To be successful, a business must also be dynamic. Its survival and growth depend on obtaining financing, setting up partnerships or acquiring complementary or competing businesses. In all these transactions, intellectual property assets play a prominent role. This is why the evaluation of these assets must be scrutinized during the due diligence, a process which allows the purchaser or financier to examine the object of the proposed transaction. This is a crucial step which reveals a company’s soundness and value.
In many start-up companies, intellectual property is the main, if not the only, asset. Intellectual property includes patents, trade-marks, copyright, industrial design, trade secrets, know-how and confidential information. Not all businesses have a portfolio filled with these types of intellectual property but businesses that have no intellectual property are rare.
A patent protects an invention, whether it be a process, a machine or the manufacturing or composition of material, as well as improvements to an existing invention. Trade-marks protect the word, symbol, design or a combination of these elements which distinguish a company’s products or services. Copyright protects literary works, which may include a web site, software, a brochure, a book or documentation, and artistic works, including photographs, drawings, plans, musical works and dramatic works. An industrial design protects the configuration, form, motif or decorative elements of an object or a manufactured article.
Trade secrets, know-how and confidential information are protected through agreements and cover any information which is not disclosed and which constitutes a commercial advantage for the person holding the secret. They are therefore verified with the use of related agreements including more specifically confidentiality, non-competition, non-disclosure and technology transfer agreements.
Although intellectual property is intangible, it is of significant importance during the sale of a business, the transfer of technology and financing. This is why consulting an intellectual property lawyer is essential to the due diligence process.
It is important first to identify the inventors, authors or holders of the rights to ensure the validity of the chain of title of the assets in question. Employment agreements or the intellectual property policy set up by the company must be read carefully to validate the chain of title. Contrary to the Patent Act, which is silent on the issue, the Copyright Act provides that any work made in the course of employment belongs to the employer, unless indicated otherwise.
A due diligence also includes an examination of the scope of the rights to each asset. For patents, any claims must be examined. A search for existing patents in the same area to find out the permitted uses is also recommended. For trade-marks, copyright and industrial design, a review of the licence and transfer agreements lets you identify the extent of the rights. According to the relevant legislation, there must be a written document for most transfers or licences of intellectual property. It is also recommended that the transfer document or assignment of an intellectual property interest be registered so it can be set up against third parties in good faith. If security or movable hypothecs have been granted on any intellectual property registrations, they should appear in the relevant register of the Canadian Intellectual Property Office (CIPO) as well as the Register of Personal and Movable Real Rights (RPMRR) and will be discovered during the due diligence.
In an assignment of a licence or franchise contract, the characteristics and quality of the goods on which the mark will be placed or advertised by the licensee should be mentioned; it is important for a trade-mark owner to retain control of these aspects so the use by the licensee will have the same effect and will be deemed to always have had the same effect as if it was used by the owner, and thus benefit him. It is important to recall that a trade-mark must always retain its distinctiveness and identify a single source.
Certain intellectual property assets, such as trade-marks and copyright, do not require registration to exist and be recognized. Trade-mark rights exist through their use alone whereas copyright exists as soon as a work is created without having to be registered. Of course, there are several advantages to registration which should be considered. The representations and warranties found in agreements to this effect are very important.
It is useful to recall a copyright principle too often forgotten by business executives, namely that the rights to a work such as software, an advertising campaign or other work created by an outside consultant are not automatically transferred or assigned to them just because the consultant is paid for the services rendered. For the rights to a work that has been ordered to be assigned, there must be something in writing to this effect in the agreement or purchase order transferring the consultant’s rights to the company. Otherwise, the consultant is and remains the first owner of copyright to the work in question. We note in passing that there are two aspects to copyright in relation to a work: pecuniary rights (copyright) and moral rights. Moral rights, which are essentially the right to be associated with the work as the author and the right to the integrity of the work, cannot be assigned. It is therefore useful to ensure when signing a service agreement and ultimately during the due diligence that the author of the work has waived his moral rights. This will allow useful changes, additions and updates to be made to a work, such as software, in a timely manner.
Special attention must also be paid to infringement proceedings and proceedings to contest a trade-mark or have it cancelled, in order to ensure the legitimacy of the rights covered by the transaction.
Lastly, it is important to remember that intellectual property rights are only protected in the territories where they were obtained. The due diligence process should therefore extend to other countries if a company has activities outside Canada.
Constant monitoring of your intellectual property assets is an investment that will pay off over time. Companies that devote time and resources to the management, use and protection of their intellectual property assets can become more competitive and increase their presence on the market and thus enhance their value. Accordingly, it is to the advantage of the vendor of a business to properly manage its assets and of the purchaser to be diligent in evaluating the intangible property to be acquired as part of a transaction. The involvement of an intellectual property expert in your projects and on the due diligence team could make all the difference to the success of your transaction.