A guide to Intellectual Property in Insolvency
No-one has been left in any doubt that coronavirus has had a devastating effect on the global economy.
Car sales have plummeted to their lowest levels since 1946, the airline industry is at a standstill and high street retail is on the verge of collapse with the demise of many well known brands, such as Debenhams, Mark Hix, BrightHouse, Carluccio’s and Remnant Kings.
Businesses are working tirelessly to survive and are taking radical steps - as demonstrated by Rolls Royce’s recent announcement to cut 9000 jobs and Jaguar Landrover’s negotiations with the government to secure a £1billion loan.
Despite such measures there has been a dramatic rise in companies experiencing financial difficulties, and both insolvency professionals and those considering buying a distressed business need to be aware of the risks and opportunities.
Why is IP valuable during an insolvency?
Intellectual property (“IP”) is an important consideration in the context of insolvency. This was illustrated when administrators of Carluccio’s received several competing offers for its prestigious brand - which was eventually bought by food industry tycoon, Ranjit Singh Boparan, the man behind Giraffe and Ed’s Easy Diner.
Similarly, there will also have been discussions over securing ownership and use of copyright in the drawings and patterns for Debenhams’ ranges of clothing and household furnishings, or in the rights to the extensive databases of customers of BrightHouse.
However IP is often overlooked and, as a result, those involved may not realise the full value of the assets they are buying or selling. Consideration needs to be given on how to identify, protect and realise the full value of intellectual property, both from the perspective of the insolvency practitioner (whether an administrator or liquidator) and the purchaser of an insolvent business.
Companies which derive substantial revenue streams from licensing out their IP, or companies whose core business model is dependent on licensing in IP from others, need to be aware of what insolvency risks they need to address in their licences.
Almost every business will own or use IP in some form or another, whether that be a patent for an invention, bespoke software, a database of customers, a brand or some valuable know-how. The starting point is understanding the nature of IP and how it arises in the context of any business.
IP is essentially a bundle of very different intangible rights which have commercial value. They share one characteristic, which is that they are moveable and can be sold, licensed or securitised in much the same way as any other moveable property.
Identifying IP assets
The starting point is being able to identify properly what assets attract IP and the nature of the rights. Ownership should then be clarified and consideration given to what should be done to preserve value. Lastly, parties need to be aware of the pitfalls that may arise in connection with the sale of IP.
Identifying what IP exists can present its challenges and this often depends on whether the IP is registered. Some IP can be registered, such as patents, registered designs and registered trade marks. In such circumstances it is relatively straightforward to carry out searches to verify the nature and status of the IP and whether it is actually owned by the company in question.
A quick search can reveal that the company owns patents in specific countries or has registered trade mark protection. A search will also reveal at what the stage an application for registered rights is at and give an indication as to whether the application is likely to be granted.
Other IP does not require to be registered and protection arises automatically such as copyright, know-how and database rights. Unregistered IP can be notoriously difficult to identify and capture in the context of insolvency. For example, it may be difficult to determine whether software or website content has been created or merely copied from another source or who is the author of the work.
Checking ownership of IP
Once the relevant IP has been identified, an insolvency practitioner will need to be satisfied that appropriate value has been given to the IP. There may often be gaps in ownership and this can arise if the company has commissioned freelancers to develop technology on its behalf or collaborated with others in developing new products.
Even if ownership is clear, the company may nevertheless have granted licences to others and the licences should be checked to ensure that the rights under the licences can be transferred to a buyer. For example, the licence might provide that the agreement automatically terminates on the insolvency of either party, in which case any buyer will be deprived of the licences granted and any royalty streams payable to the company
Assessing the value of IP
Consideration should also be given to the potential value of IP as it may not always be viewed positively and the insolvency practitioner may take the view that it is not worth keeping.
For example, the company may need to incur heavy costs in pursuing a patent application or, if the IP is licensed into the company, the company may need to incur significant costs in getting the product to market or to continue to pay royalties to the owner. Any adviser may need to weigh up future costs in securing or maintaining IP against the likelihood and value of future revenue from its exploitation.
Valuing registered IP presents its own challenges as registered rights have limited periods of protection. For example, patent protection is only available for a period of 20 years from the date of first filing of the application. Similarly, registered design rights are for a period of 25 years. Therefore, if a registered right has only recently been secured then it will have much more value than say a patent which is due to expire in three years.
It should not be forgotten that pending applications for registered rights have value in themselves, and the adviser may have to weigh up the difficulty and costs involved in completing the registration process against any guarantee of future revenue.
