What In-House Counsel Should Ask Before Buying an IP Asset

Introduction : Intellectual property is part of corporate transactions like acquisitions and joint ventures, but now it is a prominent asset in corporate transactions. A franchise of trademark, a portfolio of patents, and a proprietary codebase may be more valuable than the business itself. Unlike land and machinery, IP asset is an intangible business asset. Its value is in the statutory and contractual title that is granted to it. Incomplete or defective title may not entitle the buyer to a stronger IP asset, but rather no asset at all.

Acquisition of an IP asset is not a routine negotiation of a contract. With respect to the Ownership of Intellectual Property in India, it is governed by the Patents Act, 1970, Trade Marks Act, 1999, and Copyright Act, 1957, which stipulate different requirements for an assignment. In the case of noncompliance with the IP Act, the acquisition may be worthless even if the assignment is recorded, the scope is clearly defined, and the encumbrance was disclosed. There have been many cases that have been resolved by Indian courts due to lack of registration and chain of title issues.

The following are the questions that in-house counsel should consider prior to the internal signing of a term sheet and after the signing of the assignment deed. The studies on Indian courts focus on views regarding all forms of IP assignment under Indian law. The focus is on how courts try to minimize transactional risks. The focus is also on how courts try to minimize transitional risks as well as on the measures seek to prevent IP from being treated like movable property or regulatory licenses, which is contrary to the treatment IP deserves.

Legal Provisions

Patents Act, 1970 : According to the Patents Act, 1970, an assignment of a patent, or of any share, mortgage, license, or other interest in a patent, is invalid unless the assignment is made by a written instrument. The parties therefore must embody their agreement in a single instrument. The person entitled to an assignment, transmission or other operation of law shall apply for the registration; the person shall not be entitled to institute any action for infringement of patent or for any other relief against the registered proprietor of the patent.

Trade Marks Act, 1999 : Section 37 of the Trade Marks Act, 1999 provides the right to a registered proprietor to assign her/his trademark and to affect an assignment for valuable consideration. For registered marks, the assignment of the trademark (with or without the goodwill of the business) is permitted by sections 38 and 39 of the Act, respectively. Section 40 and Section 44 provide safeguards against potentially conflicting ‘parallel exclusive rights’ which may arise. Section 45 states that the assignee must apply for the registration of title with the Registrar. It also gives the Registrar discretion with regard to the registration of the title when the assignment's validity is in contention between the parties.

Copyright Act, 1957 : Section 18 gives the owner of a Copyright in India the right to make a complete or partial assignment of the Copyright with or without the imposition of conditions. In accordance with Section 19 of the Act, no assignment shall be valid unless it is in writing, executed by the assignor and provides for the time and place of the assignment. The Act provides for a default of five years and India in the case where the time and place of the assignment are not specified. Section 19A gives the Appellate Board the jurisdiction to hear cases regarding the assignment.

International Framework and Trade Secrets : The 1994 TRIPS agreement, which India is a signatory to, addresses assignment indirectly. Article 21 provides the conditions of assignment and of assignment and licensing of trademarks, and Article 39 provides the protection of undisclosed information from unauthorized use. In India, there is no specific legislation to protect confidential know-how except the law of contract and principles of breach of confidence. IP due diligence is the formal procedure of examining an IP asset transaction that aims to confirm the legitimacy of IP asset rights, the valid registration of such rights, the absence of undisclosed litigation, and alignment of the exploitation terms of the IP owner with the terms proposed by the buyer.

Legal Analysis

Do You Have the Chain Of Title? : The first and foremost of all questions is whether the seller is in a position to prove that he/she has the complete chain of title from the first owner, creator, inventor, or author of the IP to the seller. This is almost always assumed, especially in situations where the IP in question was not created by the company, but has been created by its employees, directors, or independent contractors.

Unlike the Copyright Act in Section 17, which contains an automatic assignment of ownership to the employer for the employee's work, Indian patent law has no such provision. In a case, it was held that patents obtained by a company's managing director in his personal capacity did not belong to the company, since he had no contractual or fiduciary duty to invent and there was no invention assignment or similar clause in the company's favour. A practical tip for in-house counsels is that ownership representation, in and of itself, is not proof of ownership. In-house counsels are strongly advised to request evidence of the underlying employment and consultancy agreements and related documents. The company in-house lawyer should get the employment or consultancy agreements and seek signed assignment of all named inventors for all the patents and applications covered by the patent portfolio.

