Since we entered into the digital era
a decade ago, the way we conduct business has changed dramatically.
"Information Age" is a term we now hear everyday. But what does it
really mean? It has several definitions but in one common sense, it illustrates
a changing definition of property. Assets no longer have to be tangible; some
of the most powerful corporations in the world rely on abstract information to
survive. In order to capitalize on that value, however, the property has to be
transferable.
Intellectual
property plays an important role in an increasingly broad range of areas,
ranging from the Internet to health care to nearly all aspects of science,
technology, literature and the arts. Understanding the role of intellectual
property in these areas – many of them still emerging – often requires
significant new research and study. Intellectual property, often known as IP,
allows people to own their creativity and innovation in the same way that they
can own physical property. The owner of IP can control and be rewarded for its
use, and this encourages further innovation and creativity to the benefit of us
all. In some cases IP gives rise to protection for ideas but in other areas
there will have to be more elaboration of an idea before protection can arise.
It will often not be possible to protect IP and gain IP rights unless they have
been applied for and granted, but some IP protection such as copyright arises
automatically, without any registration, as soon as there is a record in some
form of what has been created.
The four main types of IP generally
accepted worldwide are:
- Patents: for inventions of new and improved products and
processes that are capable of industrial application;
- Trade marks: for brand identity of goods / services allowing
distinctions between different traders;
- Designs: for product appearance of the whole or a part of a
product resulting from the features of, in particular, the lines,
contours, colours, shape, texture or materials of the product itself;
- Copyright: for literary and artistic material, music, films,
sound recordings and broadcasts, including software and multimedia.
Transactions
about IP such as licence agreements and transfer of ownership will involve the
making of contractual agreements. In many cases, but not always, a contractual
agreement will be able to override any provisions in IP law that might conflict
with what is to be agreed. A contractual agreement is usually particularly
important where you have commissioned someone else to create something
protected by IP since, without a contract, you may not know whether you are
licensed to use the IP. Even where IP is not to be licensed or ownership
transferred, there may be situations where a contractual agreement about IP is
important, such as:
- An agreement where a person
investing in the development of IP who will not necessarily own it, but
who may become entitled to some form of payment at some point in the
future.
- An agreement between a creator of
IP and a potential partner in its exploitation to discuss what might be
possible under a confidentiality agreement.
- An agreement between right holders
and a collective licensing body over administration of some of the IP
rights.
In every
case, general provisions in law about what contractual terms are acceptable
need to be considered carefully as well as the nature of the IP that is the
subject of the contract. In particular, competition law and company law may be
relevant.
Intellectual property is a hot-button
issue these days, and for good reason. As we can see, the transfer of
intellectual property is becoming a common business transaction. However, the
sale and purchase of IPR (“Intellectual Property Rights”) is unlike any other
type of transaction. Everybody in the digital business (and others) now realize
that intellectual property is an asset and can be bought and sold.
Unfortunately, most people make an invalid assumption that the normal rules of
asset purchase and sale can apply. We hope that by the end of this guide, you
will see that while there are many common factors, the differences can be very
significant.
We first look at what some of these
differences are, and how they are commonly dealt with in IPR sales. Following
this will be examples of common terms in sale agreements. Then, we will deal
with issues peculiar to the major forms of intellectual property protection,
including patent, copyright and trade mark. This guide is aimed at the
non-specialist. Those who practice intellectual property on a full-time basis
will think of many other points that should be reviewed in the sale context.
For reasons of time and space, we can only mention some of the items. As well,
many factors will be obvious to even the non-specialist, and we will ignore
those; instead, we will discuss the things that are easily overlooked.
This guide will also tend to look at
purchasing issues more than selling issues. Simply because there are more risks
for the purchaser than the vendor in intellectual property transactions. The
vendor is usually only concerned about getting the money. The purchaser has to
acquire full rights to an abstract piece of property, make sure the vendor is
not continuing to use it, and ensure that there are not any competing rights, to
name only a few of the problems. We will not ignore the seller’s concerns, but
they will not be this guide’s primary focus.
Finally, while IP can be different,
the normal rules of purchase and sale still apply more often than not. IPR are
the property of the Information Age, but you should always remember they are
still property.
Starting points
Intellectual property rights are
plainly assets. They have value, and they can be bought or sold. There are some
differences, however, when comparing IPR to other types of assets. If you are
not regularly dealing with IPR, you will usually try to find precedents or
earlier files that give you some guidance. Often, these precedents deal with
hard assets; a reliance on these can be dangerous for a few reasons.
First, intellectual property rights
do not have to be sold. Indeed, a purchase and sale of IPR is somewhat
uncommon, because licenses are often used. The hard asset mindset becomes
dangerous when you look at the deal only as a sale or potential sale. If your
client asks you to transfer rights, you must not lose sight of the fact that a
sale/assignment is only one of the options. It would be like someone coming to
you looking for office space. In that case, you would not only discuss the
possibility of buying a building, but you would probably also consider leasing.
