Business owners often find themselves struggling to protect their IP rights after having not taken appropriate preventative steps in the first instance. To find out more about IP licensing and the legal implications it brings, Lawyer Monthly speaks to Alexis Apostolidis, Darren Olivier and Andre Visser from South African law firm, Adams & Adams.

Alexis Apostolidis is a partner in the Patent Litigation Department of Adams & Adams and also the Head of the Competition Law Group of the firm. He often assist clients in the commercialization of their IP and/or in litigation where contractual aspects present themselves.

Darren Olivier is a partner in the Trade Mark Department at Adams & Adams with extensive IP licensing experience gained in-house (Dunlop Slazenger- IP Counsel) and leading law firms (Field Fisher Waterhouse, Bowman Gilfillan - Partner) over the past 17 years with a special interest in IP commercialization in Africa.

Andre Visser is a partner in the Corporate and Commercial Department at Adams & Adams. He has 16 years experience in a variety of corporate and commercial fields, specifically mergers and acquisitions, tax and commercialization of intellectual property.

Research suggests that only when an issue arises do companies look for advice regarding their IP licences. Why do you think this is?

Companies often assume that at the time of drafting and preparing the IP license all their interests were adequately protected. Due to specific circumstances or the factual circumstances, the drafting process may have been influenced in a particular way and only when an issue arises does a company turn to the IP license to enforce its rights and seek advice in respect thereof. In most instances the process around IP licensing, is regarded as an administrative process with little or no attention being given to properly structured documents to protect the specific IP and assets of the client.

Another factor is ignorance and apathy. Deal focused legal firms and companies tend to underestimate the impact of IP or they do not understand it all, and this is especially the case in Africa where the economy is based on commodities and minerals and rarely on IP rights per se. In addition to this, quite often standard template form license agreements are utilised, which may be inappropriate for the particular circumstances and are negotiated or implemented by individuals who do not always have the necessary understanding of the risks involved, how to identify those risks and how to mitigate them.

What pre-emptive measures should companies be taking to ensure their IP assets are protected fully?

Firstly, proper information disclosure within the company must take place to ensure that IP is properly identified, registered and therefore protected. This will allow the company to properly understand what the IP assets are to be able to identify the risks, challenges and areas of protection required.

As part of the process to identify IP, the validity of IP should be assessed in the relevant jurisdictions involved. Depending on the jurisdiction, all IP that is registrable, should be properly registered and any regulatory provisions available to protect rights in the IP should be pursued as part of the licensing arrangement. In most African jurisdictions specifically, trade marks should be cleared for use and licenses registered.

Where applicable, exchange control measures should be considered to ensure repatriation of funds and in some cases, the validity of the particular IP licence. All IP licences should be in writing, and existing agreements checked for enforceability.

The function of negotiating, settling and maintaining licensing arrangements should be centralised and under control of an individual / individuals who understand IP licensing and can manage the function centrally. Alternatively, and to the extent that the volume of IP licences is small, external legal advice should be obtained at an appropriate stage to ensure that all possible risk areas are properly considered and covered.

Strict obligations should be placed on all licensees to ensure that they act pro-actively in protecting the rights and interests of the licensor and bring any misuse or other factors of risk to the attention of the licensor.

Under all circumstances, appropriate secrecy and/or confidentiality provisions should be inserted in all licensing arrangements to ensure that the IP, know-how and related information is protected to the fullest extent allowed in the laws of the particular jurisdiction.

What are the risks associated with transferring rights and the legal strategies and expertise required by companies negotiating licensing agreements?

Depending on the type of license and the relationship between the parties, a future competitor may be created, and a company may also give away know-how which later may not be capable of being adequately protected in terms of the IP license.

The licensee or potential licensee may plan and design around the licensed rights to avoid paying royalties and under certain circumstances, If there is no quality control, rights in trade marks may even be lost.

Companies need to understand why they are licensing their IP, sometimes even that they are in fact licensing IP, what happens to future IP and how that supports their business strategy, for example to enter new markets, collaborate in an open access environment etc.

What are the main legal issues to arise regarding IP licences when negotiating mergers and acquisitions?

From a competition law perspective one must consider whether the M&A is solely to acquire access to IP licenses and/or IP assets, thus blocking other parties and/or reducing competition and naturally what the effect will be on the particular market.

The issues to consider will depend on whether the IP license itself is assigned, or whether the underlying IP is transferred from one party to another. Transferability of IP will be dictated by a number of factors, which includes exchange control limitations, tax implications and whether or not any licensing regime exists in the particular jurisdiction. Other factors include who owns what, whether the rights are free for license or transfer and valid, whether the use of the rights infringes third party rights, whether there are any co-branding or product liability concerns or aspects, who owns future IP, whether there are any exchange control implications, how the IP will be enforced in case the licensee needs to be protected and practical aspects as to how exactly know-how, for example, can be transferred. If license agreements are assigned, issues such as change of control and grandfather clauses should be considered and, depending on whether it is the licensee or licensor involved, the appropriate consents from third parties should be obtained in each instance.

Of utmost importance is a proper due diligence into the substance of the IP, the terms of any license agreement and any other specific matters of interest to the parties involved. Particularly difficult with due diligence investigations is how to protect the IP which is quite often disclosed as part of the due diligence, with the risk that the party to whom the information is disclosed, may utilise IP without entering into the particular arrangement. Accordingly, secrecy provisions and, if appropriate, restraint provisions, are of utmost importance before a due diligence into IP and IP assets is conducted.

Valuation of IP is always tricky for M&A transactions, as the methodology applied and information available on which to base the evaluation is often not clear, and not comparable to previous transactions or even distinct IP assets within a particular portfolio. A proper valuation methodology and approach is therefore important and parties need to be in full agreement as to the methodology to be utilised when an evaluation of IP is undertaken.

Originally published in Lawyer Monthly

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