SA reducing incentives for intellectual property outflows

In an article for Moneywebtax.co.za Clayton Bonnette explains how the introduction of S231 of the South African Income Tax Act seeks to squash so called "intellectual property arbitrage".

"It is not uncommon for intellectual property rights (IP) to be developed by one group company and subsequently transferred to another group company on arms length terms. The reasons for transferring IP between group companies are generally not only motivated by the possibility of reducing royalty withholding taxes. There are non-tax reasons too and these include ensuring that the continued development of the IP takes place where the necessary technical skills can be found and that the jurisdiction from which the licensing of the IP takes place is "credible". The "credibility" of the jurisdiction not only facilitates the international exploitation of the IP but also increases the possibilities of raising additional capital to fund the ongoing development expenditure.

The perceived resulting loss of tax base in the country in which the IP was initially developed has resulted in a number of tax administrations carefully scrutinising these types of arrangements. In order to counter so-called "intellectual property arbitrage", section 23I was introduced into the Income Tax Act, no 58 of 1962 (ITA) by the Revenue Laws Amendment Act, no 35 of 2007.

Section 23I, which comes into operation on January 1 2009, places restrictions on the quantum of the royalty payments to non-residents (payee) that a South African taxpayer (payor) may claim as a tax deduction in certain circumstances.

The mischief that section 23I broadly seeks to cure is to deny or restrict the tax deductibility of the royalty expenditure incurred by a payor, where the royalty is payable to a payee that is a non-South African resident for the use of IP that was either originally owned by a South African resident or was created or developed in South Africa."

IP - Take it to the Bank

The value of Intellectual Property is also very much an issue in Jamaica.

The Export-Import Bank (co-sponsored by Foga Daley & Co.) recently hosted an IP seminar on “Valuing Creative Assets”, aimed inter alia at determining the value of intellectual assets and using them to leverage financing. The seminar was held under the fitting theme: “Intellectual Property - Take it to the Bank”.

Aron Levko, a PwC Partner in Chicago, explained the current prominence of IP issues, with “IP having grown in importance to be the predominant asset value in corporations, rising to over 70% of total market value for the S&P 500*”. Michael Stern, Minister of State in the Ministry of Industry, Investment and Commerce (pictured), said that Jamaica was at the vanguard of promoting IPR protection in the region and that IPRs were significant contributors to enterprise value.

More information can be found here, here and here.

Braveheart pays for options on Aberdeen research results

In The Scotsman (which I found via Technology Transfer E-News) there's a very positive piece about a 15-year deal struck between Aberdeen University and Perth-based investment syndicate Braveheart to provide funding and development for the school’s innovations. The deal gives Braveheart the right of first refusal to license the university’s research in defined areas, while Aberdeen get significant funding for start-ups –- amounting to some £5m over a period of two to five years. Braveheart already has similar arrangements with the universities of Strathclyde and Edinburgh.

After bankruptcy: what happens to the Italian business format franchise?

Although, once a business format is successfully trialled, a franchise contract runs a heavily reduced risk of encountering an episode of bankruptcy on either side, this event can still occur. The Italian Bankruptcy Law (267/1942) divides business contracts into three categories:

* contracts that terminate on an adjudication of bankruptcy;

* contracts to which the bankruptcy trustee automatically succeeds the bankrupt because continued performance is to the creditors' advantage;

* contracts that are suspended until the bankruptcy trustee decides whether to terminate or continue them.

Franchise agreements, despite their ubiquity, are not however mentioned -- an oversight that was not addressed when the Franchising Law was revised in 2004. This means that their regulation on bankruptcy must be handled by analogising them to one of the three categories mentioned above.

In intellectual property terms, franchise agreements can span a number of elements of the contractual relationship:

* the use of trade marks and other signs belonging to the franchisor;

* the transfer of the franchisor's know-how to the franchisee;

* the sale by the franchisee of products and services and

* the payment by the franchisee of agreed royalties or fees.

The diverse nature of these provisions makes franchise agreements comparable to several types of contract, such as licence, agency, distribution, supply and commission agreements.

Some commentators consider the franchise relationship to be one of personal trust, which automatically terminates in the event of either party's bankruptcy, in the same manner as agency and commission agreements. Case law from the Court of Turin in January 1995 however construed the franchise as a supply agreement in which the franchisor supplied services, rather than goods. On this basis it was regulated by the provisions of the Bankruptcy Law that provide for the suspension of performance of mutual obligations until the bankruptcy trustee decides whether to terminate or continue the contract. This ruling has however been questioned on practical grounds.

Ultimately each case will be decided on its own facts and its own merits. Parties are advised to stipulate the consequences of bankruptcy in advance, to avoid undertainties and undesired consequences [source: Marco De Leo and Beatrice Masi, of Rinaldi e Associati, writing in International Law Office].

A cricketer's pose

The West Indies Players Association have been assigned the image and intellectual property rights for 75 of their members as set out in the formal agreement between the players and WIPA. It is an initiative that has been welcomed by WIPA and its members as the organisation seeks to exploit and maximize the full commercial potential for the use of the players' intellectual property and image rights. "WIPA has fought many long and tough battles in recent times including those to protect the intellectual property and imaging rights of players and we are quite pleased that the parameters are now much clearer in relation to such rights," said WIPA president and CEO, Dinanath Ramnarine. He said the deal with the 75 cricketers follow the emerging trend of similar arrangements between cricket players and their associations as in the case with the equivalent groups in South Africa and England.(source: CarribeanCricket.com).

