|
|
Buying & Selling Businesses: Warranties and Ensuring you get the IP |
Introduction |
When purchasing a business it is important to identify what intellectual property is part of its assets, or is needed in the business and, once those assets have been identified, to ensure that:
(a) the vendor owns or has the right to use the intellectual property and the vendor has taken the necessary steps to protect the intellectual property;
(b) the vendor can assign the intellectual property or a licence to use the intellectual property if a licence is sufficient;
(c) the intellectual property does not infringe the rights of any third party. |
| For most other assets which form part of a business where it is easy to establish ownership, questions of infringement or challenge to that ownership rarely arise. However ownership is not always easy to establish for intellectual property and the grounds of challenge, even where that intellectual property is registered, are many. Accordingly, unlike those other assets which require fairly few inquiries, there are numerous inquiries which could be made for each type of intellectual property. These inquiries may often be involved and expensive. |
The extent of IP due diligence inquiries you conduct will depend on how important or essential the relevant intellectual property is to the running of the business being acquired. This is not to say that if the intellectual property being purchased is not integral to the business that no inquiries should be made. Indeed it is always prudent to make some inquiries because of the risk that the intellectual property rights being acquired may infringe the rights of a third party, exposing the purchaser to payment of damages and other relief. |
Unfortunately not all IP issues can be solved by general IP representations and warranties in the purchase agreement. |
Whilst strong representations and warranties must be included in any purchase agreement, falling back on representations and warranties will often be inadequate when the lack of the required IP destroys the Purchaser's future business plans. |
Examples |
Rolls Royce |
Volkswagen paid 479 million pounds or almost $800 million dollars in 1998 for the assets of Rolls Royce and Bentley - well at least they thought they were buying all the assets. They discovered later that whilst they had acquired the manufacturing plant, the designs and the machinery, those assets did not include the right to use the Rolls Royce trademark! |
The owner of the trademark then went on to sell the rights to use the Rolls Royce mark on automobiles to BMW. |
CCH Australia Ltd and Anor v Accounting Systems 2000 (Developments) Pty Ltd and Ors |
Accounting Systems 2000 (AS2000) entered into an agreement to assign its copyright of the AS2000 software, to Castle Douglas Pty Ltd, a company affiliated with CCH, and in doing so stated that it was the sole beneficial owner of the copyright. In fact, the AS2000 software was a modification of a third party's software for which it had a licence to modify and on sell, subject to certain conditions. CCH, upon discovering that AS2000 was not the sole copyright owner, commenced litigation to rescind all agreements and contracts between AS2000 and CCH based on the fact that AS2000 had engaged in misleading and deceptive conduct in claiming to be the copyright owner of the software it was marketing. CCH was successful in its claim both at trial and on appeal. |
Pine Sol |
The American company Clorox purchased the Pine-Sol business and trademark from American Cyanamid. Pine-Sol was a huge manufacturer of cleaning products and Clorox had plans to use the product name to expand into other markets. |
Unfortunately for Clorox, the trademark rights were subject to a 30 year old restrictive trademark agreement with the owner of the Lysol trademark. The agreement prevented Clorox from marketing any product other than a general cleaner under the name Pine-Sol. |
Shamu |
After acquiring the Sea World parks, Anheuser-Busch learned that the name 'Shamu' under which the theme park's killer whales had performed for many years, was not in fact owned by the company. When the deal closed, the buyer had no legal right to refer to the whales as Shamu any longer. |
Whilst the importance of IP warranties, or lack of them, is not to be underestimated, the importance, often critical, of a Company holding the correct IP assets, should dictate that the process of inquiry be carried out extremely carefully. |
The Value of Intellectual Property |
In a survey in 2002 of the UK venture capital industry by Howrey Europe (www.findlaw.com.au/articles/ default.asp?task=read), indicated that:
The majority of analysts considered that intellectual property rights were an important factor in their assessment of an investment prospect. More than a quarter of survey participants indicated that they would not invest in a company which did not have a proper intellectual property strategy.
94 % of the survey participants believed that a company's intellectual property strategy and the quality of its intellectual property rights were important to protecting its market position and 97 % were of the view that it provided a company with a competitive advantage.
