IP in business transactions: United States overview

A guide to intellectual property law in the United States. The IP in business transactions Q&A gives an overview of maintaining an IP portfolio, exploiting an IP portfolio through assignment and licensing, taking security over IPRs, IP and M&A transactions, and the impact of IP on key areas such as competition law, employees and tax.

To compare answers across multiple jurisdictions, visit the IP in business transactions: Country Q&A tool.

This Q&A is part of the global guide to IP law. For a full list of jurisdictional Q&As visit www.practicallaw.com/ip-guide.

Lanning G Bryer, Ladas & Parry LLP
Contents

Overview of main IPRs

1. What are the main IPRs in your jurisdiction? How are they protected?

Patents

Patent protection in the US derives from the Intellectual Property Clause (IP clause) of the US Constitution (Article I, Section 8, Clause 8). The IP clause gives Congress the power to secure exclusive rights for authors and inventors to their writings and discoveries for certain time periods. Congress has implemented this protection through the US Patent Act and the America Invents Act (AIA). The AIA introduced the following two major changes to US patent law:

  • The traditional American approach that patents should be granted to the first inventor changed. The America Invents Act changed the law to bring the US closer to a first-to-file system. While exceptions apply, a very simple summary is that a patent is granted to the first applicant to file as long as he files within a year of the first public disclosure of the inventor by or deriving from the inventor.

  • The US Patent and Trademark Office (USPTO) can review patents previously granted when these patents are challenged by third parties. A review is held in a "mini-trial" before the Patent Trial and Appeal Board comprised of judges with a specialised technical expertise.

Trade marks

Trade marks are protected under both US federal and state law. Protection is primarily governed under the federal statute (The Lanham Act); however, protection also arises out of use under state common law, as well as state statutory law. The scope of federal law is limited to interstate commerce, as under the Commerce Clause of the US Constitution Congress does not have the power to regulate intrastate commerce. Conversely, trade marks used in solely intrastate commerce are protected through state law.

Under federal law, trade marks are protected through registration of the mark with the USPTO. Absent use, an intent to use (ITU) application can be filed with the USPTO provided that the applicant asserts a bona fide intent to use the mark in trade and interstate commerce. An ITU gives an applicant priority, such that the date of filing is considered as constructive use of the mark. To maintain a mark's protection, it must be continually used in commerce.

Copyright

Copyright protection also derives from the IP clause. Congress has implemented this power through the Copyright Act, which gives the owner the exclusive right to do and to authorise any and all of the following:

  • Reproduce the copyrighted work.

  • The right to prepare derivative works based on the copyrighted work.

  • Distribute copies of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending.

  • For literary, musical, dramatic, and choreographic works, pantomimes, and motion pictures and other audiovisual works, to perform the copyrighted work publicly.

  • For sound recordings, to perform the copyrighted work publicly by means of a digital audio transmission.

For authors in the US, registration is not required for protection; however, it offers additional advantages and is required to bring a claim of infringement. For foreign members of the Berne Convention, copyrights can be enforced without registration and it is not required to bring a claim of infringement.

Design rights

A utility patent can protect design or appearance as long as it has utility. In order to protect "ornamentality", that is, features that are visible and not dictated by function, a "design patent" must be applied for with the USPTO. Design patents must otherwise meet the general requirements for patentability.

Trade secrets and confidential information

Trade secret protection is generally available on a state level. However, as additional protection, 48 states and the District of Columbia have adopted some form of the Uniform Trade Secrets Act (UTSA), which protects against misappropriation of trade secrets. The remaining two states, New York and Massachusetts, have proposed legislation regarding the topic. Companies often use contractual means to protect their trade secrets (for example, non-disclosure agreements).

Other

The Plant Variety Protection Act (PVPA) offers intellectual property protection to breeders of new, distinct, uniform, and stable sexually produced or tuber propagated plant varieties a 20-year period of legal control (25 years for trees or vines). This control allows the breeder to exclude others from selling, reproducing, importing, exporting, or using the plant variety to create a new hybrid. Certificates of Plant Variety Protection are issued by the Plant Variety Protection Office, a division of the US Department of Agriculture (USDA).

New Drug Product Exclusivity is provided by the Federal Food, Drug, and Cosmetic Act under sections 505(c)(3)(E) and 505(j)(5)(F). Once marketing approval for a new drug is granted by the FDA, the FDA will grant a period of exclusivity for the data supplied by the applicant for market approval. This means that during this period, any drug manufacturer will have to provide its own clinical test data in order for it to obtain its own marketing approval. After this period, it can rely on the data supplied by the drug innovator. This period is five years for new pharmaceutical chemical entities; three years for new indications for pharmaceutical drugs; and 12 years for biologic products.

 

Maintaining IPRs

Search and information facilities

2. What facilities are available to conduct IP searches and obtain IP information on registered IPRs?

Patents

Utility patents can be searched for on the US Patent and Trademark Office (USPTO) website, which has information on granted patents and published patent applications. Most utility patent applications are published after 18 months of the initial filing date. However, if an applicant certifies that no patent registration is being applied for in any other country, the patent application can remain confidential until the registration is granted. A USPTO search gives information such as, but not limited to, the assignee, applicant name, inventor name, and the application as published. An additional search tool that can be used is the Patent Application Image Retrieval (PAIR), which displays information on activity in the USPTO on that application, including the status of the application and its prosecution history. Patent information is also often compiled by non-governmental entities (for example, Google Patents). Additionally, there are several vendors that provide patent searching services.

Though rare, an applicant may have filed a non-publication request, which prevents the publication of the application up to grant of the patent. If granted, the patent application will not appear in search results.

Trade marks

Trade mark rights in the US are procured through commercial use and may not always be registered. To ensure availability and minimise the risk of objection or litigation, searches can be conducted to identify in advance any similar marks. Searches can be conducted before filing for registration on the USPTO database online to ensure the mark is available for use and registration; however, the tool will only provide information on federal applications and registrations. There are also trade mark searching services offered by various third-party vendors to assist in clearing marks.

