29/04/2020

We are undoubtedly living in challenging economic times; as a result, many businesses are looking for ways to improve their balance sheets and cashflow positions. One way for a business to unlock value is by carving out (selling off) certain of its assets, including its intellectual property (IP) assets.  

IP carve-outs can take many forms; popular carve-outs include:

  1. the sale of IP assets to a single purchaser for certain jurisdictions considered to be non-core to the assignor’s business, with the assignor retaining the IP assets in its core jurisdictions;
  2. a split sale of IP assets, with a geographical divide between purchasers based on their location (e.g. separate sales for the Americas, Europe, and Asia Pacific);
  3. a sale of certain non-core IP assets within the assignor’s core jurisdiction(s), e.g. a carve-up of trade mark rights for certain classes of goods and services only.

Each of these carve-outs has its own particular challenges, but there are certain issues that come up time and again depending on the rights that are being carved out. It is these issues that this article explores. We provide practical suggestions for minimising risk while maximising value to our clients.


Trade Marks

Registered trade marks

Registered trade marks are theoretically ideal subjects for carve-ups, as:

  • the rights are jurisdiction specific – a registered trade mark in one country cannot be enforced in another country; 
  • they have country specific unique identification numbers, which makes them straightforward to assign;
  • few companies are in the position to exploit their brand in every country in the world (if a trade mark is not used in the country in which it is registered, it will generally become vulnerable to non-use after 3 years [1] in any event);
  • trade mark rights can be partially assigned in respect of certain goods and services only.

There are many examples of successful brand carve-ups, for example DUNLOP, SCHWEPPES [2] and CRUMPLER, however there are also several points that dealmakers can trip up on.

A - Transfer formalities

Traps: There are usually extensive and expensive formalities that are associated with carve-ups of registered trade marks overseas, e.g. the assignments may need to be notarised, legalised and apostilled. Assignment formalities are particularly onerous in Asian and Middle Eastern jurisdictions. Due to these requirements, many trade mark assignments are not in fact recorded (i.e. registered with the local IP office), which in many cases means that the assignment is not perfected, which can cause issues in terms of chain of title for the purchaser on later divestment, or worse [3].

Tips: Local law advice should be sought early on in terms of requirements for effective assignment and recordal, and transfers should be recorded promptly. Cost allocation for recordals should be considered at an early stage. With a global portfolio, recordal costs can run into the hundreds of thousands of dollars.  Robust provisions for further assurances also often prove useful. It is worth bearing in mind, however, that these can be challenging to enforce once the momentum towards completion of the transaction is over.

B - Parallel imports

“Parallel importation” refers to the practice of unauthorised importers importing into a country trade marked goods that were intended by the brand owner to be sold overseas only. The goods are not counterfeit (fakes, or impermissible copies); rather, they are goods which have been approved for sale only in certain countries. 

Australia has made a policy decision to generally permit parallel imports and has gradually, over recent years, removed the previous protections available to rights holders. [4] Many other countries also recognise wide parallel importation rights, including the UK and New Zealand.

Traps: The risk in the context of a territorial carve-up is that the assignee of a trade mark(s) in a certain country will manufacture goods that are then imported into the home market of the assignor, thereby effectively competing with the legitimate business of the assignor and its distributors. Further, where the parallel imported goods are of lower quality, this can erode consumer confidence and brand value enjoyed by the local IP owner.

Tips: Consideration should be given as to whether the specific industry in question carries a parallel importation risk. Certain industries, e.g. the pharmaceutical industry, are less vulnerable due to the highly regulated nature of pharmaceutical or therapeutic products. If parallel importation is a concern, it may be preferable to adopt a worldwide licensing structure instead, to allow the brand owner to retain control of products sold in various markets.

Unregistered trade marks

Many companies use common law, or unregistered, trade marks and significant value can subsist in these marks.

Traps:  In Australia, unregistered trade marks cannot be assigned without the goodwill of the business to which they relate. [5] In addition, if a company has not been trading in a particular jurisdiction, then it may in fact have nothing to sell in terms of an unregistered brand. It’s also worth noting that in many Asian jurisdictions, unregistered trade mark rights are not recognised.

Tips: Exercise caution in the valuation of unregistered brands. Seek local law advice if overseas transfers of unregistered trade marks are contemplated. Consider filing trade mark applications so you have something of value to assign.

Co-existence

Where a company is divesting certain business lines or certain IP assets within its own core jurisdiction, careful consideration should be given to how any risk of customer confusion can be managed. Frequently, there will need to be either an ongoing co-existence agreement or an ongoing licence agreement with thought given to how the rights will be differentiated. Failure to do so may result in trade marks being vulnerable to challenge [6]. 


Designs

Like registered trade marks, registered design rights are also theoretically a good candidate for a carve-up, since:

  • the rights are jurisdiction specific – a registered design right in one country cannot be enforced in another country; and
  • they have country specific unique identification numbers, which makes them straightforward to assign.

Traps and Tips: Australia does not recognise unregistered design rights, and as such any purported assignment of unregistered design rights for Australia is ineffective. In addition, the same comments as made above in relation to transfer formalities and parallel imports apply to designs. It is also worth keeping in mind that unregistered design rights for Australia cannot be cured by a later application as applications must be filed before the design is published or used commercially anywhere in the world.


Copyright

Although it is not a registered right in Australia (nor in many other jurisdictions besides the United States and China), copyright law is nonetheless "territorial" and national in scope. The author of a copyright work is automatically granted protection in Australia and the other Berne Convention member countries (most of the world). This means that copyright can be carved up on a territorial basis.

