How to navigate complex IP issues in European tech M&A

For prospective buyers, understanding what business critical IP rights target businesses hold, and what IP risks they are exposed to, is vital to getting value for money from a deal.

That task is complicated, however. Developing case law around the licensing of patents ‘essential’ to standardised technology, the fallout from Brexit, and possible reforms to IP law, including in the context of artificial intelligence (AI), will all play into due diligence exercises.

Pinsent Masons, in partnership with other law firms in its European network, has looked at a number of IP-related factors buyers and targets should consider in the context of technology merger and acquisitions.

Patent licensing and FRAND

No single technology business will own all the IP rights necessary to develop and service its customers. Collaboration in some form with original equipment manufacturers and technology suppliers will be essential for that business to operate. 

Collaboration requires the careful handling of IP rights – particularly determining whether, and the terms on which, existing IP rights owned by the parties in collaboration will be shared; and the ownership, control and user rights of the parties in relation to IP developed as part of the collaboration.

Amsterdam-based Gijs van Mansfeld of Pinsent Masons, the law firm behind Out-Law, said: “In the current M&A market, we come across a lot of tech companies whose technology is developed in a closed ecosystem. This means that often a significant part of the technology development is outsourced. This increases the need for due diligence into third parties and potentially their suppliers, as dependence on third party suppliers may well adversely impact the day-to-day business operations.”

Where a business relies on using standardised technologies, they will commonly encounter requirements around the licensing of the underlying patents deemed essential to the operation of those technical standards such as Wi-Fi and 5G. Standardisation bodies, under which the standards are developed by industry in collaboration with one another, typically require standard-essential patents to be licensed on fair, reasonable and non-discriminatory (FRAND) terms.

What constitutes ‘FRAND’, particularly in relation to the royalties payable under the licence, can determine whether a company’s product or service ideas are viable and their attractiveness to investors. Courts around Europe have grappled with the questions of what constitutes ‘FRAND’ and what obligations are on both standard-essential patent rights holders and prospective licensees in the context of FRAND negotiations.

Arguably the most notable ruling to-date was that of the UK Supreme Court in the case of Unwired Planet v Huawei in 2020 in which the court confirmed its jurisdiction to determine the royalty rates and terms of a global 'FRAND' licence. A series of rulings by lower courts have since developed case law on FRAND licensing in England and Wales further. Case law in Germany on FRAND negotiations is closely aligned with that in the UK but there remains uncertainty about how other courts in other jurisdictions will approach the requirements around FRAND licensing. Johnny Petersen of Danish law firm Bech-Bruun and Niklas Follin of Swedish firm Setterwalls confirmed the respective absence of and limited FRAND case law in their countries.

Miriam Cugusi and Lorenzo Stellini of Italian law firm Gatti Pavesi Bianchi Ludovici (GPBL) said that while FRAND issues have arisen in some cases litigated in Italy, they have yet to be considered by Italy’s highest court, the Corte di Cassazione. The question of what constitutes a FRAND royalty is among the issues still to be settled, they said.

Cugusi and Stellini, however, highlighted a further “central issue” that remains unresolved in the context of FRAND litigation: whether implementers of standard-essential patents can compel the patent holders to seek licensing agreements from their suppliers rather than with them. The EU’s highest court was set to rule on the issue until telecommunications and IT company Nokia and automotive company Daimler reached a deal to withdraw all pending litigation between them.

Supply chain licensing practices will vary between industries. “It seems that the dominant approach is to license at the end-device level in the telecommunication industry, and at components level in the automotive industry,” said Cugusi and Stellini. “However, as in the Nokia v Daimler case, SEPs holders sought to license only at the end of the production chain in the automotive industry too in order to extract the maximum value from their SEPs portfolio.”

Patents and the doctrine of equivalents

A further patent-related risk for buyers to consider is the extent to which a target company’s product or service might be deemed to infringe the patent rights of another business even if there are some differences in the elements of the product or process concerned.

