Due Diligence of IP Rights

Modern business realities are forming new rules and opportunities for strengthening our positions and security on the market. The anticipation and prevention of risks associated with the loss of a company’s intangible assets or their non-liquidity are vital tools of protection. That is why the due diligence of the IP rights procedure is performed.

It takes in the following set of measures:

– verification of the legality of obtaining protection documents in Ukraine for inventions, utility models, industrial designs, trademarks, copyright objects with a mandatory description of the due diligence of protecting the rights of the authors of these intellectual property objects, establishing no conflict of interests between the authors;

– verification of know-how and trade secrets protection;

– study of the list of IP objects used by the company under licensing agreements;

– verification of the actual use of IP objects by the company and protection of such rights;

– identification of innovations in the company and recommendations for their protection;

– identification of legal disputes and claims of infringement of intellectual property rights;

– other activities that are necessary for achieving the purpose of conducting due diligence of IP rights.

Practice has shown that due diligence of IP rights is necessary in the event of buying/selling intellectual property rights, mergers and acquisitions of businesses, attracting finance, optimizing taxes, optimizing the company’s innovation potential and identifying the most promising innovations, which in the future provides opportunities to create and implement the company’s management system for intellectual property rights and forms a reliable, transparent intellectual property portfolio. Depending on the purpose for performing due diligence of IP rights, the strategy and tactics of the conduct and the experts involved in this procedure are determined.

Enterprises that use objects of IP rights shall protect exclusive rights to their intangible assets. In order to keep a strong position on the market and to use effectively competitive positioning in relations with third parties regarding intellectual property rights, the senior management of a company shall always have access to objective and up-to-date information, namely:

– innovative activity of the company and the number of employees involved in this process, as well as the internal legal documents of the company;

– quality and quantity of intellectual property rights and their use in the company’s activities, degree and duration of their protection;

– licensing agreements of the company;

– encumbrances, violations or possible violations of the rights to the objects of intellectual property rights of the company;

– assessment of the value of intellectual property rights, taxation, listing in registers, etc.

One of the most important tasks in conducting due diligence of IP rights in the company is to identify unused intellectual property rights that entail unreasonable expenses and to get rid of them.

The owners of trademark certificates and patents are granted a monopoly on their use, but there are situations when owners do not apply and do not use registered intellectual property rights in their business activities. This may hinder the operation and development of other businesses that want to use such a trademark, invention, utility model, or industrial design, but cannot obtain the consent of their copyright holder. According to Ukrainian legislation, if the owner does not use the trademark within the period established by law, then any person has the right to apply to the court for early termination of the certificate in full or in part, and if the requirements are met, to then register the mark and to legally use it. The situation is somewhat different for inventions, utility models and industrial designs. One can invalidate a patent only if it does not meet the requirements of the law. If the patent is not used for three years from the date of publication or the date when its use was discontinued, any person can apply to the court for permission to use such an invention, utility model or industrial design. It should be noted that the courts pay attention to the reasons for the non-use of the registered object. For example, the owner of a trademark certificate can assert their rights if the fact of non-use is due to valid reasons, which may include: circumstances that prevent the use of the trademark regardless of the will of the certificate owner, such as restrictions on export/import or other requirements for goods and services established by law, and the possibility of misleading a person who produces goods or provides services.

The next important task is to check the timing of maintaining the protection of intellectual property rights. Thus, it is not only important to register and obtain protection documents, but to also extend the term of protection for inventions, utility models, industrial designs, and trademarks. The final term of inventions’ protection is the 20th year of the patent and the 10th year for industrial designs and utility models. At the same time, the term of the patent for an industrial design can, in some cases, be extended to 15 years. The trademark certificate shall be renewed every 10 years. The above-mentioned deadlines shall be continually monitored as these are the most frequent causes of loss of intellectual property of a company due to lack of attention on the part of the persons responsible, which is why such control is entrusted to a professional in outsourcing.

Another important consideration in the process of conducting due diligence of IP rights is that internal documentation and internal regulations are carried out based on the process of creating intellectual property, innovations are managed, and know-how and trade secrets are protected. I will focus in more detail on the service objects of intellectual property rights that were created in a company during the performance of any official tasks or research work, or exclusively in the course of labor relations. Thus, the entire chain of documents is analyzed from the moment of the first mention of the innovation in question to the moment of obtaining rights to the object of intellectual property rights. This is necessary to confirm the legitimate grounds of ownership, confirm the authenticity of authorship and to avoid any conflicts of interest between authors. Thus, according to Article 9 of the Law of Ukraine On Protection of Rights to Inventions and Utility Models, the rights to an invention created in the course of labor relations between the inventor and the employer belong to the employer, unless otherwise provided by relevant written agreements between the employer and the inventor. At the same time, Article 430 of the Civil Code of Ukraine provides for joint ownership of intellectual property rights between the customer (legal entity) and the inventor unless otherwise provided by relevant written agreements between them. Given the complexity of the legal settlement of this issue in Ukraine, this aspect requires careful verification in the process of conducting of due diligence of IP rights.

When it comes to an upcoming transaction for the purchase/sale of intellectual property rights, the main focus of due diligence of IP rights is on the choice of tactics for conducting the procedure. So, if the customer of the service is the owner of the rights to the object of intellectual property rights they will, as a rule, choose the “protective”, “defensive” tactics of conducting due diligence of IP rights, while the buyer of the rights, accordingly, “attacks”. Therefore, the use of “protective” tactics for the seller of intellectual property rights enables legal purity to be proven, competitiveness in the market, the best quality in terms of possible disputes of rights and, as a result, it is a reliable foundation for justifying the highest possible price for the rights of intellectual property rights for the sale.

At the same time, when ordering such a service, the buyer of such rights conducts a similar set of measures to clarify and confirm the “strength” of the object of intellectual property rights being put up for sale. However, the result of this due diligence of IP rights is the search for evidence of pressure on the seller to reduce the cost of selling an object of intellectual property rights.

These examples of areas of due diligence of IP rights show how important it is to know the state of affairs in this area in the company, first of all, by its owner or top manager so as to avoid and prevent financial, reputational, and business risks. After all, intellectual property is the foundation of any business and a strong and reliable intellectual portfolio is its tool.