INTRODUCTION
Today, with the market economy increasingly shifting to a digital economy, M&A (mergers and acquisitions) activity is becoming driven by the quest for innovation, where IP (intellectual property) has become the most valuable and strategic asset for technology companies more than conventional market expansion. In fact, IP often determines the true value of the deal, as it has a higher expectation of being incorporated into products and services than traditional market-based assets. However, the IP assets that create a desire for a company can result in legal issues, ownership disputes, and ownership data valuation issues, creating a structure of rights and risks known as “IP wars” around tech takeovers.
THE INCREASING IMPORTANCE OF IP IN TECHNOLOGY MERGERS AND ACQUISITIONS
Intellectual property, which includes patents, trademarks, copyrights, and trade secrets, is the foundation of innovation and market competition. In the context of a technology merger or acquisition, these types of rights are the main creators of value. Adequate intellectual property due diligence will ascertain that the acquiring company receives ownership of the rights (both patentable and non-patentable), and that it does not infringe upon the rights of third parties. If the acquiring company does not verify its intellectual property background, it may incur substantial litigation costs following the merger and reduce the company’s and management’s credibility in the marketplace.
An unprecedented example of the predominance of intellectual property rights in M&A is Google’s purchase of Motorola Mobility in 2012 for $12.5 billion. The rationale behind the transaction was not the hardware business, but the pre-existing patent portfolio acquired by Motorola at an earlier date, which encompassed 17,000 patents and another 7,500 applications. The patent portfolio gave Google a defensive wall against lawsuits from Apple and Microsoft in order to defend its Android operating system; however, it later sold Motorola to Lenovo for considerably less than the acquisition price, while retaining ownership of the patents. This aspect of IP exemplifies the addition of value, while also magnifying the complexity of a merger strategy on the operations phase following a completed acquisition[1].
In the same manner, Facebook’s purchase of Instagram four years later showcases how the care of intellectual property ownership and data ownership can lead to a more successful integration process. The value of Instagram was attributable in part to its valuable brand identity and intellectual property rights. Facebook’s thorough due diligence in relation to IP ownership enabled it to retain ownership rights in terms of the platform’s name, design and user data[2].
LEGAL FRAMEWORK FOR INTELLECTUAL PROPERTY IN MERGER AND ACQUISITIONS
The legal systems in India provide clear statutory instructions on how IP is to be assigned in a merger or acquisition scenario. Under the Patents Act, 1970, particularly Sections 68 and 69, an assignment of registered patents must be executed in writing, and to be valid, must also be registered with the Controller[3]. The Trade Marks Act, 1999, deals with the assignment and transmission of trademarks under Sections 37-45, and seeks to protect goodwill that is associated with the trademark as well as brand identity as part of the transfer process[4]. The Copyright Act, 1957, lays out the framework for the assignment of rights in literary, artistic, and software works under Sections 18 and 19, again requiring a formal written agreement, and stipulating certain terms of assignment[5]. The Companies Act, 2013, also obligates a merging or amalgamating company to disclose all IP assets under the disclosures required for a merger or amalgamation under sections 230 to 232[6].
When mergers are cross-border, such as in the case of a merger between an Indian company and either an American or Canadian company, the IP assets will also need to consider the corresponding international IP regimes and compliance with the TRIPS agreement and conferring with obligations of the conventions of the World Intellectual Property Organization (WIPO)[7]. US companies engaged in business in India will need to ensure compliance with the US Patent and Trademark laws as established in the Patent Act (35 U.S.C.) for a patent, and for trademarks under the Lanham Act[8]. Compliance will ensure that all intellectual property can be assigned and is recognized, and enforceable globally.
INSIGHTS FROM POSSIBLE CASE LAW AND JUDICIAL APPROACH
Judicial case law from various jurisdictions suggests the need for accuracy when documenting and assigning intellectual property in mergers. In Sun Pharmaceuticals Industries Ltd. v. Cipla Ltd. (2009), the Delhi High Court focused on the litigation regarding imperfect assignments leading to uncertainty in patent ownership[9]. The Court held that patent rights must be documented, executed and registered to avoid disputes in that a patent’s post-acquisition ownership issues will jeopardize the transaction altogether due to uncertainty of ownership.
