IP in Business Transactions 2024 in Turkey - Part 2

IP Aspects of M&A

IP Due Diligence

9. What IP-related due diligence is commonly carried out in both a share sale and an asset sale?

Share Sale or Merger

In a share sale or a merger, IP due diligence is based on an analysis of the relevant undertaking's IPRs in terms of:

• Quality.

• Scope.

• Registration.

• Use.

• Protection status.

• Strengths and weaknesses.

• Potential risks.

• Potential opportunities.

Efficient due diligence on the IPRs includes:

• Listing and classifying all the undertaking's IPRs (patents, trade marks, copyrights, design rights, domain names, knowhow, trade secrets, and so on).

• Verifying the status and owners of the IPRs, including any pending or potential disputes, licences, and other agreements.

• Identifying any current or potential infringements to minimise risk or mitigate loss.

These checks can be done by reviewing relevant documents, requesting original documents from the TPTO, and detailed registry research at the TPTO.

Asset Sale

The same applies as in a share sale or merger (see above, Share Sale or Merger).

Warranties/Indemnities

10. What IP-related warranties are commonly given by the seller to the buyer in both a share sale or merger and an asset sale?

Share Sale or Merger

Common IP-related warranties and indemnities given by the seller are that:

• A list of all the IPRs together with their complete history has been provided.

• Ownership of all the IPRs is full and valid, and the seller has full power to assign the IPRs without additional authorisations from third parties.

• The IPRs do not infringe those of third parties.

• Information on any pending or potential disputes about the IPRs has been provided, including pending or potential attachments of registered IPRs.

Asset Sale

The same applies as in a share sale or merger (see above, Share Sale or Merger).

Transfer of IPRs

11. How are the main IPRs transferred in both a share sale and an asset sale?

Share Sale or Merger

A share sale does not usually involve a change of ownership of the IPRs, as they continue to be owned by the target company after the share sale. Therefore, the IPRs do not usually have to be transferred in a share sale.

If the share sale specifically requires the transfer of the IPRs, the transfer must comply with the assignment rules (see Question 1 and Question 2).

Asset Sale

In an asset sale, the main IPRs usually have to be specifically transferred. It is important to execute separate agreements to assign the IPRs (see Question 1 and Question 2).

Lending and Security Interests

12. Can security be taken over IPRs?

Security can be taken over all main IPRs, namely trade marks, patents, designs, and copyright. In practice, security is commonly taken over trade marks or patents. It is important to conduct detailed due diligence to determine the owner of the IPRs and whether any security has been taken over them.

The main issue in taking security over IPRs is valuing the secured assets. There are also likely to be issues relating to enforcing the security, such as determining the rank of creditors if more than one pledge has been taken over the IPR, and enforcing the security against third parties who take an assignment of the secured IPR without being aware that security has been taken over it. It is not possible to take a pledge over trade mark and design applications which are not yet registered with the TPTO. However, it is possible to take security over unregistered IPRs such as copyright and trade secrets with a proper agreement.

13. What are the main security interests taken over IPRs and how are they created and perfected?

Patents, Utility Models, Trade Marks, and Design Rights

The main security interest taken over IPRs is a pledge. A pledge cannot be taken over trade mark and design applications which are not yet registered with the TPTO.

A pledge agreement over IPRs must be in writing and is subject to the general provisions of the Civil Code.

To be enforceable against third parties, the pledge must be registered with the TPTO. The documents submitted for registration must be in Turkish.

Copyright and Trade Secrets and Confidential Information

As there is no compulsory copyright registration system in Turkey, a pledge in the traditional sense is not possible. Security can be taken over copyright after a proper valuation and through an agreement between the parties.

The same applies for trade secrets and confidential information.

Settlement Agreements

14. What are the main considerations when entering an IP litigation settlement agreement?

Parties may prefer entering into a settlement agreement as an amicable dispute resolution method during litigation or before litigation. In these agreements, the most preferred way is to license the use of the IPRs to the alleged infringing party. While future use is licensed in return for a licence fee, past use can also be licensed/compensated in a form and amount agreed by the parties.

