One acquires intellectual property by assignment and rights therein by licence, correct? Not exactly.
Consider the following scenarios:
- X acquires a trademark by assignment from Y and uses the trademark in its business. Y is liquidated and the trademark is acquired by Z (who lacks knowledge of the previous transaction between X and Y).
- X acquires a design by assignment from Y and uses the design in its business. X and Y fall out, Y claims to have retained ownership in the design and “sells” it to Z (who lacks knowledge of the previous transaction between X and Y).
Assuming that, after becoming aware of X’s use of the intellectual property, Z institutes infringement proceedings against X. Does X have a defence? Is X free to continue to use the intellectual property in its business?
Whether the business of X survives is wholly dependent on whether X recorded its assignment on the relevant IP registers. Without recordal, X merely enjoys personal rights against Y, which do not extend to the asset itself. Rights that attach to the asset are called real rights and recordal is necessary to convert these personal rights into real rights. Attaching to the asset, real rights bind all subsequent owners. As such, in the absence of recordal, provided that Z had no knowledge of the previous assignment to X, Z may ignore the prior transaction between X and Y.
Notwithstanding the expense that X may have incurred in starting his business, Z may institute infringement proceedings against X, interdicting X from continuing to infringe the IP. In addition, X may claim damages from Y for infringement following the date on which the assignment to Z is recorded! The only remedy available to X is a damages claim against Y, which is seldom of any practical value.
The South African Trademarks Act complicates matters somewhat by providing for the backdating of assignments to an “effective date” 12 months prior (or such extended period as the Registrar may on application permit). However, it is my opinion that this provision will not assist Y to “jump the queue” in front of Z. Provided that Z is recorded as the proprietor prior to Y’s application to record the initial assignment, the assignment to Y will not be recorded and the “effective date” will consequently not be triggered.
Would the result be any different in the following scenario?
- X licences a patent from Y and builds a factory to manufacture the licensed products, but fails to record the licence. Y falls on to hard times and decides to sell the patent to Z (who lacks knowledge of the previous transaction between X and Y).
None of the South African intellectual property Acts require licences (or “users”) to be recorded (or “registered”). Generally speaking, recordal is only required to join the proprietor in infringement proceedings and to confer jurisdiction in order to claim damages.
But, without recordal, X is again in a position where he enjoys only personal rights against Y. At first blush, X appears to be in the same position as an unrecorded assignee. However, will the Roman Dutch doctrine of Huur gaat voor koop be of assistance to X? It is doubtful. This doctrine protects a lessee of immovable property that is in possession of such property from an owner’s action (rei vindication). In the current scenario, the property is an incorporeal, which is not in possession of the licensee and Z relies on an infringement action. What about the principle Nemo plus iuris, which states that no-one can transfer more rights than he in fact enjoys? Assuming that the licence is non-exclusive, Y cannot be regarded as having disposed of any of its rights in the intellectual property – Y has merely granted X an “indemnity” against infringement proceedings. Where X obtains an exclusive licence, Y may well have contractually limited his rights in the intellectual property, but without recordal, the rights subsisting in the intellectual property remain unaffected. Either way, it appears as if in the absence of recordal, X may well find himself in a similar position as the assignee described above.
South African law is not unique. In this regard, it mirrors the principles in US law and the law in most other countries of the world.
Now, here is food for thought: may the South African Revenue Service ignore unrecorded assignments and licences?
In my opinion, the recordal of licences has no impact on the deductibility of royalties. However, SARS is fully within its rights to ignore allowances for the acquisition of intellectual property where the assignments are unrecorded.