Copyright

Registration is not required to obtain rights; therefore, clearance searches are not necessary to register. Clearance searches can, however, be important for due diligence, acquisitions, third party use, and enforcement activities.

Design rights

Design patent applications are not published until granted. A search will therefore only produce issued design patents.

Trade secrets and confidential information

Companies can take internal precautions to monitor against the misappropriation of trade secrets or confidential information. These can include monitoring employee internet usage, and restricting access to physical and digital files, among others.

Other

The Plant Variety Protection Office, a division the US Department of Agriculture lists the entire contents of an application file on their Public Access Databases once a Certificate of Protection has been issued. They also publish a public version of the Certificate Status Database monthly or as time permits, but they do not guarantee the accuracy or frequency of such updates

To find information on drugs that have received New Drug Product Exclusivity, the US Food and Drug Administration (FDA) publishes drug products approved on the basis of safety and effectiveness in its Orange Book database.

Maintenance of main IPRs

 
3. What steps must a business take to maintain the registration and legally protectable status of its main IPRs?

Patents

Patent protection lasts for 20 years from the initial filing date from the non-provisional application. An extension of patent term is possible if the patent is for a drug that must be approved by the US Food and Drug Administration or if the Patent Office delayed excessively in examining the patent application. The following are the current maintenance fees that must be paid to the US Patent and Trademark Office (USPTO) to preserve the registration and legally protectable status of patents:

  • Due at three and a half years: US$1,600 (small entity fee: US$800; micro entity fee: US$400).

  • Due at seven and a half years: US$3,600 (small entity fee: US$1,800; micro entity fee: US$900).

  • Due at 11.5 years: US$7,400 (small entity fee: US3,700; micro entity fee: US$1,850).

(Source: www.uspto.gov/learning-and-resources/fees-and-payment/uspto-fee-schedule#PatentMaintenanceFee.)

The maintenance fees can be paid after the above time periods, as long as they are paid within a six-month grace period along with the requisite surcharges.

Trade marks

Maintenance for trade marks is required, and there are additional optional measures available after five years of registration to further strengthen owner's rights:

  • Required maintenance: between the fifth and sixth year after registration, the owner must file a declaration of use or excusable non-use with the USPTO, and pay the applicable fee. There is a six-month grace period for an additional fee, which can be filed after the sixth year expires.

  • Between the ninth and tenth year after registration, the owner must file a combined declaration of use or excusable non-use and application for renewal, and pay the applicable fee. This renewal is additionally required every ten years thereafter. Again, the USPTO offers a six-month grace period for an additional fee, which can be filed after the tenth year expires.

  • Optional maintenance: five years after the date of registration with continuous use in commerce, a trade mark owner can, for a fee, choose to file for "incontestability" of its mark with the USPTO. Incontestability provides certain legal presumptions in favour of the trade mark owner.

(See www.uspto.gov/trademark/trademark-timelines/post-registration-timeline-all-registrations-except-madrid-protocol.)

Copyright

For works created on or after 1 January 1978, the copyright term extends from the moment of creation to the author's life plus 70 years. For jointly authored works, this term extends 70 years from the last surviving author's death. For works that are made for hire, anonymous, and pseudonymous works, the term extends 95 years from the first publication or 120 years from creation, whichever is shorter. If the author's identity becomes known, the term is adjusted to the author's life plus 70 years.

Under the Copyright Act of 1909, governing works published from 1923 to 1963, protection was afforded for an initial 28-year term. An extension of the term for an additional 28 years could be obtained through renewing the copyright with the US Copyright Office. If renewal was not filed before the 28th year expired, the work entered into the public domain.

Under the Copyright Act of 1976, an additional 19 years were afforded under renewal, extending the renewal term from 28 years to 47, totalling 75 years of protection. The law was applicable both prospectively and retroactively. If the copyright was in its renewal period at the time the new law was enacted, it received the additional 19 years automatically. For those copyrights that were still in their initial 28-year term on 31 December 1977, the extended protection was afforded so long as the rights were renewed in the 28th year of the first term.

In 1992, Congress passed the Copyright Renewal Act of 1992, which eradicated the renewal requirement. A further amendment in 1998 extended the 75-year protection period to 95 years. Therefore, works copyrighted in 1964 or after are now afforded 95 years of copyright protection, regardless of whether a renewal was filed. Under the current US law, copyright owners are not required to pay maintenance fees to maintain registration or legal protection.

Design rights

Design patents are granted for a period of 14 years after grant if filed by 13 May 2015, or 15 years after grant if filed on or after 13 May 2015. Design patents do not require the payment of maintenance fees.

Trade secrets and confidential information

Trade secrets and confidential information are not registered rights, and therefore, no maintenance fees or renewal requirements are applicable.

Other

Not applicable.

Monitoring infringement

 
4. What steps can a business take to avoid infringing another party's IPRs and to monitor whether another party is infringing its IPRs?

Patents

A business can conduct a freedom to operate (FTO) search that reveals granted US patents that are currently in force (though not necessarily all) that can potentially be infringed by the business's product. It is also advisable to have a patent attorney review the search results and prepare a FTO opinion on the likelihood of infringement and whether it is possible to design around the patent.

If the business has knowledge of a particular patent that it believes that one of its products may potentially infringe, the business can seek an infringement opinion from IP counsel. These opinions are more targeted in comparison to an FTO opinion.

Sometimes, businesses are approached by third parties that claim they have a patent that is being infringed. In these cases, it is advisable to obtain a patent attorney's opinion who is knowledgeable in the art. The patent attorney can analyse the strength of the potential infringement claims and give recommendations on how to respond to the claims, if at all.

