Ladas & Parry - Closing the Deal - III. CLOSING DOCUMENTS

IP As Property / IP Rights Transfers / Closing the Deal

III. CLOSING DOCUMENTS

B. GENERAL TRADEMARK ASSIGNMENT AGREEMENT

1. Assignment – Goodwill – United States of America
2. Assignment – Goodwill – Worldwide
3. United States Issues – Intent-to-Use Applications - Verified Statement of Use
4. Intent-to-Use Applications – Amendment to Allege Use
5. Intent-to-Use Applications – Agreement to Continue Prosecution until Verified Statement of Use filed

C. CONFIRMATORY ASSIGNMENT DOCUMENTS FOR RECORDAL IN THE RELEVANT JURISDICTIONS WHERE TRADEMARK RIGHTS EXIST

1. Worldwide Recordal of Intellectual Property Rights
2. Separate Documents for Each Jurisdiction are Required.
3. Costs

D. COMMERCIAL LOAN DOCUMENTS
E. TRADEMARK SECURITY AGREEMENT
F. RELEASE AGREEMENTS
G. OPINION LETTERS
H. LICENSE AGREEMENTS
I. ANCILLARY AGREEMENTS AND OBLIGATIONS

A. PURCHASE AGREEMENT:

In most instances, the Purchase Agreement does not actually effectuate a transfer of assets from Seller to Buyer. Instead, it merely embodies the Seller’s promise to sell stock or assets to the Buyer under certain terms. The consummation of the transaction takes place at the Closing or at a later date (post-Closing) when the parties execute transfer documents and any other ancillary agreements. This is especially true in terms of trademark rights due to their territorial nature. This may dictate a number of specific procedures which are governed by the law of each individual jurisdiction in which the trademark rights exist.

1. Further Assurances

Trademark rights require specific confirmatory assignment and other

documentation to be prepared in accordance with local trademark practice for filing at the relevant Trademarks Office. Additionally, the documents required to be submitted in many jurisdictions frequently change or new requirements are added. Therefore, it may be necessary for the Seller to execute additional documentation subsequent to Closing.

In many instances, the Buyer may not be notified that it is required to submit additional documentation from the Seller until weeks or months after the Closing. Trademark rights in certain jurisdictions may not be capable of being transferred due to current political difficulties (e.g., Iraq, Libya or Afghanistan). Therefore, the Buyer may wish to make certain that the Seller (or its successors or assigns), is required to cooperate and execute such documentation.

“Further Assurances” clauses are critical in order to make certain that when this contingency arises, the Buyer can be in a position to seek Seller’s cooperation. Cooperation from the Seller is especially critical in transactions involving large trademark portfolios where the Buyer may require the Seller’s cooperation in execution of additional documents post-Closing on several occasions. The Buyer may need to ensure that it maintains an officer capable of executing documents post-Closing, especially where the corporate entity acquiring the rights changes its corporate structure by merger or acquisition.

B. GENERAL TRADEMARK ASSIGNMENT AGREEMENT

The General Trademark Assignment Agreement is the master assignment

agreement which conveys “equitable title” to all trademark rights which are identified in a schedule, usually attached as an exhibit. In many instances, this schedule can be quite extensive as it should identify all trademarks, including common law rights, pending applications and granted registrations being transferred for each jurisdiction. This document is executed at the Closing and should bear an effective date as of the Closing date, unless the specific circumstances of the transaction dictates otherwise. The General Trademark Assignment Agreement serves several purposes:

(1) to clearly set forth and identify all trademark rights being assigned;
(2) to demonstrate to tax authorities that equitable or beneficial title has passed to the Buyer;
(3) to make certain that certain technical requirements unique to trademark practice are met, such as the transfer of goodwill, in order to cure any such deficiencies in the Purchase Agreement;
(4) sets forth the acknowledgment of rights;
(5) contains representations and warranties;
(6) sets forth the obligation to execute other confirmatory documents;
(7) contains further assurances clauses;
(8) sets forth possible retention of rights; and
(9) can be used for general corporate purposes.

1. Assignment – Goodwill - United States of America

In the United States, a trademark cannot be assigned separate and apart from the “goodwill” it symbolizes. In addition to existing case law reinforcing this traditional requirement, the Lanham Act specifically requires that the goodwill associated with a trademark accompany any transfer of the trademark itself. Section 10 of the Lanham Act provides:

“[a] registered mark or a mark for which an application to register has been filed shall be assignable with the good will of the business in which the mark is used, or with that part of the good will of the business connected with the use of and symbolized by the mark.”

A trademark is considered merely a symbol of goodwill and has no independent significance apart from the goodwill associated therewith. Attempts to transfer trademarks without the associated goodwill of the business have been characterized as “assignments in gross” and are invalid.