However, if a settlement agreement results in the prevention, distortion, or restriction of competition between any undertakings, or a party to the agreement abuses its dominant position by imposing terms while settling the dispute, this may cause antitrust issues (see Question 17). Settlement can give rise to other antitrust issues. For example, a payment of money to the claimant in a patent invalidity case. To avoid any potential risk or breach and achieve the best result possible, it is advised to consult a local lawyer with expertise in the relevant area.

If the parties reach a settlement while court proceedings are ongoing, they can apply to the court and request an official acknowledgement of the agreement. This will end the court proceedings and have the same effect as a final judgment. If the agreement also requires the assignment of an IPR, the party who undertakes to assign the IPR must apply to the TPTO to do so within a prescribed time.

An advantage of court-acknowledged settlement agreements is that they can be enforced in the same way as a court decision through the execution offices. In practice, a party may still breach the settlement no matter how broad its terms. Therefore, it is crucial to have penalty clauses that can be enforced through an execution office in the case of a breach.

Parties can also include legal costs in the agreement and decide freely on the scope of costs, which party bears them, and how to allocate them without involving the court.

The court encourages the parties to settle during the preliminary examination phase (Article 137, Civil Procedural Law No. 6100). These offers to settle do not have any specific advantages in IP litigation and are usually conducted as a procedural requirement. In most cases, the parties respond negatively to them. There is also a separate mandatory mechanism under Article 5/A of the Commercial Code No. 6102 for monetary claims in commercial disputes, including compensation actions in IP matters. This could have an advantage in complex compensation actions that are only resolved after long court proceedings. In practice, it has not yet proved to be an effective method to shorten the process and most cases are still resolved by the courts, as the parties usually do not reach agreement during these mandatory proceedings.

Parties can also include a no-challenge clause in a settlement agreement, but they are not enforceable under Turkish law on their own. An action for breach will be examined as a breach of contract under the general provisions of contract law. To strengthen its effect, a penalty clause can be linked to a no-challenge clause.

Employees and Consultant Agreements

Employees

15. Who owns each of the main IPRs created by an employee in the course of employment?

Ownership

Patents and utility models. Inventions developed by employees are divided into two categories:

• Service inventions. These are inventions made by the employee during the term of their employment while performing a task assigned to the employee, or which are based largely on the employer's experience and activities.

• Free inventions. These are inventions that are not service inventions.

In principle, free inventions belong to the employee. Under the IP Law, an employer can claim partial or total ownership of a service invention by notifying the employee in writing. If the employer claims total ownership, all rights to the invention pass to the employer on notification to the employee. If the employer claims partial ownership, rights to the invention partially pass to the employer on notification to the employee. The rest of the invention becomes (in principle) a free invention.

Designs. Unless the employment contract or nature of the employee's work provides otherwise, ownership of a design developed by an employee vests in the employer if it was created either:

• In the performance of their duties.

• Using the information and equipment available at work.

Under the IP Law, there are no further requirements to transfer ownership. However, it is advisable to include a specific clause in employment agreements to ensure that the employee cannot claim that ownership was not transferred.

Depending on the importance of the design, it may also be advisable to execute specific and separate assignment agreements. Copyright. The author's moral rights cannot be transferred or waived and belong to the employee but the economic rights are transferable.

The employer is not the owner of the economic rights. However, the employer is the legal owner of the right to exercise the economic rights over a work created by an employee during the performance of their duties (Article 18, Copyright Law).

Due to the strict regulation of copyright, it is advisable to execute separate agreements to assign the economic rights once the work comes into existence.

The right to exercise the moral rights can be separately assigned to the employer.

Compensation

Patents and utility models. If the employer claims total or partial ownership, the employee is entitled to claim reasonable compensation from the employer.

Designs. The employee receives compensation corresponding to the importance of the invention to the employer and the market. Copyright. The Copyright Law does not set a compensation amount to be paid to the employee if its economic rights or rights to exercise the moral rights are assigned to the employer. In practice, the parties cover this in the assignment agreement.

Main Steps

See above, Ownership.

For other types of IPRs, the employer must include a specific clause in the employment contract or sign separate assignment agreements when the relevant IPR comes into existence. Separate assignment agreements are advisable for every IPR, depending on its importance for a business, as this provides the strongest protection for an employer.

