How to Prevent an IP Nightmare

Originally Published on the Marks Gray Blog

In the arena of buying and selling businesses, the tangible elements involved are often the first items that come to mind. Most brokers, agents, and business owners always remember the basics such as financial statements, deeds, and contracts. However, there are key elements of businesses and business structures that are often never taken into consideration during the selling process, specifically Intellectual Property.

Intellectual Property is often overlooked by the average buyer or seller because they fail to recognize the value of the intellectual property assets to the business.  Often sellers fail to properly identify intellectual property assets, buyers fail to perform a proper due diligence search and both parties fail to make sure proper assignments are filed with the appropriate government entity immediately after the sale of the business. For this reason, it can present the biggest nightmare after a sale due to the lack of accurate information and proper follow-up. Let me explain this process with a nightmare example from a previous case.

A few years ago, I was contacted by a client and asked to prepare and file an assignment for some patents and trademarks.  The patents and trademarks had been included in the sale of the company a few years previous but no one had ever drafted the assignments and filed them with the United States Patent and Trademark Office (USPTO). The process took me much longer than normal because the official who had signed on behalf of the seller had suffered a stroke and was no longer competent to sign any documents.  I had to locate the guardian who had been appointed by the court and explain to him what I needed.  In the end, everything was properly signed and filed but I did not understand why no one had made sure all assignments were properly completed and filed at the time the sales agreement was completed.”

Prior to the sale of a business, the owner should identify all intellectual property assets that belong to the company. The owner should have a complete list of Intellectual Property items such as:

  • trademarks (registered and not registered)
  • copyright registrations
  • patent registrations
  • trade secrets
  • domain names

 

The owner should be able to provide proof of ownership of all intellectual property assets.

 

Trademarks, Copyrights, and Patents

The owners should reveal whether or not there are any licensing agreements for the trademarks and patents, and provide copies of the licensing agreements to the buyer. All royalty agreements for copyrighted material owned by the business should be included.  If there are any confidentiality agreements, non-compete agreements or invention assignment agreements with employees the buyer should be made aware of the agreements and receive copies of the agreements.

The buyer should understand what the trademarks, copyrights and patent registrations cover.  For instance, is the trademark registration just for the words but not include the logo? The buyer should have a clear understanding of what claims the patent registrations cover and if the patents pertain to the current products that are being sold by the company.

The buyer should review all state and federal trademark and patent registrations the seller claims to own and verify ownership, validity and if the registrations are current or expired.  Sometimes, small business owners register trademarks and patents in their individual names instead of the company name because they want to maintain individual ownership of the asset.  There should be a frank discussion as to whether or not the individual owner of the trademark or patent is going to include the asset with the sale of the company.

 

Trade Secrets

If the owner of the business has properly maintained trade secrets there should be confidentiality agreements in place with employees and vendors.  Trade secrets may include recipes, formulas, unique methods, designs, devices, engineering information and prototypes. The buyer should verify that the seller intends to turn over the trade secrets as part of the sale of the company. If the trade secrets are included in the sale of the business the buyer needs to know what steps were taken to maintain the confidentiality of the trade secret (i.e. locked in a safe, limited access by employees, labeled as confidential, training provided to employees).

 

Domain Names

All domain names and websites owned by the company or used by the company should be listed as part of the assets of the company. The buyer should verify that all domains names owned by the company are included in the sale. If this item is not included or covered you could be walking into a hairy situation…

“I was contacted by a person who purchased a hair salon. The sales agreement did not include the company website and domain name as an asset of the business. Getty Images accused the new owner of the business of copyright infringement because the website contained Getty Images that had not been properly obtained prior to the sale of the hair salon.  The buyer and seller of the business fought for months over who was responsible.”

If the sale or purchase of a business is done correctly, all of the intellectual property assets of the company are identified, verified as valid, inventoried, and included in the sales agreement. Assignments should be signed at the same time the sales agreement is signed and filed with the government entity that issued certificates of registration (i.e. USPTO, State of Florida Division of Corporations) and copies provided to all parties.

A good intellectual property lawyer can help buyers and sellers’ save time and money by conducting a due diligence search and review of all intellectual property assets prior to the sale to ensure the process does not become an “IP Nightmare” for both parties.

 

Crystal Broughan is an intellectual property law attorney with Marks Gray, P.A.  If you would like to learn more about Marks Gray’s intellectual property law services please contact Ms. Broughan at [email protected]ay.com or 904-807-2180.