The ‘doctrine of equivalents’ in essence provides that if a product or process is not substantially different from the elements of a patented invention, it can be considered to be infringing that patent. This approach aims to prevent patents being circumvented by making small changes to the patented invention whilst reproducing its core and inventive elements. However, courts around Europe have developed different interpretations and legal tests for determining whether there has been infringement by equivalence.

In the UK, the legal test for determining whether there has been infringement of a patent on the basis of the doctrine of equivalents was set out by the Supreme Court in 2017 in the case of Actavis UK v Eli Lilly. Although that case concerned pharmaceutical patents, the doctrine of equivalents is relevant to patent infringement claims in other sectors too, including the technology sector.

“Clients in all sectors are increasingly interested in this doctrine because it means that patentees may seek to argue a broader inventive concept of their patent to capture alleged infringements,” said Mark Marfé of Pinsent Masons.

Two separate legal tests concerning infringement by equivalence must be satisfied in Germany, while the position is again different in France.

Jules Fabre of Pinsent Masons said: “The French doctrine of equivalents can lead to a very broad scope of protection, very favourable to patentees. However, this is not without risks for them. As there is no bifurcation in France, courts will consider both validity and infringement at the same time. As a result, those defending an infringement claim may be able to raise a so-called squeeze argument when the scope of protection is so broad that it covers variants from the prior art, which would render the patent obvious and invalid.”

“There may also be challenges in enforcing patent rights when relying on the doctrine of equivalents in the context of preliminary proceedings. In France, a preliminary injunction will only be granted if the patent is considered to be valid and infringed from a summary analysis, which requires that there are no serious arguments on either invalidity or non-infringement,” he said.

A separate legal test concerning infringement by equivalence applies in Italy too.

Miriam Cugusi and Lorenzo Stellini of GPBL said: “Under Italian case law, it seems that among the different existing criteria in verifying the applicability of the doctrine of equivalents, the main and most accredited in Italian case law is the so-called ‘triple test’. Under these criteria, the doctrine of equivalents is held to be present when the substituted element performs substantially the same function, in the same way to obtain the same result.”

Portuguese law firm SRS Advogados, Swedish firm Setterwalls and Danish firm Bech-Bruun all told us that the doctrine of equivalents had been considered on multiple occasions by the courts in their jurisdiction too.

Johnny Petersen of Bech-Bruun said: “In 2017, the Danish Maritime and Commercial High Court for the first time, in the Eli Lilly v Fresenius Kabi case, decided to grant a preliminary injunction with reference to patent infringement by equivalents.”

Brand protection

The UK’s exit from EU membership has complicated the way in which European technology companies protect their IP, perhaps most notably in the context of trade marks and design rights.

EU trade marks and Community registered design rights used to apply in the UK automatically until Brexit. Though businesses were able to apply to convert the UK scope of those rights into UK-only equivalent rights until 30 September, Miriam Cugusi and Lorenzo Stellini of GPBL said that Italian businesses would be considering the merits and cost of maintaining both EU and UK rights in the long term.

Also relevant to decisions over whether to register IP rights are the consequences if businesses subsequently fail to make use of the rights. Buyers will want to review whether trade marks owned by target companies have been put to use, as the rights are liable to be revoked if they have not been, as Gian Marchet Kasper of Blum & Grob highlighted is the case in Switzerland.

The existence of separate EU and UK regimes also has a bearing on the exhaustion of IP rights. Buyers will want to understand how this affects IP protections enjoyed by target companies.

Brexit should also spur a review of anti-counterfeiting strategies, particularly by Irish technology companies or those wishing to acquire them, said Aoibheann Duffy of Pinsent Masons in Dublin.

“It is particularly important for rights holders to understand their IP rights and options around enforcement in Ireland, where there is potential for a heightened risk of counterfeiting activity due to the country's proximity to the UK,” Duffy said.