The public policy behind the requirement for transferring the goodwill of the business in conjunction with the trademark itself is to prevent use of a trademark with a different goodwill and different product which may result in deception upon the consumer public. The requirement that goodwill accompany the trademark ensures that a transferee’s use will not be deceptive and will not break the continuity of the goodwill associated therewith.

2. Assignment – Goodwill - Worldwide

However, unlike the United States, many jurisdictions throughout the world do not impose a similar goodwill requirement in conjunction with the assignment of trademarks. In fact, the majority rule worldwide is that trademarks may be assigned without the goodwill. There are basically three categories worldwide in which the transfer of trademarks may or may not be transferred with goodwill. These comprise countries which:

(a) allow unfettered assignments of trademarks;
(b) allow assignments with or without the goodwill but impose an advertising requirement; and
(c) impose a goodwill requirement such as the United States.

In view of the above and the conflicting laws with respect to the transfer of goodwill, the General Trademark Assignment Agreement should specifically address the category of goodwill being transferred.

3. United States Issues – Intent-to-Use Applications - Verified Statement of Use

The Lanham Act allows for the application of trademarks based upon a bona fide intent-to-use the trademark at a later date. Although the Lanham Act allows for the assignment of intent-to-use (ITU) applications, it also imposes specific requirements limiting the circumstances in which they may be validly transferred. Section 10 of the Lanham Act provides:

“[n]o application to register a mark under section 1051(b) (intent-to-use applications) of this title shall be assignable prior to ... the filing of the verified statement of use....except for an assignment to a successor to the business of the applicant, or portion thereof, to which the mark pertains, if that business is ongoing and existing.”

Essentially, this statute requires that either use of the mark is made (along with the proper filing of the Verified Statement of Use with the Patent & Trademark Office) or the entire business associated with the intent-to-use trademark applications has been transferred before the assignment can be considered valid.

For those instances where intent-to-use applications cannot be made subject to the assignment, either because the application has not been converted to a use-based application by the filing of an Amendment to Allege Use or the Verified Statement of Use has not or cannot be filed because use has not and will not be made by the Seller and the Buyer cannot make bona fide use of the trademark within the required time periods, it may be necessary for the parties to agree to abandonment of the application by the Seller. Towards that end, the Buyer should negotiate an undertaking on behalf of the Seller to file the necessary documentation at the USPTO to expressly abandon the intent-to-use application and not to interfere with any new applications for the trademark filed by the Buyer. Potential difficulties in adopting this approach include:

(a) loss of priority; and
(b) the potential for third party objections to any new applications for the trademark which may be subsequently filed based upon priority of use.

4. Intent-to-Use Applications – Amendment to Allege Use

If use of the trademark has been made, it may be possible to file an “Amendment

to Allege Use” before the application is published for opposition, together with evidence of the assignment in order to convert this intent-to-use application into a use-based application. Once this documentation has been received and officially processed by the United States Patent and Trademark Office, this would allow for assignment of the application.

5. Intent-to-Use Applications – Agreement to Continue Prosecution until Verified Statement of Use filed

If the application has already been published for opposition and it is too late to file an Amendment to Allege Use, the parties can simply agree to allow the prosecution of the intent-to-use application to continue unfettered by the Seller until such time as the Verified Statement of Use is filed. At that point, assignment of the intent-to-use trademark can take place.

It is critical that intent-to-use trademark applications are identified early so that the parties may afford them the proper treatment under current U.S. trademark practice. As it turns out, very often these trademark applications cannot be assigned at a Closing or post-Closing ceremony. This circumstance illustrates the importance of having a further assurance clause such that when the ITU applications are ready to be assigned, the Seller must execute the necessary documentation. This often takes place well after the Closing date.

C. CONFIRMATORY ASSIGNMENT DOCUMENTS FOR RECORDAL IN THE RELEVANT JURISDICTIONS WHERE TRADEMARK RIGHTS EXIST

1. Worldwide Recordal of Intellectual Property Rights

With the exception of all-stock deals or relatively similar stock transactions, the assets, including the trademark rights of the acquired company, need to be transferred into the name of the new owner in each jurisdiction where such rights exist. Timely recordal of a change of ownership is critical to protect the ongoing validity and enforcement of intellectual property rights for several reasons, including:

(a) If a change of ownership is not promptly recorded, a misconception can arise in the marketplace as to the identity of the actual trademark owner, leading to a possible loss of rights where a trademark no longer functions as a true indication of origin. This is particularly true in the case of well-known trademarks, or in the case of other marks which are extensively used in their particular jurisdiction;

(b) The new owner may not be able to prosecute infringements, file oppositions or attend to renewals. For example, enforcement of a trademark can only be carried out under the authority of the owner of record or its exclusive licensee. If prompt injunctive relief is required, an undesired delay will result from a necessity to record the transfer of rights. Furthermore, the right of the trademark owner to obtain damages for acts of infringement which occurred before the transfer documents were recorded may be lost in certain jurisdictions.

