The fact that a target company uses certain intellectual property rights does not mean those rights can continue to be used in the same way after a business is transferred.
Where IPRs have been developed in-house by employees of the target company as part of their normal employment duties, UK legislation generally gives the company automatic ownership of patents, copyright works, database rights, and unregistered and registered designs. This is usually confirmed in employment contracts. The rules are not the same for all rights or in all circumstances, so each needs to be considered in turn.
Intellectual property rights
It is essential to establish how intellectual property rights were developed.
Intellectual property rights (IPRs) can be either registered (such as patents, registered designs and trade marks) or un-registered (such as copyright, know-how, or unregistered trade mark and design rights). IPRs are commonly accumulated over a period of time. In the case of un-registered rights, they are most likely not listed in an asset register. It is also common for the seller of a target business not to recognise the existence of certain IP assets (such as copyright works) at all. Identifying the IPRs a target company uses in its business and how those rights were developed are essential steps in making sure that the company can continue using those rights following a transaction.
Employees
Contrary to employees, a third-party consultant or contractor will usually own the IPRs they develop during their engagement with a company, even if they are engaged and paid specifically to create such IPRs. It is therefore vital to ensure that either the contract with the consultant contains adequate and legally effective assignment provisions (and not merely an ‘agreement to assign’), or that a separate assignment of IPRs has been entered into. If due diligence determines that valuable IPRs are still owned by a consultant or contractor, the target company should approach them as soon as possible to assign the IPRs to the company. Not engaging with the third-party consultant or contractor early enough could delay completion where the IPRs are an essential asset for the buyer.
Third parties
Where IPRs are used in common with the seller or other members of the seller’s group, the rights may be used under a common licence, or the arrangements may be informal. Sometimes, there is a lack of clarity on which group entity owns certain IP assets and the basis on which the target company is permitted to use them. Either way it is important to put a separate arrangement in place at the time of the transaction to ensure the rights can continue to be used.
Common use
It is also important to beware of domain names. Although strictly speaking these are contractual rights rather than IPRs, they are often linked to the brand name of a target company. As an important customer gateway, domain names can represent a significant part of the value of a business. Company domain names are often registered under the personal name of an employee, possibly in the IT department. If this employee has subsequently left the company, that can cause difficulties with moving the domain name to the rightful owner.
Domain names
For many businesses, the most valuable IP asset is the “know-how” in the proprietary methods, processes and techniques relating to their goods or services. In legal terms, know-how is protected as confidential information, making it difficult to itemise in an asset register. Due diligence enquiries should review the target’s use of NDAs, access restrictions and other measures aimed at preserving confidentiality of any key know-how.
Know-how
It is essential to consider the target’s dependence on third party IPR. Where the target company holds any critical IP assets under licence, those licences should be clearly documented, robust and secure, and not terminable due to the transaction. The impact of third-party rights over the target company’s own IPR (e.g., continuing licences, use restrictions under settlement agreements, or joint ownership) should also be considered.
Third party rights