Posted: New Hampshire Bar News
Intellectual property (“IP”) is a key business asset that provides important rights and competitive advantages. In the context of mergers and acquisitions (“M&A”), intellectual property is often the subject of particular attention when negotiating the purchase price and the terms of the agreement (representations and warranties, compensation, etc).
Due diligence is essential to accurately identify intellectual property assets, assess potential risks, and determine post-closing obligations and liabilities. When a transaction involves registered intellectual property, including trademarks and patents registered with the United States Patent and Trademark Office (“USPTO”) and copyrights registered with the United States author, a buyer must determine whether the seller (and/or the target company) has a valid right of ownership. rights. This article discusses intellectual property issues to consider in mergers and acquisitions due diligence, focusing primarily on chain of title issues.
Registering an IP asset has significant benefits for the registrant, including enforcement rights against infringers. A “chain of title” is a public document that tracks the ownership of a registered intellectual property asset from the original owner to the present day. These records are used to establish ownership status and must be maintained to effectively protect and preserve intellectual property rights.
Chain of title gaps occur when an intellectual property owner fails to properly register any of the following with the appropriate federal, state, or foreign intellectual property registry:
- An assignment transferring the intellectual property interest to a new owner.
- A corporate merger where the assets of two companies are merged into a new or existing entity.
- A change in entity type.
- Any change in the name of the entity.
A vendor may undergo a corporate restructuring, including a reorganization under Section 368(a)(1)(F) of the Internal Revenue Code, as part of its mergers and acquisitions strategy. These restructurings often involve a change in entity type (eg, conversion from a corporation to a limited liability company) and a change in name (eg, “ABC, Inc.” becomes “ABC, LLC”). Entity changes should be promptly registered with the appropriate intellectual property registry after the reorganization to avoid gaps in the chain of title.
Whether a buyer is purchasing specific intellectual property assets or inheriting a company’s existing intellectual property portfolio when buying a majority stake in the entity, chain of title issues can lead to complications in merger and acquisition transactions. Discrepancies in the chain of title cast doubt on who is able to exercise ownership rights and may result in loss of intellectual property rights if left unresolved. If the chain of title is incomplete at closing, a buyer will encounter issues along the way in enforcing IP rights against infringers and filing the necessary forms and fees to maintain IP records. An inaccurate chain of title can also prevent a buyer from timely registering an assignment of intellectual property after closing. Depending on the importance of the registered intellectual property, the loss of purchased intellectual property rights can be costly.
If a transaction involves registered intellectual property assets, a buyer should carefully review public ownership records and identify any gaps in the chain of title during their due diligence period. Ownership information for federal registrations is available in databases maintained by the USPTO and the US Copyright Office. Commercial databases may also provide access to domestic or foreign databases that are not publicly available online. In some cases, a buyer may need to hire local agents to manually extract property records in the relevant jurisdictions.
Note that searches of the database by owner name may be incomplete if records and requests are saved in the name of a previous owner or under a different entity name. To avoid missing valuable intellectual property assets during its due diligence review, a buyer should ask the seller to identify:
- Any intellectual property covered by federal, state, or foreign registrations or pending applications;
- The relevant jurisdiction covered by each registration or request;
- Patent, registration and application numbers; and
- Dates of filing, registration and issuance.
In its due diligence review, a buyer should also confirm whether there are any unreleased liens affecting the intellectual property assets by (i) reviewing registered security interests in patents, trademarks and copyrights registered with the USPTO and US Copyright Office and (ii) conducting UCC -1 searches in the relevant states. The parties should identify the liens that must be released prior to closing and coordinate the filing of termination documents with the appropriate agencies.
Depending on the jurisdiction and accessibility of the previous owners (and their authorized signatories), resolving discrepancies in the chain of title can be a lengthy and costly process. The parties should identify these issues at the outset of an M&A agreement and allow sufficient time for resolution.
At closing, the parties must sign valid, recordable transfer documents to proactively avoid future chain of title issues. For an IP assignment to be recordable, it must be in the correct format. For example, trademark assignments must clearly identify the transferred assets (for example, by listing the specific trademarks and applicable registration numbers on an attached schedule) and must include the assignment of “corporate goodwill” for be valid.
Any assignment of intellectual property rights must be registered as soon as possible after closing and must meet jurisdiction-specific deadlines. Under US law, an assignment of a patent or trademark is void against a subsequent purchaser for value unless registered with the USPTO within 3 months of the date of the assignment. disposal or prior to subsequent purchase.
Post-closing divestitures can be complicated when a transaction involves the transfer of rights to foreign intellectual property assets. Foreign jurisdictions often have more onerous transfer requirements, and to avoid delays, a buyer should be prepared to obtain all required documents at closing. When a buyer acquires all or substantially all of a seller’s assets, the seller often liquidates and dissolves its business after closing. If a buyer waits too long to obtain the required documents, the necessary signers may not be available (or unwilling) to sign.
Ultimately, a buyer wants to be sure that he will receive the full panoply of intellectual property rights promised (and paid for) under the purchase contract. When the benefits of ownership of registered intellectual property are diluted by discrepancies in the chain of title, a buyer pays a premium for rights it may not be able to use.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.