Proper execution, registration and enforceability of the Assignment? : A flaw in the execution, or lack of registration of the assignment, may compromise its enforceability, even if the title is valid. According to the Patents Act, the registration required under Section 69 will be as a document of evidence and will determine the enforceability of the assignment. In Sergi Transformer Explosion Prevention Technologies Pvt. Ltd. v. Kumar Pratap Anil, the Delhi High Court held that the unregistered licence or assignment will be valid only when the same is registered under the Patents Act by the Controller or by the court.

This is equally applicable to trademark assignments. Section 45 imposes an obligation on the assignee to register the assignment title, and Indian courts, including the Delhi High Court in Modi Threads Ltd. v. Som Soot Gola Factory, have not hesitated to enforce such an obligation. It means that the assignee will not be prohibited from asserting its rights on an unregistered assignment, but if the deed is not recorded, the buyer risks exposure during the enforcement phase, especially with regard to interim relief. It should be ascertained whether the deed exists and that the application filed for Form TM-P (for trademarks) or Form 16 (for patents) has been lodged and ideally registered.

Is the Scope of Rights Under the Deed Greater than That of the Purchased Rights? : A frequent cause of controversy after completion arises from the situation where there is a mismatch between the scope of rights that the buyer has acquired and that covered by the deed. The assignment in s.19 of the Copyright Act should state the work and the rights, times and geographical extent of transfer, where there are defaults under the Act in the absence of such statement. In Video Master v. Nishi Production, the Bombay High Court held that there was no automatic transfer of the video rights of the cinematograph film to the satellite broadcasting rights, as the latter is a form of communication to the public distinctively different from the former.

On the contrary, Saregama India Ltd. v. Suresh Jindal upholds the legal validity of the assignment of a copyright in a future work, thus providing for the automatic assignment of the assignee the ownership of the copyright upon the creation of the work. Hence, in conducting the negotiations on the acquisition of the copyright asset, it is important that the deed include provisions specifying the nature of the rights, media and modes of exploitation, the rights that can be exploited in the future and those which are not yet commercially available, among others, and that the deed will be narrowly construed in favour of the seller.

Are there any restrictions, conflicts, or potential safety or liability issues? : In addition to the title and the scope of the asset, the lawyer must consider whether the asset is already burdened with licences, security interests, opposition and rectification actions, and litigation which would render the asset less valuable or prevent the buyer from using the asset. Indeed, this is the very substance of WIPO's due diligence literature on confirmation of IP rights: "valid, properly registered, not subject to litigation and consistent with applicable law." These are the risks that the review based on the assignment deed and registration certificate will be unable to identify without searching through the relevant registers and litigation records. For assets, where the possession of the asset is crucial to the buyer's business plans, conducting a freedom-to-operate analysis, i.e. another separate due diligence that will check whether the use of the asset will violate rights of a third party, will inevitably follow from ownership due diligence.

How is the value of undocumented Know-How and Trade Secrets protected? : If the IP asset includes any confidential technical data, formulas or know-how that is unregistered, there is no statutory registry available under Indian law to consult for this purpose, and protection can only be obtained via contract or equity. In John Richard Brady v. Chemical Process Equipments Pvt. Ltd., the Delhi High Court struck out the confidential disclosure of technical drawings and specifications as part of failed commercial discussions, holding that an obligation of confidentiality may be imposed at law in the absence of any written agreement to the contrary, provided the information possesses the necessary quality of confidentiality and the circumstances of its communication imply a confidentiality obligation.

It pertains to the underlying non-disclosure structure of confidentiality in relation to whether adequate efforts have been made for the maintenance of the secrecy of the know-how, whether the employees/contractors are bound by enforceable confidentiality undertakings, and whether such confidentiality undertakings would subsist even after the sale of the target company without being renewed.

Case Law Relevant to This Topic

In Darius Rutton Kavasmaneck vs Gharda Chemicals Ltd., (2015): It was observed by the Bombay High Court that there is no implied duty on the part of the managing director to assign to the company the patent which he may become entitled to, during his tenure as the employee or director of the company, unless there is any express agreement/duty towards assignment of the said patents to the company.

Sergi Transformer Explosion Prevention Technologies Pvt. Ltd. v. Kumar Pratap Anil, Delhi High Court: It was decided that, in the absence of any reasoned order as regards the recognition of evidentiary value, an unregistered patent assignment/licence cannot be recognized.