Monitoring of patents by outside companies is less common; however, there are certain companies that monitor competitors' patents, as well as what is coming out of the US Patent and Trademark Office (USPTO). For confidentiality reasons, most monitoring is typically done in-house. It may also be beneficial for a company to review competitors' websites and product catalogues to determine whether they hold patents in related products.

Trade marks

Conducting a clearance search before applying for registration is important to ensure that a trade mark does not infringe on that of another. A federal register search can be made; however, this will only reveal federal registrations. A search for "common law" usage should always be done (that is, use of marks that have not yet been registered). Once a registration is procured, monitoring and maintenance services should be used to ensure protection of a trade mark. For example, a number of vendors offer a watch service that monitors various media and official government publications and notifies rights' holders of a possible third party's application for registration of an identical or confusingly similar trade mark.

Copyright

Monitoring services are available that survey the internet and media publications for possible infringement of copyrighted material or images.

Design rights

See above, Patents. However, for monitoring design patents and applications on the USPTO database, design applications are only listed in the database once they have been granted (unlike utility applications, which are typically published 18 months after the earliest priority date, unless the applicant has requested non-publication).

Competitors' design patents can be monitored on the USPTO website by searching for, among other criteria, assignees. However, it is important to be cognisant that competitors often have complex corporate structures (for example, holding companies that hold the IP) when searching by assignee, as patents may be assigned to an entity under the control of the competitor, but with a different name.

Trade secrets and confidential information

A business cannot infringe the trade secrets of others; however, it does not want to be held liable for misappropriating the trade secrets of others, whether intentionally or unintentionally. Therefore, it should be cognisant of confidential information that a new employee brings with him or her from a previous position. Businesses can take steps to avoid such situations in addition to preventing their own trade secrets from being misappropriated by counselling employees against such misappropriation and carefully drafting contracts to preserve company information.

Other

Not applicable.

 

Exploiting IPRs

5. What are the main steps in conducting an IP audit in your jurisdiction to determine the content of an IP portfolio?

Internal and external audits and IP due diligence can be conducted.

Internal audits

It is advisable for companies to review and catalogue their portfolios of registered and unregistered IPRs. An accounting of a company's IP portfolio can help determine the value of its assets, allowing it to maximise its worth. Among other reasons, audits are conducted for tax purposes, transfer pricing and calculating imputed royalties for licensing agreements.

For trade marks, the company should audit the brands it has registered and determine which of those marks are still of interest to or have value to the company. The company should determine whether it still needs to maintain its rights in the marks, or alternatively, if it should sell or abandon such marks. A critical factor can be the costs required for maintenance of these rights.

For pending trade mark and patent registrations, the company should evaluate the continuing costs of obtaining, maintaining, and enforcing such rights, compared to the benefits of not doing so. If another party is using an IP right, the registered owner may be contractually obligated to maintain the rights.

External audits/IP due diligence

It is highly advisable to review the IP rights of a company if seeking to acquire them. In assessing the company's IP assets, this would assist in assessing a fair and reasonable purchase price and confirm which IP rights are valid and in force. The following are typical components of an IP audit that should be conducted before acquisition:

  • Identify the target's IP assets.

  • Confirm ownership rights.

  • Assess the strength and enforceability of the target's rights.

  • Review relevant licences and agreements.

  • Analyse potential or existing conflicts.

Apart from the general considerations listed above, specific due diligence enquiries should be conducted on the respective type of IP assets being acquired, which may include patents, trade marks and copyright.

Patents

In addition to internal and external audit general considerations, the following should be referenced when conducting due diligence on patents (see above, Internal audits and External audits/IP due diligence):

  • Patent number.

  • Title and scope (it may be complex and costly to do this for utility patents).

  • Date of application.

  • Date of issue for issued patents.

  • Any prior owners and how the patent was obtained by the target.

  • Remaining patent term.

  • Prosecution history (whether patented claims are relevant to the "state of the art").

  • Presence of any liens, security interests or other encumbrances.

  • Confirmation that the patents are still in force and maintenance fees have been paid.

Trade marks

In addition to internal and external audit general considerations, the following should be considered when conducting due diligence on trade marks (see above, Internal audits and External audits/IP due diligence):

  • Country of registration or application.

  • Registration or application number.

  • Goods or services included in the registration or application.

  • Date of application and (if applicable) registration.

  • For pending US applications, whether the application is based on use or a bona fide intent-to-use the mark.

  • Any prior owners and how the trade mark was obtained by the target.

  • Presence of any liens, security interests or other encumbrances.

Copyright

In addition to internal and external audit general considerations, the following should be considered when conducting due diligence on copyright (see above,Internal audits and External audits/IP due diligence):

  • Country of registration

  • Registration number.

  • Date of issue.

  • Date of publication or, if not published, date of creation.

  • Initial author(s) and prior owners.

  • Duration of copyright.

  • Presence or absence of any security interests.

  • Copyright notices.

  • Renewal periods.

Design rights

See above, Patents. Additionally, the following should be considered/acknowledged:

  • Design patents do not require maintenance fees.

  • If available, a list of competitor design patents.

Trade secrets and confidential information

A company should take inventory of its various projects to identify any trade secrets and take active steps to protect those secrets.

Other

Not applicable.

 

Assignment

Scope of assignment

6. On what basis can the main IPRs be assigned?

Patents

Assignment of patents is governed by the federal Patent Act, which provides that an owner can assign its exclusive rights to a third party. A patent right is treated as a property right, therefore the owner can make an assignment at will (that is, without the consent of any joint owners).

The Patent Act also provides that the owner can assign his right to a specific part of the country if he chooses to do so.

Trade marks

Assignment of trade mark rights to a third party is permissible at the owner's discretion. It can be governed by the laws of the states, as well as the federal Lanham Act, depending on the nature of the trade mark rights. Section 10 of the Lanham Act provides that the assignment must transfer the goodwill of the assignor, protecting against assignments "in-gross". The purpose of a trade mark is to identify a connection between the owner and the goods in question in the course of trade. Trade marks do not have value that can be amortised as property and are valueless apart from the business with which they are associated; therefore, they cannot be sold without the goodwill of the assignor.