Licensing IPR can be analogous to leasing, except that more than one person can
license the same property.
Secondly, you will never get the same
level of comfort when buying IPR as you will when purchasing hard assets. In a
hard asset sale, the mere fact that the vendor has possession of the goods
gives you some comfort. With abstract property like IPR, it is much easier to
pass on (fraudulently or otherwise) a non-existent title. The problem is
exacerbated because of the abstract nature of the property; there is no
registry you can search to be 100% sure the vendor can properly sell the asset.
Further, think about what happens
when there is a sale of know-how. To say that you are buying the asset is based
on "old" property law and is not truly accurate. In fact, you are
buying a copy of the asset. The vendor will informally retain most of the
information and there is nothing that can be done about it (except of
extricating the brains of all people who have pertinent knowledge). In order to
prevent unwanted competition in the future, you have to include special
contractual terms and restrictions that are unheard of in hard asset
transactions.
This can be a problem from the
vendor’s side as well, especially when the purchase price is not paid up-front.
Normal rules of enforcement upon breach do not apply to IPR deals, particularly
when dealing with unregistered rights like trade secrets. Suppose that you sell
a trade secret to a company, with payment of the purchase price made over time.
Further suppose that the purchaser defaults under your contract soon after
signing and before you have received much of anything in the way of
consideration. Yes, you likely could sue the purchaser for the breach, but we
all know the issues and difficulties that arise from litigation. The other
remedy that you would have available in a hard asset situation, namely seizure
or repossession of the asset, is often irrelevant here. You likely know the
information anyway (or at least could reconstruct it fairly easily), and you do
not have to seize it to get it back. On the other hand, even if you do seize
the physical manifestations of the technology (documents, computer disks, and
so on), there is no guarantee that you have vacuumed it all up, and there is, therefore, the risk that the purchaser will still take advantage of the
information in some way notwithstanding the breach. Obviously, these problems
must be thought through before you deal with even fundamental items such as
purchase price.
Finally, an understanding of the
underlying technology is crucial when dealing with IPR. You don’t really have
to know how an apartment building is constructed in order to document its sale.
Things are more complicated with IPR. This does not necessarily mean that you
need a PhD in genetics to transfer biotechnology. It does mean that if you are
dealing with, say, computer software, you should understand the importance of
source code versus object code, or the consequences of re-coding the program in
a different language, or how a compiler works, to name just a few things. When
involved in buying or selling IPR, you must understand all issues implied. If
you don’t have the necessary knowledge, don’t hesitate to rely on external experts.
We will now go into the actual
mechanics of a deal, and the important features of the sale agreement. We won’t
discuss much detail on the form of assignment, or sale clause, itself. That part of
the agreement is very simple and is much like that used for any other type of
asset. An IPR agreement differs in the level of warranties, representations and
searches that are needed, for the reasons discussed above.
One of the first questions will be
whether this is a share or asset purchase. Normal considerations apply here.
Tax consequences will undoubtedly have a bearing. As well, there is always the
risk of undisclosed liabilities when you purchase shares rather than assets.
The risks and benefits of each course of action should be familiar to anyone
with experience in ordinary commercial transactions.
The differences between assets or
shares in IPR sales are more a matter of detail than fundamentals. For
instance, if you are hiving off one segment of a corporate group that owns IPR,
you should pay attention to the chance of rights being terminated. This could
apply in two contexts. First, the rights might be dependent on an agreement
with a third party that prevents their transfer or "spin-off".
Secondly, it might just be an internal circumstance where additional rights
that are needed to exercise the sold property remain within the vendor’s
control. In both situations, your due diligence investigations should recognize
this and provide for a solution.
Finally, the entire agreement, not
just the assignment, should be scrutinized by any lenders that may be
participating in the deal. Most of the major banks are now becoming more aware
of intellectual property issues, and are prepared to lend money on that type of
security. They still have specific needs, though, and your sale agreement
should take these into effect. It is tough enough to reach a deal between the
vendor and purchaser. If you have to substantially rewrite it simply because
your lender is not prepared to accede, you may put the entire deal in jeopardy.
The lenders should be apprised of the broad strokes of the deal at a very early
stage, and certainly before anything is signed.
Identifying
the parties
The agreement has to make the parties clearly identifiable, using :
- The name of the person or organization that requests
the authorization to use the work (recipient).
- The name of the person or organization that is the
author or that has the rights to the work (author or beneficiary).
The main difficulty raised by this kind of agreement is that
of checking that the party which claims to be the author or beneficiary does in
fact hold the rights referred to in the contract.
Indeed, during the "lifetime" of a work, several persons or organizations can own it or represent the owners of the various rights pertaining to it. For
example, one company may be responsible for marketing a work in France and
another in Italy. It is advisable to make sure that the author or the
beneficiary concluding the contract can actually assign the rights relating to
the work which is the subject of the contract.
