IP in business transactions: South Africa overview

A guide to intellectual property law in South Africa. The IP in business transactions Q&A gives an overview of maintaining an IP portfolio, exploiting an IP portfolio through assignment and licensing, taking security over IPRs, IP and M&A transactions, and the impact of IP on key areas such as competition law, employees and tax.

To compare answers across multiple jurisdictions, visit the IP in business transactions Country Q&A tool.

This Q&A is part of the global guide to IP law. For a full list of jurisdictional Q&As visit www.practicallaw.com/ip-guide.

Andre van der Merwe, Derek Momberg and Kevin Dam, D M Kisch Incorporated (KISCH IP)
Contents

Overview of main IPRs

1. What are the main IPRs in your jurisdiction? How are they protected?

Patents

Patents, which are considered one of the main IPR's in South Africa, are protected by registration.

The fundamental requirements for patentability of an invention are:

  • That the invention is new. Absolute novelty applies, meaning that the invention must not form part of the state of the art. (The invention must not have been disclosed to the public in any form anywhere in the world before the date of the relevant patent application.)

  • The invention must include an inventive step. That is, the invention must not be obvious to a person skilled in the particular art.

  • The invention must be capable of being used or applied in trade or industry or agriculture.

An application for a patent must be made to the Registrar of Patents in the prescribed manner, as set out in the Patent Regulations promulgated under the Patents Act. It must be accompanied by a provisional or a complete specification that fully describes the invention and including one or more claims defining the subject matter for which protection is claimed.

The term of a patent is 20 years from the date of filing of the complete application, subject to payment of the prescribed annual renewal fee (starting from the third year).

Trade marks

Rights under a trade mark can be obtained:

  • Through registration under the Trade Marks Act 194 of 1993, if the marks are "well-known" for the purposes of the Paris Convention and are likely to give rise to deception and confusion in South Africa if used by a party other than its international proprietor.

  • Under the common law, on the basis that the mark enjoys a reputation in South Africa.

Copyright

Copyright is protected under the Copyright Act No. 98 of 1978. It is extended to South African residents, citizens and domiciliaries (and to the residents, citizens and domiciliaries of Berne Convention countries on the same basis) in respect of defined categories of "works", and in the case of each category, to the author or deemed author of such works, or to the successor in title of such works.

The right includes moral rights in favour of the author, including against distortion or mutilation that is prejudicial to the honour or reputation of the author, save for exceptions in the case of cinematograph films, television broadcasts, computer programs and architectural works. The extent to which moral rights are capable of being waived is an open question.

The term of copyright is dependent on the nature of the work, and, where appropriate, on whether or not it has been published.

Design rights

Design rights, which are also considered one of the main IPR's in South Africa, are protected by registration. Protection can be obtained for:

  • Aesthetic designs. An aesthetic design is a design applied to an article for its pattern, shape, configuration or ornamentation, or for two or more of such purposes, having features which appeal to and are judged solely by the eye, irrespective of its aesthetic quality.

  • Functional designs. A functional design, is a design applied to an article for its pattern, shape or configuration, or for two or more of such purposes, with features required by the function which the article is to perform. It includes an integrated circuit topography, a mask work, and a series of mask works.

The fundamental requirements for an aesthetic design to be registrable are that the design must be new (absolute novelty applies, as for patents) and original. The fundamental requirements for a functional design to be registrable are that the design must be new (absolute novelty also applies) and not commonplace in the art in question.

The requirement for novelty means that the design must be registered soon after it was first made available to the public anywhere in the world with the consent of the of the proprietor or any predecessor-in-title. This must be within:

  • Two years in the case of an integrated circuit topography, a mask work or a series of mask works.

  • Six months in the case of any other design.

Application must be made in the prescribed manner as set out under the Regulations promulgated under the Designs Act, to the Registrar of Designs, accompanied by a representation or representations of the design and a definitive statement of the design.

The duration of the registration of an aesthetic design is 15 years (ten years for a functional design) from the date of registration, or from the release date, whichever date is earlier, subject to the payment of the prescribed annual renewal fee.

Trade secrets and confidential information

Trade secrets and confidential information are protected under the common law. Such protection is effectively a function of whether the claimant of rights in such material has taken appropriate steps to preserve its trade secret or confidential character.

Other

The Protection of Personal Information Act No. 4 of 1913, which has only been partially implemented to date, accords protection to personal information, and curtails dissemination of such information.

For further information about the main IPRs, see Patents, trade marks, copyright and designs in South Africa.

 

Maintaining IPRs

Search and information facilities

2. What facilities are available to conduct IP searches and obtain IP information on registered IP rights?

Patents

Computer-based searches can be conducted through the South African Patent Office records for inventors' and applicant's/patentee's names. However, subject-matter searches must still be conducted manually through Patent Office records. It is advisable to conduct both types of searches before an application to register a patent and after registration.

If access to a private patent/designs-database with searching capabilities is available, a name or keyword search through such a database should disclose any relevant South African patent.

Trade marks

The Trade Marks Registry provides search tools to interrogate the registry records to ascertain if marks conflicting with a proposed mark are the subject of prior rights.

