Hi, my name is Rowan Joseph. I’m a patent attorney practicing with the IP firm, Von Seidels, in Cape Town in South Africa. The topic I’ll be dealing with today is IP due diligence when acquiring intellectual property and freedom to operate searches or procedure.
We dealt with IP acquisition and we’ll deal with IP acquisition and IP due diligence in Part 1, and in Part 2, I’ll look at freedom to operate. So methods of acquiring IP would be through asset purchase of a company, asset purchase of patents, and the licensing of patents. Asset purchase of a company has the advantage that you acquire an already established and going concern, so important contracts and relationships are in place, necessary managerial structures are in place, and you have access to all the assets. You have access to equal relationships between patents and other intellectual property, such as trademarks, trade secrets, copyright, and more. The disadvantages, of course, are that you would acquire more rights and obligations of the acquired company between the old employer and employee as the new employer, and this is regulated by our Labour Relations Act. You also have to pay for assets that you probably don’t need, and you have to take the bad with the good. It is costly to perform a comprehensive due diligence, which would be needed to make an informed decision, and it could be a quite complicated commercial transaction.
From that end, you could simply purchase the patents, which are assets. The pros would be certainty of what you’re acquiring, more control of the asset that you purchase. Assignment of the patent is relatively simple. It’s a less expensive exercise than acquiring a company that owns the patent, and there are less commercial considerations. The disadvantages would be the need to strategically incorporate the patent into your business—how you do that—that the patent might have limited value, necessary structures are not in place, such as marketing channels, networking opportunities, et cetera. It’s also of limited value without access to the necessary intellectual property expectations, such as trademarks, know-how, trade secrets, copyright, goodwill, et cetera, and commercialization of the patent itself might be expensive.
The third option is, of course, licensing, and you’re probably aware that the advantages would be that you get to negotiate the conditions and terms of the license agreement. You can determine the term of the license agreement, and you can negotiate royalty streams or royalty schemes as suitable. You also have the advantage of having a termination clause so you can get out if you didn’t like it.
Difficulties: Of course you’d have to be aware of whether you’re getting an exclusive, sole, or a nonexclusive license, being aware that only registered licensees can litigate patents and then only as a coplaintiff. You could never run patent litigation on your own as a licensee, and this issue should be addressed in the license agreement. And there are certain limitations on license agreements. We touched on these in the previous topic and so we don’t need to go into this topic. And of course, the prime disadvantage is that the patent will never become part of your business.
So which is best? There’s obviously no clear answer. It’s really a question of fact and of circumstance. Your other important considerations in this deliberation would be the fact of poor people in South Africa, poor-based black economic policies, which are aimed at redressing economic imbalances, especially when dealing with the South African government and other makers of affirmative action. You also might have skilled labor problems with finding skilled labor in South Africa. On the labor topic, annual labor negotiations are required, often marked by unrest and strikes, especially in the mining, transportation, and public sectors of late, and this could have a negative effect on productivity and an increased cost of conducting business in South Africa, so it’s best, when acquiring a company, you might want to take on those responsibilities. On the other end, South Africa is the gateway to sub-Saharan African countries, and so there are huge advantages to offer. It’s all a matter of horses for courses thing.
The next section is IP due diligence, and so we said acquisition and due diligence. You would realize and know that when acquiring a company or IP, or when licensing IP, it is essential that an IP due diligence and IP evaluation be done. It is not uncommon for information which may compromise the validity of a registered IP right to come into the hands of the owner only after the registration of the right has been completed. Some examples would be prior art in the case of patents, prior use by a third party of a similar trademark in respect of the same good and services come to light or where weak links in the chain of ownership of the rights, et cetera. Bear in mind that South Africa is a nonexamining jurisdiction with regard to patents, and so the grant of a patent or registered design doesn’t necessarily mean that the patent is, per se, novel and inventive. It simply means that proper procedures have been complied with. The object of diligent procedure, then, would be to determine the prima facie validity of the existing IP registration and have registered rights, checking the current status and the renewal of the status of the right; looking at the history and registration process, including prior art and citations; conducting searches and looking at results; looking at licensing records and controls; looking at licensing periods and renewal periods, et cetera; assessing the vulnerability of the IP to infringement claims or validity attacks; and risk assessment and formulation of a plan to enhance the validity of each category of IP rights.
For patents and designs, the IP due diligence procedure would be to check procedural correctness, formal correctness. You can assess novelty by looking at results and coverage of searches and examination in other countries, so look for corresponding patents and see whether the examining offices granted patents and what the results on the patent are. Bear in mind that you have utility requirement and the other statutory requirements in South Africa, as well. You can directly report on the history of the issue as well as discover the claims, and you could look at the merit of any challenges that may be pertinent to the patent. So again, just to reiterate a concern in terms of South Africa patents is that it’s a registration system and not an examination system, so you’d have to interrogate the validity of the patent critically, often as I said, with regard to corresponding foreign patents.
So now you’ve gone to Part 2, freedom to operate searches. These would aim to determine if any other patents in force in South Africa that exclude others from making, using, exercising, disposing, or offering to dispose of a claim invention in and into South Africa, so we’re talking of a patent issue. A strategy would probably entail a background search, looking like or what would seem like a background search, then doing keyword searches on international databases, followed by patent family searches, typically to identify South African equivalents, which would act on data so that it can find equivalence to foreign patents. You could then also search so that South African Patent Office CIPC electronic database, which we call CIPC, and you would produce searches in the patent journal, particularly in the electronic version of the patent journal, which has recently become available, and you would expect the official patent register and obtain copies of the register.
I’m just going to say here that the South Africa Electronic Patent Database is online. Often, the results could be questionable. It’s not 100% accurate, and one would not rely completely on it. It should not even be used to determine the status of a patent, particularly as regards to patent payment of renewal fees. These are not always recorded online. There’s been a recent policy decision to change from a manual to a completely electronic version, but we’ve yet to see the proof of how reliable this electronic version’s going to be. As I’ve mentioned, there’s an electronic version of our patent journal, but it’s mainly covering from 2010 onwards. Prior years are not yet captured, and when approvals are granted, then the electronic version as the place where patents are published, when granted, to try to find more detail on patents. As we said, you are entitled to obtain an extract of register with respect to the patent register, and you may also obtain a hard copy of open to public inspection files, and one should make use of these provisions to confirm the status of rights.
Looking at trademarks, it’s easy to determine whether you can freely use the mark under freedom to operate, and you cannot use the mark which is confusingly similar to the other mark. This is both in terms of our common law and of our trademark law. You can conduct freedom to operate searches electronically, and the sources will include the Electronic Trademark Database, also a general Google search, .co.za a domain name search, et cetera. On registered designs, you would especially want to do a search for packaging and containers. The difficulty is that freedom to operate searches cannot be done electronically, and one must actually conduct a physical search in specific classes, which makes it, obviously, a difficult task. In terms of copyright, bear in mind that there’s copyrighting package inserts, instructions, et cetera, so you would try and see to determine whether the patent insert was maybe copied from another package insert or whether the instructions were copied from somewhere else. It can be quite a difficult and laborious task. You also have labeling and marking requirements, so South African Bureau of Standards would have certain requirements that need to be met, especially for chemicals, electric, technical, food and health services, mechanical materials, mining and minerals areas, you’d want to ensure to comply with these regulations, and then you’d also want to bear in mind that South Africa has a trading agreement with the EU, which enables European products to enter the South African market at duty-free or at relatively low rates, and so you’d probably want to do a market analysis to determine the market and the potential size.
That concludes our discussion. Thanks very much.