Caution is also necessary if several authors created the work. Each one has
rights to the work as a whole, and the agreement of all the authors is required,
unless the co-author or beneficiary has a mandate (necessary in writing) from
all the collaborators.
Description of Property
This is fundamental to the operation
of the agreement, and yet more often than not it is put in without much
thought. Perhaps there is a communication gap between technical people and
lawyers in terms of explaining what is covered. Sometimes the vendor and
purchaser have been talking about the technology for so long that they just
assume they are both on the same page.
Even non-specialists know this is not
always the case. Particularly where the technology is an unregistered trade
secret, there is ample room for small or substantial differences in
interpretation between the parties. The doctrine of legal mistake can apply
where hard assets are involved but the principle is much harder to apply to
vague concepts.
This is where an understanding of the
technology involved can come in handy. For example, if you are buying software,
is it clearly spelled out that the source code is included? If not, the
property received may be useless because it cannot be easily modified. Do not
rely on assumptions that property is included. If it is not specifically
mentioned, add it.
The problem is less acute for
registered intellectual property rights such as patents, since you can simply
refer to the patent number itself. Remember, however, that pure patent sales
are rare. More often improvements or changes have been made, and the purchaser
wants access to this know-how in addition to the patent. All of these other
enhancements should be discussed and added if applicable.
We prefer to use a term called
"Technology" which is defined very broadly so as to include all
patents, copyrights, trade marks, trade secrets and other forms that the property
takes. Typically, the definition also includes improvements or changes to the
technology. Unless otherwise specified, all of the warranties, conditions and
terms of the agreement will therefore apply to the total bundle of rights, not
just to a single patent, or a single copyright.
A
typical definition clause may read as follows. Note that the term
"Technology" builds on other defined terms:
"Technology means any technology
owned by or licensed to the Company, its Subsidiaries or Affiliates related to
the Process [Products or Business]
including, without limitation, all Intellectual property Rights and Technical
Information."
"Technical Information means all
know-how and related technical knowledge of the Company, its Subsidiaries or
Affiliates relating to the Process [Products
or Business] including, without limitation:
(a) all trade secrets and other proprietary know-how, public
information, non-proprietary know-how and invention disclosures;
(b) any information of a scientific, technical or business
nature regardless of its form;
(c) all documented research, developmental, demonstration or
engineering work;
(d) all information that can be or is used to define a design
or process or procure, produce, support or operate material and equipment;
(e) methods of production; and
(f) all other drawings, blueprints, patterns, plans, flow
charts, equipment, parts lists, software and procedures, specifications,
formulas, designs, technical data, descriptions, related instructions, manuals,
records and procedures."
"Intellectual Property Rights
means all Patents, Trade Marks, Copyrights, Industrial Designs, and other
intellectual property rights whether registered or not, owned by or licensed to
the Company, its Subsidiaries or Affiliates relating to the Process [Products or Business]."
The definitions for Patents, Trade
Marks, etc all should similarly be broadly drawn.
Statement
of reasons
A short paragraph can be useful to define the context of the transfer of rights
agreement. It can also be expedient to indicate the reasons that lead the
recipient to ask for, and the author or the beneficiary to give permission to
use the work.
For example, the recipient can describe how he intends to use the work: on-line
distribution, inclusion on a CD-ROM or another piece of work, etc.
Although optional, the statement of reasons is useful as it enables the parties
to include what each of them (owner and recipient of information) expects from
the agreement. In the event of a dispute, it will enable a judge to understand
their motives more easily.
For
example :
« The company [...] (the recipient) intends to market the product [...]
containing a work, the rights to which are held by Mr [...] (the author)"
or "by the company [...] (beneficiary). The marketing of the product [...]
will involve the right of the recipient to reproduce the work, to adapt it or
to translate it.. »
Purpose
of the agreement
It is important to describe the purpose of the agreement, since this determines
the type of contract. Describing the purpose of the agreement can prevent the
contract from being reclassified as another type of agreement, for example in
the event of dispute.
For
example :
« The purpose of this agreement is to permit the recipient [company] to practise the acts necessary
to market [PRODUCT]» or « to put the site [ADDRESS], containing [work], on-line. Authorization will be
granted subject to remuneration, calculated according to the rules defined in [Article] by the author ».
Identifying
the work
It is imperative that the contract makes it possible to determine the work or
the works that are the subject of the authorisation with the greatest
precision.
When this work bears a name, this has to be quoted, as well as that of the
author, possibly as well as the part concerned when this involves only an
extract from the work.
It is advisable to accompany the contract with the work in question each time
it is possible to do so, for example by attaching a CD-ROM or any other format
containing the reproduction of the work concerned with the authorization.
The more precise the given information, the lower the probability of confusion
or misunderstanding (even bad faith), and therefore any consequent risks.