Typically, a trade mark search includes internet, domain name and company name registry searches to establish (in addition to data contained in the Trade Marks Register) whether or not there are any other relevant conflicting third party rights.

Copyright

While it is possible to register copyright for cinematograph films (and to search the Cinematograph Films Copyright Register in respect of such works), the subsistence of copyright in all other categories arises automatically if a given work is the product of original skill and labour.

If works are published, it is advisable for copyright titleholders to do so under an appropriate notice asserting copyright and the date from which it is claimed in order to give public notice of the claim. Further failure to do so can impact adversely on any damages claim under copyright, if the public has reasonable grounds to believe that a work is not capable of bearing copyright.

Design rights

Computer-based searches can be conducted through the South African Designs Office records for applicants' and registered proprietors' names. However, subject-matter searches must still be conducted manually through the Designs Office records.

If access to a private patent/designs-database with searching capabilities is available, a name or keyword search through such a database should disclose any relevant South African design registration.

Trade secrets and confidential information

Objective enquiry generally reveals whether any body of suspected trade secrets or confidential information is indeed secret or confidential.

 

Maintenance of main IPRs

3. What steps must a business take to maintain the registration and legally protectable status of its main IPRs?

Patents

A business must ensure that its patents are renewed annually, as prescribed, and ensure that the business is not abusing the rights in any of its patents, If so, a compulsory licence can be granted in respect of that patent. Such rights are deemed to be abused if:

  • The patented invention is not used in South Africa on a commercial scale or to an adequate extent after a period of four years after the date of application for the patent or three years after the patent was sealed, whichever period expires last, and there is no satisfactory explanation for this in the opinion of the Commissioner of Patents.

  • The demand for the patented product is not being met to an adequate extent and on reasonable terms.

  • Trade, industry or agriculture in South Africa is prejudiced, due to the patentee refusing to grant a licence or licences on reasonable terms, and it is in the public interest that a licence or licences are granted.

  • The demand in South Africa for the patented product is met by importation and the price charged by the patentee, its licensee or agent is excessive in relation to the price charged in countries where the patented product is manufactured by or under licence from the patentee or its predecessor or successor-in-title.

An interested person can apply to the Commissioner of Patents and must prove that one or more of the above circumstances apply.

Trade marks

The term of a trade mark registration is ten years from the date of effective grant (generally the date of filing), and requires renewal every ten years.

Non-use of the mark for a continuous period of five years and three months before the date of any application to cancel it on the grounds of non-use, renders a mark liable to cancellation on these grounds. However, there are certain exceptions, such as the use of associated marks, or special trade circumstances precluding use.

Copyright

Under the Copyright Act, licences can be inferred from conduct. Copyright title holders must avoid the manner in which they or their licensees publish copyrighted material creating the impression that use of that material does not require their consent.

Design rights

To maintain the registration and legally protectable status of its main design registrations, a business must ensure that its design registrations are renewed annually, as prescribed, and ensure that it is not abusing the rights in any of its registered designs. If so, a compulsory licence can be granted in respect of the design registration. Such rights are deemed to be abused if:

  • Articles embodying the registered design are not available to the public in South Africa on a commercial scale or to an adequate extent after the registration date and there is no satisfactory reason for that in the opinion of the Court.

  • The availability of articles embodying the registered design in South Africa on a commercial scale or to an adequate extent is prevented or hindered by the importation of such articles.

  • The demand for the articles embodying the registered design in South Africa is not being met to an adequate extent and on reasonable terms, or trade or industry or agriculture in South Africa is prejudiced by the patentee refusing to grant a licence or licences on reasonable terms, and it is in the public interest that a licence or licences should be granted.

  • Demand in South Africa for the articles embodying the registered design is being met by importation, and the price charged by the patentee, his licensee or agent is excessive in relation to the price charged in countries where the articles are manufactured by or under licence from the patentee or his predecessor or successor-in-title.

An interested person must apply to the Registrar, who in practice refers the application to the High Court. The interested person must prove that one or more of the above circumstances apply.

Trade secrets and confidential information

See Questions 1 and 2.

 

Monitoring infringement

4. What steps can a business take to avoid infringing another party's IPRs and to monitor whether another party is infringing its IPRs?

Patents

In addition to conducting one or more of the various searches (see Question 2), a business may obtain general market information and/or conduct one or more competitor or technology/trade surveys.

Trade marks

A business should only adopt a trade mark after conducting appropriate registrability and user searches (see Question 2).

Copyright

A business should undertake appropriate competitor/trade surveys to determine whether copyright is likely to subsist in a third party's work which it intends to use, and then ensure that nothing of the copyrighted character of such work is in fact replicated. For its own copyrighted material, it should assess if any competing or threatened competing use of that work in any way replicates the copyrighted material, and take the appropriate steps to object if so.

Design rights

In addition to conducting the one or more of the various searches (see Question 2), a business can obtain general market information and/or conduct one or more competitor or technology/trade surveys.

Trade secrets and confidential information

See Questions 1 and 2.