However, the assignment of an intent to use (ITU) application, which can be filed before the party has used the mark in commerce, is subject to certain restrictions under the Lanham Act. The applicant cannot assign an ITU application unless it is transferred to a successor in the business that is "ongoing and existing".

(See www.uspto.gov/trademark/trademark-assignments-change-search-ownership.)

Copyright

Copyrights are treated as a personal property right, and assignment is permissible at the owner's discretion. However, the Copyright Act generally provides for a non-revocable right to terminate such a transfer subsequent to an assignment made by the author. Termination rights are intended to give the author or the author's heirs a second chance to exploit the work where its value has significantly increased from the time of the original transfer. This right is non-negotiable and cannot be contracted away; however, it not applicable to works made for hire or to those who created derivative works before the termination date.

Design rights

See above, Patents.

Trade secrets and confidential information

A business can assign the right to use a trade secret, as long as it takes steps to ensure that the trade secret is not publicly disclosed. This consideration becomes especially important in mergers, for example.

Other

Not applicable.

Formalities for assignment

 
7. What formalities are required to assign each of the main IPRs?

Patents

Under the Patent Act, the assignment of patent rights must be effected by a written agreement. Assignments must be recorded within three months of the date of transfer or before that date to be effective as to a subsequent purchaser.

Trade marks

The Lanham Act provides that the assignment must be recorded with the US Patent and Trademark Office. The assignment can be recorded before, or within three months of, the date of transfer.

Copyright

Transfer of exclusive rights must be recorded in writing with the signature of the copyright owner. Transfers need not be recorded with the Copyright Office; however, it may offer certain advantages. If there are two conflicting transfers, the Copyright Act of 1976 provides that the first recorded prevails, as the recordation acts as constructive notice of the transfer.

Design rights

See above, Patents.

Trade secrets and confidential information

Trade secrets have limited protection in federal law via the Economic Espionage Act of 1996 (18 USC 1831-1839). Business should also look to the relevant state laws and misappropriation statutes to determine what, if any, formalities are required.

Other

Not applicable.

Main terms for assignments

8. What main terms should be included in an assignment of IPRs?

Patents

Under the Patent Act, a patentee has the right to bring a lawsuit. Case law indicated that exclusive licensees can sue as long as they effectively hold all the patent rights. It is therefore particularly advisable to include provisions regarding the right to sue (a person cannot sue without the consent of all patent owners). It is also advisable to address questions of rights relating to improvements, including the possibility of filing a continuation-in-part application, which allows for the addition of features to a patent application on further research and development.

Trade marks

It is important to include a provision concerning the transfer of the owner's goodwill to the subsequent purchaser under US law. The goodwill associated with the trade mark cannot be separated from the mark and therefore assignments made without the accompanying goodwill may be deemed invalid.

 

Licensing

Scope of licensing

9. On what basis can the main IPRs be licensed?

Patents

Generally, patents can be licensed on three difference bases: exclusive, non-exclusive and sole. Licences can be granted on an exclusive basis for particular goods or alternatively stipulate a certain period of time during which the licence will remain exclusive.

Under an exclusive licence, the owner gives up the right to use the patent itself. Once an exclusive licence is granted for a given patent, no additional exclusive licences will be granted. The licensee obtains the right to sue third parties for infringement and the right to sub-license the patent to third parties. Exclusive licences are also subject to certain conditions, such as the possibility of reversion. If the owner retains reversion rights, the owner must be party to a potential infringement suit brought against a third party. If the owner does not retain these rights, the licensee can bring a lawsuit on its own.

Under a non-exclusive licence, the owner retains the right to use the patent itself, as well as the right to grant additional non-exclusive licences to third parties. The licensee in turn receives the right to make, use and sell the product within the limitations of the agreement, which may include restrictions on time, geographic region and field of use.

Under a sole licence, the owner agrees not to grant rights to anyone else. However, the owner maintains the right to use the patent itself.

Trade marks

A trade mark owner can grant a licensee the right to use its mark in commerce at will. However, the Lanham Act requires that the licensor maintains adequate control over the nature and quality of the licensee's use of its mark. Failure to do so is referred to as "naked licensing", whereby the mark loses its significance and may lead to the invalidity of the mark.

Copyright

The Copyright Act of 1976 explicitly declared that copyright is divisible, meaning that any of the exclusive rights held under a copyright can be transferred in whole or part. A copyright owner can license any of its exclusive rights on an exclusive or non-exclusive basis. Under an exclusive licence, the licensee has the exclusive ability to exercise the right for the duration of the licence, to assign the right to a third party and to sue a third party for infringement. Conversely, under a non-exclusive licence, the owner maintains the ability to exercise the right itself and can license the right to additional third parties. The licensee under a non-exclusive licence is unable to assign the right to a third party or sue for infringement.

Design rights

See above, Patents.

Trade secrets and confidential information

Typically, the licensee grants a non-exclusive licence back to the licensor.

Other

Not applicable.

Formalities for licensing

 
10. What are the formalities to license each of the main IPRs?

Patents

It is advisable to have a written patent licence agreement between the parties. Agreements may be subject to formalities required by certain state laws; however, the Patent Act does not require recordation. It is possible to elect to record with the US Patent and Trademark Office (USPTO). A requirement of the USPTO is that the agreement is written in English or an English translation is provided.

Trade marks

With a few exceptions (for example, quality control), transfers of trade mark licences are generally governed by state contract law. There is no requirement under the Lanham Act that a trade mark licence is recorded with the USPTO, but it is possible to do so. It is advisable that the licence between the parties is in a written agreement.

