IP warranties and due diligence

Most businesses often overlook the fact that they generate intellectual property (‘IP’) on a daily basis. IP rights are, in large part, similar to rights attached to tangible property IP can be purchased, sold, licensed and destroyed at the whim of its owner. IP rights are therefore a valuable commercial asset and a prudent business purchaser should value a business’ IP when deciding whether to proceed with a purchase.

A business purchase agreement should contain warranties to offer the buyer comfort as to what they are investing in. A breach of these warranties by the seller will give rise to a claim for damages if the buyer can show it has suffered loss as a result. It is worth noting, however, that an insolvent seller with no realisable assets will not be able to in a position to pay damages. At the outset of the due diligence process, the purchaser should make these enquiries and, if necessary, insist on some form of security (often a bank guarantee) to ensure the safety of its investment.

It is often the case in business purchase agreements that IP issues are overlooked or are not given a great deal of attention, as purchasers have a tendency to focus on tangible assets. Broadly worded warranties should therefore be omitted in favour of specific warranties which deal with particular aspects of a business’ IP portfolio. A prudent purchaser will also ensure that agreements entered into by the target business, such as collaboration agreements with a third party, have sufficiently addressed IP issues and allocated risk accordingly. Most crucially, it is vital to secure a warranty from the seller relating to their ownership of any IP.

Furthermore, enquiries should be made of the seller as to whether it is aware of any infringement of its IP rights and whether it has taken any steps to enforce those rights. It is also vital to know whether the business’ IP has been challenged or is in the process of being challenged, as invalidity may affect the value of the business considerably. A key pitfall for purchasers to avoid is where trade marks have not been used for a continuous five year period and are therefore potentially subject to revocation proceedings. A thorough due diligence exercise will uncover most, if not all, potential pitfalls. In relation to registered IP rights, an asset purchaser should also ensure the transfer is registered with the relevant Office promptly upon completion.

It is important to note that sellers are increasingly reluctant to provide purchasers with IP warranties or are otherwise qualifying these in an attempt to limit their scope. There are several reasons for this, although a recent upward trend in relation to IP litigation could be the driving force behind this, particularly in relation to patents. Purchasers should avoid being put off by such tactics and should ensure that appropriate warranties are in place.

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