 

Exploiting IPRs

5. What are the main steps in conducting an IP audit in your jurisdiction to determine the content of an IP portfolio?

The main steps in conducting an IP audit are generally:

  • Establishing an overview of all the core competencies of the business.

  • Determining the material embodiments of those competencies, including in relation to its:

    • IPRs (and any lack or shortfall in any registrable rights). This involves carefully co-ordinating and cross-indexing various IP searches and investigations (see Question 2).

    • processes and systems, including, where appropriate, all third party licences required for their use.

  • Any know-how transfer process that would be required to enable effective delivery of those competencies to an arms-length third party, and its likely cost and duration.

 

Assignment

Scope of assignment

6. On what basis can the main IPRs be assigned?

Patents

An applicant for a patent or a patentee can assign in writing his rights in an application or patent to any other person. However, unless the assignment is recorded in the prescribed manner in the Register of Patents at the Patent Office it will not be valid except as between the parties.

Any condition in a contract of employment is null and void if it:

  • Requires the employee to assign to his employer an invention made by him other than in the course and scope of his employment.

  • Restricts the right of an employee in an invention made by him more than one year after the termination of the contract of employment.

A patent or patent application is assigned in its entirety, and it is not possible to assign it in part or with jurisdictional or territorial restrictions. However, it is possible to assign rights in an invention that may be developed in future, for example by employees or contract developers/parties.

Trade marks

An assignment of a trade mark (registered or unregistered) is effective between the parties when in writing and signed by the assignor, but only becomes effective as against third parties when the assignment has been recorded in the register.

Partial assignment of a trade mark registration is sufficient in certain circumstances, generally when, in the discretion of the Registrar, the circumstances will not give rise to deception or confusion.

Copyright

An assignment of copyright (as is the case with any exclusive licence) must be in writing and signed by the assignor.

It is possible to assign only limited aspects of a copyright in respect of limited geographical areas, media, fields of activity and so on, and also to assign such rights in works that are to be created in the future, such as under a commission arrangement.

Design right

An applicant for the registration of a design or a registered proprietor can assign his rights in an application or design to any other person. The must in writing to be valid between the parties, and recorded in the prescribed manner in the Register of Patents at the Patent Office to be valid as against third parties.

Any condition in a contract of employment is null and void if it:

  • Requires an employee to assign to his employer a design made by him other than in the course and scope of his employment.

  • Restricts the right of an employee in a design made by him more than one year after the termination of the contract of employment.

A design application or registration is assigned in its entirety, and it is not possible to assign it in part or with jurisdictional or territorial restrictions. However, it is possible to assign rights in a design that may be developed in future, for example by employees or contract developers/parties.

Trade secrets and confidential information

In principle, a possessor of trade secrets or confidential information is free to contractually determine the specific nature and extent of any rights divested or disposed of, and to impose any limitations on their use.

 

Formalities for assignment

7. What formalities are required to assign each of the main IPRs?

Patents

The assignment of a patent or patent application must be in writing to be valid. Although the Patents Act requires a signature by the patentee or patent applicant only, it is good practice to have the deed of assignment signed by both parties (to avoid any dispute between the parties).

The assignment documentation does not have to be notarised or legalised.

The assignment of a patent or patent application must be registered (recorded in the prescribed manner at the Patent Office) to be valid as against third parties.

Trade marks

See Question 6.

Copyright

See Question 6.

Design rights

The assignment of an application for the registration of a design or a design registration must be in writing to be valid. Although the Designs Act in effect requires signature by the applicant or the registered proprietor only, it is good practice to have the deed of assignment signed by both parties (to avoid any dispute between the parties).

The assignment documentation does not have to be notarised or legalised.

The assignment of an application for the registration of a design or a design registration must be registered (recorded in the prescribed manner at the Designs Office) to be valid as against third parties.

Trade secrets and confidential information

See Question 6.

 

Main terms for assignments

8. What main terms should be included in an assignment of IPRs?

The main terms to be included in a written assignment are as follows:

  • The full names and street addresses of the two parties.

  • Full details of the IPRs and the relevant country or countries, for example South Africa only, or South Africa and other countries. Where future rights may arise, these should be included.

  • In the case of trade marks, it should be indicated whether the assignment is in whole or in part, with or without goodwill, or with goods and/or services restrictions or jurisdictional or territorial restrictions, if applicable.

  • In the case of copyright, it should be indicated whether assignment is in whole or in part, and whether jurisdictional or territorial restrictions apply.

  • In the case of trade secrets and confidential information, the specific nature and extent of the rights divested, and any limitations on their use.

 

Licensing

Scope of licensing

9. On what basis can the main IPRs be licensed?

Patents

The Patents Act does not prescribe the nature that a patent license may take. Accordingly, a patent licence agreement can be express or implied, or oral or in writing.

Licences can be exclusive, sole or non-exclusive (ordinary).

A patent may be licensed in whole or in part, and can have jurisdictional or regional or area restrictions.

Trade marks

See Question 6.

Copyright

See Question 6.

Design rights

The Designs Act does not prescribe a form for design licences. Accordingly, a design licence agreement can be express or implied, or oral or in writing.

