A business’s Intellectual property (IP) can be its most valuable asset. It may be essential to the continued operation of the business. For this reason, a buyer of a business must ensure that the IP is properly identified and dealt with in the business sale contract.
What is IP?
The key components of IP are:
- patents: protect inventions;
- industrial design: protects aesthetic creations determining the appearance of industrial products;
- trademarks: protect distinctive marks (name, motto or symbol) that identify a business or its products or services;
- copyright: protects literary, artistic, musical or other creative work – the expressions of an idea.
How is IP dealt with by the REIQ Business Sale Contract?
The REIQ Business Sale Contract (Standard Condition 3) provides that the business and business assets include “industrial and intellectual property”. In the four examples of IP above, the first three are classified as “industrial property”, which is IP that relates to “industry”, i.e. business.
The REIQ Business Sale Contract provides:
- upon completion, the seller must provide:
- transfers of all business assets … together with such instruments of title and other supporting documentation as may be necessary to effect registration in any competent authority (standard condition 6.1(e);
- any other documentation necessary to vest in the buyer unencumbered title to the business and the business assets (standard condition 6.1(h);
- an effective transfer of each Trade Mark (standard condition 6.1(n).
- the seller warrants that it is the owner of the business assets and those assets are unencumbered (standard condition 8.1(a));
- the seller will execute all such documents and give such other assistance as the buyer may reasonably require to transfer all right title and interest held by the seller in the business assets (standard condition 8.1(e);
- the seller warrants that any trade mark noted in Item J(f) is, at the date of contract and the date of completion, registered pursuant to the Trade Marks Act 1955 (Cth);
So in essence, the REIQ Business Sale Contract provides:
- the business being sold includes all the IP;
- the seller promises it owns all the IP;
- the seller promises all the IP is unencumbered;
- the seller will provide the buyer will all documents and other assistance necessary to transfer the IP to the buyer on completion;
- any trademark specifically noted in the contract will be registered on completion.
Whilst these clauses address many of the key issues, are they sufficient?
There are many grounds for attacking the validity and rights in IP. Before a buyer pays any significant some for IP included in the business being purchased, they buyer must be satisfied with respect to the validity or the IP and potential claims against it.
The following issues are not addressed in the REIQ Business Sale Contract:
- whether the seller is the sole owner of the IP;
- whether the IP is all that is required to run the business;
- whether any fees are payable in relation to the IP;
- whether the seller has granted any licences or rights to other parties to use or otherwise deal with the IP;
- whether anyone is claiming, or may claim, a right to the IP; and
- whether anyone claims that the IP infringes a third party’s IP.
Whilst these issues are normally addressed in any due diligence of the business, it is important that the business sale agreement also includes warranties (promises) by the seller that the IP:
- is valid;
- does not infringe another’s IP;
- there are no rights granted to others with respect to the IP; and
- there are no claims, or potential claims, against the IP.
These warranties, at the very least, are required. If any IP is significant to the buyer, there are likely to be other warranties required or issues that must be addressed or warranties required. For example, with patents, warranties are required from the seller that the seller is the true and first inventor of the invention and the invention has not been used or published in Australia before the patent application was filed.
The REIQ Business Sale Contract deals with the ownership and transfer of IP from the seller to the buyer. Whilst it addresses many of the key issues, there are important issues that are not covered. Depending on the significance of the IP, the buyer should seek a variation to the contract to include particular warranties (promises) from the seller concerning the IP.
Also, the more significant the IP the more warranties that may be sought (and rightly so) by a buyer. It is advisable that all buyers of businesses containing significant IP obtain legal advice.
What to do next: If you would like help or more information on intellectual property and business sales, call Joe Kafrouni on (07) 3354 8888 or email [email protected].
DisclaimerThe information provided by Kafrouni Lawyers is intended to provide general information and is not legal advice or a substitute for it. Small business people should always consult their own legal advisors to discuss their particular circumstances. Kafrouni Lawyers makes no warranties or representations regarding the information and exclude any liability which may arise as a result of the use of this information. This information is the copyright of Kafrouni Lawyers.
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