Effective due diligence is one of the best ways to avoid costly and disruptive surprises when acquiring or licensing trade-marks, allowing the purchaser or licensor to determine whether it wishes to proceed with the transaction, for what price, and on what terms and conditions. Effective diligence can also identify deficiencies with the target marks and gaps in the target’s trade-mark coverage and protection, bringing to light important contractual limitations on the target’s use of the marks and potential infringement liabilities.
While general due diligence checklists are often helpful in generating basic information required for trade-mark due diligence, they are generally not designed to address key trade-mark issues and rarely provide answers to specific questions that the purchaser may have regarding the target marks.
Identification of Rights
In an acquisition, the target typically provides a list of trade-mark registrations and applications as part of its disclosure. The accuracy of the target’s trade-mark disclosure can often be checked by comparing it against owner searches conducted by trade-mark counsel. In transactions where the target has affiliates or subsidiaries that use the target marks (including foreign subsidiaries and affiliates), care should be taken to ensure that all relevant names are searched.
Searches can also be conducted against key marks if it is suspected that title to the target marks has not been updated in the relevant IP offices. Consideration should also be given to identifying and listing unregistered target marks. Information regarding such marks (and the goods and services they represent) can often be found by reviewing the target’s website and printed materials, including product literature, press releases, public filings (for public companies) and annual reports.
Trade-mark counsel should also request a list of the target’s domain name registrations (if not provided) and verify the status of such registrations by checking relevant online records.
Ensuring that the target owns the assets it proposes to transfer or license is a fundamental task of due diligence. Online databases can often be used for verification, but local counsel may need to be engaged where office records must be searched by hand or where data is only available in a language that trademark counsel does not speak. Ownership or attribution statements in the target’s online and printed materials can also be useful sources of information regarding ownership of target marks.
Trade-mark counsel may request copies of assignments and other documents on which the target bases ownership of marks acquired from another party. Care should also be taken to clarify ownership of marks where the target has affiliates or subsidiaries that use them: related companies often fail to properly document the ownership and use of “shared” intellectual property. Untangling the ownership of marks in such circumstances can be difficult and often exposes licensing issues.
It is similarly important to ensure that the purchaser acquires title to the target marks free and clear of encumbrances. While some IP offices allow for the recordation of security interests, many jurisdictions do not require (or allow) parties to file security interests against trade-marks or other registered intellectual property. Trade-mark counsel should therefore work closely with transaction counsel to identify any liens, security interests or other encumbrances that might transfer with the target marks (especially in circumstances where the target itself or some assets of the target are not being acquired by the purchaser).
Agreements establishing trade-mark rights and agreements that may limit or restrict the use of marks should be reviewed to identify ongoing obligations that may be acquired by the purchaser and restrictions or limitations on the target’s use of its marks.
Agreements should also be reviewed to ensure that they are transferable to the purchaser (with or without consent) and that the parties to the agreement are in compliance with their obligations. Subject to any materiality thresholds, ongoing obligations (e.g., payment or minimum performance specifications) should be noted and brought to the purchaser’s attention. Material restrictions on the target’s usage of its marks (including restrictions on the goods and services in association with which the marks can be used, or territorial limitations and restrictions on the manner of use of the marks), and onerous or unusual termination, indemnification or choice of law provisions should also be brought to the purchaser’s attention in a timely fashion.
Evaluate Pending Litigation
The target usually provides a list of existing or pending litigation and opposition proceedings as part of its initial disclosure. In many jurisdictions, searches of court and IP office records can be conducted online to verify that there are no further pending claims or proceedings.
In jurisdictions where centralized electronic searching is unavailable, local counsel may need to be retained to search records by hand. The target can be asked to provide a brief description of each pending proceeding (both by and against the target), and to provide the opinion of its counsel regarding its likelihood of success, in addition to key documents relating to proceedings.
The purchaser may also wish to have the target provide information about past litigation and proceedings as well as threatened or anticipated litigation or proceedings. Counsel can review documents regarding the disposition of such proceedings, including judgments and orders (if any), and settlement agreements can be reviewed to identify continuing obligations or restrictions on use or limitations of the marks.
The purchaser should also ask the target to provide information relating to actual or suspected infringements of its marks, and actions it has taken (if any) in response to allegations or complaints of third parties or in respect of potential infringement of the target marks.
Coverage and Enforceability
Where the trade-marks are material to the transaction, trade-mark counsel may wish to review the scope and coverage of the target’s marks as well as the enforceability of the target marks. Initial searches of relevant registries and online searching can be helpful in identifying whether there are similar marks registered or in use by others in relevant jurisdictions. Such searches can be particularly useful in identifying potential bars or obstacles to the purchaser’s intended use of the marks post-closing.
A review of the target’s website and printed materials can confirm whether the target has secured registration of its key marks in relevant markets, and whether its existing registrations cover its current usage of the marks.
Not all of the issues may be relevant or appropriate in all transactions. Every deal is different, and the level of trade-mark due diligence required varies from transaction to transaction. Numerous factors can have an impact on the amount of diligence that is deemed necessary and feasible in any given transaction.
It is always important to keep in mind, however, (in any transaction) that relying on checklists alone (including the issues identified in this article) can lead counsel to miss relevant or important items, or lead to a focus on issues of no importance to the purchaser. Those conducting diligence should always strive for at least a basic understanding of the transaction, and inform themselves about the business of the target and the goals of the purchaser or licensor.
Diligence counsel should also remain actively engaged with transaction counsel throughout the course of the transaction. Due diligence is an iterative process: the target’s disclosure of information often leads to further questions, and issues in a transaction (including the structure of the transaction itself) can also change during the course of negotiations. Keeping these points in mind can help trade-mark counsel increase the effectiveness of IP due diligence and add significant value to the transaction.