For
example :
« This agreement concerns the work entitled [...], as reproduced in
attachment (CD-ROM or attachment on paper). The authorization concerns the
whole of the work » or « the following parts or details [...]. »
Calculating
the remuneration
The author can request payment in exchange for authorizing the recipient to
exploit a work. In theory, this remuneration has to be proportional to the
profit that the recipient will make from using the work. It is also possible,
depending on a country's legislation, to pay the author with a lump sum.
In any event, that has to be mentioned in the contract:
- If the author is remunerated
"proportionally", the calculation rules and the methods of
payment for the rights have to be clearly established and described in the
contract (for example, payment of a fixed fee for each copy of the work
which will be produced) ;
- If the author is remunerated by a lump sum, the amount
and the methods of payment have to be mentioned.
Duration
of the contract
The duration of the authorization has to be mentioned, expressed either as an
expiry date, as a period of time or as a term.
Once the date, the period of time or the term has elapsed, the authorization will have to be regarded as revoked and the recipient will have to cease any
use of the work.
Confirmation of Ownership
If you don’t often practice in the IP
area, you will often fall into a conservative shell and requires guarantees of
title. This makes it very difficult for the deal to proceed. Unlike land,
there’s no exhaustive registry for IP.
What about the Patent Office, and the
Trade Marks Office, and the Copyright Office? All of these provide for
registration, so why not just search there? The short answer is that you do
have to perform those searches, but you still have to understand the
limitations.
None of the various IP offices serve
as guarantors of title and validity. Trade marks are a good example. You can
register a trade mark and get the official looking Certificate with a fancy red
seal, but there are several ways to nullify that registration. For example,
prior unregistered users have up to 5 years to come forward and prove that they
used the mark first. If this is done, the registered trade mark can be expunged
from the record.
Patents are another example. We have
heard figures estimating that anywhere from 70% to 90% of registered patents
are nullified once they are challenged in court. The patent system is not
intended or designed to guarantee that you have obtained a patent that complies
in all respects with any Patent Act. All the registration means is that you
have traversed the required hoops and hurdles, and at least one examiner
believes that you have a patentable invention or process. It is always open to
a court to find that your patent is not novel, or that it conflicts with an
existing registration, or that it otherwise does not comply with the Act.
This is one of the biggest
misapprehensions that the general public (and some lawyers) have about the
intellectual property registries. Make sure that you don’t have unreasonable
expectations about the quality of the technology or its protection simply
because it is registered. Just as importantly, ensure that you understand the
nature of the registries, and what their limitations are.
Due Diligence
A natural tendency is to be far too
conservative and suggest there is no way to purchase the technology because it
cannot be guaranteed. The answer lies in what is called due diligence. A more
straightforward description is "investigation". In order to protect
you, the investigation must be as thorough as possible.
As its name implies, the detail
required is only what is "due" given the circumstances. You will not
be held to the same standard for the purchase of a $1,000 software package as
for a patent worth millions of dollars. As well, you are free to constrain or
expand the degree of scrutiny in the investigation.
The key point is to make sure you
understand the limitations of your search. Documenting this understanding in
writing is a very good idea. Due diligence will not require you to become an
expert in the field. For major projects, you may have to employ engineers,
scientists, or other specialists who can opine on the strengths of the
technology and the business.
DUE
DILIGENCE PROCESS
1.
Find out everything about business/product being
acquired
The starting point is usually the
asset, whether it is a business that primarily uses IPR, or the rights
themselves. This is done first for two reasons. First, you plainly need to
gather information and this is the logical place to start. Just as important,
though, is that you need to find out what questions to ask. It can be extremely
daunting at the outset of a due diligence search, especially when you do not
have an underlying knowledge of the technology. Only by looking at the product
or business itself can you decide what further investigation needs to be done,
and who to ask for information.
You should attend at the vendor’s
business, and if possible, set up an office there so that you can properly
examine the materials. Not only does this save time in requesting and receiving
the inevitable "additional documents" that you will need, it also
helps you get a first-hand look at how the business operates. Often, you can
tell more from how the staff operates and treats confidential information than
you can from looking at all of the contracts in the world. If you see such
information being treated in a cavalier or careless manner, this should at
least trigger more detailed investigation on the point.
2.
Searches
We mentioned earlier that searches at
the intellectual property registry offices are no guarantee of ownership.
Nonetheless, these queries still have to be done to at least ensure the basic
steps have been complied with. This is another case where agents can be
necessary. For example, a patent agent may have to be retained in order to
given an opinion on proper registration.
You also must consider how far afield
your searches should go. It can become intimidating and expensive to start
searching outside of Canada and the United States because there are no
international registries - each country must be searched more or less
individually (the European Economic Community is a bit of an exception). As
well, the different rules in each country make it necessary to obtain local
agents in many cases.
3.
Computers
This is more important when you are
acquiring an entire business instead of one single product. Even where computer
software is not involved, you will want access to computer records. You can
determine a lot about a business simply by the software that is being used. You
can also find files that will need to be earmarked for destruction if and when
the sale goes through.
