So, you created some IP, now what?

So, you created some IP, now what?

Irrespective of whether you support the overzealous protection of intellectual property (“IP“) or believe in a more open-source world, one thing is certain in the world of technology and IP – the greatest economic value of IP stems from its use in licensing arrangements. Whether for commercial or development reasons, the concepts remain the same. The registration of IP is only your first step in a long and complex dance with any entrepreneur, service provider or developer who you wish to collaborate with.

The unique thing about IP is that it is subject to constant development. This means that new stand-alone IP can develop from base IP, thereby attracting unique and new avenues to attract its own separate IP.

This starts to blur the lines of ownership when more than one party is involved and the failure to properly regulate these relationships can mean the death of innovation; as the once exciting venture is distilled down to a playground battle with the participants’ crying over sand in their eyes.

This blog post serves to touch on the basic legal concepts which form part of standard commercial agreements involving IP. It also highlights what you need to start thinking about to ensure that the boundaries of ownership and use are clearly set out from the get-go.

In most licensing agreements there is a distinction between ‘Background IP’ and ‘Foreground IP’. Background IP is the term used to define that IP which the respective parties own prior to performing under an agreement, or IP that is developed or conceived independently of the agreement. ‘Foreground IP’, on the other hand, is usually used to define new IP developed in terms, and during the subsistence, of an agreement. An important element of these distinctions is that not only does Background IP lead to the creation of Foreground IP, but Background IP is often linked to Foreground IP and the ability to exercise it.

These concepts exist to protect and regulate one of our most basic human tendencies derived from those even our most primary of conquerors practiced, think “Veni, Vidi, vici”. Basically, what’s mine is mine and in some cases (especially where you fail to regulate your IP properly) what’s yours is mine too.

So to avoid being the subject of someone’s Odyssey, standard agreements usually start off with a definition of these two terms, thereby creating a split between each party’s IP prior to entering the agreement and the IP created from the agreement. This allows for the protection of each party’s previously developed IP and ensuring that any new IP is regulated by the terms of the agreement.

Regarding ownership of Foreground IP, different models will be appropriate in different sets of circumstances. For example, where an agreement opts for Foreground IP to be jointly owned, administration becomes a problem as every party must be consulted and agree on any further use, development or commercial exploitation of such IP. Further frustration can be present where an agreement doesn’t regulate a breakdown, as this could in effect mean that one party could potentially hold ransom the further exploitation and commercialisation of the IP.

Another ownership option could be that such IP is rather outrightly owned by one of the parties (by means of assigning the IP rights over to one party) and for that party to grant access to the other, which may include terms of use, extent of exploitation, as well as compensation. For the more seasoned entrepreneur, the possibility exists that this model could be used to strategically transfer IP into a new entity, by means of building and developing Foreground IP in a newly established entity, based on a Background IP licencing agreement with an older entity. This, however, is a topic for another day.

This second aspect in the above examples highlights the use component of IP licensing. Irrespective of whether you are licensing your Background IP to a partner or joint venture so as to create the Foreground IP, or whether you agree that one of the parties owns the Foreground IP so as to licence it to the other, the extent of a party’s use or participation in the particular IP is regulated by a use license.

The most renowned types of licenses which you should start to become familiar with include exclusive and non-exclusive licenses. From a high level, a non-exclusive licence will potentially grant a licensor the unfettered freedom to exploit the IP without giving the other party any say, as well as the ability to allow other licensees to exploit the same IP. Whereas an exclusive licence could potentially limit both licensor and licensee from exploiting the IP.

It is crucial to understand that your unique circumstances will guide which licence is the best option for you and the onus will be on you to ensure that you are aware of the effects of such a license. Inevitably, you will have to ensure that the licence reflects what was in fact agreed to and that you are not the recipient of a very attractively constructed Trojan Horse.