93 % believed that intellectual property rights were important to enhancing a company's profitability and its share price and 64 % believed that there will be a greater emphasis on intellectual property rights in the future
|
| Despite the value of intellectual property assets, it is not uncommon that intellectual property aspects of a due diligence investigation into a potential investee company will be given a low priority in terms of both timing and rigour. Unless the main motivation for the deal is the acquisition of the IP assets, buyers often underestimate the importance of IP due diligence. The consequences of such an approach can be significant - as seen above. |
The business purpose of the transaction |
The business purpose of the transaction and the future business plans for the IP assets must be discussed in order to identify the assets which are particularly valuable to the purchaser. The buyer must clearly communicate what it expects to get from the deal and what it expects to be able to do with the assets. This guidance will allow the lawyer to perform the due diligence and advise their client whether the transaction will meet the client's business expectations. |
The level of IP due diligence should be appropriate to the deal, considering the over-all value of the deal, the importance of the IP assets and the parties' risk tolerance. The goal for both buyer and seller should be to enter the deal with eyes wide open as to what IP assets are necessary to the deal, what IP assets are being transferred and what, if any, encumbrances are attached to the relevant IP assets. Once these questions are answered, both parties can better evaluate their individual needs with respect to the representations, warranties, indemnities and post-closing assistance.(www.jonesday.com/pubs/pubs_detail.aspx?pubid=6233001) |
General IP Due Diligence Issues |
1. Review copies of all cease and desist or demand letters sent out or received by the vendor concerning IP. |
2. Review all threatened or pending litigation concerning IP. |
3. Review all settlement agreements concerning IP. |
4. Review all domain names in the name of or controlled by seller that incorporate any trademark or service mark of the seller or are used in connection with any of the business assets being transferred. |
5. Review all trade secrets concerning the business assets being transferred and the means by which their secrecy is maintained. |
6. Review any proprietary information owned by the seller and not protected by copyright, trademark or patent, including trade secrets, know-how and confidential information. |
7. Review all agreements pursuant to which the seller's goods or services are distributed or marketed to third parties. |
8. Review the seller's standard form agreements with employees, officers, directors, temporary employees and independent contractors regarding employment, confidentiality, non-disclosure, work-made-for-hire, assignment of inventions and copyright. |
9. Review all non-standard agreements between the seller and its employees, officers, directors, temporary employees and independent contractors regarding employment, confidentiality, non-disclosure, work-made-for-hire, assignment of inventions and copyright. |
10. Review all policies and guidelines of the seller relating to the protection or use of proprietary information protected by copyright, trademark, patent and trade secret. |
11. Review all documents and filings affecting title to IP (security interests, releases of security interests, assignments, changes of name) to confirm a complete chain of title. |
12. Review all security interests, security agreements and releases of them, whether or not recorded, relating to any of the IP assets scheduled to be transferred.(Buying and Selling Businesses - Personal Property, CCH Loose Leaf service) |
The buyer should use the vendor's responses to these queries as a starting point for evaluating the validity of the rights it is to receive. These results should be compared against information available to the public at IP Australia. If appropriate, the corresponding records of other countries also can be checked through online data sources or with the assistance of trade mark or patent attorneys. Also, the information provided by the vendor should be reviewed for internal consistency -- for every trademark used there should be a registration, and for every registered mark there should be a recent specimen of use. Discrepancies discovered through this process should be brought to the attention of the seller immediately so that an explanation can be provided or an accommodation can be negotiated. |
The next step, assuming the IP rights are sufficiently valuable to the buyer to merit the effort, is to evaluate the quality (as opposed to ownership) of the IP being transferred. For patents, the buyer should consider obtaining a validity or right to use investigation, which is designed to disclose other patents covering similar technology that might affect the validity of the patent rights being transferred or that might prevent the buyer's use of those rights. For trademarks, the buyer might consider having a dilution search conducted to determine what other parties have registered or are using the same or similar marks for other goods and services. This will help the buyer evaluate whether the marks being acquired will enjoy a broad scope of protection. |
To get the maximum benefit from the due diligence, the buyer should begin the process early and be persistent in following up on questions and inconsistencies. Experience shows that a discrepancy is more likely to be reconciled to the satisfaction of the buyer if it is raised early than if it is raised at the 11th hour, when the buyer will be forced to choose between forfeiting this found leverage and calling off the entire deal. |
Appropriate IP warranties cannot be properly drafted without a vigorous due diligence which identifies all IP relevant to the business and how it is protected. |
Copyright |
However seemingly insignificant the intellectual property being purchased may appear to be, it is always prudent to make some inquiries because of the risk that use of intellectual property in the business may infringe the rights of a third party, exposing the purchaser to payment of damages and other relief. |
The first type of Intellectual Property we will have a look at is Copyright. Due diligence should include:-
1. Review of all copyrightable works that are used in the business. If the seller does not own copyright in such works, review who owns the copyright and the nature of seller's right to use the works.