Copyright

Under the Copyright Act of 1976, formalities are not required for licence agreements. However, at the election of the parties, the Copyright Office will accept licences for recordation.

Design rights

See above, Patents.

Trade secrets and confidential information

In the US, formalities are not required for the licence of trade secrets and confidential information. Typically, the licensee grants a non-exclusive licence back to the licensor.

Other

Not applicable.

Main terms for licences

11. What main terms should be included in an IP licence?

There are various different provisions that should be included in an IP licence agreement. Some of the basic provisions that are particularly significant include:

  • Definition of the property.

  • Indication of whether the licence is a sole, exclusive or non-exclusive licence.

  • Quality control (especially for trade marks).

  • Territory for which the licence is granted.

  • Licence initiatives (such as reasonable-effort clauses, minimum royalties clauses, reversion rights to patent owner if certain targets are not met).

  • Right to use improvements (including how to deal with improvements made by licensee).

  • Duration of the licence.

  • Tying clauses (for example, the requirement of the licensee to purchase raw materials used a process. However, potential anti-trust violations must be considered. These clauses can be found unlawful if the one dividing the tying clause has market power in the sector in question).

  • Sub-licensing (the right to sub-license is not an automatic right and the main terms should be included in a grant clause).

  • Termination.

  • Royalty provision.

  • Infringement procedures.

  • Typical miscellaneous contract clauses (for example, choice-of-law clause, availability of attorney's fees, dispute resolution (if by court action rather than arbitration, the jurisdiction should be specified), clause addressing what happens if the IP right is found to be invalid).

  • Maintenance of the confidentiality of trade secrets, among others.

The licensor should never guarantee the validity of the patent. Accordingly, the following two issues should be addressed in a patent licensing agreement:

  • How to deal with a situation where someone is infringing your patent.

  • How to deal with a situation where you are infringing someone else's patent (that is, who has control of litigation and who pays for it).

 

Taking security

12. What are the key issues in taking security over the main IPRs?

IPRs

Typically, IPRs are governed by federal law, particularly those that are used in interstate commerce. However, Article 9 of the Uniform Commercial Code subjects the creation of a security interest in IP to state law. Issues often arise in the context of perfection, the next component of the securitisation process. Federal law may be pre-empted by state law during this stage.

Trade marks

The Lanham Act's prohibition against an assignment "in-gross," that is, without the goodwill of the assignor, may potentially pose an issue in relation to taking a security interest in a trade mark. If a debtor defaults and the creditor takes ownership of the mark without the associated goodwill, the mark may be subject to cancellation. To avoid these situations, it is advisable for the creditor to take a lien on additional assets that are marketed under the trade mark.

 
13. What are the main security interests taken over IPRs?

Creating security interests in IPRs is subject to state laws, under Article 9 of the Uniform Commercial Code (UCC).

Perfecting a security interest provides notice to the public of the existence of that interest. To perfect the interest, a lien notice must be filed with the applicable local, state or federal agency, depending on the type of IP involved.

Patents

The Patent Act does not explicitly require filing for perfection. Filing is proper at the state level, although a second filing with the US Patent and Trademark Office (USPTO) may be advisable.

Trade marks

Article 9 of the UCC governs perfection of a security interest in a trade mark, as the Lanham Act does not address liens on federally registered marks. Additionally, case law suggests that filing only with the USPTO is insufficient to perfect, although a second filing with the USPTO may be advisable.

Copyright

Together with the definition of a "transfer of copyright ownership" under Section 101 of the Copyright Act, Section 205 provides that perfection can be achieved by filing with the Copyright Office. Case law rejects that perfection of federally registered copyrights is effectuated through a UCC filling and suggests that in the context of registered copyrights, federal law pre-empts state law. However, case law varies on the issue in the context of unregistered copyrights.

Design rights

See above, Patents.

Trade secrets and confidential information

Parties should be extremely careful when considering to offer trade secrets as liens due to the risk of divulging confidential information into the public record.

Other

Not applicable.

 

M&A

Due diligence

14. What IPR-related due diligence is commonly carried out in both a share sale or merger and an asset sale?

Share sale or merger

The due diligence for share sales, mergers or asset sales includes:

  • Determining whether there is a flow of technology, proprietary rights and employees between the target and the seller.

  • Determining whether the target operates using the IP and technology of a related company without a formal licence agreement in place.

  • Determining whether the contractual relationships of the target and the seller will survive the transaction and/or are assignable. Identify and list all specific IP and technology assets and liabilities.

  • Preparing comprehensive appendices to accompany the purchase of assets agreement.

  • Identifying all liens, encumbrances and licences relating to the IPRs.

  • Determining whether there are contractual restrictions on the assignment of the rights.

Asset sale

See above, Share sale or merger.

Warranties/indemnities

15. What IPR-related warranties and/or indemnities are commonly given by the seller to the buyer in both a share sale or merger and an asset sale?

Share sale or merger

Typical guarantees can include, but are not limited to, the following:

  • The seller is the exclusive owner of the scheduled IP.

  • The scheduled IP assets are valid and enforceable (not for patents).

  • The seller is unaware of any claim of invalidity or infringement on the scheduled IP.

  • The seller has not infringed on, diluted or misappropriated the IPRs of third parties.

  • All US Patent and Trademark Office or Copyright Office recordings and filings necessary to maintain and enforce the target's IPRs have been made.

  • There are no pending suits, actions or other proceedings that threaten or otherwise involve the scheduled IP.

  • The seller is not subject to any judgement, decree, injunction or court order that limits or restricts its ability to use the scheduled IP.

  • The seller has not entered into any agreement that impairs or limits its rights regarding the scheduled IP.

Asset sale

See above, Share sale or merger.