Copyright is particularly interesting from a carve-up perspective since it is best described as a bundle of rights (e.g. to copy or reproduce the work; to make an adaptation of it; to publish it; to perform it in public; and to broadcast it to the public), and, it often subsists independently and separably in different elements of the one product (for instance, in the text and images, or the music and the lyrics). These rights can all be transferred separately even within one jurisdiction.

Traps and tips: Division of rights in a copyright work will need to be considered very carefully, as it may be challenging to exploit just one aspect of a copyright work without having the benefit of the other rights too.

Copyright works face many of the same challenges as trade marks with regard to parallel importation (i.e. parallel importation is allowed), however given so many copyright works now exist primarily on-line (music recordings, film, TV shows, even e-books), there are practical technological solutions (e.g. geo-blocking) and legal solutions [7] that can assist with geographical division of rights.

When copyright is assigned, it is important to describe it with as must specificity as possible to avoid later disputes about the scope of the transfer. It’s also worth being aware that moral rights cannot be assigned, so any assignee will need to continue to respect the moral rights of the original author (or obtain written consents from those authors).


Trade Secrets/ Know-how

In Australia and many other jurisdictions, trade secrets and know-how are not strictly property rights [8] (although some protections are afforded to them by the laws relating to breach of confidence, and they may be safeguarded to an extent through contractual provisions).

Traps: Given they are not strictly property, assignment of trade secret and know-how “rights” is particularly challenging from a legal perspective. Attempting an assignment in particular may in fact result in the loss altogether of confidentiality and any value. Despite these technical legal challenges, assignment and licensing of trade secrets is very common in the context of carve-up transactions (see for example the know-how provisions in the EU Technology Transfer Block Exemption Regulations).

Tips: There are a number of key points to bear in mind in looking to minimise risk associated with this sort of transaction, and there are also many contractual tools that can be utilised. Without seeking to be exhaustive, some of those points for note and contractual tools are as follows:

  • avoid a territory specific assignment of know-how if the know-how is still valuable to the business that is looking to do a carve-up. Instead, a robust licensing structure would be preferable with tight controls on use and disclosure by the licensee;
  • if an assignment of know-how is desirable (because for example the business no longer has a need to use the relevant know-how), to maximise the effectiveness of the assignment:
    • the assignment should be framed as an assignment the rights that the assignor has in law to prevent the unauthorised use or disclosure of the know-how
    • the assignee may want the assignor to be subject to an obligation to join in any proceedings for breach of confidence (i.e. in the event that the assignment is not effective) – this is an onerous obligation so the assignor may at least want an indemnity for such ongoing involvement, or may resist such a request altogether;
    • the assignor should be under an obligation to destroy and/or not use or disclose the know-how without the prior consent of the assignee;
    • it would be worth including warranties around non-disclosure of the know-how (except subject to non-disclosure or confidentiality agreements);
    • it would be wise to include an obligation on the assignor to deliver up the know-how including all technical information and drawings and to provide transitional assistance regarding use of the know-how if required;
    • it is worth considering transfer of key employees who have the skills and experience to maximise the value of the know-how.

Patents

Like registered designs and trade marks, patents are a good candidate for a territorial carve-up, since:

  • the rights are jurisdiction specific – a patent in one country cannot be enforced in another country;
  • they have country specific unique identification numbers, which makes them straightforward to assign; and
  • patentees often file Patent Cooperation Treaty (PCT) applications ambitiously covering many jurisdictions at the outset, but, given patent filing and annuity fees are expensive and onerous a patent owner may not want to pay those fees in a particular jurisdiction if it has no intention to operate there. Assigning or licensing the patents for a fee for the relevant jurisdiction is a way to continue to monetise the rights.

Traps and tips: The same comments as made above in relation to recordal of transfers of trade marks also apply to patents. Further, an assignee of a patent can also reasonably ask for:

  • the right to any patent application in the relevant territory which claims priority to and is a divisional, continuation, continuation-in-part, re-issue, renewal, re-examination, substitution or extension of the patent; and
  • an assignment or licence of corresponding know-how.
 

[1] Section 93(2) Trade Marks Act 1995 (Cth).

[2] In relation to the SCHWEPPES brand, see the CJEU judgment in (case C-291/16). In this judgment, the CJEU offers a general interpretation of article 7.1 of Directive 2008/95 (now article 45.1 Directive 2015/2436), noting that the mere existence of a division in the ownership of a trade mark does not result in the exhaustion of the rights.

[3] Pursuant to Section 22 Trade Marks Act 1995 (Cth.), a bona fide purchaser for value can acquire a registered trade mark from the registered owner mark free of any unrecorded third party interests.  

[4] Section 122A Trade Marks Act 1995 (Cth.) provides a defence to trade mark infringement to a parallel importer who makes "reasonable inquiries" in relation to a trade mark before using it and reasonably concludes that the trade mark had been applied to the goods with the consent of the trade mark owner (or one of its authorised users, or someone with significant influence over the use of the trade mark, or an associated entity of any of those people).

[5] See Kraft Foods Group Brands LLC v Bega Cheese Limited (No 8) [2019] FCA 593 and Kraft Foods Group Brands LLC v Bega Cheese Limited [2020] FCAFC 65.

[6] Section 88(2)(c) Trade Marks Act 1995 (Cth.) provides that the Trade Marks Register may be rectified on the basis that   because of the circumstances applying at the time when the application for rectification is filed, the use of a trade mark is likely to deceive or cause confusion.

[7] Section 115A of the Copyright Act 1968 allows copyright owners to seek an injunction against a carriage service provider to block access to foreign websites that have the primary purpose of infringing, or facilitating the infringement of, copyright.

[8] Cf US trade secrets legislation

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