Intellectual Property Pitfalls in an Asset Sale / Purchase Transaction
As professionals working in intellectual property law, we are oftentimes asked by clients to assist them with transferring intellectual property purchased via an asset purchase agreement that has already been finalized and signed.
In many circumstances the form of agreement, while perfectly suited to a transaction where there is the sale of tangible assets, is inadequate when considering the transfer of intellectual property. The inadequacies occur on both sides of the transaction. From the vendor’s side, the agreement may fail to associate a value to the intellectual property being transferred; and from the purchaser’s side, the agreement may fail to include the applicable assignments of registered and unregistered trademarks, copyright, waiver of moral rights, domain names, trade names and trade secrets. The agreement may also fail to provide a non-competition and/or non-solicitation clause with respect to one or more of the following: establishment of a similar business, approaching current employees, distributors and/or clients.
When entering into an agreement where intellectual property is being sold, the vendor should ensure that value is being assigned to these intellectual property assets and the purchaser should ensure that there is satisfactory language to accomodate the proper transfer of such assets:
- registered trademarks - searches on both the trademarks and the vendor should be conducted to ensure that all registered trademarks are included for transfer in the agreement. If the business of the vendor is an international one, searches should extend beyond Canada and the United States;
- unregistered trademarks - a search of the vendor’s website should be done to confirm that there are not any unregistered trademarks which the vendor uses in association with its business. Unregistered trademarks also have protection under common law and accordingly, should be included in any asset transfer. The purchaser should also obtain evidence of first use of any unregistered trademarks and confirmation as to the entity that first used the unregistered trademarks so that if the purchaser later wishes to register such trademarks, it can file an accurate trademark application;
- copyright - if there are any design logos that are used in association with the vendor’s business that are part of the asset sale, the copyright in that original work needs to be assigned and any moral rights existing in that original work must be waived in order for the purchaser to have full ownership of the logo;
- domain names - the purchaser will want to ensure that the owner of the domain name that contains the name of the business being purchased, is also transferred;
- patents and industrial design - it may be that the assets being purchased includes the inventory of a produced good and the right of the purchaser to continue to produce such goods. When this is the case, it should be determined whether there is a patent or industrial design that is applied for or registered that will need to be transferred.
This list is not exhaustive as each transaction involving intellectual property is unique and needs to be specifically documented to ensure that all of the intellectual property is being considered. If you are contemplating buying or selling assets that include intellectual property, an intellectual property lawyer will ensure that your needs are covered.
When you first meet with a trademark agent, you will be asked specific questions about your trademark. How you respond to these questions will determine how accurate your trademark application is and, in turn, how susceptible it will be to an opposition in the future.
In order to ensure that the information contained within your trademark application is as accurate as it can be, remember to P.R.O.D. your brain before answering:
- P - when asked who owns the trademark really consider this question and advise your agent if there have been any Predecessors who were using the trademark before you or your company, this could be a previous owner from whom you purchased the trademark or it could have been yourself acting as a sole proprietorship. Many times individuals determine to incorporate a company and move all of the assets from their personal business into the corporate entity. If this is the case, you must ensure that there is a trademark assignment in place and that the trademark application indicates that the trademark was used by a Predecessor, namely you.
- R - Review and consider the goods and services that are going to be associated with the trademark. In particular, consider whether you are using the trademark in association with goods or in association with services. For example, if you are a distributor you may incorrectly advise your trademark agent that you are using your trademark on the goods that you are licensed to distribute, when really those goods are manufactured by another entity under that entity’s trademark. The use of the your trademark in this example would actually be with respect to distributorship services, namely the distribution of the type of goods.
- O - equally important is to ensure that you Own the trademark, in particular when the trademark includes a design element. Even if you have paid a designer to create a brand for you, this does not guarantee that you have full ownership of that brand. If you have failed to obtain, and the designer has failed to provide, an assignment of copyright and a waiver of moral rights then you need to advise your trademark agent so that she can prepare the necessary documentation to ensure that your trademark will not be opposed when it comes time to have it published in the Trademarks Journal.
