How to handle IP transfers in anonymous purchases

By Ken Li, Chang Tsi & Partners
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The market is a battlefield. In the course of changing commercial operations today, strategic operational means, e.g. anonymous purchase in the intellectual property (IP) field, are sometimes indispensable. However, anonymous purchase has always been denounced as a form of “fraud”. This article explores the issue of how to properly handle IP transfers by discussing a case of anonymous purchase.

Is anonymous purchase fraud?

The widely known iPad trademark case could be called a fight started by a possible anonymous trademark transfer. In this case, Proview Technology (Shenzhen) instituted a legal action in a California court asserting that Apple Corporation, in the course of purchasing the iPad trademark, “misled Proview through an affiliate, and deceived Proview in a premeditated manner to enter into an agreement with it”, constituting fraud. Ultimately the case was dismissed by the court on the grounds of jurisdiction. But should the anonymous purchase by Apple Corporation be deemed as a fraud?

Ken Li Trademark Attorney Chang Tsi & Partners
Ken Li
Trademark Attorney
Chang Tsi & Partners

It is the author’s opinion that Apple’s anonymous purchase of the trademark did not constitute fraud because the transfer agreement executed by the IP company (an affiliate established by Apple for the anonymous purchase) and Proview was genuine and valid. First, the agreement genuinely reflected Proview’s desire to dispose of the iPad trademark, provided for reasonable considerations, and was a true expression of the parties’ intent. Second, the IP company was a lawfully existing company, without any fraud of subject. It did not have any obligation to disclose that it was an affiliate of Apple, and in purchasing the trademark in its own name there was no issue of fraud. Third, in international trade, the strategic establishment of an affiliate and the use of the body to attempt to acquire certain assets is a common business strategy employed by multinationals, which should not be subjected to legal obstacles.

Still, many issues remain in the course of an IP transfer that require attention.

Which rules are applicable?

This author would argue that the following rules/procedures needed to be complied with for a proper IP transfer.

  1. Sound due diligence. Conducting due diligence to cover the following by a lawyer specialising in IP is of utmost importance.

    (a) Understanding the rights holder’s legal status. If the rights holder is an enterprise with legal personality, it is important to know whether its entity is in a good standing, and whether risks, such as the filing of a petition to have it declared bankrupt for insolvency, etc., exist. If the rights holder is a natural person, it is important to know whether he or she has the civil capacity to act. If the IP could involve a succession, it is necessary to ascertain the genuine rights holder after the succession and whether the person(s) conducting the negotiations on the transfer have the lawful authority to do so, etc.

    (b) Understanding the legal status of the target rights. This includes evaluating the legitimacy of the rights. Several questions can be posed. Are there any associated rights identical or similar to the target rights in China, or elsewhere? Is the validity of the target rights stable, and is there a possibility of a rights dispute arising with a third party? Has a change, transfer, licensing or pledge occurred, or is there the possibility of a freeze, and could these things act as an impediment to the transfer of the rights? It is also necessary to understand whether there are any factors, such as negative news and/or a penalty decision, etc., that could affect the value of the rights. Due diligence should additionally include a preliminary market survey to uncover any possible instances of infringement or passing off. This can be useful to assess the potential for working with the rights and the costs of rights protection after the transfer.

  2. Appraisal of value and formulation of negotiating strategy. Prior due diligence will give the acquirer a basis to:

    (a) Appraise the value of the target rights. When conducting the appraisal, in addition to the opinion of the professional appraisal firm on the value, gathering marketing, technical and legal personnel to carry out comprehensive discussions is more important. The decision as to whether to purchase the target rights, and the corresponding quote and tactics, should be made on this basis. Taking patents as an example, in the value appraisal it is necessary to consider current market sales forecasts and the possibility of development of the patent, but also to study whether the claims contain any gaps, and whether the enforcement of the patent could infringe a third party’s IP.

    (b) Formulate the negotiating strategy. Should anonymous assignment be adopted? How would this be handled? What contract terms must be insisted on, and who is liable to pay the taxes? Are there any other key points involved in the case, and which party is responsible for drafting the assignment agreement? There are many technical issues that need attention. Therefore, it is necessary to engage a professional lawyer to manage the whole assignment procedure well.

  3. Lawful assignment procedures. In addition to executing a written assignment agreement, the parties are required to record the assignment before the competent authorities. Failing to do so will cause the assignment to fail against a bona fide third party, and the assignee would face huge legal risks.

    Accordingly, the assignee should pay particular attention, with the assignor, to jointly carrying out the recordal of assignment procedure, and supervising the process. There are three points that require special attention: (1) appointing an assignee’s lawyer to be responsible for the assignment; (2) if necessary, making an application to accelerate the examination for the assignment procedure; and (3) releasing of the business plan and application of intellectual property rights should be restrained before the confirmation of IP transfer.

IP is a trenchant weapon that enables a commercial entity to expand its business, but is also a frequent source of problems. In an actual IP transfer, there are many other specialised and technical operational issues that require attention. For a commercial entity, it is strongly advised to engage a specialised lawyer to proceed with the transfer process, to stand as the praetorian guard for the enterprise’s commercial development.

Ken Li is a trademark attorney at Chang Tsi & Partners

(Chang Tsi & Partners)

7/F and 8/F, Tower A, Hundred Island Park

Bei Zhan Bei Jie Street, Xicheng District

Beijing 100044, China

Tel: +86 10 8836 9999

Fax: +86 10 8836 9996

E-mail: [email protected]

www.changtsi.com