Licences can an exclusive, sole or non-exclusive (ordinary).

A design registration can be licensed in whole or in part, and can have jurisdictional or regional or area restrictions.

Trade secrets and confidential information

See Question 6.

 

Formalities for licensing

10. What are the formalities to license each of the main IPRs?

Patents

Although there are no formalities in the Patents Act for the nature or form of a patent licence agreement, it is strongly recommended that such an agreement is in writing and signed by the parties (essentially to focus the minds of the parties and to avoid disputes between the parties).

Although it is not a requirement for a patent licence agreement to be recorded at the Patents Office, it is recommended that a licence agreement (or a short form thereof) is recorded at the Patents Office to give notice to the world that exploitation of the patent is lawful and takes place with the consent of the patentee.

It is also recommended that patented products are marked as being made and sold under the terms of the relevant South African patent under licence from the patentee.

Trade marks

See Question 6.

Copyright

See Question 6.

Design rights

Although there are no formalities laid down in the Designs Act for the nature or form of a design licence agreement, it is strongly recommended that such an agreement is in writing and signed by the parties (essentially to focus the minds of the parties and to avoid disputes between the parties).

Although it is not a requirement for a design licence agreement to be recorded at the Designs Office, it is recommended that a licence agreement (or a short form thereof) is recorded at the Designs Office to give notice to the world that exploitation of the design registration is lawful and takes place with the consent of the patentee.

It is also recommended that products bearing the registered design are marked as being made and sold under the terms of the relevant South African design registration under licence from the registered proprietor.

Trade secrets and confidential information

See Question 6.

 

Main terms for licences

11. What main terms should be included in an IP licence?

The main terms to be included in a written IP licence agreement are as follows:

  • The full names and street addresses of the two parties.

  • Full details of the IPRs and the relevant country or countries, for example South Africa only, or South Africa and other countries. Where future rights may arise, these should be included.

  • In the case of a patent it should be indicated whether licensing is in whole or in part.

  • In the case of trade marks, it should be indicated whether licensing is in whole or in part, with or without goodwill, or with goods and/or services restrictions or jurisdictional or territorial restrictions, if applicable.

  • In the case of copyright and trade secrets and confidential information, it should be indicated whether licensing is in whole or in part, and whether jurisdictional or territorial restrictions apply. Generally, the full nature and extent of the user right granted needs to be specified in a level of detail which is appropriate to the material and industry in question.

  • Whether the licence exclusive, sole, or non-exclusive.

  • What remuneration is intended and on what basis (with periodic statements and audits).

  • What the term of the agreement is and whether there are options to extend the agreement.

  • In what circumstances can the agreement be terminated.

  • Which legal system will govern the terms of the agreement.

 

Taking security

12. What are the key issues in taking security over the main IPRs?

The key issues in taking security over IPRS are:

  • How the interest in the right is to be secured, such as, where appropriate, by hypothec supported by a credit agreement in the Trade Mark, Patent or Design register, and/or a notarial bond.

  • In the case of IP which is not the subject of a registered right, how practical possession of the asset is to be secured. For example, in the case of software, systems and processes, by way of source code held in ESCROW (together with periodic updating protocols), and clear definition of the default events entitling the creditor to obtain access and possession.

 
13. What are the main security interests taken over IPRs?

Patents

The Patents Act provides for a patent or a patent application to be attached by recording a warrant of execution or attachment order in the Register of Patents.

The Patents Act also provides for the hypothecation of a patent or a patent application to be entered in the Register of Patents.

Such security interests are created in writing and, when entered or recorded in the Register of Patents, become enforceable against third parties.

Trade marks

See Question 12.

Copyright

See Question 12.

Design rights

The Designs Act provides for a design registration or an application for the registration of a design to be attached by recording a warrant of execution or attachment order in the Register of Designs.

The Designs Act also provides for the hypothecation of a design registration or an application for the registration of a design to be entered in the Register of Designs.

Such security interests are created in writing and, when entered or recorded in the Register of Designs, become enforceable against third parties.

Trade secrets and confidential information

See Question 12.

 

M&A

Due diligence

14. What IPR-related due diligence is commonly carried out in both a share sale or merger and an asset sale?

Due diligence is a process under which the buyer (or potential licensee or assignee) seeks to identify and gather information relating to the business and assets of a seller (or potential licensor or assignor) to allow a reasonable estimate of the viability, risk and future profitability of the transaction in question.

Such an exercise aims to enhance understanding of what exactly is being acquired and to enable the parties to place a meaningful value on the assets to be transferred with the benefit of legal opinion. The due diligence effort should therefore be conducted at an early stage, since its conclusions will have a significant impact on negotiations leading to the structure and completion of the transaction.

Due diligence should start by identifying all rights involved in a transaction. For example, these may include a mixture of registered or registrable rights, such as pending or granted patents and trade marks existing in numerous territories, and unregistered rights such as copyright, know-how and trade secrets. Once registered rights such as patents have been identified and their current status and expiry dates checked, it should be verified that all due fees have been paid. Official records should reveal the history of a patent in terms of any changes in ownership or granting of licences. Rights are often pledged as security and it is therefore also important to extend the search to security interests.