Transfer of IPRs

16. How are the main IPRs transferred in both a share sale or merger and an asset sale?

Share sale or merger

Mergers are often classified as horizontal, vertical or conglomerate. A horizontal merger is the combination of two competitors into one entity. A vertical merger involves two companies who previously had a buyer-seller relationship. A conglomerate merger occurs when two companies who were not competitors or engaged in a buyer-seller relationship, combine. The structure of a merger and the methods of merger financing are widely varied and can be all cash, all security or a combination of both. Variations on merger types include short-form mergers, leveraged buyouts (including a management buyout) and freeze-out mergers.

In the US, assets pass between entities by operation of law. Therefore, there is no requirement that the parties sign an agreement to transfer IPRs. To record with the US Patent and Trademark Office, the parties are advised to submit documentary evidence attesting to the merger, such as a certificate of merger, issued by the appropriate government entity.

Asset sale

If a party gains certain IPRs by acquiring a business vis-à-vis a sale of assets, it is not unusual (although not recommended) for the transfer agreement to not specifically mention trade mark or other IPRs. If a business is sold as a going concern, the intent to transfer trade marks and the goodwill associated with this intent may be presumed, even though not expressly provided for. However, it is recommended that such issues are addressed in the supplemental closing documentation. An exception to this concept lies in the context of transactions between parent corporations and their wholly owned subsidiaries. Asset-based purchases in this context will not automatically include IPRs; rather, ownership of the intangible assets will remain with the parent corporation unless the underlying agreement expressly provides for transfer to the subsidiary.

 

Joint ventures

17. Is it common for companies to set up joint ventures in your jurisdiction to develop projects that heavily involve IPRs?

Yes, joint ventures are used in the commercialisation of IP, as well as to advance research and development, production, marketing and so on. Companies also engage in co-branding, whereby two or more brands are used together to market a particular product or service. This practice exposes each respective company to its partner's consumer base, expanding its reach in its current market, or launching the company into a new, unrelated market. Examples of co-branding include MAC Cosmetics' "Barbie Loves MAC" collection and the "Balmain x H&M" clothing collection.

Under the Patent Act, joint owners of a patent have the right to use the patent without recourse from any of the other co-owners. Case law has extended this right to licensing, but a co-owner can never grant an exclusive licence without the consent of the other co-owners.

 

Competition law

Main provisions and common issues

18. What are the main provisions of your national competition law that can affect the exploitation of the main IPRs?

IP exploitation is subject to the same anti-trust principals as other forms of tangible or intangible property: mainly, the Sherman Act, the Federal Trade Commission Act and the Clayton Act. The US Department of Justice and Federal Trade Commission have collectively issued guidelines relating to mergers and licensing of IP.

The most important provisions of US anti-trust laws that relate to and can impact the exploitation of IPRs are as follows:

  • Any contract, combination or conspiracy that has the effect of creating a restraint on trade is unlawful (applies to both interstate and foreign commerce) (section 1, Sherman Act).

  • Monopolists, or those who seek to monopolise interstate or foreign trade or commerce, are guilty of a misdemeanour (section 2, Sherman Act).

  • Contracts that take away freedom of purchasers to buy in an open market are prohibited (section 3, Clayton Act).

  • Acquisition of stock or assets are not allowed if they would substantially lessen competition or possibly create a monopoly (section 7, Clayton Act).

  • Price discrimination under certain conditions is prohibited (section 2(a), Robinson-Patman Act (amending the Clayton Act)). Under the Robinson-Patman Act (amending the Clayton Act) certain types of concerted arrangements have been found per se unreasonable, including, among others, horizontal and vertical price fixing.

  • Unfair competition and unfair or deceptive practices in commerce are prohibited (section 5, Federal Trade Commission Act).

 
19. What are the most common national competition law issues that arise in the exploitation of the main IPRs?

Anti-trust law issues often arise in the context of horizontal mergers and joint ventures involving patents. Where the companies possess high levels of market power, there is a greater risk of anticompetitive effects.

There have been attempts to tie the grant of a licence to a requirement to purchase unpatented material from a specified source. Under current case law, this is unlikely to be a problem unless the licensor has market power in the relevant market.

Recently, issues have arisen as to whether agreements between owners of patents relating to pharmaceutical products and generic drug manufacturers to settle patent infringement suits whereby the patent owner pays the generic company to stay off the market for a given period may give rise to anti-trust liability. The law on this issue is still developing.

Additionally, attempts to enforce a patents that were obtained fraudulently from the Patent Office can give rise to anti-trust liability.

 
20. What exclusions or exemptions are available for national competition law issues involving the exploitation of the main IPRs?

Exemptions are rare in the US. However, there is a labour exemption created under the Clayton Act 1914. The exemption is divided into two categories:

  • Statutory exemptions, which apply largely to labour unions and insurance industries. For example, the McCarran-Ferguson Act, passed in 1945, protects insurance industries from federal regulation, including, to an extent, federal anti-trust laws.

  • Non-statutory exemptions, which are largely applicable in the context of professional sports. The 1922 Supreme Court decision Federal Baseball Club of Baltimore, Inc v National League of Professional Baseball Clubs (42 S Ct465) declared a unique anti-trust exemption for professional baseball. This decision upheld the reserve clause used by the Federal Baseball League, which precluded players from switching to another league. Under this judicially-created exemption, good faith collective bargaining agreements that would otherwise violate anti-trust laws are protected from attacks on grounds that they are collusive or anti-competitive.

 

Advertising

21. To what extent do advertising laws impact on the use of third party trade marks?

Under the doctrine of nominative fair use, a company can use the trade mark of another to describe or identify the other's product or service.

However, if a company uses a competitor's trade mark in connection with its advertising, and that advertisement is false or misleading, the competitor can bring a claim for false advertising under the Lanham Act. A claim for false advertising can be comprised of a superiority claim (for example, claims that "consumers prefer" a certain product or that product is "more effective" than the competitor's), or a comparative parity (for example, "nothing is more effective"). The former can be proved false by showing that the competitor's product is superior or equivalent to the advertiser's product; the latter can be proven false by showing that the competitor's product is superior, both of which are frequently done through consumer surveys.

