Who Owns the IP? The Importance of Entitlement Due Diligence If you intend to buy or license intellectual property (IP) assets, or buy or invest in a company rich in such assets, you should conduct due diligence on those assets. There are a number of due diligence questions you can ask. However, first and foremost, should be the question: who owns the IP?
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Knowing who owns the IP, or who is entitled to the IP, is very important, because the owner is the person who controls the IP. Many think the answer is obvious, but this is often not the case. It is quite common for a seller or licensor to misunderstand entitlement, and to inadvertently come to the wrong conclusion on ownership. You should, therefore, challenge assumptions about entitlement. In order to analyse entitlement, you must first know the type of IP you are dealing with, and each type of IP is different. In the case of patents, the inventors are the first owners. Thus, for example, you can ask whether an inventor listed in the patent application actually devised the invention. For a copyright work, such as a computer program, the author (i.e. the programmer) will be the first owner. However, you also need to question how many programmers “authored” the work. When it comes to trade secrets, to clearly identify the “owner” of the secret you need to determine who has the right to take action in the event of the misappropriation or unauthorised disclosure of the information (and against whom that action can be enforced). The first owner of the IP may not be the current owner (the “assignee”). Often, the assignee is the first owner’s employer. In the UK, an employer is automatically entitled under law to most IP rights created by its employees in the course of their employment. But this rule may not apply to company directors and it will not apply to independent contractors, where instead contractual terms transferring IP to the assignee are needed. In other jurisdictions, automatic entitlement may not occur (such as in the USA) or may require certain additional steps and actions (such as in Germany). Your entitlement analysis, therefore, needs to take into account the relevant laws of the country in which the IP was created, and then it must ensure that everything necessary was done to vest the IP in the seller or licensor. You also need to be aware of the possibility that the IP has already been assigned, or is promised, to a third party. Any such agreements with third parties should be closely inspected. Furthermore, IP can be jointly owned. In such cases, you need to be clear whether you are buying the whole of the jointly owned IP or a share of it. If you are buying all of it, then the entitlement of each of the owners needs to be examined. You will also need an assignment from each of them. If you are buying a share, you need to check that the seller is entitled not only to the share of the IP they are selling, but also that they have the necessary permission to sell it. In some jurisdictions, further rules may apply. For example, someone seeking to sell a share of a French patent may be subject to the co-owners’ preemption rights. Similar issues also arise where you are licensing jointly-owned IP.
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Alongside this, you also need to determine whether the IP you are buying or licensing is “encumbered” by the rights of third parties. This might include a licence (which would limit freedom to operate) or a security charge (that will need to be discharged before the sale). If you are dealing with registered IP rights, such as patents or trademarks, encumbrances may be recorded on the national registry. If you are dealing with unregistered rights (such as copyright), then you must rely on the seller’s answers to specific questions you raise, or the warranties you set out in the sale and purchase or licence agreement. A transfer of the ownership of IP is achieved by way of a written “assignment”. In some places (UK, USA and Japan for example) an assignment can be effective even if it is only signed by the assignor. But elsewhere both the seller and the buyer may need to sign, and often specific formalities such as witnessing or notarisation may also be needed for the assignment to be effective. Getting the assignment document correct for each national IP right is critical to ensuring that the property transfers to the new owner. A correct assignment document is also necessary to ensure that the “recordal” of the transfer of registered IP assets in the relevant national IP offices. This is an important step. In the UK, failure to record an assignment within 6 months of the transfer may affect your ability to recover litigation costs. In other jurisdictions there may be harsher consequences, including the inability to enforce your newly acquired rights. Finally, we are often asked what the value of an IP asset is. This is rarely an easy question to answer, because (unlike, for example, cabbages) IP rights are, by their nature, varied and unique. Many different valuation schemes exist, and the most appropriate scheme will depend on the circumstances. However, whichever valuation method you choose, you are unlikely to want to publicise the value. Fortunately, you usually do not need to include the real value in the IP assignment, which is potentially a public document. Instead a “nominal” sum of £1 often suffices. However, a paper trail linking the assignment back to the true value may be advisable, for example to allow tax auditing. ABOUT THE AUTHOR Mewburn Ellis LLP is a leading firm of European patent and trade mark attorneys offering the full range of IP right legal services, including obtaining, enforcing and exploiting IP rights. Dr Sean Jauss is an English qualified solicitor and partner in Mewburn Ellis LLP. He is head of the legal department specialising in science law and IP. He and his team provide focussed and pragmatic legal advice to support of clients’ science and research objectives, and protecting and commercialising their IP.