The key to IP due diligence for cross-border transactions

The legal battle over the iPad trademark between Apple Inc. (Apple) and Proview Technology (Shenzhen) Co., Ltd. (Proview (Shenzhen)) has been white-hot. If Apple loses its appeal at Guangdong Higher People’s Court, it might face an injunction in mainland China, as well as severe liabilities of civil damages and administrative penalties. Both parties are now extremely cautious, as any inappropriate move may cost them dearly and both parties have indicated their wishes for a ceasefire to the bloody war.

Apple has made continuous efforts to acquire the right to the iPad trademark. After losing the dispute over iPad with Proview in the UK, Apple incorporated an “IP Application Development Limited” (IPADL) in Britain. Then, Apple made a takeover bid for iPad trademark of Proview across the world on the ground that Proview’s trademark shares the same abbreviation with “IPADL.” It can be inferred from this that Apple has made careful preparation before its negotiation on the transaction of the iPad trademark with Proview. However, it is still in a dilemma because of some defects in its IP due diligence. Now, a question arises: could this battle for iPad have been avoided if there had been no such defects?

I. What is an IP due diligence report

An IP due diligence report is needed for every attempt at an IPO, M&A, financing, or IP takeover. It is absolutely necessary in cross-border transactions because of the differences in IP systems between different countries and IP’s characteristics such as complexity and profession. There is no exception for the transaction of the iPad trademark between Apple and Proview, which is a leading case in cross-border transactions. However, due to the similarity of various trading purposes, it should be noted that to some extent there are many basic similarities in what constitutes IP due diligence, despite the differences in the contents of diverse transactions.

(1). IP legal environment

IP laws are territorial in that all countries provide legal protection to their own patents, trademarks and other IP rights, excluding rights from other countries. IP laws differ from country to country in terms of application, ownership, validity, transfer, export, trading and other aspects. For example, China adopts the system of first-to-file while U.S., first-to-use. For this reason, the IP due diligence inquiries must start from a good understanding of IP legal environment of the subject for acquisition. Otherwise, there would be wrong conclusions in the result. Therefore, local lawyers specialized in local IP legal system should be appointed to a better due diligence report.

It was disclosed by the lawyer of Proview at first instance that Apple hired an army of lawyers from US, UK, HK and Taiwan in its intended takeover of the iPad trademark. However, those lawyers came from different jurisdictions with different IP legal systems, which are also significantly different from that of China. The current dilemma might have been avoided if Apple had taken legal advice from Chinese lawyers specialized in the IP legal system of Mainland China before its takeover bid. This is the first mistake made by Apple in this case.

(2). The ownership of IP right

The significance of a due diligence report is embodied in two aspects in terms of the ownership of a specific IP right. First, there might be many right holders, such as applicant, the exclusive right holder, licensee, joint right holder, and mortgages or liens related to an IP right. Therefore, the first is to identify the specific type of the subject of rights, specific boundaries of the content, scope, duration and other aspects of the subject of rights in their exercises of the rights. There are close relations between such information and IP rights in terms of the latter’s market value, validation, trading price and validity as well. Secondly, the identification of subject of rights is the precondition for the transaction. There shall be a frustration of the takeover bid if an invalid or nonbinding agreement is concluded when it’s done with a party without authorization for the disposition of the IP rights.

The contention for the iPad trademark is the case in point in this regard. This is especially obvious in the battle for the iPad trademark between Apple and Proview. Proview contended that the Taiwan affiliate was not the true right holder of the iPad trademark in mainland China, and therefore had no right to execute the transfer of the trademark in China’s mainland jurisdiction. Proview also claims that Apple knew that Proview (Shenzhen) was the owner with exclusive right to the trademark in mainland China and still executed the agreement with Proview (Taiwan) for the transfer of the trademark, without requiring Proview (Shenzhen) to issue a clear release document, which is amazingly incomprehensible. If true, this would be the second mistake made by Apple in this case.

(3). The validity of IP right

There are four tasks for a due diligence report on the validity of IP right. The first is to confirm whether the right to application for patent or trademark would be approved by competent authorities. Only by doing so can the necessity of the takeover, purchasing price and trading risks be evaluated according to the extent of risk and uncertainty in the intending transaction. The second is to identify whether there is a litigation or dispute, or the possibility of invalidation by the local government or the judiciary related to the patent or trademark though it has been granted by authorities. The third is to ascertain whether there is an agreement for the transfer, license and cross-license of the registered patent or trademark in order to make a judgment whether there is a limitation on the owner to transfer, license, and the possibility and extent of such limitation. The fourth is to investigate and clarify whether there is a restriction on the right, such as pledge, judicial seizure, and etc.

After signing an agreement with Proview (Taiwan) through IPADL in December 2009 for the transfer of the iPad trademark, Apple should have, by way of a timely due diligence report, learned that Proview (Shenzhen) had few properties in mainland China to cash because of its heavy financial crisis. IPADL should have immediately negotiated with Proview (Shenzhen) for the transfer of the latter’s iPad trademark to itself and go through the procedures in China. However, IPADL acted too quickly by transferring the iPad trademark assignment to Apple at a price of £10 in April 2010 though the trademark had not been formally transferred to it according to law. In March 2010, the iPad trademark in Shenzhen was sealed up by court, prohibiting the transfer of the iPad trademark during the period of judicial seizure. Apple thus lost a good time of going through the procedures for the transfer of trademark. That is the third mistake made by Apple in the case.