 

Employees and consultants

22. Who owns each of the main IPRs created by an employee in the course of his employment? Must compensation be paid to the employee? What main steps can an employer take to ensure it owns each of the main IPRs?

Ownership

Patent law recognises a doctrine referred to as "employed to invent", which relates to rights in relation to those employees who were hired to create an invention. Under this principle, absent an employment agreement to the contrary, the employer can own the rights in the invention created by the employee.

Even in circumstances where an employer does not hold rights to the patent, it may have a "shop right" in the patent. This right is founded in the employer's contribution to the invention through materials, tools and financing, among others. In situations where the employer is deemed to hold such a right, it retains the ability to use the patent on a royalty-free, yet non-exclusive and non-assignable basis.

To ensure that the employer owns patents created by its employees, it is advisable to require employees to sign a "pre-invention assignment". However, simply being a researcher in a department does not necessarily mean that the person is employed to invent; therefore, written agreements are necessary even for such researchers. Under current case law, an agreement stating that "I hereby assign any (relevant) invention" will have the effect of causing an immediate assignment of any future invention made by the signatory covered by the agreement. However, an agreement saying "I agree to assign" requires a further assignment document to effect completion. The agreement should indicate at the outset that the employee agrees to assign his rights to any inventions created within the scope of employment to the employer.

The Copyright Act provides that works "prepared by an employee within the scope of his or her employment" are deemed "works made for hire", which grants the employer the exclusive ownership of that work. However, it is advisable for an employer to stipulate this in an employment agreement with each employee.

Compensation

See above, Ownership.

Main steps

See above, Ownership.

 
23. Who owns each of the main IPRs created by an external consultant? What main steps can a business take to ensure it owns each of the main IPRs?

Ownership

Rules relating to the ownership of patent rights by an external consultant, or independent contractor, differ from those that relate to an employee. Generally, patent rights belong to the independent contractor unless however there is an assignment agreement to the contrary. Shop rights can apply in situations involving independent contractors; however, to ensure that the employer retains ownership, it is advisable to have the independent contractor sign an assignment agreement at the outset of the relationship.

Works that are created by an external consultant can be deemed works made for hire if there is a written agreement between the parties stipulating that the work is made for hire, and if it fits into one of the following categories:

  • A work specially ordered or commissioned for use as a contribution to a collective work.

  • Part of a motion picture or other audiovisual work.

  • A translation.

  • A supplementary work.

  • A compilation.

  • An instructional text.

  • A test.

  • Answer material for a test.

  • An atlas.

In the absence of a written agreement, whether or not a work is considered to be made for hire is dependent on the relationship between the consultant and the party commissioning the work. Subject to the discretion of the court, if the consultant more closely resembles an employee rather than an independent contractor, the work will be deemed a work for hire, and the commissioning party will hold the rights. To ensure that a business maintains rights in these situations, it is strongly advised that it obtains a written agreement at the outset of the relationship stipulating that the work is a work made for hire, and to the extent it is not a work made for hire, the consultant assigns all rights.

Trade secrets, or "know how", are considered property for tax purposes. Therefore, the sale or exchange of know how may potentially qualify for capital gains treatment under §§ 1221 or 1231 of the Internal Revenue Code.

Main steps

See above, Ownership.

 

Tax

24. What are the main taxes payable by a licensor on the licensing of the main IPRs?

Generally, the licensing of IPRs, where the owner retains some right, precludes capital gains treatment of the royalties obtained. The royalties are considered revenue, and are therefore taxed as ordinary income.

 
25. What are the main taxes payable by a seller on the sale of the main IPRs?

Patents

Transfers of patent rights are governed by section 1235 of the Internal Revenue Code (IRC), which generally provides capital gains tax treatment to income derived from the sale.

Trade marks

Transfers of trade mark rights are governed by section 1253 of the IRC. Absent the retention of power, the income derived from the sale of trade mark rights is treated as capital gains.

Copyright

Generally, transfers of copyrights are governed by section 1221(a)(3) of the IRC. As copyright cannot be considered a capital asset in the hands of the author, the author is not entitled to capital gains treatment for income derived from the sale of the work. Therefore, the income is typically treated as ordinary income for tax purposes.

However, the sale of copyright in a musical composition is governed by section 1221(b)(3) of the IRC, which provides that the taxpayer can elect to have the income taxed at capital gains rate in such circumstances.

 

Cross-border issues

26. What international IP treaties is your jurisdiction party to?

Patents

The US is party to the Patent Cooperation Treaty (PCT), which provides member countries a uniform filing procedure for each of the contracting states. However, filing a patent application with the PCT will not grant you a single international patent that is protectable in each of the contracting states, as patent rights are limited by jurisdiction.

Additionally, the US, among 175 other contracting states, is a member to the Paris Convention, which provides for the protection of industrial property. The Paris Convention provides for the right of priority for patents, whereby an applicant can file for registration in one of the contracting states and thereafter apply for protection in any of the other states during a specified period. The subsequent applications are given the same filing date as the first application. (See www.wipo.int/treaties/en/ip/paris/summary_paris.html.)

Trade marks

The US is party to the Madrid Protocol, which allows trade mark owners of member countries to file a single application for international registration in member countries (contracting Parties). Once filed under the Madrid Protocol, the application is then examined according to the national law of each respective member country. If granted, the international application applies solely to that respective jurisdiction. International applications are valid for ten years and may be renewed for further periods of ten years on the payment of prescribed fees. (See www.wipo.int/treaties/en/registration/madrid/summary_madrid_marks.html.)

Moreover, the Paris Convention provides protection for marks and trade names. A contracting state cannot, except in rare cases, deny registration if the mark has been duly registered in the country of origin. Additionally, protection of trade names in a contracting state must be granted without an obligation to file or register the names.