The Microsoft Corp v Motorola Mobility, Inc (2013) case demonstrates how pre-existing rights and license agreements under standard-essential patents can add complexity to the merger process[10]. The Court examined the licensing obligations that Motorola had in relation to Motorola’s obligation to grant licenses under fair, reasonable, and non-discriminatory (FRAND) conditions. The case shows how pre-existing license agreements and conditional commitments can restrain a newly acquired company’s freedom to use its new intellectual property acquired through an acquisition process.
The decision in Yahoo! Inc. v. Akash Arora & Anr. (1999), while not an M&A case, reinforced the need to protect brand values and trademark rights[11]. In this case, the Court held that unauthorized use of a domain name confusingly similar in character to a trademark would result in a risk of dilution of the trademark’s brand value or reputation, which is an illustration of the kind of risks that an acquirer can face when conducting due diligence regarding trademark portfolios upon acquisition.
TYPICAL IP PROBLEMS IN TECH ACQUISITION
Issues relating to intellectual property (IP) in mergers and acquisitions often arise from unresolved ownership issues, litigation matters, or a failure to obtain licenses. In many cases, a startup fails to address the formal transfer of ownership of IP from founders, employees, or outside contractors, which can then create uncertainty in an acquisition. Litigation (threatened or otherwise) relating to infringement of third-party IP, or simply not having registered IP in time, can also affect the valuation of the transaction. Likewise, improper use of open-source code (especially failing to comply with licenses) can also lead to unwanted and unexpected exposure to liability for the acquiring company. Dealing with these issues makes comprehensive due diligence of IP in M&A essential, taking it from a simple checklist item to an organizational capability that must be well-articulated even in high-level planning.
PROVIDING INNOVATION THROUGH DUE DILIGENCE AND COMPLIANCE
In order to protect innovation, companies must have both a strong legal and a practical strategic approach to M&A. Completing an IP audit before closing a transaction will help flush out any unknown (or even disclosed) risks. In addition to making representations and warranties regarding ownership, validity, and enforceability of the IP assets contained in the company’s IP portfolio, there are additional legal mechanisms, like indemnity and escrow, available to protect the buyer against undisclosed liability. Also, especially in deals where the buyer obtains the entire data repository of users, compliance with evolving data and privacy laws is a significant consideration for any buyer, particularly, the legal barrier to entering a data repository for users in a transaction. Since the beginning of 2023, India’s Digital Personal Data Protection Act, 2023, has established strict rules with severe penalties for storing and using personal data without the appropriate consent, while the EU is advocating to expand its GDPR in the area of protecting a buyer’s property, proprietary software, or algorithms[12].
CONCLUSION
In the age of technological disruption, intellectual property(“IP”) is at the center of every major acquisition. The success of a merger and acquisition transaction is now based not only on financial synergy, but also on the ownership and clarity of IP rights. As companies compete to innovate, those that place emphasis on diligent IP management, retention and documentation, and compliance across all relevant jurisdictions, will protect their assets and enhance their position to achieve a sustainable competitive edge. Technology takeovers will continue to affect industries, but it is the diligent protection of intellectual property that will determine the ultimate winner of the many IP wars in the digital age.
Author(s) Name: Abhinav Manchanda (UILS, Chandigarh University ,Mohali(Punjab))
References:
[1] Google Inc, ‘Acquisition of Motorola Mobility’ Financial Times, (London 2012).
[2] ‘Facebook’s Acquisition of Instagram’ The Guardian (2012).
[3] Patents Act 1970, ss 68–69
[4] Trade Marks Act 1999, ss 37–45
[5] Copyright Act 1957, ss 18–19
[6] Companies Act 2013, ss 230–232
[7] Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) (1994)
[8] Patent Act (35 U.S.C.); Lanham Act (15 U.S.C. §1051 et seq)
[9] Sun Pharmaceuticals Industries Ltd v Cipla Ltd [2009] 39 PTC 347 (Del)
[10] Microsoft Corp v Motorola Mobility Inc [2013] 795 F 3d 1024 (Fed Cir)
[11] Yahoo! Inc v Akash Arora & Anr [1999] 78 DLT 285
[12] Digital Personal Data Protection Act 2023
