When IP is in the wrong place in M&A deal making

It is not uncommon when carrying out IP due diligence in anticipation of an M&A transaction to find that registered IP is not registered as being owned by the company anticipated to be the owner and seller. In fact, being able to spot and then address such a problem is a valid justification for carrying out such due diligence exercise itself.

In worse case scenarios, the registered owner is not even another company in the target group, but a separate company entirely, an insolvent or dormant business or an individual whose current whereabouts may not be entirely clear. 

Why does this happen?

There are three common occasions where IP is found to be registered as owned “in the wrong name”:

• IP may have been registered in the name of an individual rather than the company. This is not unusual in younger companies where founders may register IP, particularly patents, in their own name at an early stage and simply don’t get around to formally transferring ownership rights to the company. We have also seen this done in bad faith by individuals who wish to gain leverage over the business;
• IP may have been acquired from a third party in a transaction – for example, a corporate acquisition – and the recordal of new proprietor then not completed, or not done within the required timeframe. Recordal is the process of formally updating information about registered IP rights in official databases operating by IP offices;

• IP may have been transferred as part of a group reorganisation or restructure and that transfer not recorded. This is not unusual, since the company believes that the IP is still within the “umbrella” of the corporate group and considers recordal an unnecessary formality. However, issues then arise where part of the group is subsequently to be sold or disposed of.

There are many reasons why a change in ownership of IP is not recorded. It may simply be overlooked in the euphoria of completing a deal. The assignee may not realise that recordal is necessary and legally required. There may be confusion between who is responsible for recordal between the client, and their in-house legal team, and their external legal advisers, which leads to it not being completed or listed as a task for post-completion but then not diarised and followed-up. Another reason is that personnel at the assignee may leave or change roles – which is not uncommon in a post-transaction situation – and that they are the person who would usually handle the task of recordal. In many cases this is simply a situation where a straightforward task is just overlooked.

If a registered IP right is assigned, but such assignment is not recorded, only the beneficial title transfers, not the legal title. There are real-life consequences to this.

Problems that can arise

There are a surprisingly high number of negative consequences which can arise if registered IP is not being recorded in the name of the correct owner.  Examples include:

• Where the situation comes to light as part of a wider transaction or dispute, this can hold up progress of the deal or litigation until resolved – and give an unfortunate impression that the seller/licensor is not on top of its IP portfolio;
• In the UK, if an assignment of a registered IP right is not recorded within six months of the date of such assignment then the assignee is not entitled to damages or an account of profits in the event of an infringement. In addition, bringing or defending a claim has additional complexity, for example the actual registered owner may need to be joined as a party to the action;
• If an assignment of registered IP has not been recorded, then it is not effective against a third party acquiring an interest in the IP right in good faith. For example, the original assignor may have assigned or licensed rights to such third parties, which the non-recording assignee will not be able to recover;
• Seeking to record assignment later than within the specified time period will often incur an additional fee, and can also rack up significant extra legal costs if submissions need to be made explaining the reasons for the delay in recordal and collecting or drafting additional necessary documentation, such as to evidence changes in corporate names and chains of title;
• If time has passed between an assignment and a subsequent application to record such assignment, then practical problems may have arisen. For example, the original owner may have become insolvent, dormant or wound up and individual assignors/creators may be uncontactable. This can create problems in jurisdictions where the assignor/creator is required to execute additional documents to complete the recordal. In my experience, the most challenging project of this nature was having to advise administrators or an insolvent company on the execution of a variety of forms needed to retrospectively record a previous assignment, across a number of jurisdictions;
• The IP right still in the name of the assignor may be cited against the unrecorded assignee and cause problems in their applications for further IP rights. For example: Company A assigns a trade mark ‘PLUMS’ in Class 3 to Company B. Company B fails to record such assignment but subsequently applies to also register ‘PLUMZ’ as a trade mark in the same class to extend its protections. In this scenario, the trade mark office will likely reject this application on the grounds of the pre-existing registration still in the name of Company A; and
• There are a variety of practical and administrative problems, for example in correspondence and reminders from IP offices being sent to the address of the registered owner, who may simply bin them on the grounds that they have assigned the IP right which is the subject of the correspondence – or such contact may not even still exist or be at the same postal address.

How to avoid problems

Given the raft of problems that can arise, it is clear that failing to promptly record the assignment of registered IP rights should be avoided. Practical steps to take to address the risk of problems materialising include:

• Where registered IP is assigned as part of any transaction, there should be a section or schedule to the assignment documentation which lists post-completion actions and obligations on each party. This should include an express provision on making an application for recordal of the assignment at the relevant IP office(s) within a set time period;
• Lawyers or patent/trade mark attorneys, whether external or in-house, involved in any transfer of registered IP rights, whether as part of an M&A transaction, internal reorganisation, disposal of assets in an insolvency or as part of settlement of a dispute, should advise their clients of the need to record such assignment, seek instructions on who should be progressing this – whether this is the clients’ usual trade mark or patent attorneys or the lawyers advising on the transaction – and also diarise a reminder to ensure that this is not overlooked;
• Recordal of the assignment is also a perfect opportunity to review a registered IP portfolio and consider whether this would benefit from any streamlining or extension. This review can check whether the same contact point is named for correspondence in respect of all registered IP used in the target or target group’s business. We often see problems arise because, for historical reasons, a company may have a number of different firms or subsidiaries listed as contact points for different rights in the same portfolio. Tidying this up helps avoid similar situations arising in future.