(4). Duration and content of IP rights

There is duration for the exclusive right to IP right. Take China for example, the duration of an invention patent shall be 20 years, the duration of the patent for a utility model or design shall be 10 years, counted from the date of application. One of the basic tasks of due diligence is to confirm the remaining years of the IP rights concerned, ascertain whether such duration could be extended or not. For example, it is permitted to extend another 10 years before the expiration with a six month grace of right to trademark in China.

It is also necessary to conduct due diligence inquiry on the contents of IP rights. In accordance with China’s trademark law, protection for registered trademarks shall be given to the very identical or similar class of goods, and the universal protection shall only be given to well-known trademark. The due diligence for patent should include the following: Is the content of each claim the technical solution expected by the bidder? Does it contain the core technology exploited by the transferor in operation? Is it stable because of novelty, inventiveness and practical applicability as a patent?

(5). IP’s market value

There are variations of IP’s market value because of interior and exterior factors, including the stability, integrity, monopoly, advancement of the right itself, the legality of and the convenience for the exercise of such rights, substitutability and the duration of such rights.

The valuation of IP’s market value is of great significance to transferor and transferee, and there is disagreement on this matter between both parties at times. In China, there have been regulations formulated for the valuation, such as Guiding Opinions on Appraisal of Patent Assets (No. 217 [2008] of China Appraisal Society on November 28th, 2008) and Standards for the Appraisal of Assets—Intangible Assets (Ministry of Finance of the People’s Republic of China), stipulating market, cost, gain and other approaches for consideration and adoption.

Apple deliberately incorporated IPADL in order to conceal its true identity as the acquirer by fabricating its purchasing intent in the battle with Proview for the control of the iPad trademark. Apple’s acquisition strategy successfully led Proview (Taiwan) to make a mistake in market valuation of its iPad trademark, which was conducive to the transfer of the global right to iPad trademark at a lower price of £35,000. It is obviously an unequal consideration, and may be the factor behind the refusal of Shenzhen Proview to transfer its right to the trademark of iPad in China. Proview (Shenzhen) initiated a lawsuit against Apple at Superior Court of the State of California in Santa Clara, U.S., alleging that there was a fraud in the acquisition between Apple and Proview in December 2009. The case was dismissed on May 4th, 2012 for lack of evidence.

II. Steps for IP due diligence inquiries

(1). The formation of professional team for IP due diligence

IP due diligence report is a work requiring high professional qualification. Those involved in the investigation should not only have a good understanding of the local IP legal system, but also command of approaches to IP valuation at times. Therefore, a mature IP due diligence team should have lawyers proficient in local IP legal system at least, technical personnel having a good command of the patent’s technical background at times, and appraisers qualified in the accurate valuation of IP concerned. Generally speaking, a lawyer shall act as the leader of the team, coordinate matters of investigation in the whole process of due diligence, and submit a due diligence report to the commissioner in the end.

As mentioned earlier, if professional IP lawyers from mainland China had been involved in the process of the IP due diligence inquiries, it might have been possible for Apple to be fully aware of the importance and urgency of the procedures, processes and the time for the effectiveness of iPad trademark to transfer in mainland China, and thus might have avoided the mistake of signing an agreement with Proview (Taiwan) to transfer the iPad trademark registered according to the laws of mainland China.

(2). Laying out a plan for IP due diligence inquiry

IP lawyers should lay out a detailed plan for IP due diligence report according to the purpose, budget and other factors of takeover. This plan should include: a) the subjects to be investigated, including the selling party, its parent company, subsidiaries and other affiliated subjects, inventors, designers, managerial personnel, and even the spouses and children of such personnel and etc.; b) the objects to be investigated, including the content and scope of patent, trademark, copyright and trade secrets to be investigated; c) the timetable for the investigation; d) the obligations for the selling party, including what kind of information and documents to be disclosed; e) the key to be investigated, generally referring to the issues worthy of special consideration, such as whether there is unnamed affiliated obligee, whether the patent technology is in line with the purpose of the takeover or not; f) the responsibilities of the members of the team; and g) the timetable for the team to communicate with commissioner (bidder).

(3). The implementation of IP due diligence program

The basic work of the investigation team is to retrieve, organize, and review written documents related to IP concerned. Meanwhile, the team should conduct field surveys to verify IP’s implementation, exploitation and confidentiality. Sometimes, the team should communicate with the inventor or designer of the vendor in order to further verify the IP’s attribution, stability and inventiveness.

(4). The composition of IP due diligence report

IP due diligence report should include the timetable, scope, objects, steps, methods, status quo, existing problems, potential risks, market value and other points of the investigation. If necessary, the report should give professional advice and solutions for the bidder to have a comprehensive and accurate understanding of targeted IP and trading risks. It is based on the report that the bidder determine whether the transaction can achieve the purpose of acquisition or not, and weigh the amount of the trading price.

III. Conclusion

In the wake of global M&A, IP due diligence has become an important component of due diligence inquiries regardless of the M&A initiated by foreign enterprises’ for the takeover of China’s businesses or vice versa, and transnational private M&A of IP rights. It can be seen from the battle between Apple and Proview for iPad that IP due diligence is of great significance, necessity, and professionalism. Apple is clearly aware of the need for the due diligence inquiry, but far from being fully aware of the importance and professionalism. Enterprises or the legal professions can learn lessons and experiences from this case.

(Translated by Yuan Renhui)

Source: China IP

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