By this time, you should have an
understanding of the technology in general, and you will be starting to gear
your efforts toward determining potential problems. Some of the first items to
obtain and examine are copies of all contracts that involve the intellectual
property. A few of the things you will be looking for include:
· Are the contracts in good standing?
· Are any of the contracts terminable on a change of
control? "Control" is sometimes defined differently, so be sure that
a simple transfer does not trigger this.
· Is there any lack of assignability in the agreements?
While the general rule for contracts is that they are assignable without
consent, the rule is different for licences. A licence is considered to be
personal, and cannot be assigned without the licensor’s consent.
· Are there any options to purchase buried in the
contracts?
5.
Litigation
You will normally conduct searches
for writs, judgments and pending actions, but other investigations could point
out potential problems with the rights themselves. Much of intellectual
property litigation is conducted in Federal Court, so that Registry should be
searched. As well, the Patent and Trade Mark Offices may have records of
disputes or oppositions.
6.
Foreign Rights
If there are significant foreign
rights, it would be a good idea to talk to a lawyer in the jurisdiction
involved. As an example, many Latin American states require that inventions be
worked in that country for patent rights to be renewed. There is no way that
you can know these rules without help. There are many other things to be done,
but at the end of the day (or month) you should have a good idea of what the
situation is, and what significant problem areas remain.
Warranties
The representations and warranties
are one of the most important, and the most scrutinized, portions of an IPR
sale agreement. Their importance is obvious for reasons that have already been
discussed. For instance, proving ownership, or preventing the vendor from
continuing to use the technology, often comes down to no more than a
contractual representation. While you should do everything possible to protect
your interests, you must be careful not to go beyond what is practically
possible.
The vendor will often want to restrict
the warranties to matters within its knowledge. While this is part of the
negotiating phase, recognize that there are different shades of "best of
knowledge", each of which has subtle but important effects on the quality
of warranty given. Consider the following examples which vary in their
protection:
·
To the Vendor’s knowledge, information and belief,
there are no...
·
To the best of the Vendor’s knowledge, information and
belief, after due inquiry, there are no...
· To the best of the Vendor’s knowledge, information and
belief, after due inquiry, but without searching outside its own records, there
are no...
No matter what form of representation
you end up with, it should not be seen as a substitute for due diligence
(unless you and your client specifically make that decision). A representation
is, after all, only a contractual remedy, and is subject to defences,
judgment-proof parties, and the like. We will talk about the major
representations and warranties that are used in IPR deals, but like other
transactions, there will be many other conditions included in the final
agreement. As in any legal area, proper research and preparation is needed to
create a robust contract.
Guarantee
Before obtaining the authorization to exploit a work, the recipient has to
identify the author or the beneficiaries. But in many cases, it is essentially
impossible to check whether the other party or parties indeed hold the rights
that are intended for transfer.
The author of a work can, for example, entrust the use of a work to different
persons or organizations depending on the country or the way in which it is
used. In such cases, authorization will have to be obtained from several
persons or organizations. It is therefore particularly important for the
recipient to be aware of the rights that the other party is in a position to
transfer.
One way of obtaining this information is to contact authors' societies, which
are generally instructed by authors to exploit their work. A list of these organizations can be found in our "National Pages" section.
Even with the above information, it is nevertheless in the recipient's interest
to insert a guarantee clause into the contract. This clause would commit the
author or beneficiaries to compensating the recipient in the event of any
proceedings brought by any third parties whose rights to the work had been
violated.
Title
The paragraph that often causes the
most negotiation (or argument) is based on title. As was discussed earlier, it
is impossible for a purchaser to guarantee that it is receiving perfect title,
with no encumbrances or potential claims. The purchaser must recognize this,
but on the other hand, one should not let the vendor escape without any
warranty as to title at all.
This can be handled in many different
ways. It is rare for a well-informed vendor to warrant that the intellectual
property rights are valid; there are simply too many uncertainties in
litigation. This is not fatal to the deal from a purchaser’s perspective, but
the buyer will want something – perhaps some indemnities in terms of
infringement litigation that may arise in the future.
Here
is a common, if brief, form of representation:
"The Vendor is the sole owner of
all right, title and interest in the Technology free of any security interest,
charge or encumbrance."
For
comparison’s sake, here is one that we would not agree to from the vendor point
of view:
“The Vendor is the sole owner of the
Technology, and there are no claims, potential or existing, by any third party
against the Technology."
The most objectionable part is that
there is no way of knowing if third parties have a claim. As we have mentioned,
it is impossible to foresee this. A more subtle problem is in the looseness of
the phrase "sole owner". Does this include encumbrances?
Right to Sell
At the very least, the vendor should
be warranting that it has the right to sell the asset, and that there are no
encumbrances. This could be done as follows:
"The Vendor has the sole right
to assign the Technology and it has not assigned the assets to any other
person, nor are there any agreements, transactions or arrangements of any kind
that would restrict the assignment of the Technology."
