IP Audit for Startups & Businesses

IP due diligence and Audit in Mergers and Acquisitions

Jun 30, 2024 | General, IP Audit

IP assessment, due diligence & valuation play an important role at the time of company acquisition for buyer and seller alike as it would help them gain clarity as to what they are getting in the form of IP and whether the IP is worth acquisition or not. Typically, the IP which exists in the company is either registered or unregistered. The registered IP is often in the form of patent, trademark, design, copyright whereas the unregistered IP may be in the form of know-how, trade-secret, protocols, processes, confidential information etc. Docketing of registered IP is much easier than assessing unregistered IP because identification of IP which exists in the form of know-how, trade-secret can be really challenging. Moreover, transferring such unregistered IP at the time of company acquisition could be quite prone to misappropriation if stringent processes and guidelines are not followed.

The IP audit, followed by IP due diligence is beneficial to assess a collective value. Some of the important considerations for buyer and seller alike are as follows:

IP Audit and Segregation of IP

Firstly, it is required to take stock of all IPs and segregate them on the basis of type, relevance and priority. The following steps may be helpful:

• All forms of IPs, registered or unregistered, shall be listed. While it is easy to list the registered IP, it may be quite challenging to identify, docket and valuate the latter.
• The first round of segregation of IP shall be done depending upon its type, registration status and its relevance to the business.
• Legal status of registered or the filed IP shall be identified to ensure that the IP is not expired or abandoned. If any official formality is to be fulfilled with respect to such IP, it may be done to ensure that the IP remains active and enforceable. This step is significant to avoid what occurred between Ebay and Skype. After 4 years of Ebay’s acquisition of Skype, they learnt that Skype did not own many of its key intellectual property rights owing to which they had to abandon their plans to launch Skype’s Initial Public Offering in the share market.

The second round of segregation shall be done depending upon relevance of IP for the business.

• In case of the registered IP, which is not relevant for the business, options of out-licensing or sale of such IP may be explored.
• If there is an IP which is not strong enough to get registered, such IP may be published as a research paper as well.
• Sometimes, companies may also consider donating some of their IP or let the IP abandon or expire. For instance, Disney’s Steamboat Willie, one of the first iterations of Mickey and Minnie Mouse is now available in public domain as the copyright protection has expired after a long period of 95 years.

Docketing of IP

Secondly, docketing is a process of managing, documenting and tracking deadlines and documents related to the prosecution of IP assets, such as patents, trademarks, designs and copyrights. After segregation of IP is done to identify the relevant IP, following steps shall be performed:

1. • Registered IP shall be docketed to observe the important official timelines, such as responding to official communication, paying the renewal fee to maintain it. For instance, post-acquisition of Jaguar Land Rover, it can be observed that Tata Motors is filing several patents across the world since it has acquired the necessary intellectual property rights of Jaguar Land Rover.
   • As a part of docketing, it is also required to note down expiry date of IP. For example, if there are only a few months remaining for a patent to expire, it may not be worthwhile to transfer that patent from seller to the buyer as transferring the patent requires amendments to be done and the cost of amendment may be high.

Due diligence and Valuation of IP assets

Thirdly, registration certificates of the registered IP shall be reviewed to understand whether there is a clear title of IP assets and on this basis, the valuation of IP shall be determined.  In 2007, Kingfisher airlines merged with Deccan Airlines and following the merger, the Deccan airlines was named as “Kingfisher Red”. This completely diluted the trademarks of both the companies and there was a lot of confusion between Kingfisher and Kingfisher Red. owing to which Kingfisher Airlines suffered heavy losses. This merging which resulted in the creation of “Kingfisher Red” caused degradation in the brand status of Kingfisher Airlines and the company was deprived of its premium value.

