Mergers & Acquisitions: The Hidden Risk in Trademark Assets

Introduction

In the fast-paced global economy of today, mergers and acquisitions (M&A) have become essential tools for business expansion, diversification, and consolidation. But within the complicated process of financial analysis, regulatory approvals, and planning and integration strategies, trademark due diligence is often neglected as a key M&A process step. Trademark assets are more than legal rights; they represent a company's brand identity, market reputation, and consumer trust. A company considering acquisition based strictly on brand equity is acquiring trademark rights that come with potential risks. If the trademark asset is not secure - due to prior infringements, failure to register proactively, or unforeseen disputes - the acquiring company is now exposed to significant risk.

This blog will explore India's legal ownership concepts of trademark assets, analyze actual cases of post-acquisition lawsuits as a result of poor trademark due diligence, and provide our best practices on how to avoid these hidden risks during M&A.

Legal Framework: Trademark Rights And M&A Implications

Trademarks are part of Indian law under the Trade Marks Act, 1999. This Act defines a trademark as a mark capable of distinguishing the goods or services of one person from those of others, and includes aspect in the mark such as the shape of products, packaging and the mix of colors.¹

With a registered trademark, the registered owner will receive:

• Exclusive rights to use by the registered proprietor,

• Presumption of ownership and validity in an enforcement action,

• The right to license or assign, for a commercial gain.

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In the case of M&A, a due diligence team must investigate:

• Ownership and assignment documents,

• History of renewal,

• Opposition or cancellation proceedings,

• Current or prior litigation,

• Jurisdictional reach, and international protection.

In instances were IP assignment is not recorded properly, acquirers may find themselves in the difficult position of later handling infringement claims, or losing rights to key brand assets after acquisition if due diligence was not satisfactory.

Common Pitfalls in Trademark Due Diligence

Even M&A advisors experienced in doing trademark audits underestimate the importance of conducting thorough trademark audits. Here are the most common, but most damaging areas that advisors overlook or seize on:

1. Failing to confirm ownership and chain of title Many trademarks change hands numerous times and oftentimes, there are incomplete assignments or assignments that are not recorded. The more there is a misalignment between the records and the actual ownership, the weaker the enforcement becomes and possibly invalidated altogether.

2. Failing to discover common law rights While registered marks are just sitting there for verification, many small companies and businesses [i.e. ones that have been operating below the radar] operate with only common law rights. They may only have unregistered marks that have a certain amount of protection under the doctrine of passing off law.² Not knowing of any of those rights, particularly those of players in local markets, could leave the acquirer vulnerable for litigation.

3. Failing to conduct a diligence veil on lapsed registrations and lapsed registrations If not looked after properly and not renewing or responding to office actions in a timely manner, there will more than likely be some rights that will be lost. A full audit diligence should require a full inquiry on the maintenance of registrations and check into any oppositions that may have occurred.

4. Legacy licensing agreements / encumbrances The trademark of an organization can be encumbered with thrid-party licensees, franchisees or with co-branding agreements. A buyer would not be aware of this unless the due diligence of agreement size and review was considered.

5. Blinkers regarding territory Many Indian companies are 'local' players, yet they still have global players in their market sectors. Many of these companies do not bother to register their trademarks in those other territories. If there are no registrations to rely on for intended internationalization, don't be surprised if you're threatened with infringing on the more senior registration overseas.

Case Studies: Post-Acquisition Trademark Litigations

Sun Pharma v. Ravi Kumar Cosmetic Co. (2014)

Sun Pharma bought a herbal skin-care brand and wound up in a lawsuit over trademark infringement because Ravi Kumar Cosmetic Co. claimed infringement based upon prior use and registration of a deceptively similar mark.³ Sun Pharma had not completed a class-wide clearance of related cosmetic marks, losing shelf space, incurring re-branding costs and legal fees.

Kellogg Co. v. Britannia Industries Ltd. (2017)

Britannia was trying to internationalize a slogan based mark obtained in a takeover; Kellogg had registered the same slogan in a number of jurisdictions. The UK High Court ruled in favour of Kellogg so Britannia had to take back the product line and repackage it in Europe, and limit export growth by limiting the brand's footprint.

The Relationship Between Trademarks and Domain Names

Domain names are an important part of the information technology revolution, and also part of a brand in the digital economy. Due diligence on trademarks should include domain portfolio investigation, which includes examining domain ownership, expirations, and conflicting names.