There is often much debate about whether it should be the individual, the team or the league or the federations in charge of the sport as to ownership of image rights. Some people argue that the personalities have worked hard to create their fame and so should be able to control commercially the results of this hard work by owning the rights themselves. There is also a case that since the public created the personality's fame, that it should be the public as a whole that decide who owns the rights.

Whatever the position this development must come as relief to WICA who suffered the emabarrasment of a revolt over image rights, as reported in the Telegraph here in 2004.

Music recordings: the Lincoff model

The excellent Intellectual Property Watch weblog carries a lengthy feature by Bennett Lincoff (right), "Inside Views: A New Business Model For The Music Industry Explained". This feature, which is itself based on a longer work (a 64 page article), succinctly describes the current problem facing the recording industry. Having outlined the status quo, Mr Lincoff proposes as follows:

"I suggest that lawmakers aggregate the rights of songwriters, music publishers, recording artists and record labels in their respective musical works and sound recordings and create a single right for digital transmissions of recorded music. The digital transmission right would replace the parties’ now-existing reproduction, public performance and distribution rights (and, where applicable, the communication and making available rights) for purposes of digital transmissions.

Going forward, the determinative consideration will be whether transmissions of recorded music have occurred, not whether transmissions result in sales, promote sales, or may cause sales to be lost. Licences will be made available without regard to whether recordings are streamed, downloaded, or transmitted by some means not yet devised; whether programming is interactive or non-interactive, or contains this, that or another recording; or whether the service that provides the transmission accepts user-generated content or operates as a P2P network. The number of copies made in the course of transmissions (including server copies, and ephemeral, transitory and buffer copies), the type of transmission technology used, and the file format in which recordings are transmitted will not be of concern.

Ownership of the digital transmission right in each recording will be held jointly by the songwriter(s), music publisher(s), recording artist(s) and record label who contribute to it. Each party will be a co-owner of the right in the recording in question. Moreover, regardless of the nature of their relationships to each other under pre-existing agreements, or to particular recordings under current law, under the digital transmission right each rights holder will have independent and sufficient authority to grant non-exclusive licences on any terms to which they and their licensees agree. The only limitation on this authority will be the obligation to account to co-owners for royalties earned.

...

The digital transmission right would only be enforceable against those who provide digital transmissions, retransmissions or further transmissions of recorded music.

Accordingly, consumers would not incur any liability to rights holders for accessing streams, downloading music, or making copies of recordings for personal use. Similarly, software distributors, technology firms, consumer electronics makers, and telecommunications and internet service providers, as such, would have no liability.

On the other hand, audio service providers will need licences if they operate websites or other services that provide digital transmissions, retransmissions or further transmissions of recorded music.

...

Operators of centralised P2P networks would be jointly liable with their users who share music. These operators would also be liable for further transmissions or retransmissions through their servers of transmissions of recordings initiated by their users. A through-to-the-user licence would authorise all transmissions of licensed recordings through an operator’s centralised network; and individual users would be free to share those recordings through that network without the need to obtain licences themselves ...".

Whatever you may think of the author's proposals,

* it's great to say that someone with experience in the field in question is actually putting solid suggestions on the table rather than simply saying "the recording companies should stop harking back to the halcyon days when their old (pre-digital) business model worked and should design something else;

* it's notable that Mr Lincoff's proposals start with legislative reform as a sine qua non for the development of a new business model -- and this raises the question whether business models should shape the law or merely respond to it;

* given the nature of the distribution media, any solution will depend for its efficacy on the adoption of uniform legal provisions internationally. If there is no international norm, any business model will have to factor in the potentially devastating effect of havens in which the model becomes meaningless.

Combining trade marks in a Jointly owned IP holding company

I spotted this recent article by Lanning Bryer and Matthew Asbell (both of Ladas & Parry) in issue 3 of INTA's Trademark Reporter, vol. 98 (May-June 2008). Entitled "Combining Trademarks in a Jointly Owned IP Holding Company", its abstract runs as follows:

"With the advent of increased trademark sharing between unrelated entities, intellectual property holding companies have been formed specifically to enable combined ownership of trademarks among multiple companies. A mutual trademark holding company (“MTHC”) is often formed as the jointly owned subsidiary of multiple parent companies to act as owner of trademark rights. Companies should consider the formation of MTHCs with the goal of sharing trademarks while finding safer avenues toward at least some of the benefits of the traditional wholly-owned IP holding company model.

MTHCs may: (a) provide a sensible means for companies either to partition and sell off portions of their goodwill; (b) allow them to find opportunities for synergy with others that can help their brands grow; (c) help companies to accurately assess and improve the value of these assets; and (d) provide tax and other additional benefits. However, corporate law, tax law, antitrust law, IP law, and other laws may complicate the use of MTHCs. Thus, the decision to employ an MTHC should only be considered carefully with all relevant issues explored. This article describes the risks and advantages of using an MTHC as the owner of trademark rights in a strategic branding plan".

Do readers of this blog have any thoughts on this topic, particularly when the issues involved are not confined to the US but are driven by international considerations?