IP Matters in the Due Diligence Process
→ Jiří Hrádek
A number of issues may arise in a transaction where a new owner acquires a business or assets and can play an important role in the decision-making process. Issues relating to intellectual property matters must be carefully checked before making a decision on a purchase.
When deciding to purchase an enterprise, regardless of whether as a share deal, asset deal or part of enterprise, most investors ask their lawyers to carry out a due diligence of the purchased target. Due diligence is extremely important, because it may reveal serious deficiencies in the purchased target and save the investor money, as he can apply the outcome of the due diligence in the negotiation process.
Although most investors are aware of the necessity of due diligence, the extent of due diligence is often subject to dispute. Lawyers see all the risks that may be connected with an enterprise and that apply to real estate, corporate issues or contracts. The company often uses diverse trademarks, logos and designs, is a provider of websites or uses know-how from related companies or persons.
These issues relate to intellectual property matters and must be carefully checked before making a decision on a purchase. The discussion should not be based only on current matters, but also on the future plans of the investor.
IP matters in question
As regards trademarks and logos, the real owner of protected rights in the Czech and international registries always must be verified, as well as whether the company has concluded a licence agreement that entitles it to use these rights in the Czech Republic. This verification is not very time and money consuming, as the Czech Office for Protection of Industrial Property (UPV) operates a reliable online database and the same can be found worldwide. The World Intellectual Property Organisation (WIPO) provides the Romarin system and the Office for Harmonisation on the Internal Market (OHIM) this year started a new online database. Moreover, the UPV offers a national and international search service which is well structured and prepared.
Websites must be verified to see whether there is a potential conflict with existing domains, trademarks or business names of third parties, which could lead to long-term and expensive disputes and which could potentially endanger the operation of the website. In addition to domains, content is often important from the point of view of copyright. A photograph on a website that was taken from the internet can potentially lead to compensation obligations on the part of the company. Therefore, it must be verified whether the company concluded all necessary licence agreements with the authors of the copyright-related content, such as web designers or the authors of the photographs and designs used.
The use of inventions, utility or industrial designs is mostly protected either by related companies or by third parties. After the sale of the business, all relations with former related companies and thus IP rights owners will be lost; therefore, the company needs to ensure that it does not lose the ability to operate its business.
An important issue related to all of the above-mentioned matters is the role of the employees who created the particular object of IP rights. Although Czech law provides a complex regulation that entitles employers to carry out the right (invention, copyright etc.), the law enables the employee to specifically agree on a regime of use of the invention or copyright-related content or even ask for higher remuneration than provided by law. The investor must be aware of these facts before taking over the business or assets.
There are a number of issues that may arise in a transaction where a new owner acquires a business or assets in addition to those mentioned above. These can play an important role in the decision-making process.
IP matters sometimes may be even more relevant than the other “standard” issues and underestimating these matters can lead to serious consequences. Schönherr can detect and eliminate them in advance during the due diligence process.