What IP issues should you consider when buying a company? How about when you are the one selling your company? What even is a strong patent portfolio? We speak with two experts who help to answer IP related queries.
What are important compliance issues when devising a patent portfolio?
Based on our experience the question of true ownership is the most important compliance issue when it comes to devising a patent portfolio. Clients are often not aware of the fact that in many jurisdictions, IP rights including patents may literally be transferred “on a beer mat”, or, in other words, outside the official register. Therefore, one should always bear in mind that the official register does not necessarily reflect current ownership status.
A typical scenario from the German perspective is that the registered patentee failed to comply with the requirements under the German Employee Invention Act (Arbeitnehmererfindergesetz). Unlike, for example in the US, where employers may simply request that all inventions by employees are assigned to the company, under the former German law up until 1 October 2009, the employer had to claim the invention explicitly within four months from being notified by the employee. Once this time limit had been missed, a transfer of rights was not effective and all rights to the invention remained with the employee. The former law thus required considerable organisational efforts imposing a heavy burden, especially on smaller and middle-sized companies. Although this problem was recognised by the German legislator and the new law is facilitated, it has to be considered that patents have a term of protection of 20 years and most of them are granted and thus enforceable only after five to ten years from application. Especially those patents filed before 2009 tend to relate to inventions which are absolutely key for a company’s business, while at the same time being particularly prone to the risk of not being owned by the company using them.
Apart from this specifically German phenomenon, there are various other reasons why the rights to patents may not lie with their registered owner, but in fact with a third party. This includes the absence of proper assignment clauses in contracts with management staff, all the more, as case law on fiduciary duties, for example imposed on CEOs, to transfer inventions to the company does not provide for much legal certainty. The same applies for subcontractors, research institutions and freelancers. Also, in many cases there is more than one inventor and assignments of all inventors involved must be obtained in order for the company to acquire all necessary rights.
How can disregarding such issues cause problems?
In a worst-case-scenario, such “skeletons in the closet” may impede a technology-driven company from enforcing an essential part of its patent portfolio.
If the true owner of the key IP rights is not with the company, for example, because an inventor employee has switched firms, such rights may, either directly or indirectly fall into the hands of competitors, who might then prevent the company and/or its clients from using the patented technology literally overnight by means of a preliminary injunction. Practically speaking, this means that a product using the patented technology may not be shipped anymore and that remaining stock has to be modified or destroyed. Products that have already been supplied to commercial customers may have to be recalled. This is particularly harmful, if patents are concerned which were generated within the company and thus tailored specifically for the company’s core products.
Besides the aspect of true ownership, the question of encumbrances in terms of licences and cross licenses is relevant. For example, if a patent portfolio is acquired as part of a business model involving patent enforcement, the whole business model may be ruined, if the further existence of licenses to third parties, in particular directly or indirectly to those who are possible targets of the enforcement business model, has not been thoroughly considered.
What common problems occur regarding patents during M&A transactions? What should clients be aware of?
From the purchaser’s perspective, there is always the risk that the IP portfolio or parts thereof are not owned by the target company. Unlike in other jurisdictions there is no bona fide acquisition of German IP rights, in particular no such acquisition clearing encumbrances such as licenses, pledges or security interests. Given that the register is no proof of legal ownership or freedom from encumbrances and that the seller may often not be able to provide complete information, profound strategies for risk management aligned with the quality and/or lack of information are required. Remaining risks may be covered by the seller’s warranties and indemnities.
Sellers have to be prepared for the fact that the true ownership of the entire IP portfolio will be under increased scrutiny. Any uncertainties in this respect may considerably reduce the value of the IP portfolio and thus the purchase price. In technology driven areas where IP rights constitute the target’s main asset, which is, for example, often the case with respect to software solutions developed by FinTech companies, any shortcomings of information provided in the data room or in expert calls may become a showstopper with an investor possibly backing out of a project should the risks prove to be too high.
What three things do you think clients should consider when devising a strong patent portfolio?
- To maximise business outcome, building a strong IP portfolio should be approached as an integral part of a company’s overall strategy. IP strategy should thus be aligned with business perspective. This does not only mean that companies are well-advised to provide for broad coverage for core products, but at the same time for strategic coverage as regards competitors’ products. For the sake of cost-effectiveness, a strong application focus on innovative solutions should be accompanied by a regular review process for skimming out non-successful innovations.
- Secondly, to make provision for the most common problems occurring during M&A transactions, ownership of all IP rights should be secured as early as possible. This includes providing for clear and effective contractual arrangements early on in corporations with freelancers, suppliers, research institutes and any other third parties, and ensuring complete documentation of chain of title. Whenever German employees are involved, rigorous management with respect to the requirements under the German Employee Invention Act is paramount. When acquiring IP rights from third parties, a company should apply high scrutiny to verify that the seller is in fact the true IP owner and that the rights are free from any encumbrances, cushioning any remaining risks with warranties and indemnities.
- Our third recommendation is to establish an IP compliance programme implementing schemes to figure out whether a product, process or service may be considered to infringe any IP rights owned by others. This may especially involve freedom-to-operate analyses and other forms of right clearances. Based on the outcome of such compliance measures, further steps may be advisable to clear any obstacles, such as purchasing, (cross-)licensing in or inventing design-around solutions.
How do you expect to see the world of IP in the upcoming years?
From a transaction perspective, especially for technology driven hidden champions in Europe, we expect high interest from Asian, in particular Chinese, investors. We also anticipate a further increase of the interest of larger companies to invest in seed and early stage start-ups, for instance in the FinTech sector. Since both are trending in technology and as related IP rights are often the core asset, we expect to see increased attention being paid to possible risks in IP portfolios and their mitigation in M&A transactions. This goes hand in hand with the increasing focus on other compliance topics such as data security and financial regulatory frameworks. Apart from attracting investors German companies may, on the other hand, take an interest in developing strategies to evade hostile takeovers, which is also an important consideration to be taken into account when building an IP portfolio.
Dr Katrin Winkelmann
Dr Sandra Müller
Dr Katrin Winkelmann is a Patent Attorney and Partner at German IP law firm Eisenführ Speiser. Besides patent portfolio development, opposition proceedings before the GPTO and EPO as well as litigation and nullity proceedings before the German Courts, a particular focus of Katrin’s practice is comprehensive IP consulting for technology driven mid-cap companies. With her engineering background and experience in management consulting Katrin’s IP expert knowledge and business perspective complement one another, making her a specialist in strategic IP advice, such as patent portfolio analysis, IP due diligence and IP transactions.
Dr Sandra Müller is an Attorney-at-Law at Eisenführ Speiser. In her role as an IP Litigator Sandra has represented clients from the luxury brand and consumer goods industry in various infringement proceedings before the German courts and in cancellation and opposition proceedings before the GPTO, the EUIPO and the ECJ. With several years of experience in one of Germany’s major commercial law firms Sandra further advises on transactions relating to intellectual property rights.
Eisenführ Speiser is one of Germany’s leading IP law firms with a particular emphasis on mid-cap companies with a strong IP focus. Since its foundation in 1966 Eisenführ Speiser has been advising clients in all matters related to intellectual property rights. With offices in Bremen, Munich, Berlin and Hamburg, a staff numbering over 200, including more than 50 patent attorneys and attorneys-at-law, assists clients in filing applications for patents, utility models, trade marks and registered designs and defending and enforcing those rights as well as in any other intellectual property related matters such as portfolio and freedom-to-operate analyses, licensing and IP due diligence.