Delivery
The next warranty or representation
you will want is that the vendor has and will deliver all of the materials,
documents, computer disks and other items that make up the technology. This
again is illustrative of the unique nature of IPR. There are few other assets that
can be sold in their entirety to a purchaser while still theoretically enabling
the vendor to hold on to everything. Without this warranty, it is tantamount to
selling a store, and letting the vendor retain an identical copy to continue in
business across the street!
"The Vendor warrants that all
documents, computer records, disks and other materials of any nature of kind
containing the Technology or any portion thereof have been [will be] turned over to the Purchaser,
and that the Vendor will not retain the Technology, or any portion thereof, in
any form whatsoever after the closing of the within transaction except as
specifically permitted hereunder. For the purposes of this Agreement, the term
"documents" includes all information fixed in any tangible medium of
expression in whatever form or format, and copies thereof.
It is very difficult to police
whether all materials have been turned over. We dare say computer files that
should technically be deleted are invariably left on the vendor’s hard drives.
This is not the main concern, however. For most purposes, you simply want a
contractual right to go against the vendor if they should try to sell or
benefit themselves from the property that is now the purchaser’s.
Sale of Goods
There is some controversy over
whether the Sale of Goods Act applies to sales of technology. Instead of
spending countless hours researching the point (and probably coming up with
inconclusive results) you might want to simply build the Sale of Goods Act
implied warranties directly into the agreement. The major ones should be
familiar: that the vendor has the right to sell, that the purchaser will have
and enjoy quiet possession, that the technology is or is not reasonably fit or
suitable for a particular purpose, and so on. Again, be careful of inserting
these without thought. A clause that warrants quiet possession can conflict
with the risk of infringement claims brought by third parties.
Indemnities
The issue of indemnities is closely
related to warranties and representations. In most cases, there will be a
blanket indemnity for breach or misrepresentation with respect to any warranty.
This is one of the areas where the risks can be more significant to the vendor.
For instance, the purchaser may ask for an indemnity against patent
infringement actions. A significant danger arises if the indemnity forces the
vendor into bringing patent infringement actions (or to pay for any such
actions brought by the purchaser). One fact should dissuade a vendor from even
hinting at such an indemnity: the average cost of a patent infringement suit in
the United States is estimated to be $500,000.00 to $700,000.00. In the Nigeria, it varies. As a vendor,
there is no way that you want to be irrevocably committed to those amounts, and
you should not even entertain the possibility of indemnifying them without a
clear escape hatch.
International Differences
We have already mentioned the fact
that due diligence investigations need to recognize international issues. This
is no less important when dealing with the sale of the technology itself. In
today’s economy, it is rare that you will find a sale that deals exclusively
with a specific country’s rights and territory. Indeed, even matters in other
states/provinces might require specific legal advice from that jurisdiction.
Encumbrances
As mentioned previously, a purchaser
will want a warranty that there are no existing or threatened encumbrances
against the IPR. This should be seen as a fallback position only, since due
diligence searches can ferret out most of these beforehand. One of the common
culprits is a licence that has already been granted to another person. There
are rules at the IP registries that permit a purchaser to take free of
unregistered licences, so some sort of search should be high on your list.
Authorship claims can approach the level of an encumbrance. You need to
determine who actually developed the technology. You may have to interview
those persons to determine whether they have retained any rights. Consider also
obtaining releases where appropriate.
The author’s identity is significant
because of the way intellectual property law has developed. While intellectual
property rights have been treated as "property" for the most part,
there is still an element of mystique around the creative process. The original
author can sell the products of his/her mind fairly freely but the common law
and statutes still permit the author, in certain cases, to "reach
through" a sale agreement to restrict or prevent particular activities.
Moral rights (discussed under the copyright rules below) are an example of
this. In effect, these rights act as an encumbrance on the rights of the owner
to fully and completely deal with the property that it holds.
It is also appropriate to discuss the
matter of compulsory licenses in this context. As you know, the monopolies that
are granted by patent, copyright and the like represent a balancing of
interests. It is felt that without these monopolies, inventors and creative
persons will not be inclined to produce works that benefit others. On the other
hand, there is a public interest in furthering the free flow of information to
benefit society as a whole. To alleviate the monopoly’s stifling effect,
compulsory licenses have been used in some instances.
As its name implies, a compulsory
license involves someone stepping in (usually a government or quasi-government
authority) and forcing the owner to licence the technology on specific terms.
For instance, if the Commissioner of Patents is satisfied that a patented invention
is not being worked on a commercial scale three years after the issuance of the
patent, a licence may be imposed. Ordinarily the licence will be non-exclusive,
but the power exists to make it an exclusive licence.
This is significant for sales of
technology because the purchaser will want to know when there is a risk of a
compulsory licence being granted. In some cases, the purchaser has no intention
of working the technology. It may be trying to protect other technology that it
already owns by "burying" the new developments. You should be
alerting your client to the chances of a compulsory licence being imposed.