Liability and potential risk after acquiring IP

Lastly, Acquiring IP requires a lot of official formalities to be fulfilled in each country where IP is filed for or registered and Important considerations and liabilities to be considered for acquisition are as follows:

1. • The buyer party must know that acquiring an IP comes with a lot of liabilities. For instance, transfer of IP from the seller to the buyer requires a lot of amendments in the official records of the office where IP is filed for or registered. Oftentimes, change of attorney also is preferred by the buyer for the purpose of prosecution which may cost extra. Post acquisition of IP and amendments in the official record, the buyer still has to bear liability in the form of annual renewal fee to maintain the IP  For instance, prior to a court declaration in 2019, the ‘well-known’ status of the Vistara Airlines, a joint venture between TATA Sons Pvt Ltd and Singapore Airlines Ltd, remained under dispute since the requisite form and fees for inclusion of this trademark in Trade Mark Registry’s Well-Known trademarks was not done.
   • Further, if any of the IPs are litigated or opposed, due-diligence shall be performed to know what stage of litigation or opposition it is in and to observe what the further course of action will be. The failed merger between Indian pharmaceutical company Ranbaxy with Japanese Pharmaceutical company Daiichi Sankyo has several examples that the latter faced in terms of litigation hurdles, there was a settlement with US based pharmaceutical company Pfizer over a patent dispute; a settlement with Swiss pharmaceutical company Roche over a patent dispute; a payment of 500 million dollars to resolve a lawsuit and federal charges over the Indian company selling improperly manufactured drugs etc.

IP may be a valuable intangible asset playing a vital role at the time of M&A of the company. Prior to assessing the value of the IP, due diligence is necessary to understand legal status. The business relevance of IP as may be observed can be a game changer.

Authors: Bindu Sharma (CEO, Origiin IP Solutions LLP), Janaswamy Venkata Lakshmi Tanya, Symbiosis Law School, Hyderabad)

Please contact us at info@origiin.com to know more about our services (Patent, Trademark, Copyright, Contract, IP Licensing, M&A of companies)

Subscribe to YouTube Channel HERE

Join LinkedIn Group: Innovation & IPR

The Ultimate 7 Step Guide for IP Due Diligence

Jul 5, 2023 | General, IP Audit

In the contemporary business landscape, Intellectual Property (IP) is emerging as one of the most important assets that a company owns. Intellectual Property is increasingly occupying a central role in any overall business and growth strategy of an organization. By effectively managing and optimizing IP, the organizations stand to derive maximum benefits and gain a competitive edge. However, IP Due diligence is extremely critical to identify the ways IP shall be identified, safeguarded, monetised & enforced.

IP due diligence & its objective

Every business possesses one or the other form of Intellectual Property and most of the times, such IP is either under-utilised or un-identified. Though it may not be required to register all IP assets, it is pertinent or rather crucial to identify it to take decision on whether it is worth registration or not.

Any investigation or exercise that aims to determine the health, validity and value of intangible assets like IP, forms part of IP due diligence. IP due diligence is a set of parameters required to have in a company to ensure that IP:

1. is not misappropriated or leaked from the company,
2. is protected in right legal framework,
3. is brought to the market at right time, either by itself or by licensing it out, and
4. infringement analysis is done at right time to prevent infringement of third party’s IP rights,
5. systems & processes are created to monitor unauthorized use of own IP by the third party (ies).

The primary objective if IP due diligence is to realize full value of IP assets by identifying them, take strategic decision about safeguarding them and further formulate a clear roadmap detailing the steps for the effective management.

Steps involved in IP due diligence

The main purpose of IP due diligence is to assess & optimise value of IP and mitigate the risk associated with its loss or infringement. The IP due diligence steps and strategies may be different for each company depending upon area of business, skill set of employees, kind of core IP and jurisdiction, however, this article focusses on the general steps. It is recommended to take expert legal advice to formulate customised steps for effective IP due diligence for your company’s specified needs.

Step 1: “As-is” IP assessment

Before we dig further into IP due diligence, it is crucial to understand and determine the IP that a company owns. Spotting IP and identification of right legal framework in which IP shall be registered is found to be challenging by majority of the organizations. Most of the IP can be registered in the form of patent, copyright, design or trademark. In addition to this, there may be a possibility to protect some form of IPs as trade secret as well. Certain steps like patent/trademark search right in the beginning may be extremely useful to create a stronger IP and give right direction to the R&D efforts. Investigations like patent landscape are helpful to understand global trends related to evolution of the technology.

