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Selling your SME / ME? Who owns your intellectual property?

Selling your company is one of the most important but equally most stressful things you will ever do in your business life. The irony, however, is the sale itself is often straightforward, but it's the process of getting the company ready for sale that can be fraught and which can highlight many issues that could materially impact on the value of your business.

Regardless of whether you are looking to buy or sell we would encourage readers to address some of the following issues. While some are generic to all companies, many will apply to a greater degree to software developers and resellers.

The most commonly overlooked issue and one of great importance to the software world is the company's intellectual property and who owns it.

It is usual for many small and medium sized businesses to ask a director, employee, or their website developer to register the domain names used to access the company website. Legally this can create an issue as the domain name may be registered in the name of the director, employee or third party contractor and a company may have to have the domain name transferred to the company's name before the business is sold. This can be made more complicated if the employee concerned has left the company or the business has parted company with the website developer. If they are unwilling to transfer the domain name the company may have to resort to using a domain dispute resolution process, court proceedings or paying a sum of money to the current registrant in order to get the domain name back.

If you're not sure who is the registrant of your business domain name, you can find out from a WHOIS database--a public database that accredited registrars are obliged to maintain.

Any entity holding a domain name can voluntarily transfer it to another entity, but there are conditions. You can either enter into a domain name transfer agreement; supply details about the new domain holder-to-be for the WHOIS record; and confirm with the relevant domain name registry operator that the new domain holder-to-be accepts the domain name (and will pay the fee) and that the existing domain holder consents to the transfer.

Apart from domain names, you also need to check the type of restrictions found in software licences if you are planning on selling your business. For example, is the use of the software restricted to the business with which the supplier is contracting? Suppliers typically achieve this by prohibiting sub-licensing and assignments, so if you are planning to sell your business assets (and the associated software used by your business), and the licence prohibits sub-licensing and assignments without the supplier's consent, a sale of the business may constitute a breach of the licence.

If your business is part of a group, and licensed software is uploaded to a network which is used or accessed by any of the businesses within the group, then you should check that the licence permits use of the software by users in this way. You need to make sure that the software licence extends to all businesses within the group and multiple users otherwise you may be in breach of the licence.

Using software without licence or in breach of your licence could entitle the licensor to terminate the software licence, claim damages or seek an injunction preventing use.

In the case of outsourcing services, the software may be being used by, or have been assigned to, the external service provider. If you didn't include the outsourcing of services at the time when the licence was entered into, and you have not reviewed your software licences since then, you need to check that that outsourcing is permitted by the terms of the licence. If it's not, then the supplier may charge a fee for agreeing a change of use.

Trademarks are another area to consider before selling your business. Established trade marks can add significant value to your business and increase its saleability.

Whilst unregistered trade marks are protected in the UK under the legal wrong of passing off, establishing passing off in a court case can be hard to prove.

You should not therefore underestimate the value of your trademarks and the importance of registering them. If you fail to protect your trading name you could risk the loss of a potential purchaser or being offered a reduced sale price.

You can register a trademark by filing an application to the registry in the relevant jurisdiction (for example the UK Intellectual Property Office or the EU's Office for Harmonisation in the Internal Market). Registering your trading name as a trade mark you will gain the exclusive right to use your mark for the goods and services that it covers, in the jurisdictions set out in the registration, and it can be easier to take legal action against infringement of your mark.

You can also arrange to set up a watching service to look out for and report on the advertisement in the Trade Marks Journal of any later filed mark which is the same as, or similar to, your mark.

Copyright is an unregistered right that arises automatically and protects literary, dramatic, musical and artistic works. Owning or having the exclusive right to use copyright work is also important if you are planning to sell your business.

If you have engaged a third party to develop software for your business, to design your logo or your website, the copyright in the software and designs may be owned by the third party.

If you have agreed with the third party developer or designer that your business will own the copyright and other intellectual property rights in these works or that such works will be exclusively licensed to your business then you should make sure that such agreement is in writing and signed by the third party.

Other intellectual property rights are patents, a patent is a type of intellectual property that protects inventions which are products or processes. A purchaser will want to make full enquiries to ascertain if any patents have been applied for or granted to the company. A purchaser will want to know whether any patent applications have been filed, granted, whether they are still in force, who owns them, whether there are any registered licensees of the patent.

Anyone can file a patent application, but only someone who is entitled to the invention may be granted the patent. Therefore, before putting your business on the market for sale you should check whether any inventions that are the subject of patent applications made by your company are actually owned by your company (and not, for example, by directors or sub-contractors).

If any patents have been previously 'assigned to the business, or if your presale check identifies any patents or inventions which need to be assigned, the assignment must be in writing and signed by or on behalf of the assignor. In addition, the assignment must be registered at the UK Intellectual Property Office within six months so that third parties are given notice to claim priority over parties claiming rights under later transactions.

Design rights, on the other hand, protect the appearance of a purely functional product. They can protect the whole or part of a product which is novel, has individual character and does not fall within the statutory exemptions.

Once registered they are protected for an initial period of five years from the date of filing and it is possible to extend the period, five years at a time, up to a maximum of 25 years.

Where an exclusive licence of registered/unregistered designs has been granted to your business, this must also be in writing and signed by the licensor. Whilst it is not a requirement for sole or non-exclusive licences to be in writing, we recommend that they are granted in writing and signed by both parties. You should also get your any granted designs to your business legally reviewed to check its validity. It needs to be recorded in order to bind the successor in title to the licence.

Selling your business can be a minefield. However, if you are aware of what rights you do or don't have, it can simplify the process. We would always recommend that owners of an SME or ME seek legal advice before taking the step of putting their business on the market, so that they are not faced with extra costs or avoidable disputes when it comes to intellectual property.

Dorothy Anew, Senior Solicitor, Moore Blatch.
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Title Annotation:OPINION
Author:Agnew, Dorothy, Sr.
Publication:Software World
Date:Nov 1, 2013
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