When it comes to liquidations, there are a number of factors to consider when conducting an intellectual property audit.
Some of the most important and valuable assets a business has are its intellectual property rights (IPRs). IPRs encompass a wide range of intangible assets including technical processes, innovations, brands, designs and software. There is no doubt that accountants play a vital role in the development, integrity and disposal of IPRs, particularly when a company becomes insolvent.
In view of their value, it is crucial to ensure that proper care and attention is given to the disposal of a company’s IPRs, either as part of an acquisition by another business or as the result of insolvency. This article outlines the recommended steps that need to be followed by liquidators when disposing of trademarks, designs and other soft IPRs of an insolvent company.
In its Intangible Capital in Global Value Chains report of 2017, the World Intellectual Property Organisation (WIPO) revealed that nearly one-third of the value of manufactured products sold around the world derived from “intangible capital” including brands, designs and technology. While sometimes misunderstood, the value of intellectual property (IP) assets should never be underestimated. The significance of IP as a wealth creator is underscored in WIPO’s report by the fact that, in the year 2014, IP contributed US$5.9 trillion to the world’s economy for that year. This is twice as much as buildings, machinery and more recognisable forms of capital.
On a more molecular level, IP and how it is managed, exploited and protected can be the most significant and most productive source of income generation within a business.
To understand the importance of IPRs, it is necessary to first briefly look at, and explain, what intangible rights fall under the umbrella of IPRs. In a nutshell, IP is the sum of all the intangible assets a business owns. It can encompass:
- Trademarks (brands, logos, slogans, advertising jingles);
- Patents (technical inventions);
- Copyright (written material like website text, manuals, music or artwork);
- Designs (the aesthetic appearance of any products a business manufactures);
- Domain names (addresses that drive business to a firm’s website via email and/or a website); and
- Trade secrets (confidential information such as a recipe, customer lists or a way of doing something which a business would not want revealed to the outside world).
All of the above IPRs are fully protectable under Irish and European Union law. In Ireland, industrial designs, patents and trademarks can be protected through registration with the Patents Office in Kilkenny. A registration grants exclusivity in the relevant IPR and makes it much easier to stop unauthorised use by others. In some instances, it may even be possible to protect the goodwill and reputation established under a particular sign or logo of a business.
Unlike the tangible assets of a business, the value of some IPRs does not diminish over time. On the contrary, IPRs can actually add to the overall value of a business. Also, IPRs can be used not just by a business itself, but also by others, with permission, as part of an overall monetisation strategy.
IPRs can also be particularly useful for businesses wishing to secure loan or investment capital as the law allows for security interests to be registered against patents, trademarks and designs. As the value of an IPR does not diminish in time, a savvy investor and/or financier should see IPR as having a relatively low risk profile with a positive return attribute. It is therefore important to ensure that the treatment and disposal of IPRs in cases of insolvency are handled correctly.
Importance of a proper IP audit
In their role as liquidators, receivers and examiners, accountants will be used to dealing with businesses in financial difficulty. So, what happens to a company’s IPRs when it becomes insolvent? If we take the situation of a liquidation, for example, an accountant who has been appointed liquidator would be well-advised to seek the assistance of an IP lawyer in undertaking an audit of the company’s IPRs. An IP audit will identify and evaluate the IP assets of the company being liquidated. The following is just some of what you can expect a properly-conducted IP audit to cover.
Search and review of IP registers
Does the insolvent company actually own the IP right the liquidator is seeking to dispose, and/or is the company the beneficiary of a licence granted by another company? The answer to this question can be determined by a thorough search and review of the registers where the relevant IP right is registered, bearing in mind that only patents, designs, trademarks and domain names can be registered. Copyright, know-how and trade secrets are unregistered rights and therefore require separate treatment, which is discussed below.
Searching intellectual property registers and analysing the results of revealed hits needs to be carried out with care and caution as the relevant IP register may not be up- to-date and therefore not reflective of the true ownership of the IP right in question. By way of illustration, the insolvent company may have previously acquired an IP right through a written assignment agreement but, for one reason or another, the acquisition was never recorded on the relevant IP register. Failure to record the acquisition of an IP right such as a registered trademark has legal consequences. For example, if the transfer of a registered trademark is not recorded on the relevant IP register within six months of it being effected in writing, the transfer will be ineffective and it will not be possible to claim damages or an account of profits arising out of a third-party infringement of the right in question after the date of the transfer. Thus, the failure to record the insolvent company as the new owner of the IP right in question may actually diminish the value of that right, therefore making it unattractive to pass on. Accordingly, in addition to undertaking searches of the relevant IP registers, enquiries will need to be made of the directors of the insolvent company, particularly to ascertain whether there is any unrecorded documentation in existence. It will also be necessary to ensure that any previous changes in the name of the insolvent company have been recorded on the relevant IP register.