This blog post was only intended to open your mind to concepts tied to the complex nature of IP. It also provided some insight into how various commercial and licensing arrangements can impact on both ownership and use of your own Background IP, as well as any Foreground IP, which you may have had a hand in creating. A competent practitioner who can truly understand your offering and your vision for the future can make this process a breeze. With years of academic and practical experience in both IP and commercial law, our team here at Dommisse Attorneys is well placed to assist you with developing your IP strategy and to translate this into a clear and succinct agreement, thereby avoiding the exchange of any unruly phrases like “Et Tu, Brute?”.

2017 Budget Speech implications for the externalisation of intellectual property (IP)

2017 Budget Speech implications for the externalisation of intellectual property (IP)

Relaxing the South African (SA) Exchange Control Regulations, in relation to IP in particular, is crucial for many of our start up clients (especially those operating in the software development and technology space). Up to now, SA resident companies could not export their IP to a non-resident, unless the approval of the Financial Surveillance Department (FSD) of the South African Reserve Bank (SARB) was obtained. This proved to be an insurmountable hurdle for many companies trying to externalise their businesses by moving them “offshore” for any reason, including that of attracting foreign capital investments.

The Exchange Control Regulations provide that when a SA resident (natural or juristic person) enters any transaction in terms of which capital, or any right to capital, is directly or indirectly exported (i.e. transferred by way of cession, assignment, sale transfer or any other means) from South Africa to a non-resident (natural or juristic person) such transaction falls in the ambit of the Exchange Control Regulations.

The export of “capital” specifically includes any IP right (whether registered or unregistered), which means the Exchange Control Regulations must be considered when dealing with an externalisation of IP.

The reasoning behind this regulation is that the offshoring of assets / capital belonging to SA residents amounts to an exportation of assets / capital and therefore erodes the asset base of the SA resident by way of a transfer of ownership from a SA resident to a non-resident. While this reasoning may have seemed sound, the application of the Exchange Control Regulations to the export of IP has led to many negative and unintended consequences for SA companies, and start ups in particular.

In the 2017 National Budget review the Government proposed that SA residents would no longer need the SARB’s approval for “standard IP transactions”. It was also proposed that the “loop structure” restriction for all IP transactions be lifted, provided they are at arms-length and at a fair market price. “Loop structure” restrictions prevent SA residents from holding any SA asset indirectly through a non-resident entity.

The SARB has started the process of relaxing the Exchange Control Regulations by issuing two circulars relating to IP. These latest amendments to the Currency and Exchanges Manual for Authorised Dealers mean that, under certain circumstances, approval for the exportation of IP can now be sought from Authorised Dealers (banks appointed by the Minister of Finance for exchange control purposes), as opposed to the FSD. This is good news for clients looking to restructure and offshore their IP, as the approval process should now be less administratively intense, less expensive and with faster turnaround times.

Approval can now be sought through an Authorised Dealer for:

  • a sale, transfer and assignment of IP;
  • by a SA resident;
  • to unrelated non-resident parties;
  • at an arm’s length and fair and market related price.

The Authorised Dealer will need to be presented with: (i) the sale / transfer / assignment agreement; and (ii) an auditor’s letter or intellectual property valuation certificate confirming the basis for calculating the sale price ((iii) together with any additional internal requirements).

For the approval of the licensing of IP by a SA resident to non-resident parties at an arm’s length and fair and market related price, the Authorised Dealer will need to be presented with: (i) the licensing agreement in question; and (ii) an auditor’s letter confirming the basis for calculating the royalty or licence fee ((iii) together with any additional internal requirements).

The second set of amendments provide that private (unlisted) technology (among others) companies in South Africa may now establish companies offshore without the requirement to primary list offshore in order to raise foreign funding for their operations. This effectively means that “loop structures” can now be created to raise loans and capital offshore, and these companies may hold investments in South Africa. Note that there are still certain requirements that must be met, for example, registration with the FSD.

Our commercial team has experience in making the necessary applications for exchange control approval. Feel free to get in touch if this is something on the horizon for your business.