M&A: what good Brexit-related IP due diligence looks like

Out-Law Analysis | 09 Sep 2020 | 3:43 pm | 4 min. read

Businesses involved in mergers and acquisitions in the coming months must understand and account for the potential effect the end of the Brexit transition period will have on the intellectual property (IP) being sold and acquired through those transactions.

A thorough due diligence exercise is recommended to evaluate the impact of Brexit on relevant trade marks, designs, patents and other know-how, together with digital assets such as domain names.


Co-written by Blair Carlton and Kirsty Hannigan, specialists in IP law at Pinsent Masons, the law firm behind Out-Law.


Trade marks

During the transition period, EU trade marks (EUTMs) continue to have effect in the UK. However, some changes set out in the EU-UK Withdrawal Agreement will impact trade mark rights holders when the transition period ends on 31 December 2020.

The most significant change will be that, after the end of the implementation period provided for in the Withdrawal Agreement, the UK will no longer be subject to the EU Trade Mark Regulation, and EUTMs will no longer be protected in the UK. Therefore, the UK will no longer be included in the territory covered by the EUTM and international trade mark registrations which designate the EU. However, an equivalent ‘cloned’ right will be automatically granted within the UK at the end of the transition period, giving the registered proprietor two registered trade marks: one covering the remainder of the EU and a UK equivalent. Similarly, an equivalent 'cloned right' will be automatically granted within the UK where international registrations designate the EU as the territory.

Buyers and sellers should be mindful to provide or request details of the relevant cloned right where the transaction involves EUTMs and will complete after the end of the transition period. 

Design rights

Community designs will be affected by Brexit in a similar way to EUTMs. The Community Designs Regulation brought into being the registered Community design (RCD) and the unregistered Community design (UCD). The most significant impact of Brexit will be that, from the end of the transition period, RCDs and UCDs will no longer be protected in the UK. However, from the end of the transition period, the holder of an RCD or a UCD will automatically become the holder of a comparable design right in the UK.

Buyers should note that EUTM and RCD applications which are still pending at the date of exit will not be automatically cloned, and the applicant will have nine months in which to file an equivalent application in the UK. Once a cloned TM or RCD is granted in the UK, these must be actively used in the UK or there is a risk that they will be lost. After the end of the transition period, the EU Intellectual Property Office (IPO) will not recognise the reputation of an EUTM based solely on use within the UK, and conversely, the UK IPO is unlikely to recognise reputation claimed on the basis of use outside the UK.

Patents

Patents are largely unaffected by Brexit. Brexit will not affect the existing European patent system on the basis that the European Patent Convention (EPC), which established the European Patent Office (EPO) and governs the grant of European patents, is a treaty between contracting states and not a piece of EU legislation.

Similarly, the Patent Cooperation Treaty (PCT), which allows an applicant to file one patent application designating multiple jurisdictions, is not a piece of EU legislation and will remain unaffected.

As a result, national patents granted by the UK IPO and European patents granted by the EPO, and validated in the UK, will continue to be in force in the UK after the UK's exit from the EU.

Importantly, the UK will remain a member of the Paris Convention, which underpins IP protection around the world. This means it will remain possible for applicants who have filed for patent protection in the UK to subsequently claim the priority of that application for a patent registration in other countries, and vice versa.

Domain names

Domain names are web addresses that businesses can acquire the rights to operate through domain name registrars. The ability to carry out due diligence on domain names has diminished since the introduction of the General Data Protection Regulation (GDPR) as it has led to identifying details of domain name operators being removed from public access, effectively ending the practice of independent searches. As a result, buyers are solely dependent on the target company's disclosure of its domain name assets.

Brexit will impact on the ownership of domain names rooted at the '.eu' domain by UK organisations because as a result of the UK leaving the EU it has become a ‘third country’, affecting the rights of citizens and organisations to register, hold and renew domain names within the '.eu' domain.

The European Commission has confirmed that during the transition Period, the EU regulatory framework for the '.eu' top level domain will continue to apply to and in the UK. However, after the end of the transition period, unless there is a new agreement which provides for continued rights of use and application, the EU rules relating to the '.eu' domain will no longer apply in the UK.

UK organisations that are established in the UK but not in the EU, and non-EU citizens who reside in the UK will be unable to register or renew '.eu' domain names, and their domain names will be subject to revocation. In addition, UK registered trade marks will no longer provide protection against the registering of '.eu' domain names and agreements with registrars handling '.eu' domain registrations will not be able to choose the UK legal system for dispute resolution purposes.

Other IP-related consequences of Brexit

Buyers should also review IP licence agreements which target companies are party to. In the context of Brexit, there are consequences for the definition of "territory" in IP licence agreements, as after the transition period expires, if the term "territory" is defined as the EU, it may no longer include the UK.

Brexit could also impact on royalty payments, as such payments made on 'net sales' could be subject to additional tariffs.

Businesses will always want to consider the effect Brexit might have on warranties and other representations. A review should, for example, assess whether warranties around use can be given in the context of the new cloned UK trade mark rights.

Co-written by Blair Carlton and Kirsty Hannigan, specialists in IP law at Pinsent Masons, the law firm behind Out-Law.