2. Review all licenses, regardless of whether the seller is the licensee or licensor, related to any copyrightable works used by the seller.(ibid. at [44-500])
|
| Copyright licensed from third parties |
It is important that the terms of any licence are acceptable to the purchaser. In particular, the purchaser should check the provisions relating to:
The licence fee payable;
The term;
The territory in which the copyright can be used;
Any restrictions on use of the work. |
Any licence agreement should also contain the appropriate warranties as to the ownership from the licensor and an indemnity in favour of the licensee should the use of the work infringe the rights of any third party. |
Warranties |
(1) The Sale Contract should contain warranties responding to the due diligence results. Warranties might include:
(a) The copyright in the work is the sole and unencumbered property of the Vendor;
(b) The Vendor is the author of the work;
(c) The work is the Vendor's original work;
(d) The work has not been copied wholly or substantially from the work of any other author;
(e) The work does not infringe the copyright of any other person;
(f) The Vendor was an Australian citizen when the work was created;
(g) The Vendor is not aware of any completed, contemplated or current legal proceedings affecting or involving the work, or the Vendor's copyright or any infringement of copyright involving the work;
(h) There is no subsisting licence or partial assignment of the Vendor's copyright in the work; and
(i) An indemnity against loss or damage suffered due to breach of any of the warranties. |
| (2) The warranties should be expressed not to merge on completion of the sale.(ibid. at [44-500]) |
Trade Marks |
Due Diligence. |
| Pre contractual due diligence should be conducted to identify all trade marks and trade names used in the business and trade marks searches conducted against them. Trade Mark Licences should be reviewed. |
Warranties |
1. Warranties should respond to the due diligence results and might include the following:
(a) The trade mark is the sole and unencumbered property of the Vendor;
(b) The Vendor is the owner of the trade mark (Or the basis of title, eg "the Vendor is the authorised user in Australia of the trade mark, or the " the Vendor acquired the trade mark for value from its author");
(c) As far as the Vendor is aware the trade mark:
(i) Is an invented word (if applicable);
(ii) Is capable of distinguishing the vendor's goods and services; and
(iii) Is not identical to or deceptively similar to any other registered trade mark used in Australia.
(d) The application for trade mark has been accepted and its acceptance has been advertised and there has been received no indication of intention or notice of opposition to registration of the trade mark;
(e) The use of the trade mark does not infringe the rights of any third party and the vendor is not aware of any contemplated or current legal proceedings affecting or involving the trade mark;
(f) Following settlement the vendor will do all such acts as are necessary to vest ownership of the trade marks in the purchaser and have the purchaser registered as the owner of any trade marks under the Trade Marks legislation; and
(g) There is no licence or authorised user agreement subsisting regarding the trade mark.
(h) An indemnity that the warranties are correct. |
2. That the warranties and indemnity are not to merge on settlement. At settlement the vendor will hand over to the Purchaser:
(a) the certificate of registration of the trade mark;
(b) an assignment of the trade mark or if only an application, alter to read "application for registration of the trade mark";
(c) Any representations of the trade mark, literature, etc, to be specified.(ibid. at [53-500]
|
| Of course, the Purchaser should obtain the written agreement of the Vendor to render to the Purchaser any assistance required by the Purchaser with reference to Legal proceedings instituted by or against the Purchaser relating to validity, extension or infringement of the trade mark. Also, the Purchaser should bear all costs relating to such proceedings, with the Vendor's assistance being provided without any expense to the Purchaser. |
Patents |
The numerous grounds upon which a patent application can be rejected or opposed, and the relatively high number of instances where patent registrations have been successfully attacked, even after years of registration, highlight the need for the purchaser to conduct pre-contractual) inquiries. As with the other forms of industrial property the inquiries take the form of searches of the relevant register and inquiries of the vendor. |
Inquiries of the vendor |
In addition to searches of the Register of Patents for all issued, pending and abandoned Australian and foreign patent applications and patents, the following matters should be subject of inquiries from the vendor:
(a) Ownership: was the vendor the inventor of the invention or the assignee;
(b) Use: is there a list of pre filing disclosures and confidentiality agreements;
(c) Improvements: are there any improvements to the invention that are or should have been the subject of an application for a patent of addition;
(d) Infringement: is the vendor aware of any infringement of the patent by any third party or any claims against the patent;
(e) Third party interests: are there any security interests or encumbrances over the patent;
(f) Licences: has the vendor granted any licences over the patent or is the patent used under licence from a third party.