- D – when your trademark agent asks when you first started using your trademark it is easy to misinterpret the concept of “use” as it relates to trademarks, in particular because it is defined differently with respect to goods and services. Accordingly, when providing the Dates of first use, it is important to ensure that you understand how “use” is defined in the Trademarks Act which, for a good, means the date that the good, either bearing the trademark or sold under the trademark (ie. the good was put in a bag bearing the trademark), was purchased and, for a service, is when the service has been advertised using the trademark and such service is able to be provided. As well, if there are a list of goods and services associated with the trademark, you cannot simply provide a date of first use using the date that the first item or service was sold if the other items or services were sold at a later time. It will be extremely beneficial to your trademark agent to receive a table breaking the goods and services into an itemized list with a date of first use for each.
A little P.R.O.D. can go a long way with respect to alleviating errors on your trademark application, which errors may also provide grounds for an opposition when your trademark reaches the publication stage. This could save you in legal fees and will assist your trademark agent in preparing the best application that she can for you.
Misunderstandings About Licensing Intellectual Property
Entering into a partnership or other form of a business relationship can be very exciting and the potential for success can loom large. It is often a situation where one party (the “licensor”) sees the benefit of enlisting another party (the “licensee”) to sell its products and increase its revenue by way of receiving royalties from the sales made by the licensee. Similarly, the licensee is excited about being granted an exclusive license to distribute the products of the licensor and taking advantage of the goodwill created by any branding / trademarks owned by the licensor in connection with its products.
Unfortunately, the grant of a license is often misunderstood by both parties when it comes to the ownership of the intellectual property. Many times a licensee will ask their legal counsel to assist them with the registration of a trademark that contains the trademark (registered or unregistered) of the licensor, because they believe that, as they have been given a license to such trademark, they can proceed to have a similar trademark registered in their name. Similarly, a licensor may even be agreeable to the registration because it believes that their trademark is simply being expanded to accommodate the use by the licensee.
However, while a licensee has the right to use the licensor’s trademark it does not have the right to own the trademark, or one confusingly similar to that of the licensor. If the parties determine to register a trademark that contains a confusingly similar element to that of the trademark owned by the licensor, the trademark registration would need to be in the name of the licensor, as owner, even if the licensor has never used the trademark itself. The date of first use would be based on the date that the licensee began using such trademark and the new trademark application would be associated with any similar registered trademark of the licensor on the Trademarks Office Register.
If the licensor were to allow the licensee to register a trademark similar to the one owned by the licensor, then the licensor is, in essence, reducing its ability to defend its exclusive claim to the use of such trademark and is providing others with an ability to argue that they too can register confusingly similar trademarks or alternatively, that the trademark has become so commonly used that it is no longer distinctive and therefore the owner no longer has exclusive rights to its use in connection with the goods or services with which it is associated.
When providing or being issued a license for the use of a trademark, it is important that both parties recognize the importance of the licensor maintaining the ownership of the trademark and that nothing is done which could weaken the licensor’s ownership and claim to such trademark.
How BC Courts “Hammered” Home their Jurisdictional Reach
Holding search engine providers accountable for the content they display has taken a giant step forward for businesses who suffer from other parties using such search engine providers to advertise infringing goods or services. In a recent British Columbia Court of Appeal judgement, Equustek Solutions Inc. v. Google Inc., 2015 BCCA 265, the Honourable Mr. Justice Groberman upheld the decision of the British Columbia Supreme Court ordering Google Inc. to remove entire websites from its search engines in various countries.
The plaintiff, Equustek Solutions Inc. et al., was the victim of trademark infringement and unlawful appropriation of trade secrets by its former distributor Morgan Jack et al., the defendant, which engaged in passing-off by way of re-labeling the products of Equustek Solutions Inc. with its own brand, and later by filling orders for the plaintiff’s products with their own competing product which was designed and manufactured using unlawfully acquired trade secrets and confidential information.
While court orders were in favour of Equustek Solutions Inc., the defendant failed to comply with such orders and instead hid behind the anonymity of the World Wide Web, continuing to sell its infringing products via various websites. The plaintiff then went on to successfully obtain an injunction against Google® (being a third party to the lawsuit) to remove websites used by the defendant. However, Google® only complied with the injunction by removing the contentious webpages within a website and only on its Canadian search engine Google.ca. The futileness of enforcing the court order based on Google’s® limited actions prompted a comparison by legal counsel to the plaintiff to the game of “Whack-A-Mole” whereby when Google® removed the contentious webpage the content would “spring-up” again as the defendant simply moved it to a new page within the same website.