Notification to Registries
Because the IP offices serve as
notice registries, it is important to amend filings as quickly as possible. It
is not unheard of for vendors to sell technology more than once, and only those
who have properly registered their purchase may prevail. Accordingly, your
post-closing checklist on behalf of the purchaser should ensure that this step
is not missed.
Improvements
This is more of a licensing issue,
but it can arise in pure sales. The main thing to remember is that intellectual
property rights are rarely static. Even after patent registration, the
inventors and others will be working to improve the device or process. Thus,
the description of property sold should not just refer to the patent or
copyright itself, but also to improvements, trade secrets and general know-how
emanating from the invention.
In the last century, there was some
dispute over whether a sale or assignment of IPR could include future
improvements. It has been argued that a clause assigning improvements is
contrary to public policy because it would discourage inventions. Of course,
there is little incentive for a vendor to be working on improvements at all if
it has already assigned the benefits to another party.
Term of Warranties
The issues here are quite similar to
those existing in ordinary asset sales. As a rule, the purchaser will want
warranties to extend indefinitely, or at least as far into the future as
possible. The vendor will prefer a very short term of warranty, so that at some
point it can consider itself free of future liabilities.
Given the rapid rate of change
inherent in intellectual property rights, there is probably some basis for
arguing that the warranty period should be fairly brief. This is a bit of a
problem with statutory intellectual property protections in general. While
computer programs can conceivably be protected for well over a century (the
life of the author plus 50 years), nobody realistically expects that there will
be any value in today’s software that far down the road.
On the other hand, the uncertainty in
an IPR deal puts more risk onto a purchaser. The argument therefore goes that
warranties should be beefed up. While we agree that this puts more importance on
the scope of warranties, we do not necessarily accept the term should be longer.
The end result is that these academic discussions do not much matter; the
question will be a matter of negotiation among the parties.
Restrictive Covenants
We mentioned earlier that a sale of
IPR allows one to "sell the store" but retain an identical copy.
After scrutinizing countless contractual details, it can be easy to lose sight
of the purchaser’s main goal: it wants to take over the vendor’s business or
property without having to compete with it later.
Unfortunately, the restriction on the
vendor’s future business may be overlooked in the final agreement. This can
easily be rectified with a specific clause, but it does have to be kept in
mind.
The restriction should also be
suitably broad, not just related to operating a business. For instance, your
purchaser client would probably not take kindly to the vendor applying for new
patents for similar or competing devices/processes, or assisting others in
doing so.
Specific Differences
Until now, the discussion has
centered on matters that apply to all kinds of intellectual property rights. As
other presentations make clear, though, there are differences between these
rights. These variances need to be accounted for when drafting the sale
agreement.
Patent
Patents now require an annual
payment, called a maintenance fee. As part of your search process, you will
want to ensure that these fees are up to date, or else you risk the chance of
losing the patent altogether.
The next point has been mentioned
before but is important enough to repeat. Do not assume that a patent sale is
just a sale of the patent. While the registration of a patent may be the foundation
upon which the technology is based, there will usually be enhancements (called
know-how or show-how) that may not be reflected in the patent. Ensure that the
description of the property sold is broad enough to cover these improvements.
As part of this, you may also want to
find out if there are any pending improvement applications. If so, have them
included in the description of the technology.
Copyright
Copyright is one of the protections
that does not require registration at all – it exists upon publication. For
this reason, parties tend to ignore it a bit. We suggest your review should not
be so perfunctory for a few reasons.
First, there are some rights granted
in The Copyright Act that are outside mere copyright. In particular, be
aware of moral rights. These rights
deal with the protection of an author’s reputation. Apart from normal
copyright, the author retains two moral rights: the right to integrity of the
work, and the right of association or disassociation.
The first right protects the author’s
reputation. It would clearly be possible to modify a computer program so
severely that it became "a piece of garbage". The Copyright Act
grants a special status to authors to prevent such drastic modifications, even
though the copyrights themselves may have been dealt away.
The second moral right also involves
reputation. The author can require his/her name to be associated with the work,
or can require it to be not used therewith. This latter aspect might be
especially important if you are dealing with a famous author and would like to
trade on his/her reputation. For instance, some authors have a strong
reputation, and you probably would want to take advantage of this popularity.
Therefore, you should be sure that you can use the name in advertising and
such.
Moral rights rest with the author,
and cannot be assigned or transferred. They can, however, be waived. This
brings up a couple of points to watch out for. First, if you are purchasing
copyright from someone who is not the author, determine the status of the moral
rights. It may be that the vendor, or its predecessors in title, never bothered
to obtain a waiver. Even though you will be purchasing the copyright, the
author may thus still have some control over how that work is presented or
modified. The second point, of course, is that if you are dealing directly with
the author, obtain the waiver. There is no reason that you as a purchaser will
want to leave those rights with the author (unless he/she is giving you a take
it or leave it proposition).