The Delhi High Court, in Modi Threads Ltd. v. Som Soot Gola Factory, AIR 1992 Delhi 4, considered the relationship between the rights of the assignor and the rights of the assignee, and concluded that the rights of an assignee come into existence before he registered the assignment under the Trade and Merchandise Marks Act, although registration of the assignment constitutes a condition for enforcing the rights.

Video Master v. Nishi Production, 1998 (1) ALL MR 620 : The Bombay High Court ruled that “assignment of video rights” of a cinematograph film did not include rights for satellite broadcasting unless specifically mentioned therein. Thus, the court reiterated the rule that the assignment of copyright is interpreted narrowly based on what it says.

Practical Implications

Some of the above doctrines are particular to the facts of a transaction and directly affect the economic aspects of the transaction. If a Buyer finds out after closing that an important patent was not validly assigned to it from its inventor or that a trademark assignment was not registered or disputed, it may have to fall back on post-closing indemnity, failing which its cost of purchase may become irrecoverable.

As such, the IP due-diligence exercise is not supposed to start at the end of the transaction when it should ideally have already started before signing of the term sheet, leading to increased valuation of the IP assets of the target company or reduced purchase price or even cancellation of the transaction, per the guidelines of WIPO for management of IP assets.

These are some expectations that in-house counsel will find reasonable, including the preparation of a chain of title file for each of the assets, making a recordal application to the appropriate Indian IP registry, checking the register and litigations against opposition, rectification or infringement; conducting freedom to operate analysis (if necessary), and reviewing the confidentiality regime of any non-recordal know-how. The above findings should then be included in the particular representations, warranties and indemnities on title, scope, and encumbrances, and, where there is material risk, placing a part of the consideration in an escrow account until the assignment has been recorded.

India does not have a consolidated IP register for patents, trademarks, copyrights, and security interests which are not searchable in one place. It is left to corporate counsel to conduct parallel searches in the records of the Controller General of Patents, Designs and Trade Marks, in the Copyright Office and in court dockets, which need to form part of transaction timetables, if not start off transactions from the get-go.

Conclusion

Purchasing an IP asset is in essence the purchase of a bundle of formalities, namely the chain of assignments, the scope of rights and the history of registrations. All three can go wrong silently, all three are an unassigned inventor, an unregistered transfer, a more limited grant than presumed, and all three can only come to light post the transaction price having been paid. Indian courts have always found themselves dealing with the very same ambiguity-based conflict that involves everything from unassigned employee inventions to ambiguous copyright protection.

During the review of the IP acquisition by the in-house counsel, they must take into consideration the following factors, which include the chain of title from the creation to the sale; execution and registration of the IP pursuant to Patents Act, 1970, Trade Marks Act, 1999, and Copyright Act, 1957; particular rights to be assigned; encumbrances and disputes; and protection of the unregistered know-how through contract. However, the best defence from a strategic acquisition resulting to a contested and undervalued asset is the use of checklist that must include all pertinent questions asked at the right time.

Author: Khushi Gupta, 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.

References

1. Patents Act, 1970, s. 68 (India).

2. Patents Act, 1970, s. 69 (India).

3. Trade Marks Act, 1999, ss. 37–40 (India).

4. Trade Marks Act, 1999, s. 45 (India).

5. Copyright Act, 1957, s. 18 (India).

6. Copyright Act, 1957, s. 19 (India).

7. Copyright Act, 1957, s. 19A (India).

8. Agreement on Trade-Related Aspects of Intellectual Property Rights, 1994, arts. 21, 39.

9. World Intellectual Property Organization, IP Asset Management: IP Audit and Due Diligence (WIPO SME Programme).

10. Darius Rutton Kavasmaneck v. Gharda Chemicals Ltd., (2015) 14 SCC 277 (India).

11. Sergi Transformer Explosion Prevention Technologies Pvt. Ltd. v. Kumar Pratap Anil, Delhi High Court (India).

12. Modi Threads Ltd. v. Som Soot Gola Factory, AIR 1992 Delhi 4 (India).

13. Video Master v. Nishi Production, 1998 (1) ALL MR 620 (India).

14. Saregama India Ltd. v. Suresh Jindal, Calcutta High Court (India).

15. John Richard Brady v. Chemical Process Equipments Pvt. Ltd., AIR 1987 Delhi 372 (India).

16. World Intellectual Property Organization, Securing Financing with Intellectual Property Assets, WIPO SME Programme.