Intellectual Property Issues in Merger

and Acquisition Transactions

Editors: Mr. Ludwig Ng & Mr. Raymond Cheung

CONTENT

� Various forms of IP assets

� Warranties in MOU/Agreement

� Common traps in due diligence

� IP assets valuation

� Accounting treatment

PRETTY BABY Case

� Big Shark Co. wants to acquire Day Dream Co.

(PRC co.)

� Killer product – “Pretty Baby” applies certain

technology for interacting with player

PRETTY BABY case

� Existing products:

� “Pretty Baby” toy

� Video for kids featuring “Pretty Baby”& the Gang

� Fancy stationery set “Pretty Baby”& the Gang

� Big Shark wants to market “Pretty Baby”

products to the whole world

What IP assets are involved?

Customer / supplier databaseConfidential information

/ trade secrets

Fancy stationery designDesign

Scripts of “ ”

video

Copyright

Interactive technologyPatent

Trade Mark

What is Trade Mark?

� “Sign” capable of distinguishing the origin of

goods or services

� “Sign” can be:

words, letters, numerals, colours, sounds, the shape of

goods and any other combination of such sign

� Not descriptive – “ ”?

Consider ,

What is Trade Mark?

� Register in specific class(es) of

goods or services

� Goods: Classes 1-34

e.g. Class 11 : Electrical apparatus

Class 28 : Toys

� Services: Classes 35-43

e.g. Class 36 : Insurance and finance

Class 43 : Food service

What is Trade Mark?

� Exclusive right to use Trade Mark in business

� Rights obtained by registration

� Trade Mark registration is territorial

� Renewable every 10 years

Types of Trade Mark

� Word Mark:

� Device:

� Slogan: NOKIA CONNECTING PEOPLE

� Combination:

Samples of Trade Mark

Due Diligence Issues

� “ ” registered in relevant class?

� Class 28

� “ ” registered in relevant countries?

� All potential markets e.g. US, Europe (Community

TM)

� Country of manufacture (e.g. PRC, Hong Kong)

Due Diligence Issues

� Can “ ” be registered in countries of

potential markets?

� Any bad-faith registration

� Similar mark registered? e.g. Crazy Babe

� Trade mark search for similar marks

� Registration still active?

� Continuing use? Subject to revocation if non-use > 3 years

� Who is the current registered owner?

� Assignment of trade marks

What is Patent?

� Product

� • Process (method)

� Example of process patent:

� Manufacturing method

� Programming method for user

to train “ ”

� Full disclosure in exchange for

exclusive rights in

manufacturing and selling

product or in using process

Patent Rights – Market Monopoly

1. Patent Product

Exclusive right to make, put on the market,

use or import the product

2. Patent Process

Exclusive right to use the process or to make,

put on the market, use or import products

directly obtained from the process.

Benefits

� Gaining monopoly, prevent competition

– Only Big Shark can sell “ ”

� • Earning license fee /franchise fee

– Licensing technology to be used on “ ”,

“ ” etc.

� • Penetrating foreign markets

– Purchaser e.g. requires patent

registration as prerequisite for shelving goods

Basic Requirements

� Novelty

� Non-obviousness

� Industrial Application

What is novelty?

� New

� Not available to public before application

(undisclosed)

� Written in oral form

� Publication anywhere in the world

What is non-obviousness?

� Inventive step

� Standard of a person skilled in the

art

What is industrial Application?

� Able to be reproduced

� Available in mass production

Types of Patent

1. Standard patent (HK)

Invention patent 發明專利 (PRC)

2. Short-term patent

Utility model 實用新型 (PRC)

Standard Patent

� Maximum 20 years of protection

� Substantive examination

� Long application time: 3 - 4 years

Short-term Patent

� Available in some countries only

e.g. PRC, Japan, Australia,

Germany, but not US

� Max. 8 yrs of protection (HK) 10

yrs (PRC)

� No substantive examination

� Short application time: 6 months

� Owner to prove patent valid in

Court

Which type of patent is more applicable to

“ ”

1. Product life-cycle

2. How inventive is the product

3. Schedule for launching product

4. Budget

Patent Samples

Sample of Patent Document

3 Golden Rules

1. Do NOT disclose invention until

application is filled (Novelty)

2. Patent is territorial

3. File application in other

countries within 1 YEAR from

the first application date

Paris Convention

� Claiming priority of the first

application date within the first

year

� In countries which are members

of Paris Convention

Example

Big Shark’s US application date2005/11/1

Big Shark filed application in US,

claiming China priority

2006/2/1

X filed application in US2005/12/1

Day Dream filed application in China2005/11/1

X’s application is NOT novel

compared to Big Shark’s !!!

Due diligence issues

� Has patent been expired?

� What kind of patent? Standard (20 years) or

short-term (8 or 10 years)?

� How many remaining years?

� Confirm content of patent

� Relevant to technology to be acquired?

� Sufficient disclosure?

� Who is the applicant? Day Dream Co. or

some inventor?