Value is not a constant as applications may subsequently be rejected, abandoned or, even if registered, registered IP can always be challenged and revoked at a later date. The value of a brand can change overnight and if there is any risk that a brand is perceived to have an association with insolvency, the brand may need to be sold as quickly as possible in order to minimise risk to goodwill.
There are also pitfalls to look out for in the mechanics of a sale, particularly if licences have been granted to or by the insolvent company. If the company has granted licences to others, the adviser should satisfy itself that there are no breaches and that all the royalties payable to the company have in fact been paid.
Similarly, if the company has been granted the benefit of IP licences from others, consideration needs to be given as to whether those licences are able to continue in force after the insolvency event and are capable of being transferred to a buyer. This is particularly important if the company in question is heavily dependent on the IP granted from another company for its core business activity.
IP challenges for business buyers
IP is equally important to the buyer of an insolvent business. The buyer has a number of different challenges. Firstly, the insolvency practitioner will typically give no warranties or indemnities in connection with ownership, use or infringement of any IP, and the buyer will need to rely on its own due diligence. This may be difficult to do if timescales are short or pressurised.
There are a number of other issues which the buyer will need to address. For example, if the insolvent business has granted IP licences, the buyer will need to satisfy itself that these licences are transferrable to the buyer, otherwise the buyer may loose out on future royalty streams.
Similarly, if the insolvent business is dependent on the benefit of IP licences from others, the buyer will need to ensure that those licences are not terminable by the licensor on insolvency and that the insolvency practitioner is not prevented from transferring the benefit of the licence to the buyer.
The buyer will also be concerned about the risk of losing key employees involved in generation IP, and will therefore need to check that there are appropriate confidentiality undertakings or other restrictions imposed on employees relating to use of any know-how generated.
A transfer of any registered IP could be subject to any security interests or licences, therefore the buyer should make sure it searches the relevant registers to ascertain the extent of any such rights and whether they will impact on the sale. It may be that securities will need to be released and licences will need to be checked to ensure there are no onerous conditions.
If the buyer purchases registered rights, it should always ensure that the transfer of those rights is registered at the appropriate register. Otherwise, the buyer will be unable to enforce the IP rights against others until the transfer is registered.
Risks to IP licensing during insolvency
If a company’s business model includes revenue streams from licensing out its IP it should ensure that appropriate protections are included in the licences to cover risks of insolvency. In such circumstances, the licensor would hope to find a new licensee and would therefore wish to ensure that the licence is transferable or, alternatively, that the licensor has an express right to bring the licence to an end in the event of the licensee’s insolvency.
The licensor will also want to ensure that the licensee is not entitled to transfer the licence at any time during the agreement without the licensor’s consent. This is powerful because if the insolvency practitioner subsequently seeks to sell the benefit of a licence, it will be unable to achieve this without the consent of the licensor and, in this way, the licensor continues to have some control over who will be the new licensee.
Consideration should also be given to the risks for a licensee of IP in the event of insolvency. Sometimes the licence will provide for automatic termination on insolvency of the licensor. If possible, the licensee should ensure that there is no automatic right for the licensor to terminate the agreement, and to ensure that the licence is transferable to another party.
In the case of registered IP, the licensee should ensure that any licences are registered at the relevant registries as any future transfer of the underlying registered IP, whether a patent, registered design or trade mark, will always be subject to any licences that have been granted by the transferor and registered at the relevant registry. This means that they will be binding on a subsequent buyer of the business and the licensee will continue to have the benefit of the IP rights under the licence.
Sometimes a licence will typically provide that the licensor may transfer ownership of the underlying consents without the consent of the licensee. In such circumstances, if a buyer purchases the IP without knowledge of these existing licences, then the buyer will not be subject to those licences (unless they are registered at the relevant registries for those IP registered rights) and the licensee will have no recourse against the licensor other than an action for breach of contract as an unsecured creditor.
There are clearly a number of challenging IP issues which need to be considered in the context of insolvency.
Evaluating and managing potential intellectual property risks is going to become even more important for professional advisers as businesses continue to experience the economic fallout from the Covid-19 crisis and insolvencies become more frequent.
10th July 2020
We have been named as the leading IP litigation practice in Scotland.
15th April 2020
Online copyright infringement can often seem like a bit of a minefield.
24th March 2020
The UK government’s lockdown will have impacts on parties to IP licences and franchise agreements.