However, it is not enough merely to consider the rights in isolation. To make informed decisions, it is also necessary to consider how the rights relate to the main products and services of the seller. There is little point in acquiring a "peripheral" right that does not properly protect the products and services that the purchaser of the rights hopes to sell on completion of the licence agreement of merger. Therefore, it should be verified that the rights to be acquired correlate with the main products and services of the seller.

A buyer of the IP assets must satisfy itself that the seller has the legal right to transfer the property in question, for example, as owner of sub-licensing rights. It follows that the downstream consequences of wrongly assuming that a seller has a legal right to transfer the property are potentially disastrous.

Patents

The areas that should be reviewed and confirmed before closing include:

  • All granted, pending and abandoned patent applications and patents, including all applications and patents filed by the seller, currently or formerly owned by the seller, or licensed to the seller.

  • All patent searches conducted by or on behalf of seller related to inventions or designs.

  • Payment of maintenance fees for all patent applications and issued patents.

  • All co-operative research agreements, licence agreements and merchandising agreements, regardless of whether seller was the licensee or licensor.

  • All threatened or pending interferences involving the seller's patent applications or patents.

  • All invention disclosures related to the business assets being transferred that are either awaiting disposition or are to be the basis of a patent application.

  • All technologies that are material to the business assets being transferred, together with a description of how each such technology was developed or acquired and copies of all documents evidencing any such acquisition.

Copyright

The areas that should be reviewed and confirmed before closing include:

  • All copyrightable works that seller has created, commissioned or acquired rights to that are used in conjunction with the business assets being transferred. If a seller does not own a copyright in such works, there should be a review of who owns the copyright and the nature of seller's right to use the works.

  • All documents concerning all copyright registrations, including applications, correspondence, transfers and security interests.

  • All licences, regardless of whether seller is the licensee or licensor, related to any copyrightable works used by seller.

Trade marks

The areas that should be reviewed and confirmed before closing include:

  • All trade marks and service marks registered or used by the seller anywhere in the world, whether as owner or as licensee, including a review of both the geographic area of use and the date of first use of each such mark in each region.

  • The files for any registrations or pending applications.

  • All trademark searches performed or obtained in connection with such marks.

  • All licences related to such marks, regardless of whether seller is the licensee or licensor.

  • All quality control manuals, files or guidelines relating to goods or services sold under the marks.

  • Specimens of each use of such mark for each jurisdiction in which the mark has been used or registered.

General IP due diligence issues

General issues for review include:

  • All letters of demand sent out or received by the seller concerning IP.

  • All threatened or pending litigation concerning IP.

  • All settlement agreements concerning IP.

  • All domain names in the name of or controlled by the seller that incorporate any trade mark or service mark of seller or are used in connection with any of the business assets being transferred.

  • All trade secrets concerning the business assets being transferred and the means by which their secrecy is maintained.

  • Any proprietary information owned by seller and not protected by copyright, trade mark or patent, including trade secrets, know-how and confidential information.

  • All agreements under which seller's goods or services are distributed or marketed to third parties.

  • The seller's standard agreements with employees, directors, temporary employees and independent contractors regarding employment, confidentiality, non-disclosure, assignment of inventions and copyright.

  • All non-standard agreements between seller and its employees, directors, temporary employees and independent contractors regarding employment, confidentiality, non-disclosure, assignment of inventions and copyright.

  • All policies and guidelines of the seller relating to the protection or use of proprietary information protected by copyright, trade marks, patents and trade secrets.

  • All documents and filings relating to title to IP (such as security interests, releases of security interests, assignments, changes of name) to confirm a complete chain of title.

  • All security interests, security agreements and releases of them, whether or not recorded, relating to any of the IP assets scheduled to be transferred.

Share sale or merger

Issues for review in a share sale or merger include:

  • Verification of the registration and status of registered IP.

  • Verification of unregistered IP.

  • Assignment of IP by suppliers and contractors.

  • Employment contracts of employees involved in research and development.

Asset sale

Issues for review in an asset sale include:

  • Verification of the registration and status of registered IP.

  • Verification unregistered IP.

  • Assignment of IP by suppliers and contractors.

  • Employment contracts of employees involved in research and development.

 

Warranties/indemnities

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

General warranties and indemnities include:

  • Pension and provident fund. The seller warrants that the contributions in respect of its pension and provident fund are up-to-date as at the date of signature and the effective date, and that there is no unfounded deficit of any future liability.

  • Assets, liabilities and debtors. The seller warrants that:

    • it owns the business and has good and marketable title to it;

    • except for agreements entered into in the ordinary course of business, no other person has any right to or in respect of the business, save for encumbered assets which have specifically been disclosed to the purchaser;

    • none of the fixed assets are subject to any option or right of first refusal or similar right of any person, save as disclosed;

    • the fixed assets of the business are in good order and condition, fair wear and tear excepted, and are fully operational apart from breakdowns (in the ordinary course) and any loss or damage to or destruction of such assets beyond the control of the seller;

    • all inventories of the business, including without limitation, raw materials, work in progress and finished goods are of good quality, consists substantially of a quality, quantity and reasonable conditions to be useable and saleable in the ordinary course of business.