� May require inventor to undertake to assign

patent to Big Shark

Due diligence issues

� Is the patent applied/registered in

countries of potential markets and

countries of manufacture?

� Is priority claimed?

� Is it within 1-year priority period?

� If close to the 1-year priority

deadline

� Immediately file application in other

relevant countries

� Apply for PCT extension to 2.5 years

Due diligence issues

� Patent application in process –any

rejection/pending office action?

� Day Dream disclosed “ ”in any

tradeshow before patent application?

� Patentability search

� Assess novelty and non-obviousness

� Chance of successful registration

� Assignment/License affecting patent rights

� Confidentiality and non-compete clause in

key employees’ contracts

What is Copyright?

� The right to protect “an expression of

idea” not to be copied without the

consent of the author

� An expression of idea can be: a writing,

a diagram, musical works

� NO registration is required

� Right derived from author by Employment/

Commission

� Subject to any contrary agreement

� Protection period: 50 years from the death of

author

“ ” – Copyright

� Drawings of “ ”

� Scripts / songs of video drama

� Design drawings of stationer

Due diligence issues

� Who is the legal owner of copyright? Day

Dream? Author? Design House?

� Is there sufficient evidence to support legal

ownership (especially for commissioned

work)?

� Can author be identified / located?

� Document support of copyright e.g. author,

date of creation, commissioned contract,

employment contract

� Copyright protection period expired?

What is Registered Design?

� Article of manufacture

� Shape

� Configuration

� Pattern

� Ornament

���� Appearance of “ ” toy

���� Stationery Design

Basic Requirement

� New

� Aesthetic

Samples of Design Registration

Sample of Design Document

Hong Kong Copyright Protection for

Registered Design

� 15 Years

� Registered Design – 25 Years

Copyright Design

0 5 10 15 20 25Yrs

Design Registration

� Registration is territorial

� Exclusive right to make or sell article of the

registered design

� No need to prove copyright or ownership

Due diligence issues

� Is Design registered? (otherwise can only rely on

Copyright)

� Has Design expired?

� How many remaining years?

� Who is the registered owner? Day Dream Co. or

some Designer?

� Is Design registered in countries of potential markets

and countries of manufacture? (within 6-month

priority period?)

� Day Dream disclosed “Crazy Bebe” in any trade

show before Design application?

Warranties from Patent

owner/applicant/ inventor

� No infringement of other patents or IP rights

� No disclosure before filing application (novelty)

� Full disclosure in patent application

� Assignment from inventor to applicant if necessary

� Assignment of patent application/ registered patent/

right to claim priority to Big Shark

� Regarding assignment at Patent Office

Warranties from Patent

owner/applicant/inventor

� patent valid (all maintenance fee duly paid)

� inventor to assist in reply to office action during

examination

� assistance in application in other countries e.g. in

obtaining certified priority document

� no active or threatened litigation

� transfer any related know-how if necessary

� any 3rd party involvement in manufacture -e.g. supplier

agreement regarding specific raw materials for making

Crazy Bebe’s skin

IP Evaluation – Cost Approach

� Historical cost basis

� Replacement cost (using current

prices)

� Costs include legal fee, application

fee, development cost, etc.

� Applicable if “ ”

technology/ trade mark is still in

early stage

IP Evaluation – Income Approach

� Present value of future economic benefits

� Future income e.g. revenue from sale

� Duration of income (product life-cycle)

� Risk (new technology, new competitive

product)

� Less precise than cost approach

� Applicable for “ ”technology /

trade mark after entering into market

� Also applicable if Big Shark will license

“ ”technology/ trade mark

IP Evaluation – Relief from royalty

approach

� Present value of royalty stream saved

� Based on “market royalty” fee (how

much others willing to pay for using

technology/ trade mark)

� Applicable if Big Shark is not

planning to license “ ”

technology / trade mark

IP Evaluation – Market Approach

� Compare recent arm’s length

transaction

� No active market

� Data not readily available

(confidential information)

� Each transaction is unique as to

negotiation process, terms and

conditions

Accounting Treatment for Intangible

Asset

� HKAS 38, SSAP 29

� Measured initially at cost

� After initial recognition, costs

less amortization

� Allowed alternative treatment:

� Revaluation based on fair value in

active market

� Rare active market for IP asset

Amortization period

� Best estimate of useful life

� Rebuttable presumption not exceed 20

years (removed by HKAS 38 in 2004)

� Consider:

� Protection period

� Expected usage

� Product life-cycle

� Stability of industry

� Expected competitors

� Interactive technology vs.

“ ”trade mark

IP assets as a whole

� Related IP assets may not be

separable in actual dealing

� For example:

� Magazine’s title (trade mark) and

subscriber’s database (confidential

information)

� Technology (patent) and name of

technology (trade mark) e.g. “ ”

� Special trade mark for the interactive

technology?

IMPORTANT

The law and procedure on this subject are very

specialized and complicated. This article is just

a very general outline for reference and cannot

be relied upon as legal advice in any individual

case. If any advice or assistance is needed,

please contact our solicitors.

The End