Consultants

16. Who owns each of the main IPRs created by an external consultant?

Ownership

If an external consultant works under the strict supervision and instruction of the commissioning business, they are treated as an employee in relation to the IPRs (see Question 15).

For copyright, Turkish law does not recognise the "work made for hire" concept. However, if the external consultant acts independently, it is accepted in judicial practice that there is an on-demand work agreement between the parties. The General

Assembly of the Civil Court of Cassation has held that in an on-demand work agreement relationship, ownership of the work belongs to the commissioning party and copyright vests in the external consultant who creates the work (Decision E.

2019/11-474, K. 2020/26, dated 16 January 2020). The commissioning party can use the work within the scope of the on-demand work agreement even without a separate assignment or licence for this use. According to an on-demand work agreement, the creator of the work can only request payment of the fee under the agreement and cannot claim infringement if use by the other party falls within the agreement.

For other IPRs, if the external consultant acts independently, the external consultant generally owns the IPRs and a separate assignment agreement is required for the IPRs to vest in the commissioning party.

Main Steps

If the external consultant works under the strict supervision and instruction of the commissioning business, the main steps a business can take to ensure it owns each of the main IPRs are the same as for an employee (see Question 15).

For copyright, if the external consultant acts independently, it is highly advisable for the employer to enter into separate agreements to assign the relevant IPRs, specifying each assigned or licensed right individually. In particular, if the relevant work is intended to be used in a different way to that agreed in the on-demand work agreement, a written assignment must comply with the Copyright Law by specifying the format and media of the relevant use (see Question 1 and Question 2).

For other IPRs, if the external consultant acts independently, it is highly advisable for the employer to enter into separate agreements to assign the relevant IPRs.

Key Issues in IP Transactions

Competition Law

17.What are the most common national competition law issues that arise in the exploitation of the main IPRs?

IPRs create monopoly rights and provide an advantageous position for their owner. Although ownership of IPRs or their exploitation does not distort free competition in a given market as such, it may have a significant effect. The most common examples of competition law issues that may arise from the exploitation of IPRs are as follows:

• If an entity that already has a dominant position in a market is assigned trade marks (or other IPRs) from its closest competitor, this may strengthen its dominant position and may not be allowed by the Competition Board.

• If an entity in a dominant position in a market refuses to license its IPRs (particularly patents or utility models), this may be an abuse of a dominant position if the entity does not have reasonable grounds for the refusal or imposes unreasonable conditions.

• Applying anti-competitive conditions to an IPR licence (for example, resale price maintenance and market sharing) may be an anti-competitive agreement prohibited by the Law on the Protection of Competition No. 4054 (Competition Law).

The Competition Law generally mirrors EU competition legislation. The main antitrust provisions under the Competition Law and its secondary legislation (relevant regulations, communiqués, and guidelines) that may affect the exploitation of the main

IPRs are:

• The prohibition of agreements, concerted practices, and decisions that actually (or potentially) prevent, distort, or restrict competition. These include:

• price fixing;

• market sharing; and

• deterrence of entry, resale price maintenance, and discriminatory behaviour.

• The prohibition of an abuse of a dominant position. This includes:

• imposing unfair prices or conditions;

• discriminatory behaviour;

• tying and bundling;

• applying high sales price; and

• preventing market entrance of undertakings.

The Competition Law also provides an authorisation system for mergers and acquisitions that may create or strengthen the dominant position of one or more enterprises as a result of which competition is significantly distorted. The Competition Board (the decision-making body of the Competition Authority authorised to monitor compliance with the Competition Law) has determined the thresholds for mergers and acquisitions that require authorisation.

18. What exclusions or exemptions are available for national competition law issues involving the exploitation of the main IPRs?

Under the Competition Law, the Competition Board has the power to grant block exemptions and individual exemptions.

The Competition Board can exempt individual agreements, concerted practices, and decisions of associations of undertakings

if they:

• Ensure new development and improvement or economic or technical development in the production or distribution of goods or the provision of services.

• Benefit the consumer through the above development or improvement.

• Do not eliminate competition in a significant part of the relevant market or limit competition any more than necessary to achieve the above benefits.