The next thing to look out for is the
remaining term of the copyright. This is actually a problem with any rights
that cannot be renewed because you need to have enough term left to make the
purchase worthwhile. It seems to be extra important for copyright, however,
since not many people bother to check the rules for length of copyright.
You still should know what length of
time you are dealing with, and again it is important to know who the author is.
This is because the term can depend on the date of the author’s death (usually
copyright exists thereafter for 50 years). Also, some jurisdictions allow
compulsory licenses to be granted during the latter years of the term. The most
obvious thing to mention here, but one that is often overlooked, is not to
assume that the vendor is the author. Only by determining who the author is can
you calculate the term.
Computer software is a common
copyright situation these days, but we want to deal with it separately. This
guide will not go into all the nuances of computer software sales because it
would quickly double its length. We will make a special plea, however, to be
familiar with the industry. The culture is totally different from other
businesses, and in many cases the differences fly in the face of normal
business practices.
Some of this is driven by the players
involved. For many years, the large hardware companies such as IBM treated
their standard form contracts as sacred. Even large buyers like General Motors
could not get individual clauses changed, so there was little hope for smaller
companies. A lawyer who wanted to do his/her client the most good with the
least cost would recognize this, and not bother to negotiate contract details.
Instead, the negotiations might concentrate on flexible options like payment
terms.
A more current example of this need
to understand the industry is in the product that software developers can
supply. There is not one software developer, from Microsoft down to Bill’s
Software, that can afford to warrant its product as defect-free. Today’s
software is much too complex to eliminate all bugs. As the purchaser, you have
to recognize this and not demand guarantees of perfection. This does not mean,
however, that you cannot include maintenance or upgrade protection clauses.
The other major factor to be aware of
in computer software situations is the difference between source code and
object code. Computer programs are typically written in what is called a
high-level language. These languages, such as C+, Pascal, or BASIC, use
English-like commands to speed the development cycle. The result of this
writing process is called the source code. In order to allow faster and more
efficient execution, the source code is then compiled. Compiling translates the
source code into something the computer can understand, called object code. The
important thing to remember is that object code is virtually impossible to take
apart and modify. Although it is theoretically possible to reverse engineer the
object code, it is beyond the technical and financial capabilities of most
users. The source code is needed to accomplish the modifications.
In other words, purchasing object
code without the source code is equivalent to buying a car with the hood welded
shut. You can still operate the vehicle, but if you ever want to repair or
upgrade it, you are out of luck.
Trade Secrets
Patents are the most famous class of
intellectual property protection, but trade secrets are the unsung heroes. Many
people are surprised at how many more trade secrets are bought and sold as
compared to patents.
This arises for a few reasons.
Patents have priced themselves out of the reach of many, and besides, a lot of
parties like the idea of keeping ideas confidential (patents by their nature
are disclosed to the world). Further, it is rare to see just a patent sold, or
just a copyright. There are often improvements or know-how that has been
developed concurrently or subsequent to the registration itself. Even though
this is not protected by statute, it is still very valuable and something that
should obviously be part of the sale.
Trade secret lesson number one is to
scrutinize your own internal controls and keep them as secure as possible.
Respect this attitude, and make sure
your office and systems evidence the same spirit. Do not leave guides or other
materials lying around so that others can glimpse them. Instill within your
staff and colleagues the view that absolutely nothing is to be disclosed or
even discussed unless necessary to the client’s affairs. Success or failure in
the world of intellectual property can turn on any piece of information, no
matter how small, and there is no room for mistakes on your part.
It is also worth checking whether the
proper steps were taken when the vendor and purchaser started talking. The
vendor normally does not release any information to the purchaser, even for
negotiating purposes, until a non-disclosure agreement is signed. By doing
this, the seller is protected in the event the negotiations break down. As the
vendor, you should review that agreement to make sure it is adequate. If for
some reason one was never signed, and it is not too late, sign a contract
before further information is disclosed.
Although there is not a federal Trade
Secrets Act, remember that some jurisdictions do have registration or
compliance legislation dealing with confidential information. Ensure that this
is followed.
Trade Marks
Trade marks are unique in that they
can be renewed. Unlike a patent or copyright, it is theoretically possible to
maintain a trade mark forever.
To accomplish this, a few things have
to be done. First, you need ongoing renewal. The term of a trade mark is 15
years, renewable for further terms of like amount. Your searches should
disclose whether there are any problems here.
Secondly, remember that a trade mark
derives its rights from use, not registration. Not only do you need to ensure
that registration is up to date, you have to uncover and investigate whether
the foundation is stable. For most purposes, this means that the mark has been
used continuously, and continues to be used. As well, are there indications of
infringing uses that, if allowed to go on, might harm your trade mark’s
exclusivity? All of these are part of the due diligence, and are very important
to keep the rights intact.
On occasion, you will not be dealing
with a registered trade mark. Unregistered, or common law, trade marks are also
valid and can ground actions for passing off, among others. The searches
required for common law marks are much more detailed and time consuming. There
are several companies that can conduct these investigations for you.