In the end, the British Columbia Court of Appeal upheld the findings of the British Columbia Supreme Court, namely that the courts of British Columbia had jurisdiction to force Google® to “cease indexing or referencing in search results on its internet search engines the websites …including all of the subpages and subdirectors of the…websites…” of the defendants. This ruling, which provided an extraterritorial reach that in turn affected Google’s® activities in other jurisdictions, finally provides businesses with one big hammer to definitively whack that mole back into its hole.
Determining the value of intellectual property can be difficult to assess. Unlike a car, where a seller has websites, magazines and dealerships to determine what buyers are willing to pay for a certain make, model and year, valuation of intellectual property is not so black and white. Whether you are intending to sell your intellectual property or license it, you should take a moment and consider what your intellectual property consists of and how it can be divided in order to optimize its value. Here is a hypothetical example:
Oktane Energy Corp. is a health food, energy drink and nutritional powder producer. They have a registered trademark for their logo design that incorporates the word “Oktane” and have also registered their energy drink container as a distinguishing guise. The energy drink containers have become very popular with running clubs as the design allows for easy holding and has a drip proof lid. Oktane Energy Corp. holds many trade secrets with respect to the formulas used to create their snacks, drinks and powders and have also started an athletic clothing line under the name Oktane Energy.
Now Oktane Energy Corp. could license or sell all of its intellectual property to one entity for an agreed upon price, or it could choose to get as much value for its intellectual property that it can by selling or licensing its intellectual property piecemeal, to a variety of entities which are willing to pay top dollar for that specific intellectual property which will enhance their business. This could include Oktane Energy Corp.:
1. licensing or selling its distinguishing guise energy drink container to a beverage producer, so that entity can benefit from the popularity and goodwill associated with the container;
2. licensing or selling the trade secrets to another food/drink producer for them to incorporate into their product recipes;
3. licensing or selling the trade name “Oktane Energy” along with the know-how associated with the clothing production to an active wear producer; and
4. licensing or selling their registered trademark to another entity that wants to produce comparable health food and/or energy drink and/or nutritional powders.
Creating a successful business and a brand is a difficult task - an intellectual property lawyer can assist you in understanding the full value of your intellectual property and ensure that you are getting the most value for your hard work.
The internet can be a business owner’s best friend and its worst enemy. While on one hand it can assist a company to reach a wide scope of potential customers; on the other hand it can provide others with the opportunity to infringe on its intellectual property.
You may wonder, “How can I prevent others from using my intellectual property online?” While it can be difficult to protect intellectual property online, there is legislation in place to ensure that others cannot blatantly use the intellectual property of others to cause confusion in the marketplace. The following are a few of the enforcement mechanisms unique to protecting online intellectual property:
Uniform Dispute Resolution Policy (“UDRP”)
While the registering of a domain name that is confusingly similar to a trademark does not constitute passing-off or infringement on its own, if the registration of the domain name fulfills the following three-part test:
- the domain name is confusingly similar to the your trademark;
- the registrant of the domain name does not have a legitimate interest in using the domain name for a particular purpose;
- the domain name was registered and is being used in bad faith
it is possible for the trademark owner to have the confusingly similar domain name transferred or cancelled pursuant to the UDRP. This proceeding takes approximately 60 days to reach a resolution.
Uniform Rapid Suspension (“URS”)
Parallel to UDRP, this mechanism also requires the fulfillment of the three-part test noted with UDRP, but the owner of the intellectual property must be able to provide evidence to support the allegations. The process of the URS is faster and less expensive than the UDRP process, no more than 25 days, but on average 7 days, to reach a resolution whereby the domain name is blocked for the remainder of the registration term. However, URS is only available to to new generic top-level domains (“gLTDs”) such as “.guru” or “.xyz” and is not available to gLTDs such as “.com” and “.org”.
CIRA Domain Name Dispute Resolution Policy (“CDRP”)
This mechanism is only available to “.ca” websites and the complainant must meet certain requirements to establish that they have a Canadian presence. The same three-part test as required under UDRP is required for the CDRP, the proceeding typically takes about 90 days and the resolution will result in the domain name either being transferred to the complainant or cancelled.