Step 2: Leakage of IP from the company

Like any tangible form of property, IP also needs protection. However, owing to its intangible nature, sometimes it becomes challenging to take right steps to safeguard such crucial IPs. First of all, one must identify the channels through which IP leakage happens. Most of the times, IP leakage happens through ex-employees, consultants, customers etc, knowingly or unknowingly. Some of the ways to seal these leakage points are as below:

1. Have stringent agreements with employees, vendors, customers, consultants
2. Periodic IP sensitization programs in the company
3. IP Policy detailing security and confidentiality & security clause
4. Label confidential files as ‘Confidential’
5. Restrict access to confidential information of the company

Step 3: Strengthening existing IP

Review of literature is an important step in the new product development process because without knowing what is already been done, strong IP cannot be created. The wealth of knowledge available in the form of patents or paper publication can be immensely helpful to create more innovative products and reduce R&D cycle. At the time of new product development, if a thorough patent search is done and expert advice is sought, there may be a possibility for the companies to leverage some of the good patents which are either abandoned or expired or not filed in the desired jurisdictions. However, this shall always be done with expert advice and jurisdiction-based opinion on patent infringement risk.

Step 4: IP protection in right legal framework

Broadly speaking, a company may have IP which may or may not be registered. Invention, design, brand name can be registered as patent, design and trademark respectively whereas confidential information or trade secret can be protected by maintaining secrecy of it. In order to protect confidential information or a trade secrets, clear and stringent processes, policies and practices shall be devised. Some of the examples of trade secret are recipe of Coca-Cola, chicken recipe of KFC etc.  For any information to be qualified as a trade-secret, following conditions shall be fulfilled:

1. Information shall not be known to the public,
2. It shall be valuable for business,
3. Owner should have taken sufficient measures to protect it.

Spotting IPs in a product, identifying the right legal framework to protect it at a right time shall be done by the experts sothat the product is protected in the best possible manner.

Step 5: Infringement risk assessment

IP infringement refers to unauthorized use or encroachment upon the IP rights of a third party (ies), and its consequences can be fatal. IP infringement risk analysis shall be done before the product launch to understand if there is any infringement risk. Jurisdiction specific opinion by the legal expert on IP infringement may be helpful to mitigate the infringement risk. Further, periodic IP audits shall be performed to identify external software downloads.

Step 6: IP commercialization

Creation of IP requires significant investment in terms of time, money, and resources. Every good investment should yield returns and therefore, it is reasonable to say that when companies spend money to create IP, they must explore the ways to recover that investment by commercialization of IP, either on their own by integrating such IP onto their products or licensing it out to other potential partners who may bring such IP in the market.

Step 7: Enforcement of rights

One of the reasons for the companies to spend money in R&D and IP registration is to attain competitive edge in the market and create a boundary for the competition. Therefore it becomes important for the companies to be vigilant about unauthorised use of IP by the third party (ies)  and they should enforce their rights in case IP infringement happens.

Conclusion

IP due diligence is indispensable for any business aiming to create, exploit, enforce their IP in most effective manner, especially when competition is ever increasing, and business sustainability depends on being “ahead of the curve”. Establishing a strong and robust IP regime that incorporates proper processes, practices, policies and agreements with an aim to optimise benefits of IP created and owned by any company, is of paramount importance.

Authors: Bhavya Sharma, Bhuvnesh Sharma

Please contact us at info@origiin.com to know more about our services (Patent, Trademark, Copyright, Contract, IP Licensing, M&A of companies)

Subscribe to YouTube Channel HERE

Join LinkedIn Group: Innovation & IPR

WhatsApp: +91 74838 06607

Top 10 strategies to Stop IP Leakage in an Organization

Jun 16, 2023 | General, IP Audit

In 2019, two senior executives of a Bangalore-based IT company were arrested for allegedly stealing data from their employer’s company and using it for their own company. They accessed the company’s client list and used it for their own benefit. Upon further investigation by the company’s operations team, it was found that it was Intellectual Property (IP) that was stolen and the money diverted. In Navigators Logistics Ltd v. Kashif Qureshi & Ors., the court held in favour of the employees saying that the former employers cannot restrain them from using their customer list.