(g) Conflicts: Does the Vendor infringe any third party patents?
|
A request should be made for copies of:
(a) any licences granted to or from any third parties regrading the patents; and
(b) any patent attorney's advice regarding the registrability of a patent application and/or the enforceability of a registered patent.(ibid. at [50-100])
|
| Patents as Assets of a Sale and the Standard Contracts |
If patents or patentable inventions are part of the assets being acquired, specific clauses should be added to the standard business sale contract including warranties from the vendor regarding validity. Given the high number of possible grounds of attack on the validity of a patent, a vendor would be ill advised to give a blanket warranty as to the validity of a patent. Preferably, the following provisions should be added to the standard contracts. |
1. Warranties from the vendor that:
(a) The Vendor is the true and first inventor of the invention forming the basis of the patent;
(b) The invention and the patent are the sole and unencumbered property of the Vendor;
(c) The invention was not used or published in Australia before the patent application was filed;
(d) The invention does involve an inventive step having regard to what was known or used before the priority date of the patent application;
(e) The Vendor is not aware of any concluded contemplated or current legal proceedings affecting or involving the invention, the patent, its registration or infringement;
(f) There are no third party claims;
(g) There is no subsisting licence regarding the patent;
(h) These warranties shall not merge on completion of the sale;
(i) Undertakings that the vendor will do all such further acts as are necessary to assist in any patent application and to enable the purchaser to become the registered proprietor of the patent; and
(j) An indemnity that the warranties are correct.(ibid. at [50-500])
|
2. On completion the Vendor shall hand over to the Purchaser:
(a) The certificate of registration of the patent;
(b) An assignment of the patent;and
(c) Any plans, sketches, prototypes, models, literature, etc, to be specified in the agreement.
|
| Patents licensed from third parties |
Any licence agreement should also contain the appropriate warranties as the ownership from the licensor and an indemnity in favour of the licensee regarding use of the mark infringing the rights of any third party. |
Designs |
Like other forms of IP, the registration of a design does not guarantee its validity following challenge against the original owner or the assignee of the design. Vendors need to exercise care before providing warranties, as subsequent invalidity may render the vendor liable for damages to the purchaser. |
Relevant searches |
The Register of Designs includes particulars of:
(a) All registered designs, the names and addresses of their owners and the date of registration and expiry of the design;
(b) Notifications of assignments and transmissions;
(c) Any mortgage, licence or other interest in a registered design.
|
| A search of the design in the Register of Designs should be made to confirm the vendor's registration and details of the design as well as seeing whether there are any registered interests in the design such as a mortgagee or licence. In respect of a design application or a design registered under 11 months, the purchaser may also wish to have conducted a search of registered designs to help determine whether the design is new or original.(ibid. at [47-000) |
Inquiries of the vendor |
In addition to searches of the Designs Register, the following matters should be the subject of inquiries from the vendor:
(a) Ownership: was the vendor the author of the design, and, if not, how does the vendor claim to be the owner of the design;
(b) Publication and use: has the design been published or used in Australia before the priority date;
(c) Infringement: is the vendor aware of any infringement of the patent by any third party or any claims against the patent;
(d) Third party interests: are there any security reasons or encumbrances over the patent;
(e) Licences: has the vendor granted any licenses over the patent or is the patent used under licence from a third party.
|
| Warranties |
1. The Vendor warrants that:
(a) The design is the sole and unencumbered property of the Vendor;
(b) The Vendor is the author of the design;
(c) The priority date of the application for registration is [date] (called "priority date");
(d) The designs have not been used or published in Australia before the design application was filed;
(e) The design has not been published in Australia before its priority date, by display, marketing for sale, publication in trade journals, advertising or otherwise;
(f) The design is a new or original design;
(g) The Vendor is not aware of any contemplated or current legal proceedings affecting or involving the design, including for infringement or to render registration of the design invalid;
(h) There has been no objection or litigation regarding the registration or extension of the period of registration of the design;
(i) There are no third party claims;
(j) There is no licence subsisting regarding use of the design;
(k) These warranties shall not merge on completion of the sale; and
(l) An indemnity that the warranties are correct. |
2. On completion the Vendor shall hand over to the Purchaser:
(a) The certificate of registration of the design;
(b) An assignment of the design; and
(c) Any representation of the design, literature, etc, to be specified.
