Due Diligence | Part 5 | Intellectual Property Issues
In today’s post we’re continuing our series on due diligence and our series on the purchase and sale of a business. So far we have covered the financial, legal, and operational issues associated with the due diligence process, and today we’re going to explore the intellectual property issues associated with due diligence. For many businesses, the most expensive asset the company owns is its intellectual property, which makes understanding any IP-related issues increasingly important.
Registered Trademark Rights
One important issue to explore when purchasing a business is whether that business has any federally registered trademarks. By registering a trademark with the United States Patent and Trademark Office (the USPTO) you receive broader protection for your trademarks and an enhanced ability to protect your trademarks from infringement. If the company has a registered trademark, it will be published in the USPTO’s official gazette, and the company should have a trademark registration certificate. You can search for trademarks on the USPTO’s website. You can check out our blog post series on protecting your trademarks to learn more about the benefits of registering your trademarks.
You should also explore who owns the company’s trademarks. Some business owners file for trademark registration under their own individual capacity, which means that the business owner owns the trademark, not the business. In those instances, you will want to require the seller (business owner) to assign the trademark rights and interests to the company. If you fail to do so, you may face a trademark infringement lawsuit if you continue to use a trademark that is owned by the seller and not the business. You will also need to file the trademark assignment with the USPTO to ensure that you acquire all rights and interests in the mark.
Ownership of Work Product
Does the company you’re buying work with independent contractors or employees that create valuable products for the company? Does the company have an employment agreement with these individuals that states that all the work that is created for the company is owned by the company, i.e. that it is a work made for hire? Some businesses forget to protect their ownership of the work product that its employees create, and run into disputes when employees think they own their work product. It’s important to explore the company’s various contracts to determine what rights it has in regards to employee work product.
Who Owns the Patents?
Does the company own any patents on its products? Do any of the individual owners of the company who the patents on the products? You will need to ensure that any registered patents are property of the company to make sure that you are able to produce and sell the products without requiring permission from an individual patent holder. Patents are one of the most valuable pieces of intellectual property that a business can own because they essentially provide the company with a monopoly on a particular product, i.e. no other company can manufacture and sell the patented item.
Passing on and Protecting Trade Secrets
Does the company have any particular trade secrets that will be passed on to you when you purchase the company? Most businesses have trade secrets, i.e. ideas and processes for completing tasks that are secret, or not available to the general public. Trade secrets are valuable assets to a company. For example, Bush’s Best (baked beans) is far less valuable if the recipe is known to the public.
During due diligence, you will want to identify the key trade secrets, explore whether those trade secrets are adequately protected from dissemination, and identify ways to protect those trade secrets moving forward. Trade secrets should be reasonably protected from dissemination, i.e. Bush’s Best should take steps to guard against employees disclosing its secret recipe for its famous baked beans, which may include keeping the recipe in a locked door, on a password-protected computer, or a hand-written piece of paper that only the managers have access to.
Other Intellectual Property Agreements
The company you acquire may have additional intellectual property agreements with clients, customers, and other colleagues that allow others to use the company’s intellectual property for limited purposes. For example, the company may allow marketers to use its trademarks for the limited purpose of selling its products. You should carefully review these agreements to make sure you are aware of who can lawfully use the target company’s intellectual property, and how it can be used.
If you want to learn more about the intellectual property issues during due diligence or protecting your company’s intellectual property, check out this post, contact us or schedule your free consultation today.