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:
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- 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:
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- 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)
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