Due diligence for acquiring trademark portfolios

The media is full of news of brand acquisitions in India. The following high-profile acquisitions were reported in the first quarter of 2015 alone:

• Infosys Limited announced its acquisition of US-based automation technology firm, Panaya, Inc.
• Indian conglomerate ITC acquired Johnson & Johnson’s international brands Savlon and Shower to Shower, among others.
• Twitter acquired Bengaluru-based ZipDial.
• Godrej Consumer Products Ltd recently acquired a 100% equity stake in Frika Hair (Pty) Ltd, a South African hair extension company.
• Indian e-commerce major Snapdeal acquired Exclusively.in, an Indian designer wear and accessories e-tailer.

Indian business analysts predict that this will be a big year for deal making, at least in the fast-moving consumer goods sector.

Those involved in acquiring brands or a substantial stake in a business with strong brands should consider the following crucial steps in order to make sure that the deal goes through smoothly.

Initial stage – issues to consider before commencing discussions

To start, assess the nature of the transaction itself. Is it a simple brand acquisition or an acquisition of some or all of the target’s business? Once this has been established, the appropriate document(s) should be sketched out. In addition, a non-disclosure agreement or memorandum of understanding or term sheet containing a non-disclosure clause should be entered into. This is both a legal requirement and the best way to reduce the risk of disputes and protect any confidential information that is likely to be shared, particularly if the parties decide against proceeding with the transaction. Both parties should keep all key information about their businesses confidential, except for that already in the public domain, before commencing due diligence. The non-disclosure agreement or clause should be drafted carefully and include:

• a clear definition of the confidential or proprietary information that is likely to be divulged during diligence or discussions;
• a survival clause, which will last in perpetuity (with legally or generally recognised exceptions);
• the options available for an aggrieved party to invoke injunctive or specific relief without prejudice to other available legal or contractual rights – injunctive remedies can be claimed in case of breach of confidentiality alone, either in equity or under common law; and
• a clear indication of the number of authorised representatives who are permitted to carry out diligence and the extent and amount of information that may be disclosed.

Once due diligence commences, it is essential to engage a trained external attorney. A trademark attorney is a must where trademarks or brands are involved. If the matter affects more than one jurisdiction, trademark attorneys should coordinate and exchange information in order to ensure that the rights holder can assign trademarks with no limitations or encumbrances. Trademark attorneys should carry out select due diligence while keeping the entire potential transaction in perspective. This should be the guiding factor with respect to the following points.

Identify the marks being acquired

The first step in acquiring trademarks is to identify the brands of interest. Depending on the nature of the transaction or acquisition, this may be limited to the specific trademarks that are to be acquired and have thus already been identified. However, it may alternatively involve looking at all the brands or trademarks that are owned or used by the target, in case of acquisition of some or all of the target’s business.

All new marks and co-branded marks should be investigated. The issues involved in a new joint venture, a merger or the acquisition of a minority stake will be different from those involved in a simple acquisition of trademarks or the entire company. In all such cases, the same aspects should be considered with regard to trademark due diligence and integration. However, the purpose of such due diligence will be different and will involve other issues that do not directly relate to the trademark acquisition process and are thus not addressed here.

Where specific trademarks are to be acquired, the next step is to ascertain the strength of the marks by seeking specific information about them – the type of information that should be sought is set out below. If an acquisition through other means is involved, the trademark attorney should look into the target’s actual business activities, in addition to going through the standard due diligence checklist.

The target’s website, advertisements and promotional materials – including those relating to future products and services – and other relevant materials detailing its activities should then be reviewed. A good trademark attorney will likely identify much hidden intellectual property being used by the target, which might include logos, slogans, brands and trademarks. Such hidden marks might already be distinctive, making them attractive for future use; or conversely, they could infringe third-party rights.

Due diligence checklist

Once the marks have been identified, thorough due diligence must be conducted. The primary goal of this is to ascertain whether any risks are associated with the marks. The key information and documents to be covered include the following:

• a complete and up-to-date list of registered, unregistered, applied for and used but unapplied for trademarks in the relevant jurisdiction(s);
• copies of all registration and renewal certificates;
• complete and up-to-date files pertaining to the prosecution of each trademark, including all search opinions, forms, affidavits, undertakings, certificates of no objection, orders and other documents and correspondence pertaining to each trademark, whether submitted to or exchanged with the trademark office, as well as correspondence between the attorney and the target;
• complete and up-to-date information regarding the use of each trademark, particularly those that are registered and those for which no registration has been sought;
• complete and up-to-date files pertaining to any opposition or rectification proceedings, regardless of whether these were filed by or against the rights holder, along with any settlement agreements entered into in the past or planned for the future;
• complete and up-to-date files containing copies of all correspondence, notices and orders relating to trademark disputes, cease and desist letters, letters alleging infringement, letters threatening legal action and other legal notices received or sent, or legal action initiated by or against the rights holder;
• complete and up-to-date files relating to past infringements, disputes, settlements, demands or language in administrative or judicial decisions, court orders and so on that the rights holder possesses, which may affect future litigation in relation to any of the marks of interest;
• all contracts or agreements – including licences, cross-licences, co-branding, assignments, registered users, settlements and any other agreements – entered into by the rights holder with any related or third party governing or continuing to have an impact on any of the marks covered within the ambit of the acquisition or transaction, whether past, present or planned;
• complete and up-to-date disclosure of any existing or potential disputes with respect to use of the trademarks, or alleged infringement or invalidity, whether initiated by or against the rights holder; and
• any other documents or information that may have a bearing on the marks that are of interest to the acquirer.

