Australia: Ten top tips for buying a business with intellectual property

Intellectual property (IP) often confers a competitive advantage to a business, such as by increasing the business' operational efficiency or elevating the quality of its product and services offerings. The value of IP is potentially significant for businesses and may increase over time. When purchasing a business with IP, it would be prudent to assess the quality of the IP to understand how the IP may benefit the business. This article highlights some of the key questions you ought to ask and consider.

Tip 1 – What IP are you acquiring?

Ideally the asset sale agreement should provide a comprehensive list of the IP you are acquiring. Consider what type of IP is to be acquired, as set out in the table below. All acquired IP should be clearly and comprehensively listed in the agreement. For registrable IP, it is recommended that official details, such as application number, filing date, status and country are included in the agreement.

Tip 2 – Is the IP owned by the Seller?

Prior to entering into the asset sale agreement, it is prudent for the buyer to conduct due diligence on the IP and in particular, to ascertain whether the seller is the absolute legal and beneficial owner of the IP. For registerable IP, such as patents, designs and trade marks, you may conduct a search on IP Australia's relevant register to ascertain the owner as an initial step. It is also recommended that you investigate how the owner derive title from the original creator of the IP. In Australia, if an employee creates IP as part of his or her employment, generally speaking, the employer will own the IP. IP created by a person who is a contractor generally belongs to the contractor, unless an agreement provides to the contrary. Therefore, part of the due diligence process would involve mapping out the relationship between the creator of the IP and the seller, and reviewing all relevant employment agreements and consulting agreements to determine the devolution of title.

Tip 3 – Is the IP valid?

At a minimum, the status of all registrable IP should be confirmed on the relevant IP register to confirm that the IP has not lapsed and that all renewal fees are paid. However, granted IP rights on the register does not mean that the IP will be enforceable or nor will it be challenged or revoked.

Registered IP such as patents, designs and trade marks must meet certain requirements to be or remain to be registered. There are generally mechanisms for third parties to challenge registered IP, even after grant on the basis that the registered IP did not meet the threshold for those requirements. For example, in Australia, the validity of a standard patent may be challenged before a court. Registered trade marks may also be cancelled for the ground of non-use. Therefore, do not assume that registered rights are always valid and enforceable.

Sometimes, it may be appropriate to obtain a validity opinion to determine whether an identified patent or other forms of registered IP is valid or enforceable. If so, you will need to reach out to IP specialists to seek a validity opinion to ascertain whether the IP you are interested are valid. For patents, the IP specialists may give an opinion as to whether the claims are valid, in light of any found prior art references.

Tip 4 – What is the scope of the protection?

Protection granted by IP is territorial in nature. This means that if you obtain protection under a trade mark in Australia, that protection does not extend to New Zealand, unless you also obtain a registration for that trade mark with the Intellectual Property Office of New Zealand. It would be important to ascertain the scope of the relevant IP to be acquired from a jurisdictional point of view.

In addition, consider for what period for which the IP is granted protection. Always check the expiry dates. Whilst trade mark rights may potentially be perpetual (subject to payment of renewal fees), patents generally have a term of 20 years. Obviously, the scope of protection offers by a patent that expires in the next 3 years, would be different to a patent which expires in 16 years.

It would also be prudent to consider the scope of protection offered by the IP. A registered trade mark only grants protection for the goods and services the mark is registered for; and protection granted by patents is only to the extent of the claims. In this regard, a patent claim directed to a composition of certain material would be broader than a claim directed to the method in making the material. The buyer should carefully consider what kind of protection is conferred by the IP that it intends to purchase and whether such protection aligns with its business needs.

The scope of protection of IP will clearly affect the price a buyer is willing to pay.

Tip 5 – Does the technology work?

For buyers acquiring technology, it is important to conduct diligence beyond legal issues. Is the IP at an early stage of development which require substantive further development, or is the IP at a stage where it is ready or suitable for commercialisation? Does the technology function in accordance with the representation by the seller? These are important considerations for all purchase of technology based IP assets.

Tip 6 – Is there any encumbrance on the IP?

IP is a form of personal property and therefore the owner of IP may at its discretion grant security interests on the IP. Common form of security interests may include mortgage, pledge, lien, debenture or charge. In Australia, the Personal Property Securities Act 2009 (Cth) defines "security interests" broadly as a transaction that provides an interest in personal property (i.e. including IP) and in substance, secures payment or a performance of an obligation regardless of the form of the transaction. Therefore, it is prudent to not only conduct a search on the Personal Property Security Register (PPSR) against the seller and all its related entities, to the extent you are acquiring registered IP, it is recommended that you conduct a PPSR search using the serial number of the IP too.

Tip 7 – How much will you pay for the IP?

This may be by far one of the most interested questions for both the seller and the buyer. Unfortunately, there is no easy path to an answer and there is not a right or wrong answer. Ultimately, the final price is largely a commercial decision driven by factors such as market condition, industry needs, and the quality of the IP. There are, however, some conventional approaches to value IP. The cost approach establishes the value of an IP by calculating the cost of developing the IP, or a similar IP. The income approach values IP based on future projected cash flows that may be generated by exploiting the IP. The market approach values IP based on data of actual third-party transactions of comparable IP to determine a market price. Different valuation methods may lead to widely different results. You may wish to engage an IP valuer to discuss valuation of the IP, but it would be up to you to provide information regarding the industry and market you operate in, without accurate information, any valuation is at most just a guesstimate.

Tip 8 – IP assignment and recordal

Change of ownership of registered IP will need to be recorded with the relevant IP offices, such as IP Australia and the Intellectual Property Office of New Zealand. It may be possible to apply to these offices using the asset sale agreement as evidence to support your application to change the ownership of the IP. A simple confirmation of assignment listing the details of IP to be transferred would be more preferable. IP offices around the world may have different requirements for a change of ownership application, some countries may require the confirmation of assignment in a particular form, and such confirmation notarised and authenticated. Some IP offices may have a deadline when the application for a change of ownership must be lodge. It is therefore important that the asset sale agreement contains a provision for the seller to assist with such processes post completion.

Tip 9 – Warranties and Indemnities

As a buyer, in addition to other warranties by the seller, you may wish to seek certain warranties specifically related to the IP you are buying. These warranties may include warranties regarding ownership, validity and non-infringement. It would be also important to seek a warranty that the seller has disclosed all relevant IP concerning the business to you, so that you will not be in a position to purchase further IP from the seller concerning the business.

Sometimes, the parties may agree that the seller will indemnify the buyer for all claims concerning the business prior to completion of the sale; and conversely, the buyer will indemnify the seller for all claims concerning the business post completion. Whilst this provision may seem a fair allocation of risks, if the business sold has IP assets, the buyer may wish to carve out claims arising IP infringement from its post-completion indemnity, on the basis that the IP is acquired on the understanding that its commercialisation will not infringe any third party IP. Obviously, this position may change if the IP was acquired on an as-is basis with no warranty provided concerning infringement.

Tip 10 – Post completion management of IP

Once you have completed the purchase of IP, ensure that change of ownership is recorded with the IP office for each jurisdiction whether the IP is pending or granted. Create some IP management tools to manage your IP portfolio, such as an IP register and diarise all due dates for action required to continue prosecute or maintain your IP. In the longer term, it is recommended that your business regularly reviews whether the acquired IP continue to serve your business needs and make IP protection decisions accordingly.

The benefits of being smart about purchasing IP assets in a business will go a long way, and taking a proactive approach in negotiating appropriate IP provisions in an asset sale agreement at the outset will assist the buyer in understanding the nature of the IP, discovering any limitations and develop a good strategy to commercialise the IP it has acquired.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.