Block exemptions are covered by communiqués issued by the Competition Board relating to:

• Vertical agreements on sales, purchases, and resales of goods and services, including provisions relating to IPR transfers and use (Communiqué 2002/2).

• Research and development agreements (Communiqué 2003/2).

• Vertical agreements and concerted practices in the motor vehicle sector (Communiqué 2005/4).

• Technology transfer agreements (Communiqué 2008/2).

• Agreements among parties in the insurance sector (Communiqué 2008/3).

• Specialisation agreements, including provisions relating to IPR transfers and licensing (Communiqué 2013/3).

Tax

19. What are the main taxes payable by a licensor on the licensing of the main IPRs?

Stamp Duty

Stamp duty is payable at 0.189% of the total royalty amount for the term of the licence.

All signatories to the licence are jointly liable, but the parties are free to decide who is liable to pay the stamp duty.

Under the Law on Support to Research and Development Activities No. 5746 (R&D Law), all documents and agreements relating to R&D, innovations, and design activities within the scope of the R&D Law are exempt from stamp duty.

Income Tax

If the licensor is an individual resident in Turkey, income earned from an IPR licence that exceeds the minimum threshold is subject to income tax at progressive rates from 15% to 40%.

If the licensor is a corporation resident in Turkey, income from an IPR licence is subject to corporate income tax at 25%.

A non-resident individual is subject to Turkish income tax on income they earn in Turkey, including from an IPR licence, at progressive rates from 15% to 40%.

A non-resident corporation is subject to Turkish corporate income tax on income it earns in Turkey, including from an IP licence, at 25%.

Double taxation legislation may apply, so that if a corporation has already paid tax abroad on their income it can deduct that amount from its Turkish tax liability.

If the licensor is the inventor, earnings from royalties are classified as ''income from self-employment'' under the Income Tax Act. In principle, inventors are exempt from tax.

For licences granted to public enterprises, other public entities, foundations, economic enterprises of associations and foundations, and so on (as listed under Article 94 of the Income Tax Law), a withholding tax of 25% is charged on royalty fees paid by those entities. Value Added Tax (VAT)

VAT is charged at a usual rate of 20% on supplying goods and services in Turkey and importing goods or services into Turkey.

Licensing of IPRs is subject to VAT if the licence is granted in Turkey.

If the licensor is a Turkish resident and the licence is granted in Turkey, the licensor must pay VAT at 18%.

For more information, see the Revenue Administration's website.

20. What are the main taxes payable by a seller on the sale or transfer of the main IPRs?

Stamp Duty

See Question 19, Stamp Duty. The rate of stamp duty for a sale of IPRs agreement (for 2024) is 0.948% of the agreed amount.

Income Tax

See Question 19, Income Tax.

If the seller is an individual (Turkish resident or non-resident), income from the sale exceeding the minimum threshold of TRY110,000 (for 2024) is taxed at progressive rates from 20% to 40%.

For a non-resident individual, if the IPRs are sold to public enterprises, other public entities, foundations, economic enterprises of associations and foundations, and so on (as listed under Article 94 of the Income Tax Law), the taxpayer does not pay tax on the sale.

If the seller is a corporation (Turkish resident or non-resident), income from a sale of IPRs is subject to corporate income tax at 25% (see Question 19).

VAT

In principle, a sale of IPRs in Turkey is subject to VAT (see Question 19, Value Added Tax (VAT)).

Non-Tariff Trade Barriers

21. Are there any non-tariff trade barriers affecting IP development and licensing transactions?

Depending on the nature of the technology and IP developments involved, regulatory consents may be required. These permits can be considered a non-tariff trade barrier. It is highly advisable to consult the local regulations on the relevant technology area before engaging in transactions and commercial relationships.

For example, public procurement practices may be considered as a non-tariff trade barrier. The public procurement terms usually require the public authority to fully own the IP, which creates obstacles for foreign companies.

In addition, in the pharmaceutical industry, pricing regulations create a significant burden on innovative pharmaceutical companies, which creates obstacles for these companies to invest in their IP in Turkey.

First published by Practical Law in Sep 13, 2024.

Link: https://uk.practicallaw.thomsonreuters.com/8-617-3217