(c) Fines and/or penalties may be assessed for late recordal of a transfer. In certain jurisdictions, there are time limits after which it may be too late to effect proper recordal of an assignment.

(d) The failure or delay in recording a transfer of ownership may result in a possible loss of royalties. For example, if a license is to be granted and recorded under a trademark, the licensor must be the owner of record. Therefore, a delay in recording the transfer can delay the date when the license agreement becomes effective; this, in turn, can delay manufacturing and/or sales. The resulting loss of royalties may not be recoverable. In a number of countries, a license agreement must be submitted to and approved by governmental authorities and the record owner should appear as the licensor. Delay in recording thus delays approval, with consequential loss of royalties.

(e) License recordals and registered user entries will no longer be current and may affect the validity of the use by a licensee and/or governmental approval for foreign exchange authorizations for remission of royalties.

(f) In the event an “equitable transfer” occurs without the requisite official change of “record ownership” at the relevant trademark offices throughout the world, the new owner will encounter enormous difficulties when confronted with the maintenance, sale, enforcement, hypothecation, licensing and/or use of the trademark rights. For example, proof of use (where required for maintenance of existing trademark registrations) may not be accepted when used by the current owner unless that party is now reflected as the “record owner”.

2. Separate Documents for Each Jurisdiction are Required.

In order to reflect the new owner of a trademark as the “owner of record”, it will be necessary in most jurisdictions for counsel to prepare separate assignment documents for each jurisdiction in which such right exists. In some jurisdictions, a certified copy of a “general” worldwide assignment may be acceptable. Trademark statutes exist in most countries of the world and provide a mechanism for the recordal of a change of ownership at a central registry. The form and substance of these documents vary from jurisdiction to jurisdiction, which underscores the advisability for the preparation of separate documents for each jurisdiction. Such documents must be filed and recorded at the respective local registry. Furthermore, several multicountry registrations systems exist, such as the International Registration under the Madrid Agreement or Madrid Protocol which have special requirements which counsel must be familiar with in order to properly record a transfer of title. In this respect, it is recommended that the acquiring company engage counsel experienced in the worldwide transfer of intellectual property rights and who is familiar with the local requirements for the preparation and recordal of documents necessary for each jurisdiction.

Other issues arise with respect to the filing and recordal of the assignment documents at the respective local registry. In particular, stamp, value added or ad valorem taxes may be assessed on the transfer or official actions may issue encompassing a potentially broad range of issues (e.g., “associated” trademarks, advertising and publication requirements) as discussed more fully below. Local requirements underscore the need for separate transfer documents to be prepared, executed and recorded in each jurisdiction in their native language. Furthermore, confidential information which the Buyer does not wish to disclose can be omitted as each transfer document can be prepared simply to satisfy the local requirements for transfer of the national trademark rights exclusively.

3. Costs

Where a significant number of intellectual property rights exist in multiple jurisdictions that are the subject of a merger or acquisition, the costs of simply preparing and recording the necessary documents can be substantial. Official fees are often assessed by the number of trademarks or patents included in the transfer. The burden of absorbing the costs of effecting recordal of the assignment or merger frequently is borne by the acquirer. However, this is not always the case. In some cases, the costs are factored into the purchase price and in other cases these costs are shared by the parties. For instance, the parties can agree to have the Seller absorb the costs for preparation of the documents while the Buyer pays for the charges incurred in connection with recordal of the assignment at the local Trademark Offices. Accordingly, it is advisable that the issue of costs are discussed by the parties and treated in the Purchase or Acquisition Agreement entered into during the course of negotiations.

D. COMMERCIAL LOAN DOCUMENTS

Where elements of a transaction are being financed by a commercial lender, all commercial loan and security documents should be executed prior to or at the Closing ceremony. These documents can include:

(a) Credit Agreements;
(b) Loan and Guarantee Agreements;
(c) Promissory Notes;
(d) Escrow Agreements
(e) Security Agreements;
(f) Release Agreements pertaining to prior commercial security obligations among one or all of the parties;
(g) Consents, Waivers and Subordination agreements; and
(h) All other relevant Commercial Loan and Security Documents;

E. TRADEMARK SECURITY AGREEMENT

Like many commercial transactions, business transactions involving trademarks frequently require that the acquirer borrow funds to finance the transaction. In these instances, the lender providing the funds will seek collateral from the borrower to secure the loan as protection against the risk of default. When trademark rights are the subject of a security interest, the grant must take place in the form of a Trademark Security Agreement or similar document.

