In defence of due diligence
Due diligence: not the most glamourous area of intellectual property law but, potentially, one of the most valuable.
Due diligence is the process of undertaking investigations into the business, legal and financial affairs of a company to such an extent that it enables the parties looking to make a purchase to make informed decisions about that company.
The purchaser is then able to verify the claims made and review the risks with respect to a company, enabling them to determine whether or not to make the acquisition.
Intellectual Property (IP) due diligence is an important and complex part of the due diligence process. The purpose of IP due diligence is to identify, review and assess any IP rights and the scope of any such rights.
A recent Harvard Business Review article summarised the due diligence process up succulently but very accurately: “Deal making is glamorous; due diligence is not”.
The article goes on to say: “That simple statement goes a long way toward explaining why so many companies have made so many acquisitions that have produced so little value”.
The IP due diligence cannot be dismissed as a matter of formality in a due diligence exercise because it can go horribly wrong.
One of the most extreme examples of IP due diligence gone wrong happened in 1998, when German carmaker Volkswagen purchased the assets of Rolls Royce and Bentley for around $900 million.
However, it was not until the deal closed that Volkswagen realised the IP assets did not include the right to use the ROLLS ROYCE® trade mark; this right belonged to a different third party, not involved in the sale: BMW.
Volkswagen had in effect acquired all the rights necessary to manufacture a ROLLS ROYCE® car; it could look like a ROLLS ROYCE® car, it could drive like a ROLLS ROYCE® car, it could even have a model number given only to a ROLLS ROYCE® car; it just could not be called ROLLS ROYCE®.
A similar issue was encountered by Viacom, on the purchase of YouTube by Google, when it came to light that YouTube infringed rights of Viacom which were not taken into consideration by Google, during its acquisition.
Although the parties settled mutually, and not much harm was caused, the lack of sound due diligence on the part of Google could have landed them in huge trouble.
Therefore, while it is not the most glamourous of functions in any IP advisor’s job, it is one of the most critical.
A mistake in the due diligence process can have far reaching consequences and a significant impact.
So what are our top five tips?
Check the actual status of trade marks and do not just rely on the schedules provided.
- Is the information you have been provided up to date?
- Has the IP been renewed when it should have been?
- Is the IP protected in the territories it should be?
- What stage is the IP at in the application process?
- Does the seller own what they have said they own?
Check that you can perfect the chain of title, including checking the ability of the owner to sign documentation now and in the future, in case their assistance is required in the future.
Invariably, additional document is often required to effect the transfer of IP.
- Is there an obligation on the seller to continue to assist the purchaser when the transaction has completed, by signing additional document if required?
- What happens if the seller goes into administration?
- Is there an obligation on the Administrators to assist?
Consider future costs in terms of recording the assignment.
Is the seller going to make provision to assist in this respect as these costs can quickly escalate, especially when additional documents are required?
In addition, many countries require the transfer to be recorded so the buyer can enjoy the benefit of the IP. Can you afford to record the assignment of the IP?
Assess the implications of ongoing matters which involve the IP, whether being defended by the seller or enforced by the seller.
- When you acquire ownership are you going to immediately become the defendant in a legal battle?
- If so, it would be wise to seek indemnities from the seller for past infringement claims. If you are about to buy IP which is being infringed, are you prepared to take the necessary steps (and the cost) to prevent the same?
Check the implications of existing agreements in place involving the IP and check what recordals are already in place against the IP such as charges and licences.
Always check any existing third party agreements already in place to see what obligations you will be bound by.
- In terms of other recordals such as charges and licences what happens when you acquire the IP?
- Is the seller entitled to sell the IP if any such recordals have been made against the IP?
- Are you going to be bound by the recordals?
Author
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Lucy Walker
Barker Brettell LLP