  • Manner of carrying on business. The seller warrants that between the effective date and the closing date other than in accordance with written instructions of the purchaser:

    • the company will continue to carry on business in the ordinary and regular course;

    • the company will not change its normal manner and method of carrying on business;

    • no assets will be acquired or sold otherwise than in the ordinary, normal and regular course of business and without the written consent of the purchaser;

    • there will be no material adverse changes in the financial position of the business;

    • the company will not incur or become committed to incur any capital expenditure in respect of the business other than in the normal and regular course of business;

    • the company will not enter into any transaction save in ordinary and regular conduct of his business.

  • Contracts. The seller warrants that:

    • all the contracts of the business have been made available to the purchaser and have been entered into under normal credit terms and are subject to payment in accordance with those terms;

    • the seller is not party to any contract with any of its members or employees requiring more than one month's notice of termination, or entitling any of them to compensation on termination of employment (subject to the provisions of the labour laws of the Republic of South Africa), or to participation in or entitlement to a commission on profit;

    • the seller is not party to any agreement, which has not been entered into on an arms-length basis and on terms, which are normal, having regard to the nature of its business;

    • copies of all contracts and other documents submitted to the purchaser in connection with this agreement correctly reflect their terms and conditions, and have not been amended in any respect;

    • the contracts disclosed are in full force and effect and the seller is not in breach of any contract entered into between it and any other person and has complied in all material respects with its obligations under such contracts;

    • the transaction provided does not constitute a breach of any of the seller's contractual obligations in respect of the business nor will it entitle any person to terminate any contract to which the seller is a party in respect of the business.

  • IPRs. The seller warrants that:

    • the business conducted by the seller does not infringe any patent, copyright, trade mark or other intellectual property rights or any other rights of any other person and no person is entitled to an order requiring the seller to change its name or its trading style, or any of the marks and designs owned or used by it;

    • the business includes all intellectual property for the conduct of the business;

    • the training methods and style used by the business, including any designs, marks and the like applied in connection with the business, do not constitute an infringement of the rights of any other person.

  • Laws, regulations, consents, licences and permits. The seller warrants that it:

    • has complied with all material laws and material regulations affecting its affairs in relation to the business;

    • is in possession of all material consents, permits and licences necessary for the conduct of its business affairs, in relation to the business; and

    • is not aware of any facts in relation to the business which may give rise to the cancellation of, or failure to renew, any such licences, permits or consents or to their only being renewed subject to the imposition of onerous conditions that are not presently applicable.

  • Labour laws, regulations, determinations, agreements and disputes. The seller warrants that it:

    • has complied with all wage determinations and industrial conciliation agreements, which apply to it, its business and its employees;

    • has complied with the grievance procedures agreed to by it with regard to grievances of and relations with their employees;

    • has complied with the labour union recognition agreement (if any) to which it is a party;

    • is not party to any labour dispute and is not obliged by law, agreement, judgment or order of court, to reinstate employees that have been dismissed or will be dismissed;

    • has complied with all labour laws known to it.

  • Employment, leave, remuneration and pension. The seller warrants that:

    • no employee or official of the seller is entitled to any exceptional leave privileges, accumulated leave, payment in lieu of leave, pension or the like and none of the terms on which any employee of the business is employed (including without limitation any terms relating to compensation or benefits payable to that employee on redundancy) will have been changed within 12 months before the effective date;

    • on the effective date, the seller will not in any way have improved the terms of employment of or remuneration payable to any of its employees from that currently prevailing, save for normal annual increases.

  • Restraint of trade. The seller warrants that it is not bound by any restraint of trade agreement in relation to the business.

  • Books of account and minutes. The seller warrants that the books and records of the business are reasonably up-to-date and have been properly kept according to law and will be capable of being written up within a reasonable period of time.

  • Litigation. The seller warrants that the company is not party to any legal proceedings or labour disputes, including wage disputes or statutory inquiries or investigations and the seller is not aware of any legal proceedings threatened or instituted in respect of the business.

  • Taxation. The seller warrants that, as at the effective date, there is no tax liability in respect of the company.

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

Share sale or merger

Transfer of IPRs is by way of cession and assignment recorded in a written deed. Where the transaction is limited to a sale of a controlling shareholding, a transfer of IP does not arise as any IP continues to vest in the company concerned (unless otherwise provided). In a merger, there is typically an acquiring (or surviving company) to which the IP assets of the acquired entity or entities, are transferred by way of cession and assignment.

Asset sale

Transfer of IP is by way of cession and assignment recorded in a written deed. If the asset sold constitutes IP and is purchased by a non-South African buyer, then the exchange control approval of the South African Reserve Bank is required under Exchange Control Regulation 10(1)(c).

At specified thresholds, the IPR disposal may result in the disposal of all or the greater part of the assets or undertaking of a company requiring approval by the Takeover Regulation Panel, a body established under Section 196 of the Companies Act. The Panel must issue a compliance certificate, and deals with certain solvency and liquidity issues, among other things.

