Securing your IP Assets in a Business Transaction
As Covid19 has created business uncertainty, the M&A activity, in general, has slowed down but still there are companies/businesses that are tapping crisis opportunity to make strategic acquisitions. We outline a few commonly asked questions from IP perspective in a transaction involving transfer of IP assets.
- I am acquiring a business what are the IP issues I must consider?
Following are the issues you need to keep in mind vis-à-vis IP rights when acquiring a business:
- Identify or seek disclosure of all owned or licensed IP.
- Identify any gap/s which can make IP invalid/unenforceable especially with regard to validity and/or renewal of the IP. If it is not renewed, then assess what the is the grace period, if any, within which it can be renewed/restored. If not, whether you can file the application again. Are there any third party rights created in the interim period.
- Check upon the documentation as to the ownership of IP rights. In particular, you need to check if there is any registration certificate issued for the IP. If yes, then whether all the details regarding the ownership are correct. In case of patents, check if the rights have been assigned by all the Inventors. In case of multiple assignments, check whether the rights have been completely transferred to the party entering into agreement so as to ensure there is no dispute regarding the ownership.
- Check whether the party has already entered into any license / franchise agreements with a third entity and whether it would impact free use of the IP by you.
- Check,if any litigation have arisen involving the IP. If yes, then what is its status and where it stands. Also, assess if the IP case is strong enough to prosecute and its impact on the portfolio. e.g. In a patent matter, check if the the granted patent is undergoing any opposition/ revocation proceedings or if a trade mark is challenged in any court of law.
- As most of the IP rights, specifically, trademarks, patents and designs, are territorial and of limited duration, thus check whether the rights exist in the territory where you would be marketing the product. Also, check if the renewal fees has paid to keep the IP alive and maintained.
- Any legal notice received from third party for infringement of their rights in any IP and how the matter was resolved. This is important to assess if you are able to use the IP freely post acquisition of the business.
- If you are dealing with patent, check whether i) technology covered in the patent is in line to your business so that it is useful in advancing the business ii) how narrow or broad are the patent claims iii) strength of the patent i.e. check if there are any closer prior art documents through which the patent can be challenged.
- The business I have acquired owns Trademarks, Patents, Copyright, Designs, and Geographical Indications. What do I need to do in terms of recording myself as subsequent proprietor.
The best course of action to record yourself as the subsequent proprietor of any IP transferred is to have a separate deed of assignment drafted and executed for each IP involved – detailing out the terms of transfer including mentioning the monies that may have exchanged hands between the parties for this acquisition. Separate deeds are recommended as each of the Trademarks, Patents and Design office are separate. Thus it will be procedurally easier to have such deeds recorded with each of the concerned authority.
- The business I have acquired has put a lump sum value for the business. How do I segregate value for IP assets.
The valuation of IP is very subjective and depends upon various factors taking into account whether or not the intellectual property rights are well protected and in use. Outlined below are a few models that are accepted
Valuation based on cost/s spend in development
This evaluates the costs incurred by the business in the creation and development of their IPR while creating any product/prototype and will include expenses incurred on:
- Research and development
- Equipment and materials
- The cost/s of labor
- Testing the product/prototype
- Obtaining approval and certification from the relevant regulatory bodies
- Registration of the intellectual property with appropriate authority and seeking statutory protection of it
- Overheads with regards to utilities, accommodation and support staff
The concept behind the cost method of valuation is that a business purchaser would not have to incur these costs if they buy the IPR. Furthermore, in doing so they would not have to suffer the financial and/or operational consequences of failing to successfully develop their own IPR, or deal with the potential difficulties in protecting it if they did develop their own.
One of the downsides of this method of valuation is that potential future profits are not incorporated into the calculation – it is based solely on the costs incurred, which does not take account of possible future success in the marketplace.
Valuation based on economic benefit
This valuation is based on the economic benefit and/or income that intellectual property rights could generate in the future over the IP’s useful economic life and arrive at a figure. A prospective buyer can use this figure to help them make their purchase decision. Factors which may be taken into account include:
- State of the economy
- The extent of the IPR’s market
- The type of competition
- Costs such as registering and defending the intellectual property
A secondary form of the income/economic benefit method is relief from royalties, whereby a value can be assessed based on how much money in royalties the company would have to pay if they didn’t own their intellectual property assets outright.
Valuation based on Market use
This method uses a product’s performance in the market to arrive at a valuation. Transactions involving similar products are also used for comparison purposes. Market value offers a relatively reliable valuation basis. It is based on supply and demand in the marketplace which also takes into account consumer behavior. The ownership of intellectual property rights can considerably enhance the value of a business, but the most appropriate method of valuing IPRs will vary between companies. An understanding of the economy, the industry in which the business operates, and the business itself, are all required to arrive at a fair value figure.
- Is there a stamp duty to be paid on agreement assigning IP rights in my favour. How is it determined?
Yes, there is a stamp duty payable on the assignment deed and it is calculated on ad-valorem basis which varies between 3% to 7% depending upon the jurisdiction where the assignment is executed/recorded. These percentages are decided by the Indian Stamp Act and payable according to the jurisdiction. For Delhi – it is 3%, for Mumbai – 5%, and Chennai – it is 7%.
- The business I am acquiring has engaged vendors to develop Patented products for which design and know how has been shared under an agreement. What steps do I need to take to ensure that those rights and development flow back to me?
Yes, it is important to check the contract/agreement entered with the third party vendors or contract manufacturers to ensure that your rights are protected.
The contract must contain conditions that:
- The vendor acknowledges the IP rights.
- The vendor would not in any way modify the product or use technical know how for its own use.
- IP on the contribution or modification made by the third party on a product or technology should be assigned to you.
- Keep the IP confidential
- Not use the IP post termination
- Is it recommended to check third party rights as part of due diligence to ensure freedom to operate?
Yes, it is very much recommended to check third party rights as a part of the due diligence to ensure freedom to operate. There may arise a situation where post grant of a patent, while the patent is in use, it may still infringe upon any claims of a patent pre-existing in the name of a third party. It can be done by conducting the search of the Patent register and evaluating the results with the help of Intellectual Property lawyers.
- If the seller owns a registered brand that he has recently refreshed. The new brand and colour scheme application have been opposed by a third party. As a buyer how should I proceed in such circumstances?
Since the new brand and colour scheme has been opposed, firstly and foremost, you would need to assess how strong is your case in defending the rights that you are acquiring. As there is a similar brand registered, it is also advisable to acquire the old registration along with the goodwill and reputation associated with it and then see/assess the degree of closeness between the old and newly refreshed mark. The law does provide for equivalence in use of a substantially identical mark vis-à-vis the use of the another mark. In other words, the use of the old registration can be assessed to be in equivalence to use of the other depending upon the degree of closeness between the two marks. Finally you may consider obtaining indemnity from the buyer for defending the claim and also explore putting the consideration amount qua this refreshed brand in escrow until resolution of the matter.