F. RELEASE AGREEMENTS

Prior to Closing, the presence of any liens, security interests or other encumbrances in trademarks will be revealed in one of two ways:

1. Representations and Warranties: Carefully negotiated
representations and warranties in the Purchase Agreement and/or General Trademark Assignment Agreement will require the Seller to confirm whether prior encumbrances exist against the trademark rights. If such encumbrances against the trademarks exist and are still valid and subsisting, Buyer’s counsel must require the disclosure of these security interests and, wherever possible, require the release of these security interests prior to or at the Closing ceremony.

2. Due Diligence: Due diligence conducted on behalf of the Buyer, including searches of the relevant trademark registries, should reveal the existence of security interests which have been properly perfected against registered trademark rights. Where unregistered trademarks rights have been collateralized, however, a search of the Trademark Registry would not reveal such encumbrance.

For those trademark rights that have been made the subject of a security interest, it is critical to make certain that a Release of these rights is executed on behalf of the secured party in favor of the Grantor (i.e., the Seller). An obligation to obtain the release of these security interests should be made a condition precedent to the transfer. In most instances, the secured party will not be present at the Closing. If possible, the Release should be executed Nunc Pro Tunc to the date of the Closing. The rationale behind this is to make certain that when the Release is presented for recordal at the relevant Trademark Office, the assignment document does not bear an execution and/or effective date prior to the date of the Release. The Release should always be filed and recorded prior to the assignment document in order that the proper chronological chain of title is reflected on the Trademark Register.

Regardless of the manner in which prior security interests against registered or unregistered rights are discovered, arranging for execution of appropriate release documentation (either a Release Agreement or UCC-3) prior to or simultaneously at the Closing is critical. Furthermore, if the secured party is not the Seller, there is no guarantee that the secured party will necessarily release its security interest in the trademarks, depending upon the nature of its prior business with the Seller. In any event, execution of appropriate release documentation by the Seller should be made a condition precedent to performance on behalf of the Buyer.

G. OPINION LETTERS

Seller’s counsel is frequently required to deliver an opinion letter at Closing

concerning trademark issues in business transactions. For an acquiring or investing company, opinion letters are significant in that they are intended to bind the Seller to representations typically on the following:

(a) ownership;
(b) validity;
(c) enforceability;
(d) absence of encumbrances;
(e) non-infringement of third party rights;
(f) non-infringement by third party;
(g) effectiveness of proposed security documents for attachment, perfection and priority of a security interest; and,
(g) valuation of the trademark portfolio.

Whenever possible, opinion letters concerning trademark rights should be

rendered by the Seller’s trademark counsel, who, in all likelihood, is already quite familiar with the portfolio. If necessary, extensive due diligence may need to occur before the rendering of an opinion letter. Opinion letters are equally critical in financing or licensing transactions where the trademark is serving as the primary asset or collateral. Separate valuation opinions may also be required to be delivered at Closing. These opinions are concerned with assessing trademarks using different accounting methodologies to determine the actual or fair market value of the trademark asset.

H. LICENSE AGREEMENTS

Many business use intellectual property, including trademarks, that is licensed

from third parties. The method upon which trademark licenses may be transferred to a Buyer depends upon whether the transaction is a share purchase or an asset purchase. In the case of a share purchase, the Buyer’s position is relatively straightforward, since by acquiring the shares in the company, the Buyer will automatically acquire all pre-existing commercial agreements, including all trademark license agreements. In the case of an asset purchase, any existing trademark licenses will not pass automatically and will need to be specifically transferred to the Buyer. The possible methods of transferring a trademark license include:

A Novation Agreement between the Seller, the Buyer and the licensor. The Buyer then becomes a party to the license in place of the Seller, and the Seller is released from its obligations under the license.

Assignment or sublicensing of the license . The prior license may contain an express prohibition on the assignment or sublicensing of the license without the consent of the licensor. Any and all consents should therefore be obtained prior to Closing. The Buyer and Seller will need to determine whether the obligation to negotiate and obtain such consents falls on the Buyer or the Seller. The acquisition agreement may even provide that the Buyer is not obligated to close the transaction if consents from key licensors cannot be obtained.

I. ANCILLARY AGREEMENTS AND OBLIGATIONS

The acquisition agreement often specifies other obligations of the parties related to the acquisition. With respect to trademarks, a license from the Seller to the Buyer or vice versa, is not uncommon. This typically occurs in situations where the Seller is parting with one of its businesses but has certain trademark rights that are used in that business and the business it is retaining. In such a situation, the Seller can either retain the shared trademark right and license it to the Buyer post-Closing or sell it to the Buyer and take a license back. Additionally, short-term licenses may be needed to allow the Seller to phase out its use of certain trademarks post-Closing.

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