Many business brands are currently being built around environmental claims and commitments companies are making about their operations, goods or services. This reflects the increasing importance placed on climate action by policymakers, regulators and consumers. However, there are risks for businesses that are unable to substantiate the ‘green’ claims they make.

Mark Marfé of Pinsent Masons said: “Regulators are becoming increasingly interested in green claims made in adverts including businesses comparing the environmental credentials of their product against a competitor’s product. Businesses need to ensure compliance with all applicable advertising regulations in the green space and develop a strategy to allow them to make the most of their green credentials.”

Tomasz Szambelan of Kochański & Partners in Poland also highlighted how the use of certain terms such as “organic”, "bio" or “eco” on product labels is tightly governed by EU legislation and that the incorrect use of those terms in labelling can result in fines of up to 200% of the material benefit obtained or which could be obtained for the products placed on the market.

Niklas Follin of Setterwalls in Sweden said the Swedish Patent and Market Court has established relatively strict requirements on the veracity of green claims, while Miriam Cugusi and Lorenzo Stellini of GPBL said Italian authorities have closely scrutinised claims made about the biodegradability of technology products in recent times.

Virginia De Freitas of Pinsent Masons in Paris agreed green claims is also a hot topic in France. She said a new French law on fighting against climate disruption and increasing resilience to its effects, introduced earlier this year, contains new legal provisions “to strengthen the prohibition of misleading green claims made in adverts, including ads describing a product and service as being carbon neutral”.

Rights around data, AI and trade secrets

Data has increasing value to businesses that are able to organise and harness it effectively. Prospective buyers of European technology companies will want to understand how well target companies’ data is protected.

“The ”ownership” of data is becoming increasingly important,” said Dr Nils Rauer of Pinsent Masons in Frankfurt. “Database rights have proven not to be the ultimate solution in this context. Therefore, businesses need to think how they can secure an adequate proprietary position. This is particularly true in transactions.”

Data will power innovation in the use of artificial intelligence (AI), which the European Patent Office has described as “one of the disruptive technologies of our time”.

Miriam Cugusi and Lorenzo Stellini of GPBL highlighted the growing number of patent applications filed in Italy concerning AI-related inventions. There were 475 European patent applications filed in 2019 from Italian inventors concerning medical devices that use AI alone, they said. However, whether AI can be an inventor is an issue that is being grappled with. The EPO rejected an attempt to register a machine as an inventor in early 2020, and similar arguments were raised and rejected by the Court of Appeal in London in September 2021 – though an appeal and legislative reform in the UK on this point is a distinct possibility.

IP issues relevant to AI extend beyond patent rights.

Tomasz Szambelan of Kochański & Partners said there is debate in Poland over whether AI-created works qualify for copyright protection under Polish law.

“There is also the question of who should be entitled to the rights to AI works,” Szambelan said. “It often indicates the author of the program that was used to create a particular work. On the other hand, a computer program is itself protected by copyright, so that the program creator's effort has already been sufficiently rewarded by granting this protection. Similar questions arise under industrial property law in connection with the production of inventions by AI.”

European technology companies will commonly have know-how and commercially sensitive information that will not qualify for protection under classic IP protection regimes. The introduction of the EU Trade Secrets Directive in 2016 gives businesses a further route through which that information might be able to be protected.

Gijs van Mansfeld of Pinsent Masons said: “More often than not, critical company information that is considered the company's know-how rests with a small amount of the key employees. This poses significant risks for the protection of company IP. An important aspect of protection of company know-how and trade secrets lies in the creation of robust confidentiality and IP clauses in the template employment agreements.”

Dr Nils Rauer of Pinsent Masons said that many businesses had yet to change their internal confidentiality schemes to benefit from the new trade secrets regime and that buyers will want to closely examine whether this is the case as part of their due diligence activities prior to concluding technology mergers and acquisitions.

Van Mansfeld added: “Another issue is that company know-how and trade secrets are often not sufficiently documented, which limits and complicates due diligence. Businesses should seek to identify the company crown jewels in an earlier stage before legal due diligence commences".