A WHOIS domain search is also advisable as many companies register their trading names and brands as domain names. In many cases, domain names are registered in the name of privacy services and won’t, at first glance, reveal the true owner of the domain name. Another factor to take into account when transferring domain names is to ensure that there are no ongoing uniform domain-name dispute-resolution policy (often referred to as UDRP) disputes regarding ownership of the domain name in question.
For trademarks, an assessment will need to be made as to whether the relevant registration is going to be transferred by the liquidator with or without the goodwill of the business attaching to the trademark. If a registered trademark has been used by the insolvent company, it is likely to have attracted business goodwill, which is valuable in its own right. In such cases, a liquidator would do well to have the relevant brand or trademark valued by a specialist IP valuation firm. When it comes to the value of trademarks without goodwill, transferring these rights is relatively straightforward insofar as valuation is concerned. A good rule of thumb for transferring registered trademarks without goodwill is to simply attribute the cost of registering the trademark in the first place. In Ireland, for a trademark registered in a single class of goods, this would be in the region of €500.
Requirement of use
Another factor to take into account when transferring registered trademarks is whether use of the relevant trademark has been abandoned for more than a continuous period of five years. A trademark registration that has not been used for more than five years is vulnerable to cancellation by third parties on the grounds of non-use. So, if a purchaser is aware that the insolvent company’s trademark registrations have not been used within the required five-year period, they are not likely to want to pay a significant sum for the trademark registration in question.
If the insolvent company has registered designs within its portfolio, a check will need to be made as to whether the design in question was new at the time of filing for registration and that its overall impression (‘individual character’) was not the same as designs that were on the market prior to the application for registration. Most registration systems within the European Union operate a ‘deposit’ system and will not check to see if the design is novel or has individual character. A well-advised purchaser of a registered design portfolio will be aware of the ‘novelty’ and ‘individual character’ requirement and may well refuse to acquire a registered design it feels is not novel or lacks individual character.
Intellectual property licences
A check will need to be made to determine if the insolvent company has granted any licences to third parties. If so, a liquidator will need to have the terms of such licences checked by a qualified and experienced IP lawyer, particularly in relation to termination and the right of assignment. Some IP licences may have provisions that allow termination in the event of insolvency. Licences will also need to be reviewed to determine whether they are exclusive, non-exclusive or sole as this will have a bearing on the new owner’s ability to enforce the IP right in question.
Checks should again be made of the relevant IP registers to determine whether the licence in question has been recorded against the IPR. If so, unless there are terms to the contrary within the relevant licence agreement, a purchaser of the relevant right will take assignment of the relevant right with the burden of the licence. Of course, a liquidator may wish to consider making an application to court under Section 615 of the Companies Act 2014 to disclaim the licence as “onerous property”, particularly if the licence in question detrimentally affects the value of the IPR.
In Ireland, security interests can be recorded against registered designs, patents and trademarks. It is therefore prudent for a liquidator to check to see if any security granted to an insolvent company has been recorded against the relevant IP right as this may have a bearing on the ability of the liquidator to transfer the IP right onto a third-party. It is not uncommon for security interests to be granted on the basis that the grantor must consent to the relevant IP right being transferred or licensed to a third-party.
Where the insolvent company has itself granted a security interest over third-party IP rights, a check will also need to be made of the relevant IP register to ensure that the insolvent company’s interest has been recorded against the third-party IP right. Failure to register a security interest can mean that a bona fide purchaser for value can secure title to the relevant IP right free of the security granted by the insolvent company.
Agreements with third parties
A liquidator should also enquire from the directors of the company he or she is seeking to liquidate whether that company entered into agreements with third parties involving IP rights. Any agreement will need to be reviewed carefully to determine if it resulted in the insolvent company acquiring third-party IP rights or indeed, whether the agreement required the insolvent company to divest itself of IP rights upon fulfilment of an obligation. In particular, a liquidator will need to be satisfied that the relevant IP was acquired lawfully and not in breach of the agreement. A liquidator needs to be mindful that a third-party who is entitled to the benefit of an agreement entered into by the insolvent company may make an application to court to rescind the contract on terms that may include payment of damages if an obligation under the contract was not performed.
Many businesses will have unregistered designs, copyrighted materials, software, trade secrets and database rights within their IP portfolio. Therefore, in-depth enquiries will need to be conducted to identify any unregistered IPRs and how these rights have been documented in order to facilitate lawful transfer. Explanations should be provided by directors of how their unregistered IP came into existence and what steps were taken to preserve and protect such rights.
The above is a brief overview of just some of the factors a liquidator will need to consider when transferring IPRs of an insolvent company. In view of its intangible nature, IP may seem daunting to many liquidators. A liquidator would therefore be well-advised to seek the assistance of a qualified and experienced IP lawyer to ensure that all IP assets are captured and can be lawfully transferred.
Niall Tierney is a specialist intellectual property lawyer and Director at Tierney IP.
This article was originally published in the April 2018 issue of Accountancy Ireland.