided there is no notice of the intervening interest, the person relying on the entry on the Register may assert a superior title to the intervening interest: provided they did not have notice of it at the time of the transaction. The Patents Registry, Designs Registry and Trade Marks Registry at the Patent Office has more information on registered intellectual property rights in the UK.

Role of Warranties and Indemnities

In many contracts involving the licensing and the transfer of ownership of intellectual property rights, warranties and indemnities are incorporated into contracts to gear some comfort to purchasers. The purpose of these clauses is to provide the purchaser with a legal right to commence proceedings against the licensor or vendor if it eventuates that the licensor or vendor did not have sufficient rights to license or transfer ownership. In the case of licensing, warranties will be sought to guarantee the provision of the rights to be licensed from the licensor for the duration of the contract. An application of the benefit of such clauses takes place when the licensor relies on the provision of the rights from a third party - what may be referred to as a ‘head licensor’.

The required rights may be in place at the outset of the licence, however if the head licensor revokes the rights to the licensor, the licensee themselves loses the right to exploit the licensed product, service or know-how, and may sue their licensor for breach of contract.

These warranties only provide a limited amount of security, as legal proceedings may need to be commenced in order to obtain compensation for the breach of contract. Warranties and indemnities are only as good as business giving them. In the event that party giving the warranty is impecunious, unless resort may be had to an insurer, the warranty or indemnity has no value or benefit.

This stands in contrast to conducting an exercise in due diligence to ensure that the rights are in place prior to the licence being entered into, that allows informed decision-making on the existence of rights and the risks of entering into the transaction in the first instance.

Unregistered Rights

Ascertaining the true owner of unregistered rights requires consideration of the history of the creation of the rights, to ensure that when the intellectual property came into existence the default rules of ownership were in place or, if displaced by contract or some other intervening right, whether that displacement or intervening right was sufficient to deprive the asserted owner of receiving either any title whatsoever, to ascertain the extent of doubt has been introduced.

For instance in a software products, copyright may vest in software in a number of forms. The code itself will be protected as a literary work, images as artistic works, moving scenes potentially as films. The origin of the source code is vital to ownership. If source code has seen its origins as open source, copyright is not owned in the particular code, because it is not the original works of the purported copyright owner. This may not sabotage an assignment or licensing arrangement. It may affect price depending on the extent of the open source in the project.

Furthermore if consultant have been engaged to produce software or any other copyright work, and the ownership of copyright has not been in the consultancy agreement, it is likely to be the case that the consultant owns the work produced, as opposed to the party engaging them to perform the work.

What to Do

The due diligence exercise should take prior to purchase of intellectual property, be it copyright, patentee rights, design rights and know-how to ensure that the intellectual property rights exist and to ensure that the person who claims to own the relevant rights actually does. Ideally the due diligence audit will remove any doubt as to ownership. Provided the intellectual property has been managed competently during its life, there is no reason why this cannot be the case. When international rights enter the fold, different systems of law will govern the creation and ownership of rights and transfers of rights since their creation. It is part of managing risk to do so.

Failing to properly manage intellectual property may lead to unexpected losses of business value and transactions, as a assumed state of affairs may not actually be the case.