Internet Service Provider Assisted Content Removal
If you discover that your intellectual property, such as a photograph that you took or a poem you wrote is being used on another party’s website platform such as Facebook®, you can utilize the complaint procedure provided on such website platform. If such a complaint is issued, the website platform will typically either remove or block the infringing content, or will seek a resolution from the owner of the content comprising the infringing content.
If, instead, the infringing material is located on a stand-alone website, you may, pursuant to the Canadian “Notice and Notice” Procedure, contact the Internet Service Provider (“ISP”) of the infringement. The notice must set out the work being infringed, where it can be located, the date and time of the infringement, contact information of the complainant and confirmation that the intellectual property is being used in bad faith. The ISP is required to send notice to its customer of the complaint, must advise you when they send the notice and must retain a record of the notice for a period of 6 months to one year. If the material is not removed by the other party, the complainant may move forward with commencing legal action.
In addition, under the US Digital Millennium Copyright Act-Online Copyright Infringement Liability Limitation Act (“DMCA”) you can provide an ISP with a DMCA notice setting out the work being infringed, where it can be located, contact information of the complainant and confirmation that the intellectual property is being used in bad faith. This will commence the “Notice and Takedown” Procedure which will require the ISP to advise the entity posting the material of the DMCA Notice and, if a counter notice is not filed by the posting entity refuting the DMCA claim, the ISP will remove the material.
Trademarks can be created in a variety of ways, they can be a word, design, number, two-dimensional or three-dimensional form, sound or colour, or a combination of two or more of these elements. Trademarks are also designated into categories, they can be ordinary marks, distinguishing guises, certification marks or official marks. Determining the best methods to protect your intellectual property requires a firm understanding of Trademark and Copyright Law which is how a registered trademark agent can assist you..
What is a trademark agent?
In Canada, registered trademark agents must have a thorough knowledge of the Trademarks Act as well as the related rules, jurisprudence and Trademarks Office practice and are the only professionals permitted under the Trademarks Act (RSC 1985 c.T-13) to represent and act on behalf of trademark owners to obtain trademark registrations before the Trademarks Office. While some trademark agents may also be lawyers, this is not a pre-requisite for becoming a trademark agent.
The role of a trademark agent includes the functions of preparing, filing and prosecuting applications for registration of trademarks; giving opinions on the registrability of trademarks in accordance with criteria imposed by the law, procedure and practice and conducting searches to see whether likelihood of confusion might exist between the trademark searched and trademarks or trade names of others.
The registration of a trademark is not automatic. The Registrar must approve the application for registration for its publication in the Trademarks Journal. If an objection is raised by the Registrar or if anyone files an opposition to such application after its publication, the trademark agent drafts an appropriate response or prosecutes the opposition proceedings to defend the client’s interests and presents appropriate evidence and argument, including referencing relevant case law, to convince the Registrar that the subject trademark is registrable.
A trademark agent advises and serves trademark owners in the maintenance and protection of their trademarks which must remain distinctive and properly used at all times. Should trademark owners allow others to use their trademarks or grant franchises, a trademark agent can advise them in order that use of the trademarks be properly licensed to protect the distinctiveness and enforceability of the trademarks, failing which they might be subject to expungement from the register.
A trademark agent also assists trademark owners in managing their trademark portfolios, including ancillary services such as recording at the Trademarks Office any change of ownership of registered trademarks, security agreements affecting trademarks and the like, as well as attending to renewal of trademark registrations.
On July 1, 2014, most sections of Canada’s new anti-spam legislation (“CASL”) came into effect. Among other things, CASL sets out new requirements for continuing to use e-mail and other electronic messages for “commercial” purposes. Some examples of what would meet the definition of “commercial” purposes include messages that:
- offer to purchase, sell, barter or lease a product, goods, a service, land or an interest or right in land;
- offer to provide a business, investment or gaming opportunity;
- promote a person, including the public image of a person, as being a person who does anything referred to above, or who intends to do so.
In most cases, businesses and other persons disseminating such commercial electronic messages or “CEM’s” will need the consent of the recipient. You may already have seen messages from many organizations that send you electronic messages requesting your express consent in order to continue to send you such messages.