(See www.wipo.int/treaties/en/ip/paris/summary_paris.html.)

Copyright

The US is member to the Berne Convention for the Protection of Literary and Artistic Works (Berne Convention). Members are required to recognise the rights of a foreign author of another member country as they would the rights of its nationals. (See www.copyright.gov/fls/fl100.html.)

A detailed list of treaties can be found at www.wipo.int/wipolex/en/profile.jsp?code=US.

Design rights

The US is a member to The Hague System for the International Registration of Industrial Design.

 
27. Are foreign IPRs recognised in your jurisdiction?

Patents

Patents issued in a particular region are only protectable within the boundaries of that region. The Patent Act grants the patentee certain exclusive rights; however, the patentee must hold a grant in the particular country or region where infringing activity is taking place in order to enforce the rights.

Trade marks

Foreign trade mark rights are recognised in the US under Sections 44 and 66 of the Lanham Act, so long as there is a bona fide intent to use the mark in US commerce. Pursuant to the Paris Convention, under section 44(d), owners can obtain priority based on a foreign application for the mark, so long as the US application is filed within six months of the foreign application. Under section 44(e), owners can obtain registration based on a foreign registration. Like section 44, section 66(a) provides for the extension of an international registration under the Madrid Protocol to the US, which is essentially the equivalent of an application.

While case law on the subject is unsettled, the 9th Circuit has upheld rights in foreign marks that are "well-known". In Grupo Gigante SA De CV v Dallo & Co (391 F 3d 1088 (9th Cir 2004)), the court recognised an exception to the territoriality doctrine of trade mark law. To qualify for the exception, the foreign trade mark owner must show that a substantial number of consumers within the US are familiar with the mark. However, the applicability of this doctrine is limited, as the 2nd Circuit declined to follow this precedent in ITC Ltd v Punchgini, Inc (482 F 3d 135 (2d Cir 2007)).

Copyright

Under the Berne Convention, the US recognises the rights of authors from foreign member states, affording them protection under the Copyright Act.

Design rights

See above, Patents.

Trade secrets and confidential information

Foreign trade secrets are recognised in the US. If misappropriation occurs in the US, the law of the state in which the misappropriation occurred would most likely apply.

Other

Not applicable.

 

Reform

28. Are there any proposals for reform?

Patents

In 2012 and 2013, the America Invents Act created substantial change in the US patent system. Notably, under the Act, that patent system functions more similarly to a "first-to-file" system (with exceptions), rather than the "first-to-invent" system previously used.

There are many proposed reforms directed at patent trolls. One particular Senate bill would automatically award attorney's fees to a defendant who successfully litigates an infringement claim.

Additionally, case law is making it more difficult for patent trolls to obtain preliminary injunctions.

Copyright

In February 2015, the Copyright Office released a report (Copyright and the Music Marketplace) addressing the need in the US for reform in music licensing. The report proposed recommendations for issues including: "existing statutory licenses, the role of performing rights organisations, terrestrial performance rights for sound recordings, federal protection for pre-1972 sound recordings, access to music ownership data, and the concerns of songwriters and recording artists". (See www.copyright.gov/docs/musiclicensingstudy.)

Trade secrets

The Senate is holding hearings concerning The Defend Trade Secrets Act of 2015 (S. 1890). It would call for more extensive federal protection of trade secrets.

*The author gratefully acknowledges the assistance and enthusiasm of Devon DiSiena, a Fall Intern at Ladas & Parry LLP and a JD Candidate at the Benjamin N Cardozo School of Law, and Dinisha Fernando, an Associate at Ladas & Parry LLP's New York Office, in the drafting, researching and editing of this chapter.

 

Online resources

United States Patent and Trademark Office (USPTO)

W www.uspto.gov

Description. Official website of the United States Patent and Trademark Office. Trade mark, patent (both utility and design), and patent assignment databases are available on this page for searching.

United States Copyright Office

W www.copyright.gov

Description. Official website of the United States Copyright Office. A copyright registration database is available on this page for searching.



Contributor profile

Lanning G Bryer, Partner

Ladas & Parry LLP

T +1 212 708 1870
F +1 212 246 8959
E lbryer@ladas.com
W www.ladas.com

Professional qualifications. New York, US, Bar Admission; US District Court for the Southern District of New York; US District Court for the Eastern District of New York.

Areas of practice. Chemical and paint products; pharmaceuticals; consumer and industrial products; car and equipment products; online merchandising; publishing and other media.

Recent transactions

  • Representing Merck & Co in re-organisation of companies and patent assets resulting from acquisition of Cubist Pharmaceuticals and subsidiaries.

  • Representing Stanley & Decker Europe in advising on re-organisation of companies and transfers of patent and trade mark assets.

  • Conducting due diligence and acquisition of Hi-Temp Coatings and all related IP rights for PPG Industries.

  • Representing PPG Industries in acquisition of North American paint and coatings business from AkzoNobel.

  • Representing Bridgestone Corporation in acquisition of FIRESTONE brand and simultaneous restructuring of Bridgestone/Firestone Inc in a deal valued US$1.3 billion.

  • Representing PPG Industries in transactions licensing of brands owned by the Frank Lloyd Wright Foundation and Nautica.

Professional associations/memberships. American Bar Association (ABA), Appointment to Business Law Section & Intellectual Property Law Committee; International Trademark Association (INTA), Editorial Board, Publishing Task Force on Trademark Administration Online Book; Licensing Executives Society (LES).

Publications

  • Presentation on IP Market Operation, China Trademark Festival in Haiku, China, October 2015; published in China IPR Daily November 2015.

  • International Trademark Protection, INTA Online Trademark Publication, October 2015.

  • Shared Branding: Associated Use of Trademarks and Trade Dress Through Shared Retail Space, The Trademark Reporter, Volume 103, No 3, May-June 2015.


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