Due diligence

The primary goal of due diligence is to ascertain whether any risks are associated with the trademarks. To this end, a trademark attorney should review all documents in detail. Each trademark takes its own course and thus, the review should be tailored accordingly. However, the following facts should be ascertained in the case of registered trademarks, pending applications and unapplied for trademarks.

Registered marks

The following should be ascertained in relation to each registered trademark:

• How long has the mark been registered and has it been renewed?
• Is the mark in use? If not, since when and what is the duration of non-use?
• Have all renewal fees been paid?
• Is the mark associated with any other mark(s)?
• Are all original renewal and registration certificates available?
• Is any removal, rectification action or litigation pending against the same?
• Have any rights been granted or received from any related or unrelated third party? If so, ascertain the details of these. Is there a registered user registered in relation to the same? If so, with what kind of rights?

Pending applications

The following should be ascertained in relation to each pending application:

• The current status – are there any impending actions with an approaching deadline?
• Have all responses, fees and undertakings been filed or hearings attended as required under law?
• If the mark has been examined, does the examination report contain any mark that is likely to pose a threat to registration?
• If already advertised, has the opposition period lapsed?
• Has the trademark office imposed any conditions or limitations, or required that the mark be associated with any other mark?
• Is there any threat of opposition, real or perceived?
• Is there any threat of refusal of registration, particularly if any identical or similar mark has been disclosed? Is there a threat of the application being deemed abandoned for non-payment of statutory fees, non-appearance for hearings, non-prosecution or any other reason?
• Has the mark been used? Is there evidence to support use, if claimed?
• Have any rights been granted by or received from any related or unrelated third party? If so, details should be supplied.
• Are any opposition(s) pending against the trademark? If so, details should be supplied.

Unapplied for trademarks

These marks should be scrutinised carefully and may require the collection of actual evidence of use, should the acquirer be interested in securing these in future. Such evidence might include the earliest date of use of the mark, evidence of use, the reason for not applying for registration of the same, if any, and knowledge about any third party claiming rights in these or similar marks.

Twitter’s acquisition of Bengaluru-based ZipDial was one of a number of high-profile brand acquisitions in India during the first quarter of 2015

Disputes

All trademark disputes and oppositions should be examined carefully. The case’s strength should be assessed and the evidence on record examined, along with the parties’ contentions, in order to gauge whether the mark in which the acquirer is interested is likely to succeed.

By and large, if the marks are unopposed and uncontested, and the rights are vested solely and exclusively in the target, then they should be risk free and worth investing in. Most other technical issues (eg, responses to office action, payment of fees or appearances at hearings) can be handled after acquisition and are a part of the ongoing process of trademark prosecution.

Should the mark be opposed or contested, or a statutory fee not be paid within the prescribed timeframe, there is a higher risk in acquiring it. This is because the rights are uncertain and the target is not the conclusive or exclusive owner of the mark. Thus, the right to assign may not actually exist.

Once a trademark attorney gives the acquisition the green light and the parties conclude the financials, the next stage is to draft and execute definitive agreements. The acquirer must identify whether all of the trademarks are to be acquired or only some select ones. In selecting these, it is important to ensure that rights are not created among multiple entities, particularly in relation to associated marks or marks.

Execution stage – drafting a definitive agreement

The following steps may be taken into consideration at the execution stage.

First, all marks that are of interest – whether registered, applied for or used – may be assigned to the acquirer through a duly drafted and executed deed of assignment.

Next, a deed of assignment should be drafted, drawn and duly executed as per the laws of the jurisdiction from which the marks are being acquired, as trademark rights are territorial. In India, the deed of assignment must be executed in writing, state that full and final payment has been made and clearly list all trademarks being assigned. Finally, the applicable stamp duty must be paid.

In case of trademarks that are used, but not applied for, it may be practical for the assignor to cooperate and execute all documents necessary and provide all documents or information that would be needed in the future for the assignment to be perfected and a trademark application(s) filed, including certificates of no objection, as required by law.

A close watch must be kept on any impending deadlines during the entire transaction, even after the initial agreement has been executed. This will ensure that rights to the trademarks are not lost for non-prosecution in the course of the acquisition.

Closing - filing applications

Upon executing the deed of assignment, the following steps must be taken:

• Appropriate applications must be filed, along with the official fee, and responses filed at the respective trademark offices to ensure that immediate deadlines are met.
• Appropriate applications must be filed to bring on record that the assignee is the new owner of all registered and pending marks, along with the applicable fee.
• In some countries, there are timelines as to when applications to record an assignment must filed – for example, in India, an application to record assignment filed later than six months will result in increased official fees.
• Fresh applications may be filed in relation to those trademarks that are already in use, but not applied for.

Operational stage – integration into acquirer’s business

Upon acquiring all trademarks, the acquirer should assess the business prospects of continuing to use all of them or the possibility of shelving some. Much depends on the acquirer’s strategy and business goals.

If the target enjoys a strong association with the marks, it may be necessary to educate the public as to the change in ownership. This could be done through targeted communications or through newspapers and similar media. However, this may be more difficult where the acquirer has purchased a previously competing product. The acquirer should integrate the new marks into its trademark portfolio in a thoughtful and strategic fashion, so as to take best advantage of the reputation of both marks. In relation to some products or services, it may not be a bad idea to merge two existing marks to create a new one, whether previously owned by or newly acquired by the acquirer.

Whatever the acquirer’s strategy and goals, the trademarks are an asset and should be used continuously in order to ensure they are not lost due to non-use. Immediate steps should be taken against any unauthorised use or anything else that might threaten the marks’ distinctiveness. Communication with the target audience using the trademark is key to keeping the marks going and keeping them strong.