Article by Wim Alberts and Vicky Stilwell

When an attorney is approached by a client with a request for advice on the conclusion of a transaction, a number of issues must be considered. Various areas of law, for example, tax, company or competition rules, might be relevant. However, for current purposes regard will be had only to the determination of the validity and scope of protection of the intellectual property that may form part of the transaction. It is, in general, advisable to involve an intellectual property attorney in such an endeavour, in particular where the transaction is of a complex nature (in given instances even intellectual property practitioners in other countries would have to be consulted). This would seem to follow from the consideration that the quality of the input of the practitioner will, naturally, be enhanced by an understanding of the transaction and the type of business involved. This will require insight into the way in which the intellectual property will be utilised by the client. For instance, the approach to be followed in the case of a business manufacturing clothing aimed at teenagers will differ greatly from that pertaining to a business selling security systems. For one, in the latter instance, the emphasis will be more on relevant patents (providing protection for, at most, 20 years) and in the first instance on trade marks (in principle of indefinite duration).

It is customary, in these circumstances, to refer to an "audit" being done, in conjunction with a due diligence. What activities are represented by these terms? The first or "audit" phase really involves "stock-taking" or identifying the intellectual property to be acquired. Transactions on which practitioners are called upon to advise may differ in size, and involve one or more forms of intellectual property. Moreover, the practitioner may have limited human resources or most often, time within which to consider the matter, leaving aside budgetary constraints!. The focus should thus be on the prioritization of tasks. Attention should be afforded to that intellectual property which is perceived to add most value, or which forms the ratio of the transaction. The gathering of information is an essential step in the auditing process. Ideally, the client should be in a position to provide details of all the intellectual property being acquired. This does not, however, frequently occur. It is thus necessary to conduct searches of the relevant registries.

The conducting of a due diligence of intellectual property "created" by way of registration is, so to speak, relatively easy to accomplish (it is obviously necessary to ensure that all renewal fees for any registered rights are paid and that no problem would be encountered in this regard). Taking a trade mark as an example, it would be possible to establish, from a search of the Register of Trade Marks, whether other marks were cited against those of the seller during the examination process, and of course, whether any formal opposition was filed, even if not pursued through to a hearing. There can also be a number of reasons why a competitor would choose to launch an attack at a later (even post-registration) stage. Competing claims must thus be closely scrutinised in a situation where a transaction in effect hinges on the acquisition of rights relating to a specific trade mark. The process can, for logistical reasons, not be followed in detail in regard to all relevant marks. The seller must also be called on to provide details of litigation pertaining to the mark. Often, as in the case of "old" marks, such information need only relate to a given, say five year, period. It is, in particular, any challenges to the seller's title to the mark that would warrant closer inspection. Notice should also be taken of any co-existence agreements, consents or geographical limitations.

In the case of both "new" and established trade marks, a client's interests would be furthered by conducting a search of potential common law rights, and in this regard telephone or trade directories might be valuable sources of information. The same obviously applies to searches of the internet, in particular as far as the registration of domain names is concerned. It is also important, as mentioned, to consult the Registries of Companies and Close Corporations. It goes without saying that the more "uncluttered" a market is, the more one's client will benefit from the transaction. Ostensible combatants may live in harmony though for various peculiar historical reasons. It has ocurred, for instance, that parties operate in different parts of the country and, upon discovering each other, come to an understanding that the one will not take steps against the other. The client must be advised that in these or other circumstances, he might not be able to enforce his statutory rights even though they entitle him, prima facie, with the ability to prevent the unauthorised use of the mark throughout the country.

The activities of competitors should also be borne in mind in the sense that the potential for the expansion of a client's business should be assessed. This aspect could be of importance, firstly, in that a registration might exist that would bar the client from expanding the range of products he can offer, in that use of the mark to be obtained, in relation to goods that would be a line extension of the seller's goods. It could, secondly, find application in a geographical sense. It is, for instance, not uncommon for South African businesses to discover that their marks are being used unlawfully in surrounding countries. Information regarding the position on relevant registries in neighbouring states could consequently be important. The same would apply where the obvious expansion area for a client is an overseas country.

It must be borne in mind, with regard to a patent, that it is only the inventor that has the right to apply for a patent (section 27(1) of the Patents Act 57 of 1978). There is no deeming provision similar to, for instance, section 21(1)(b) of the Copyright Act 98 of 1978 that "automatically" transfers copyright in a work created by an employer, in given circumstances, to the employer. The right to apply for a patent may be assigned, though, to another person who then steps into the inventor's shoes. Thus, the applicant for a patent may be the inventor, a third party, or a company. This aspect can become complicated as there may be more than one inventor in respect of a single invention and there may be joint owners of a patent application or patent. In the situation where an inventor is employed to create a new product or invent something new, it is usually a specified term of employment that inventions are to be assigned to the employer though. The existence of such a clause is of course not a given. It is thus important to investigate the position regarding an invention and the persons(s) who invented the particular matter registered as a patent. Assignment documentation should be carefully scrutinised.

It is also necessary for the practitioner to determine what American jurists refer to as the "freedom-to-operate" that his client will have after the completion of the transaction. This applies in particular to potential patent infringement actions. The perceived scope of a licence that might be in place, in particular, must be clarified. Providing an opinion to one's client might involve, as noted, time and budget constraints, and these may determine the extent of the investigation in this regard. The emphasis must accordingly be placed on the essence of the technology being obtained, as not all relevant patents can be examined in detail. Often the seller might be aware of a particular problematic patent, and have obtained an opinion before, but it remains the duty of the practitioner to draw the client's attention to the risk involved. Related to the "freedom-to-operate" principle is the existence of any prior art that might destroy the "newness" of a patent. The scope of review undertaken here must be specified by the client, but the practitioner must provide guidance. It goes without saying that it might be of value in given instances to obtain independent verification of any claim to registered rights. In the case of a patent that is of central importance to a transaction, scrutiny of the position in other countries becomes crucial. This is on account of the fact that the South African patent system does not involve the substantive examination of a claimed invention – it is registered as a matter of course. The citation of prior art in an overseas country can thus be important in evaluating the true value of a patent "registration".

Copyrighted works can also feature, for instance, in the purchase of a software company. Here it is important to establish the circumstances surrounding the creation of the software. For example, was the program developed in-house, or created by an entity unrelated to the company? This may be a vital aspect as the author of a work is the first owner of the copyright subsisting in the work (section 21(1)(a) of the Copyright Act). In the case of a software program the author is the person who exercised control over the making of the program (section 1(1) of the Copyright Act). In the absence of an agreement to the contrary, the outside agency will thus be the owner of the copyright subsisting in the program, and not the entity that commissioned the creation of the program. If need be, an appropriate assignment agreement would have to be drafted, for swift signature (bar acrimony) between the parties. Copyright law might also find application in the case of know-how, should it be reduced to writing. Confidentiality and restraint of trade clauses should, ideally, be in place.

It is to be noted, lastly, that it is standard practice that a seller should provide guarantees of ownership and title. Practitioners should ensure that an indemnification is obtained from the seller as to any possible liability of the purchaser for the use of the intellectual property.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.