Establishing ownership in intellectual property

Due diligence requirements

Robert Michelin, lawyer

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The Canadian Institute recently held its "Licensing of Intellectual Property" conference. The cross-border nature of licensing and the ever-growing field of technology transfers guaranteed the conference's relevance for lawyers in every part of Canada. This is a summarised version of the presentation made by Duncan Card, a Toronto-based specialist in intellectual property issues.

Before any licensing arrangement can be concluded, the licensee must satisfy him or herself that the licensor has the legal right to transfer the property in question, either as owner or via another right such as a right to sublicence granted by a third party. Accordingly, prior to entering into the agreement, the licensee must conduct extensive due diligence to safeguard against the possibility that permission to use the property is being granted by a licensor whose right to enter into the transaction is unreliable.

In the view of Mr. Duncan Card, the essential problem faced by lawyers mandated to conduct due diligence as part of an intellectual property license agreement is that the intellectual property statutes of Canada were designed for the Industrial Age and not for an information or knowledge-based economy. The resulting disharmony is such that the statutory legal protection available to the parties is not sufficient and must be supplemented by contractual provisions negotiated by the parties and their attorneys. Any protective provisions are of little value, however, unless the parties are certain that the other's legal right to enter into the transaction is free of doubt.

Practical considerations

Mr. Card's presentation consisted primarily of a checklist of due diligence requirements for an intellectual property license agreement. His initial focus was on the practical considerations of the exercise. For instance, the first question that the attorney must consider is the level of due diligence required and the cost/expense factors involved. Other practical considerations include the time frame involved and the resources available to the due diligence team. While these considerations may seem obvious at first sight, even experienced intellectual property practitioners face difficulties when explaining to clients that limitations exist on what can be accomplished at the due diligence stage. For this reason, according to Mr. Card, it is essential that the attorney conducting the due diligence be creative with his sources of information and begin with a thorough understanding of the technology in question and the reasons why that technology is valuable to the business of the licensee as well as the licensor. Without a proper understanding of the essential substance of the license, the attorney cannot ask the right questions and will not be able to locate the information required to fulfil the mandate.

A very logical suggestion was made that the best way to accomplish this is to go directly to the source of the intellectual property. If a patented invention is the subject of the license, go straight to the inventor and the patent attorney who prepared the patent application. If the license is for computer software, go directly to the programmers who developed it. Another useful step is to conduct a review of the scientific literature in the field. Such a review will not only provide a measure of understanding of the technology; it may also resolve some questions as to the originality of the technology.

Key issues

Mr. Card described three issues as the focus of intellectual property due diligence. The first involves establishing a chain of title or rights in regard to property. All contractual treatment of the property from its inception to the current transaction must be verified. The second issue involves identifying any potential infringement of the rights of third parties. The third issue is one of making sure that there are no outstanding claims against the intellectual property, in the form of demands, judgements, security interests, contractual restrictions or current or pending litigation, for example.

It was suggested that narrowing the focus of intellectual property due diligence in this manner will help the attorney conducting due diligence to organise his or her task. It will not, however, reduce the number of questions that thorough due diligence requires. For instance, in establishing the chain of title or identifying any potential future infringement issues, the attorney should look to the history of the technology's development. Was it created by an individual or a research team? Was its creator employed by the licensor? If the created was an employee of the licensor, it becomes necessary to determine if the technology was created in the ordinary course of his or her employment duties. A review of the creator's job description is useful in this context. As well, all relevant employment agreements should be reviewed to determine if any patent rights or other intellectual property rights have been assigned to the employer (the potential licensor).

Another creative/developmental issue related to these three areas of faces is whether any government or private research funding was provided to the licensor. Often a technology company will grant rights to products under development in return for financial support. The providers of such funding may therefore have licensing rights or even proprietary rights of which potential licensees must be aware. Another important issue is whether any of the development work for the technology was subcontracted by the licensor to other parties. If it was, these parties may have contributed to the creation of the final product or process that is the subject of the license, and may thus have a potential interest as part owners.

Still more questions that should be asked in the due diligence process were brought to light in Mr. Card's discussion. Does anyone besides the licensor have sufficient knowledge of the technology such that it can be reproduced? Were confidentiality protection measures such as secure storage, restricted access and, where necessary, encryption codes, taken? Are there research notes and other documents' available for examination which give evidence to the development and creation of the property - its evolution from an idea to a commercially viable and valuable technology? The existence of hard evidence supporting the originality of the licensed intellectual property was described in the due diligence checklist as essential for protecting the licensee against possible infringement actions from third parties claiming ownership rights as contributors to its creation.

It was even suggested that the due diligence attorney look to the licensor's human resources personnel as a liaison when conducting the required employee verifications. This suggestion is based on the idea that an examination of employee records and career résumés may be useful in determining which employees of the licensor actually played a role in developing the intellectual property at issue. It was also recommended that the due diligence attorney examine whatever employee assistance programs are in place with the licensor. Such an examination might prove useful in revealing whether key employees involved in the development of the intellectual property and the maintenance of confidentiality surrounding it were satisfied with their employer. Content employees are much less likely to take secrets to a competitor or to challenge company ownership of intellectual property.

A thorough due diligence process also requires public record searches. This includes, depending on the intellectual property being licensed, searching the patent office, trademark register, industrial design register and copyright office. Such searches should, where necessary, be conducted on an international level if the transaction so requires. Attorneys must therefore be familiar with the intellectual property regimes of many countries or must have reliable and trustworthy contacts in these jurisdictions who can provide the required information. As well, litigation searches and commercial security searches in the appropriate jurisdictions are highly advised.

The due diligence attorney must also ask if the licensed property has ever been commercially exploited in the past. This includes any form of commercial exploitation, not merely previous licensing arrangements. One important element in such a review is whether the property in question was used in any commercial manner by a preceding company or by a company that is related to the licensor.

Conclusion

The objective of due diligence in any intellectual property license agreement is to protect the interests of the party to whom the licensed property is being transferred by verifying the legitimacy and unassailability of the other party's right to make the transfer. Mr. Card's focus in taking the participants through his checklist was to describe an effective framework for conducting a thorough and practical verification. When verifying whether the sanctity of a trademark has been violated prior to the license agreement in question, he suggested looking for signs of public use such as business cards, office signs and marketing materials. When corroborating whether certain individuals possessing key knowledge of valuable technology are likely to try to work with a competitor, he suggested examining the licensor's exit policies concerning departing employees. Above all, it was stressed was that any truly useful due diligence is practically oriented and must focus on the people involved in the creation, development, protection and commercialisation of the licensed intellectual property.

 

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