 

Joint ventures

17. Is it common for companies to set up joint ventures in your jurisdiction to develop projects that heavily involve IPRs?

Joint ventures with third parties are frequently used for the commercial exploitation of IP. These joint ventures can take the form of a basic partnership or can be in the form of the participants to the joint venture holding a certain share percentage in a company that would act as the joint venture vehicle. Typically, IPR holders own a certain share percentage in the joint venture company, subject to the transfer of the IP either by assignment, sale or licence from IPR holders to the joint venture company. The other shareholders in the joint venture company would be third parties that have the necessary financial and operational means with which to exploit the IPR.

 

Competition law

Main provisions and common issues

18. What are the main provisions of your national competition law that can affect the exploitation of the main IPRs?

The South African Competitions Act deals with merger control and restrictive practices. Restrictive practices include:

  • Restrictive horizontal practices.

  • Restrictive vertical practices

  • Abuse of dominance.

The notification and approval of the Competition Commission is required in the following two circumstances:

  • Intermediate merger. The proposed merger value equals or exceeds a combined annual turnover or asset value of ZAR560 million and the annual turnover or asset value of the target firm is at least ZAR80 million.

  • Large merger. The combined annual turnover or assets of both the acquiring and target firms are valued at or above ZAR6.6 billion, and the annual turnover or asset value of the target firm is at least ZAR190 million.

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

The Patents Act deals with competition law issues in respect of certain problematic licence terms. The Act provides that certain conditions are null and void. These include:

  • Prohibiting or restricting the purchaser or licensee from purchasing or using any article or class of articles, whether patented or not, supplied or owned by any person other than the seller or licensor or his nominee.

  • Prohibiting or restricting the licensee from using any article or process not protected by the patent.

  • Requiring the purchaser or licensee to acquire form the seller, licensor or his nominee any article or class of articles not protected by the patent.

  • Requiring or inducing the purchaser to observe a specified minimum resale price in respect of any article or class of articles protected by the patent.

  • Prohibiting or restricting the making, using, exercising or disposing of the invention concerned in any country in which the invention is not patented.

The most common national competition law issues that arise in the exploitation of the main IPRs would involve:

  • Restrictive horizontal practices. Market allocations, concerted practices and cartel forming are the main areas of transgression and anti-competitive behaviour.

  • Restrictive vertical practices. Maximum resale price maintenance and exclusive distributions are common transgressions in this area. In certain cases, minimum resale price maintenance can also amount to anti-competitive behaviour. The South African Competition Commission is actively investigating industries and commerce sectors by implementing sectoral inquiries. Previously the construction, wheat and bread industries have been investigated and certain companies were fined for anti-competitive resale price maintenance and collusive dealings. Currently the pharmaceutical and medical schemes industries are under investigation.

  • Abuse of dominance. Excessive pricing, creation of market entry barriers for competitors, tying, the requiring of resellers not to deal with competitor products and the refusal to supply scarce goods to a suppliers are the most common types of complaints relating to the abuse of dominance.

 

Exclusions/exemptions

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

Applications can be made to the Competition Commission to be exempted from the application the Restrictive Practices provisions for a specific transaction if the transaction relates to the exercise of IPRs acquired under the South African Plant Breeders Rights, Performers Protection Act, Patents Act, Trade Marks Act, Copyright Act or Designs Act.

 

Advertising

21. To what extent do advertising laws impact on the use of third party trade marks?

The Code of the Advertising Standards Authority (ASA), to which the advertising industry and the major players in the media industry subscribe, precludes the adoption by third parties of the advertising goodwill of another party, or the use of any unsubstantiated claims. Subscribers to the ASA, are obliged to give effect to rulings of the ASA Directorate (or the ASA Appeal Tribunal), in response to complaints by traders or the interested public in respect of advertising practices which violate the Code, for example ceasing use of offending advertising and/or packaging within specified time frames.

 

Employees and consultants

22. Who owns each of the main IPRs created by an employee in the course of his employment? Must compensation be paid to the employee? What main steps can an employer take to ensure it owns each of the main IPRs?

Ownership

The IP rights in inventions created by an employee in the course of his employment generally vest in the employee, unless there is a clear agreement to the contrary between the parties. Compensation does not have to be paid to the employee unless this forms part of the employment agreement.

In the event of a dispute between an employee and his employer, an application can be made under the Patents Act to the Commissioner of Patents to resolve the dispute.

If an employee is employed to invent, any inventions created by him are owned by the employer.

The main steps that an employer can take is to ensure that rights and patents for inventions created by the employee within the course and scope of his employment, are owned by the employer under the employment contract (or a separate contract between the parties). However, under the Intellectual Property Rights from Publicly Funded Research and Development Act of 2008, inventions, and patents, designs and copyright are owned by institutions such as universities and research councils as employers, with departments and inventors receiving a percentage of profits from the exploitation of such IPRs.

These principles also apply generally to designs created by an employee in the course of his employment, except that there is no provision in the Designs Act that deals with disputes between employers and employees. In the event of a dispute recourse can be made to the High Court to resolve the dispute.