Today, most businesses are facing the threat of IP theft or leakage by the their members such as employees and even consultants. Intellectual Property (IP) is a valuable asset for any organization not just due to its market value, but also the amount of money and effort which goes in to create it. Due to its intangible nature, IP is easy to misappropriate & leakage of IP may happen due to inappropriate disclosure by employees, lack of safety measures or weak policies and agreements.

In this article, the term “IP leakage” refers to a situation where the IP of an organization is made available or accessible to third parties in a wrongful manner, causing a monetary or reputational harm to the organization. The term IP here includes registered and non-registered IP, technical and business information which is sensitive and confidential in nature.

For the organizations, identification and sealing of IP leakage points is necessary to realise the long term value of IP. Top 10 strategies to prevent IP leakage are listed below:

1. Figure out what is the IP in your organization

The first step to avoid IP leakage is to identify what is the IP in your organization and what its potential value for the business is. Without taking stock of existing IP and knowing the nature of IP, one will not be able to devise appropriate strategies to safeguard it. Typically in an organization, the IP is in the form of software codes, proprietary products, designs, new inventions, new products, business plans, know-how, confidential information etc. Once the IP is catagorised, one may figure out the ways to safeguard it.

2. Stringent Agreements with confidentiality clause

While transacting with external consultants, vendors, customers, employees where there is going to be an exchange of IP, one must execute an NDA (Non-Disclosure Agreement) to ensure the IP is safeguarded. Important documents such as NDAs, Service Agreements, MOUs, etc. must be reviewed by a legal expert to ensure that the clauses of such agreements sufficiently and appropriately cover the range of IP the organization possesses along with the knowledge of  relevant governing laws, arbitration, return of confidential clause, indemnity and liability.

3. IP Policy

IP Policy along with an active IP committee may be extremely helpful in implementing right processes in an organization to handle IP. The IP Policy shall have clauses related to confidentiality and security of the information.

4. IP Sensitization programs

Periodic IP sensitization programs by internal or external speakers may play a vital role for the employees, firstly,  to understand their roles and responsibilities with respect the safeguarding the IP of the company and secondly, to understand the risk they can impose on the current employer if they bring and use IP of their previous employer.

5. Physical security of the documents and files

Important documents and files should be segregated as highly confidential or moderately  confidential based on their nature. All documents of confidential nature shall be labelled as “Confidential” and soft files shall have the word “Confidential” as header or footer.

6. Restricting access

Some areas in the organization where secret trials, experiments or research are being conducted, should be restricted and only limited number of people should be permitted to enter such areas. Having CCTV camera or restriction to use smart phones may further be helpful.

7. Registering IP

Wherever possible, IP should be registered in the form of copyright, patent, design because registration is a very effective way of safeguarding IP. The certificate of registration obtained from the Government can serve as evidence of ownership of IP. Once IP is registered, one can disclose it to others without a fear of losing it.

8. Exit interviews and induction for new joiners

When employees leave the organization, they take a lot of IP of the company with them in the form of experience and know-how. An exit interview to remind them of their responsibilities, liabilities and the agreements undertaken by them is a very effective step to safeguard IP of the company. Similarly, an induction program for the newcomers focussed on dangers of misappropriating previous employer’s IP plays an important role in sensitising newcomers about the guidelines and processes of handling IP.

9. IP audit

An annual IP audit is immensely useful in identifying any gaps in the IP processes adopted by the company. Audit also helps to take stock of existing IP, check their status to docket upcoming official timelines.

10. Using software to track transfer of data or information

Nowadays, there are many software technologies available in the market which may be used to track the transfer of data from electronic devices thereby helping in protecting the company’s IP.

Leakage of IP in an organisation may be detrimental to the business and hence special care has to be taken by the organisation to deal with such situations. Strategies that need to be adopted to safeguard IP may vary depending on the kind of business jurisdiction, but a few basic principles as stated above are simple steps that an organisation must adopt to safeguard their IP and prevent leakage to avoid any damages or losses.

Authors: Bindu Sharma (Origiin IP Solutions LLP), Bhavya Sharma (Jindal Global Law School)

Please contact us at info@origiin.com to know more about our services (Patent, Trademark, Copyright, Contract, IP Licensing, M&A of companies)

Subscribe to YouTube Channel HERE

Join LinkedIn Group: Innovation & IPR

WhatsApp: +91 74838 06607