If you’re acquiring or investing in a company, conducting trademark due diligence (DD) is vital. That helps you understand what you are buying and what its value is.
Due diligence is a process where the buyer evaluates the target and the assets that are to be purchased. Part of the process is also evaluating the trademarks involved in the transaction. By knowing this, you can better assess the risks involved and determine the value of the trademark portfolio.
Share or asset purchase
First, you need to know if you’re buying the shares of a company or its assets (or part of its assets). If you buy shares in the company, you are buying the company itself and everything it owns and owes.
If you are buying assets, you need to be very specific about what those assets include. For example, let’s say that the seller is a beverage company making beer and cider, and you’re buying its beer business (its beer-related assets). Does that acquisition include the trademarks and other brand assets of the seller? By default, this might depend on the country. Some countries have provisions in their trademark laws that, when buying assets of a company (for example, the beer business unit of the beverage producer), it by default includes the trademarks pertaining to that business, unless otherwise agreed or indicated by the circumstances. Other countries have opposite rules in force, i.e., that trademarks do not belong to the sale unless specifically agreed. Whatever the country, if you’re doing an asset purchase, you need to specify clearly which trademarks are part of the deal and which are not.
What to look for?
Here are some of the many important things you should be looking at.
Ownership of the trademarks. You need to determine who owns the trademarks in question. In asset transfer, it is evident that the seller cannot transfer trademarks that it doesn’t own. This makes it particularly important to specify the trademarks that are part of the sale. Relying on trademark law provisions that provide for the transfer of trademarks in case of asset purchase can lead to catastrophic results.
For example, it could be that the seller is not the owner of the trademarks he uses. When Volkswagen bought the Rolls-Royce automobile business from Rolls-Royce Motor Cars Ltd, it later learned that the seller was not the owner of the Rolls-Royce trademarks but only had a license to use them. Volkswagen got a factory and lots of physical assets, but not the crown jewel, the Rolls-Royce brand. Similarly, WeWork managed to raise more than USD 10 billion in venture capital before its failed IPO. Only then it became apparent that WeWork’s founder Adam Neumann had registered the trademarks for his own company, not for WeWork. Eventually, WeWork bought the trademarks from its own founder and CEO for nearly USD 6 million. Whether you are acquiring assets or shares, make sure you know that the seller is the owner of the trademarks relating to his business. If not, the seller has some serious explaining to do.
Status of the trademarks. If there are still pending applications or oppositions, it is important to know this. This could mean that the mark will not be registered in an important territory. Even if there are registration obstacles that would not prevent the use of the mark, getting a refusal still means that the brand is less well protected against third parties and, as a consequence, less valuable.
Protected goods and services. A key part of any trademark registration is the list of goods and services. It is vital to make sure that the registrations cover those goods and services that are actually offered under the mark. This is particularly important if the registrations are old and the business has evolved. Sometimes products are originally intended to be used for something other than what they eventually turned out to do. For example, Viagra was originally a drug for cardiovascular diseases, Play-Doh was a wallpaper cleaner, and Listerine was a surgical antiseptic. With older trademarks in particular, it is important to make sure that the list of goods and services is up-to-date.
Geographical scope of the trademarks. Trademark rights are territorial. You need to take into consideration that even if the seller has registered the trademark in all countries that are important to him, there might be other countries that you are interested in or already doing business in. This means that the mark is not registered in those territories, and you have to take care of that. In the worst-case scenario, somebody else has already registered a similar mark in those countries, preventing you from registering and using the mark there.
Non-infringement. You need to make sure that the marks you purchase do not infringe on other companies’ trademarks. At the very least, the seller must be able to say (represent and warrant) that there are no pending disputes or claims against the use of the mark and that he is not aware that the use of the mark would infringe on other trademarks. If there are ongoing oppositions against the registration of the mark, this is also important to know.
Contractual or other encumbrances. The owner may have made commitments (undertakings) regarding the use or registration of the mark. These could be, for example, license agreements or so-called coexistence agreements. Especially on the EU level, it is quite common that if the trademark application was opposed, the opposition has been settled amicably by way of concluding a coexistence agreement. This agreement typically states the goods and services for which the mark can be used and/or registered. For example, the seller may have undertaken that the mark cannot be used for particular products or in a particular way. If this conflicts with your intended use of the mark, you have a problem. Similarly, the mark may have been given as security for credit. This would most likely prevent the seller from assigning the trademark to you.
The above-mentioned considerations are only some of the things you must take into account when conducting due diligence. In addition to doing your due diligence, you can also limit the risks with contractual stipulations. However, the seller will do just the same. He will try to pass all the risks on to you. It is highly recommended that you get a legal advisor for doing due diligence and negotiating the agreement.
Remember that the devil is in the detail. Conducting due diligence can be tedious and boring, but it is important to do it properly and thoroughly. If you skip this stage, you may end up getting something else than you thought. Caveat emptor, buyer beware.