Compensation

There is no obligation for an employer to compensate an employee for an invention or design created by him, unless this has been expressly agreed.

Main steps

The main step to ensure that the employer owns each of the main IPRs would include an express agreement in this regard. This can conveniently form part of the employment contract as an express assignment of IPRs clause.

 
23. Who owns each of the main IPRs created by an external consultant? What main steps can a business take to ensure it owns each of the main IPRs?

Ownership

External consultants generally own any of the main IPRs created during the course of their services, unless an express agreement exists to the effect that such IPRs are owned by the business. This should form part of the main agreement and an express assignment clause should be included in the main agreement.

Main steps

The necessary clause(s) to ensure that the business owns each of the main IPRs should be included in the main agreement provided by the business to the external consultant as its standard contract. Any negotiating in respect of the ownership of each of the main IPRs should take place when negotiating the terms of the main agreement, which should also include an express assignment clause.

 

Tax

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

Since licence royalties are considered to be income, income tax is payable on the royalty income stream.

 
25. What are the main taxes payable by a seller on the sale of the main IPRs?

Capital Gains Tax applies to the gain or loss between the base cost (as defined) of an asset or the proceeds received or deemed to be received on the disposal or deemed disposal of the asset. The effective tax rate for a standard company is 18,6%.

Where the sale is cross border to a connected party (as defined in the Income Tax Act), severe disabilities arise in regard to future licensed use by the selling party.

Where transfer pricing arises, OECD guidelines in respect of the treatment to be accorded to the role of IP and intangibles are applied. Careful consideration is required to avoid adverse tax findings in the form of transfer pricing adjustments and penalties.

 

Cross-border issues

26. What international IP treaties is your jurisdiction party to?

South Africa's Patents Act, Trade Marks Act and Designs Act give effect to and are substantially compliant with the Paris Convention.

South Africa acceded to the Berne Convention for the Protection of Literary and Artistic Works. Although South Africa has not yet acceded to the Rome Convention, the Copyright Act and the Performers' Protection Act give effect to certain of its provisions.

South Africa acceded to the Patent Co-operation Treaty in 1998 and to the Budapest Treaty in 1997.

Although Parliament has approved South Africa's accession to the Madrid Protocol and the Hague Agreement, the accession has not yet taken place.

Although South Africa has not acceded to the Nice Agreement, specific provision is made in the Trade Marks Act for South Africa's registration system to be based on the classification of goods and services in the Nice Agreement.

A detailed list of treaties can be found at www.wipo.int/wipolex/en/national.jsp

 
27. Are foreign IPRs recognised in your jurisdiction?

Patents

South African law recognises prior foreign patents as forming part of the state of the art in respect of the novelty of an invention.

Trade marks

See Questions 2 to 8.

Copyright

See Questions 2 to 8.

Design rights

South African law recognises prior foreign design registrations as forming part of the state of the art in respect of the novelty of a design.

Trade secrets and confidential information

See Questions 2 to 8.

 

Reform

28. Are there any proposals for reform?

A Copyright Amendment Bill has been published. Wide ranging changes are proposed, many of which are highly contentious, and/or have been inadequately framed and/or their implications have not been adequately considered. Vigorous and detailed objection to most proposals in the Bill have been lodged by various interested parties and institutions.

 

Online resources

South African Legal Information Institute

W www.saflii.org

Description. Provides access to key/prominent current legislation and case law in South Africa and other SADC countries.

Companies and Intellectual Property Commission (CIPC)

W www.cipc.co.za

Description. The website provides various basic search services relating to IPR registration, and also more advanced search services (and in the case of trade marks, an e-filing service) on subscription to the relevant service and establishment of a pre-paid account with CIPC. An online e-filing facility is available to the public on a subscription and pre-paid account with CIPC basis.



Contributor profiles

Andre van der Merwe, Director

D M Kisch Incorporated (KISCH IP)

E andrev@kisch-ip.com
W www.kisch-ip.com

Professional qualifications. B Sc B Proc LL B; South African attorney; Registered Patent Attorney; Fellow of the South African Institute for Intellectual Property Law

Areas of practice. Patent searches, filing and litigation; copyright advisory work; design searches, filing and litigation; trade mark searches, filing and litigation.

Recent transactions

  • Trade mark litigation in South Africa and in Namibia.
  • Design litigation in South Africa.

Languages. English Afrikaans and Dutch

Professional associations/memberships. The Law Society of the Northern Provinces; the Law Society of South Africa; the South African Institute of Intellectual Property Law; The Licensing Executives Society International (South African Chapter)

Publications. Various articles written and papers and lectures delivered

Derek Momberg

E derekm@kisch-ip.com
W www.kisch-ip.com

Professional qualifications. BA LLB, Attorney & Notary Public, Fellow SAIIPL.

Areas of practice. Trade marks, copyright and confidential information.

Kevin Dam

E kevind@kisch-ip.com
W www.kisch-ip.com

Professional qualifications. B.Com; Adv. Certificate Tax, LLM.

Areas of practice. M&A and competition law issues.


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