|
| Domain names |
Although Domain Names are thought of as being strictly Intellectual Property, it is important to keep them in mind when conducting due diligence searches, as they can also be a very valuable 'non-tangible' asset. |
Internet domain names are treated slightly differently from the more traditional forms of intellectual property. The ability to transfer the domain, and the procedure for doing so, will vary from domain name registrar to registrar. |
Although, as with other forms of IP, each domain name requires a separate assignment document, signed by the seller, in order to transfer title to the domain name. Since Internet domain names are being sold for millions of dollars, failing to transfer a domain to the buyer properly can be an expensive proposition. |
One of the most overlooked details in many transactions is the expiration date of the domains. Registrars will send notices of expiration to listed administrative and billing contacts, but often those contacts no longer care about the domain and do not pass the notice on to the purchaser. Once a domain expires and is released by the registrar, it's gone, and anyone may register it.(www.jonesday.com/pubs/pubs_detail.aspx?pubid=6233001) |
Inquiries of the vendor |
In addition to searches of the Domain Name Register, the following matters should be the subject of inquiries from the vendor when '.au' domain names are involved:
(a) Ownership: Was the vendor the registrant of the domain, and, if not, how does the vendor claim to be the owner of the name (ensure that the domain name is registered in the name of the seller of the business and not a related company or a third party such as a website developer);
(b) Publication and use:Has the name been published or used in Australia before its registration
(c) Infringement:Is the vendor aware of any infringement of the domain name by any third party or any claims against the domain name; (The seller or buyer may not have the right to unchallenged use of the domain name because of the existence of a registered or unregistered trade mark. There is a simple procedure available to aggrieved trademark owners to recover domain names under the .au Dispute Resolution Policy.)
(d) Third party interests: Are there any security reasons or encumbrances over the domain name (see Ownership);
(e) Licences:Has the vendor granted any licenses over the domain name or is the domain name used under licence from a third party. |
| Warranties |
1. The Vendor warrants that:
(a) The Vendor is the registrant of the domain name;
(b) The domain name has not been used or published in Australia by a third party before the domain name application was filed; (A '.au' domain name licence may be revoked by auDA if the seller made a false warranty in order to obtain the domain.)
(c) The Vendor was Australian when the domain name was registered; (A domain name cannot be transferred from the buyer to the seller unless the buyer satisfies certain eligibility criteria and allocation rules. For all '.au' domains, the buyer must be an Australian registrant.)
(d) The Vendor is not aware of any contemplated or current legal proceedings affecting or involving the domain name, including for infringement or to render registration of the domain name invalid;
(e) There has been no objection or litigation regarding the registration or extension of the period of registration of the domain name;
(f) There are no third party claims;
(g) There is no licence subsisting regarding use of the domain name;
(h) These warranties shall not merge on completion of the sale; and
(i) An indemnity that the warranties are correct.
|
2. On completion the Vendor shall hand over to the Purchaser:
(a) The certificate of registration of the domain name and registration key;
(b) An assignment of the domain name;
(c) Any representation of the domain name, literature, etc, to be specified.
|
| Conclusion |
| It is preferable - and in certain cases, essential - that the warranties be given absolutely by the vendor rather than 'to the best of the vendor's knowledge, information and belief' as proving 'knowledge' warranties is much more difficult. |
A sale agreement may be structured so the seller makes disclosures against the warranties. Such a provision, if drafted broadly, will significantly curb the ability of the buyer to rely on a warranty. Essentially, the warranty is watered down. If the buyer is taking the warranties subject to any disclosure, the vendor should disclose as much as possible, especially if there is any whiff of a potential liability arising. A buyer should insist on a provision requiring the seller to disclose in writing all material information relating to the company. |
As it can be seen, the issues of dealing with Intellectual Property in the sale / acquisition of a company are large and tricky. Despite these challenges, it is vital that as the Vendor makes the appropriate inquiries and drafts the necessary warranties and that the Purchaser ensures that the business sale agreement adequately covers the IP that they are looking for. Once you have spotted the issues, you are then able to take corrective action and, where needed, negotiate further specific IP warranties and indemnities to protect your client. |
paul.clark@cmlawyers.com.au
|
