Intellectual Property
Patents and trademarks used by the company are held personally by its president: decisions before business succession
Preparations for business succession or the sale of a company may reveal that patents or trademarks used by the company are registered in its president's personal name. Before deciding whether to purchase them, check how the rights were acquired and the basis on which the company may use them. Then identify the matters the company needs to control after succession, including licensing and maintenance of the rights, and consider whether to acquire the rights or leave them with the individual while securing the company's use.
Reviewed by Keishi Yoshikawa, Attorney at Law and Patent Attorney (Dai-Ichi Tokyo Bar Association)
Contents
1 Ownership and the basis for current use
Begin by checking the registered holder and the history of acquisition leading to that registration. For patents, establish who made the invention and when, the duties that person performed at the time, and whether rules or agreements provided for acquisition of the rights by the company. Check their terms and whether they were performed. Whether the company is purchasing rights from the president under a new arrangement or seeking performance of an existing agreement affects both the consideration and the documents to be considered. For trademarks, also check the history of application and acquisition and any subsequent assignments.
Separately from ownership, check the basis on which the company currently uses the rights. If there is an express license, examine its scope, term, and termination conditions. Even without a written contract, consider whether there was an oral agreement and whether emails, payment records, and communications about use establish an express or implied license and its scope.
For patents, an employer may have a statutory non-exclusive license where an invention qualifies as an employee invention. Corporate officers are included among the persons covered by the employee invention provisions. The same premise does not apply to trademarks. The company's past use does not automatically give rise to a right equivalent to that arising from an employee invention.
2 Changes following inheritance or assignment by the right holder
Heirs generally succeed to all rights and obligations forming part of the deceased person's estate. If a valid license was established during the right holder's lifetime and there is no provision terminating it on death or a similar condition, the replacement of the right holder by an heir does not by itself extinguish the existing license. Other issues nevertheless remain.
One is co-ownership of the right by several heirs. Unless the co-owners have agreed otherwise, each may practice the patented invention or use the trademark personally without the other co-owners' consent. A successor's personal inheritance of a share does not, by itself, authorize the company to do so. An existing license or statutory non-exclusive license may provide the basis for the company's use. However, granting a new license to the company, or newly extending the term or scope of a license, requires the consent of all co-owners of the right. Check this separately from matters such as automatic renewal under an existing agreement.
Another issue is whether the existence and terms of the existing license can be proved. Without a written record, the company will need to explain its scope to the heirs.
Assignment to a third party raises a different issue. A non-exclusive patent license is effective against a person who acquires the patent after the license arises. A non-exclusive trademark license becomes effective against a subsequent acquirer of the trademark right upon registration of the license. Disputes about the scope or termination of licenses are addressed in Disputes over intellectual property licenses.
3 Choosing between assignment and licensing
The company's ability to use a right is different from its ability to decide who receives licenses, whether the right is maintained or disposed of, and how it is handled on a business sale. A non-exclusive patent license held by the company does not automatically prevent the president from licensing third parties. The non-exclusive license itself also does not confer a right to seek an injunction; contractual exclusivity alone does not create that right. Use the table below to identify which additional powers obtained through ownership the company needs and whether improved license terms could meet those needs.
Table: acquisition by the company compared with continued individual ownership and secured company use
| Issue | The company acquires the right | The individual retains the right and the company's use is secured |
|---|---|---|
| Company use | The company practices the invention or uses the trademark as right holder. | The company does so within the scope permitted by law or contract. |
| Licensing and infringement response | The company decides on new licenses and injunction claims itself. | The parties agree on restrictions on third-party licensing and cooperation in responding to infringement. |
| Maintenance and disposal | The company decides, as right holder, on maintenance, abandonment, and assignment. | The parties allocate maintenance responsibilities and agree on treatment of abandonment or assignment. |
| Inheritance from the president | The right itself does not form part of the president's personal estate. | Existing license arrangements generally pass to the heirs. New licenses and similar arrangements after co-ownership arises require the co-owners' consent. |
| Consideration and company approvals | The parties consider the assignment price and necessary approvals in light of existing use rights and the additional benefits acquired. | The parties consider whether royalties are payable, their terms, the additional benefits secured, and necessary approvals. |
| Completion of succession or sale | The parties coordinate acquisition of the right with succession to, or transfer of, shares or the business. | The parties check continued use, conditions for transfer of the license, and enforceability against third parties. |
Note: the continued-use option in this table assumes a non-exclusive patent or trademark license. The powers conferred by statutory exclusive patent or trademark licenses differ. Even acquisition by the company may leave restrictions arising from existing third-party rights or contracts in place.
4 Consideration and company approvals
For an assignment or paid license from the president personally to the company, clarify what the company obtains and what it is paying for. Check any use rights already held by the company, the scope and remaining term of the rights, and any third-party licenses. Record the choice between acquisition and continued licensing, the reasons for it, and the valuation assumptions. For a license, exclusivity, duration, and termination conditions also form part of the assessment. When acquiring rights in employee inventions, check the treatment of remuneration or benefits under the applicable law, rules, and agreements. Share these rights and conditions with valuation and tax advisers.
A conflict-of-interest transaction between a stock company and its president, where the president is a director, generally requires disclosure of material facts and prior approval by the board of directors if the company has a board, or otherwise by a shareholders' meeting. The president concerned does not participate in the board's vote and must report the material facts of the transaction to the board without delay after it takes place. Retain valuation materials and records of the alternatives considered, as well as the agreement and minutes recording approval. Approval alone does not establish that the consideration is reasonable.
5 Timing and documents before inheritance
Succession to or sale of shares does not automatically terminate a license to the company. However, if the license provides for termination or prior consent on a change in shareholding, check whether the proposed succession falls within the provision. Put necessary amendments and consents in place before completion. For a patent subject to a statutory non-exclusive license, consider termination of a contractual license separately from the existence of that statutory right.
If a business transfer changes the user to another company, a non-exclusive patent license may be transferable together with the business in which the invention is practiced. By contrast, transfer of a non-exclusive trademark license in connection with a business transfer requires the trademark holder's consent. Also check contractual consent requirements.
The timing cannot be decided merely by saying that the matter should be completed before inheritance. Succession to or sale of shares alone does not transfer the president's personal rights to the company. Decide which rights the company must have secured when management changes or the M&A transaction closes, and complete the necessary steps accordingly. When patent or trademark rights are assigned to the company, allow for the fact that the transfer takes effect upon registration. Issues involving discrepancies between the registered and actual ownership of shares are addressed in Disputes over who owns the shares, including shares held in another person's name.
The documents depend on the option selected. For an assignment, address the rights concerned, consideration, completion date, and necessary company approvals. For a license, address scope, duration, termination conditions, consideration, and the allocation of responsibilities for maintenance and infringement response. If the individual retains the rights, check consistency with a will or other arrangements concerning their succession. For trademarks used by the company, also allocate responsibility for labeling and quality control.
The decision whether to transfer the rights or retain individual ownership while securing company use requires consideration of the powers the company needs, consideration, approval procedures, and the succession timetable together. We advise on investigations into ownership and the basis for use, assignment and license terms and consideration, company approval procedures, and the preparation of contracts.
For our intellectual property practice, please see Intellectual property, IT and data.
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