For instance, an acquirer might discover a third party owns a .com version of their brand name. It is possible this may not be infringement, and it does not infringe a trademark until it is enforceable, or until the trademark is not registered. Acquisition of a domain through UDRP proceedings through WIPO can be a costly and lengthy process.

Global Protection: Madrid Protocol and Paris Convention

India has become a party to the Madrid Protocol and Paris Convention, which allow an expeditious and orderly international trademark filing process and the ability to claim priority rights.⁵⁻⁶

However, the seller must have acted within the required time frames for these benefits to apply:

• International applications must have been filed under the Madrid System,

• Priority must have been claimed in the 6-month period provided under the Paris Convention,

• The seller must have checked and made responses to oppositions in foreign jurisdictions.

• Poor consideration of these items can lead to foreign litigations or non-registrations.

Trademark Valuation and Financial Implications

Ind AS 38 and IFRS recognize trademarks as intangible assets needing valuation for financial purposes.⁷ Accepted valuation methods have included the following:

Relief-from-Royalty Method:

Assumes that the owner of the mark avoids making payments to a licensor like those they would incur if the mark is licensed.

Income Approach:

Estimates future income that will come from a trademark. Due diligence should confirm that valuation assumptions assist to substantiate the legal strength, registration status and market use of the trademarks.

Regulatory Compliance And Formalities

After a trademark is assigned post-M&A, compliance with the Trade Marks Rules, 2017 is important.⁸

• Assignment must be recorded in Form TM-P,

• Oppositions or cancellations must be dealt with in Form TM-O,

• Any changes to ownership must be updated in the Register to properly exercise rights.

• Non-compliance can nullify enforcement, affect renewal, or create conflict over ownership.

IP Indemnities and Transactional Protections

In a thoughtfully negotiated M&A transaction, trademark risks are managed, and risks are assigned through contractual safeguards typically including:

Reps and Warranties: Confirming current ownership is valid and confirming no known infringements.

Indemnity Clauses: Protection in the event of post-closing disputes.

Using Escrow Mechanisms: Portion of purchase price is withheld to compensate for breaches of IP warranties.

Covenants to Cure: Seller is required to cure pending IP issues over a specified period of time.

If none of the above are included in the transaction, the buyer sustains all of the risk of post-closing trademark disputes.

 

Best Practices For Robust Trademark Due Diligence

1. IP Audit Checklist: Make a list of all trademarks , registered , pending, expired and unregistered.

2. Ownership History: Review all assignment deeds, licensing agreements, and encumbrances. 

3. Clearance Searches: Perform searches for availability in India and international jurisdictions.

4. Litigations: Identify active disputes or past litigation, and examine how that affects mark validity.

5. IP Controls/Digital IP: Perform checks on all digital locations including domains, app names, and social handles for consistency, and control.

6. Global Strategy: Align  legal rights with commercial strategy, particularly with regard to plans to export.

Conclusion

Trademarks now function not only as legal instruments but also as strategic, financial, and reputational assets. To ignore trademark due diligence in mergers and acquisitions is similar to making the acquisition of a company without knowing if it owns its most precious brand identity.

Whether looking at Sun Pharma's failure of due diligence or the misunderstanding of its export obligations by Britannia, these examples provide one strong lesson: trademark due diligence needs to be proactive, globally targeted, and multidisciplinary in approach. Legal counsel, brand managers, finance departments, and subject matter experts all need to monetize their professional reputations and combine forces to find unknown risks and potentially enhance transactional protections.

In conclusion, the trade-off of time and effort invested in trademark diligence is priceless—not only in avoiding litigation—for business development focused on brand-driven growth.

Author: Irshad Ahmed, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.

ENDNOTES

1.      Trade Marks Act, No. 47 of 1999, § 2(1)(zb), § 28 (India).

2.      Amritdhara Pharmacy v. Satya Deo Gupta, AIR 1963 SC 449.

3.      Sun Pharma v. Ravi Kumar Cosmetic Co., CS (Comm.) 234/2014 (Del. HC).

4.      Kellogg Co. v. Britannia Indus. Ltd., [2017] EWHC 983 (Ch).

5.      World Intellectual Prop. Org. (WIPO), The Madrid Protocol: A Guide for Users (2020), https://www.wipo.int/madrid/en/.

6.      Paris Convention for the Protection of Industrial Property art. 4, Mar. 20, 1883, as revised at Stockholm, July 14, 1967.

7.      Ind AS 38, Intangible Assets, Ministry of Corporate Affairs, Government of India.

8.      Trade Marks Rules, 2017, Rules 91, 94 (India).