Businesses that fail to obtain the consent of recipients of their CEM’s or otherwise violate the CASL can be exposed to very substantial administrative monetary penalties (up to $1 million per offence for individuals and $10 Million for businesses). The CASL sets out a list of factors to be considered in determining the amount of the penalty and also provides for personal liability of directors, officers and agents of corporations if they authorized, assented to, acquiesced in or otherwise participated in the offence. Sections of the CASL which provide for a private right of action for both actual and statutory damages for violations of the CASL will come into force on July 1, 2017. This is likely to result in a number of class action lawsuits against organizations that have violated the CASL requirements.
The CASL is not strictly limited to e-mail and other CEM’s. It also impacts the alteration of transmission data (such as where a link embedded in an e-mail re-directs the recipient to a website that is different from what the recipient expected), address harvesting (e.g. using webcrawlers and dictionary attacks) and unsolicited installation of computer programs and software.
Three different federal agencies are responsible for enforcing and administering different parts of the CASL and related legislation: the CRTC, the Competition Bureau and the Office of the Privacy Commissioner.
We strongly encourage all businesses and other persons that are engaged in disseminating electronic messages via e-mail, text, social media, etc., operating websites and/or distributing software via the Internet to review and familiarize themselves with the information on the CASL provided by the federal government at fightspam.gc.ca/eic/site/030.nsf/eng/home and to monitor that site for updates and additional information in the coming months. Businesses that are members of an industry organization may wish to contact their industry organization to determine if the organization has published any protocols, recommendations or best practices guidelines specifically for that industry group.
Many business owners wonder “Should I be using the ™ symbol or the ® symbol beside my trademark?” Surprisingly, unlike in the United States, there are no “marking” requirements for trademarks under the Canadian Trademarks Act. However, proper marking is an extremely important method of notifying consumers that you are using a certain word or symbol as your trade-mark and can prevent third party infringement, as you are effectively putting third parties ‘on notice’ that the trademark belongs to you. Many trademark owners use symbols purely as a deterrent.
The ™ symbol may be used on registered and unregistered trademarks. So, by using the™ symbol, all the owner is doing is indicating to third parties that they are using the words or design in question a trademark – it does not tell anyone whether that mark is registered or unregistered. A ™ designation just means that the user of the trademark asserts that the word, phrase, design, or whatever it is, is a trademark owned by the user. Anyone can assert that anything is their trademark, but that does not necessarily mean that the user has exclusive rights to that mark.
The Registration symbol, ®, is a powerful symbol, but should be used with caution, and only when registration has been obtained in both Canada and the US. If you can be sure that the only use of your trademark is entirely within Canada, then use of the ® symbol is fine. However, the US has very strict marking rules, so if some of your use spills over into the US market (which can be very hard to predict), then it is safer to use the ™ symbol until you have a US registration as well as a Canadian one, and once you have a US registration, using the ® symbol is mandatory in the US market.
That all being said, many businesses prefer to continue to use the ™ designation, even when they have a registered trademark because of the costs associated with re-printing their marketing material or packaging. The important thing is that the trademark is marked with one or the other. It does not matter which symbol you use, taking into consideration the marking rules in the US, as long as you do not misuse them (for example, by using the ® symbol for an unregistered trademark).
Businesses will often create marketing material for their products/services, either in print or short video segments. A very common question I get from clients is “Can I use another person’s image in my video/marketing material without their consent?” In sum, the answer is no, it is not recommended that you use another person’s image without their consent, whether or not that person is famous.
This issue is governed by both privacy legislation and the common law in Canada.
Further, there could be jurisdictional issues as well if the advertising goes outside of the Province of BC (which, given the internet it likely ALWAYS does whether you actually intend it to or not).
Essentially, Canadian common law recognizes a “right to personality”. It was first acknowledged in the 1971 in the Ontario decision of Krouse v. Chrysler Canada Ltd. In this case, the Court held that where a person has a marketable value in their likeness and it has been used in a manner that suggests an endorsement of a product or service then there is grounds for an action in “appropriation of personality”.
Essentially, if you do not obtain the consent of the person whose image you are using, they can sue you. This right was later expanded upon in Athans v. Canadian Adventure Camps (1977) where the Court held that the personality right included both image and name.
There is substantial later case law that confirms use of images/video/photo of ANY individual without their consent constitutes infringement of their privacy, and their personality rights and is grounds for litigation.