IP Rights from publicly financed research & development Act no. 51 of 2008
16/08/2010

Regulations issued under the Act
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1. INTRODUCTION
The Act on Intellectual Property Rights from Publicly Financed Research and Development 51 of 2008 (the IPR Act) was assented to by the President and published in Government Gazette 31745 of 22 December 2008, but was not put into effect at that time. The reason was that Regulations had to be drafted and finalised before the IPR Act could be implemented. After a prolonged consultation process, the Regulations were finalised and published in Government Gazette 33433 of 2 August 2010. The IPR Act and the Regulations were put into effect by Proclamation R.675 in Government Gazette 33433 of 2 August 2010.

2. OBJECTIVES OF THE IPR ACT
The objectives of the IPR Act are set out in section 2; the main objective is to provide that intellectual property (IP) emanating from publicly financed research and development (R&D) will be identified, protected, utilised and commercialised for the benefit of the people of South Africa, whether it be for a social, economic, military or any other benefit.

Further objectives are to ensure that –
(a) a recipient of funding from a funding agency (ie from the State) will assess, record and report on the benefit to society of publicly financed R&D;
(b) a recipient will protect IP emanating from publicly financed R&D and will ensure that it is available to the people of South Africa;
(c) a recipient will identify commercialisation opportunities for such IP;
(d) human ingenuity and creativity will be acknowledged and rewarded;
(e) the people of South Africa will have preferential access to opportunities arising from knowledge and IP produced by publicly financed R&D;
(f) researchers may eventually publish their research findings for the public good; and
(g) the State may, where appropriate, use the results of publicly financed R&D in the interest of the people of South Africa.

The Regulations give a further indication (regulation 1(1)) of what is to be understood by the term ‘benefit’, namely a contribution to the socio-economic needs of South Africa, including capacity development, technology transfer, job creation, enterprise development, social upliftment, and products, processes or services that embody or use the IP.

3. APPLICATION OF THE IPR ACT
In terms of section 3, the IPR Act applies to intellectual property emanating from publicly financed research and development. It is necessary, therefore to determine what will be covered by the concept ‘intellectual property’ and, although the concept ‘research and development’ is not defined, it will be necessary to determine when R&D will be ‘publicly financed’.

The concept ‘intellectual property’ (IP) is given a wide definition in section 1, to mean any creation of the mind that is capable to be protected by law from use by any other person, whether in terms of South African or foreign law, and including any rights in such creation (but excluding copyrighted works such as theses, dissertations, articles, handbooks or other publications which are associated with conventional academic work). It is clear that ‘intellectual property’ is not limited to patentable inventions nor to creations protectible by statute, but would include creations protectible under common law, such as confidential information emanating from publicly financed R&D, eg information regarding the procedures and outcomes of clinical trials, the outcomes of experimental work in the fields of biotechnology, electronics, architecture and construction, medicines (eg to determine bioequivalence or efficacy), etc. Such information ‘is capable to be protected by law’.

In terms of section 1, ‘publicly financed research and development’ is defined to mean R&D undertaken using any funds – ie also partial funding – allocated by a funding agency (but excluding funds allocated for scholarships and bursaries). A ‘funding agency’ means the State or an organ of state or a state agency that funds R&D. The publicly financed R&D will be undertaken by a recipient of such funds; a ‘recipient’ is defined (section 1) to mean any person, juristic or non-juristic, that undertakes R&D using funding from a funding agency, and includes an institution. This definition is wide enough to include also a natural person.

The term ‘institution’ is defined (section 1) to mean –
• any higher education institution under the Higher Education Act 101 of 1997 (ie all universities);
• any statutory institution listed in Schedule 1 to the IPR Act (ie mainly research councils such as the Human Sciences Research Council, the SA Medical Research Council, the Council for Scientific and Industrial Research, etc); and
• any institution identified by the Minister as such (no such institution has as yet been so identified).

Since universities and research councils receive funding from the State or state agencies to run their operations, and since R&D work undertaken by a university or a research council (even for and on behalf of an external entity) will be part of its operational activities, ie generally conducted on the premises of the institution, in a building and using equipment of the institution, and with the basic salary of the researcher being paid by the institution, it seems clear that the legislature intended that such R&D work will be publicly financed R&D – even if part of the R&D is being funded by an external entity. The intention of the legislature is construed in this manner on the basis of the generality of the words ‘using any funds allocated’ by a funding agency in the definition of ‘publicly financed R&D’, ie even though the funds were not specifically earmarked for R&D and may not entirely cover the R&D.

4. MANAGEMENT STRUCTURES AND OBLIGATIONS
4.1 Management obligations of a recipient
The IPR Act places certain management obligations and disclosure duties on a recipient of public funding (section 5), including –
(a) to put in place mechanisms for the identification, protection, development and management of IP emanating from the R&D, any transactions relating to the IP, and the commercialisation of the IP;
(b) to provide effective and practical measures and procedures for the obligatory disclosure of the IP and to ensure that the IP will be appropriately protected before the R&D results are published or publicly disclosed, and to ensure that personnel involved with the R&D will make the necessary disclosure within certain time periods and before the information is made public;
(c) to assess the IP to determine whether it merits statutory protection and to use best efforts to obtain statutory protection;
(d) to refer IP disclosures in respect of which it elects not to obtain statutory protection or not to retain ownership within a prescribed period to NIPMO (see paragraph 4.3 below);
(e) in the case of an institution, to manage revenues from IP transactions and commercialisation, including benefit-sharing arrangements (see paragraph 5.2 below).
(f) to negotiate and enter into IP transactions with third parties;
(g) to report to NIPMO twice a year on all matters pertaining to the IP, with full reasons for IP that is not commercialised;
(h) in the case of a institution, to assess annually and to report to NIPMO on the benefits to society of publicly financed R&D conducted.

4.2 Establishment of technology transfer offices
Unless determined otherwise by a Minister (in specified circumstances), an institution must, in terms of section 6, within 12 months of the coming into effect of the IPR Act (ie by 2 August 2011), establish a technology transfer office or designate an existing structure or a person(s) within the institution to undertake the responsibilities of a technology transfer office. Such a technology transfer office is responsible for carrying out the obligations of the institution in terms of the IPR Act.

Two or more institutions may, with the concurrence of NIPMO, establish a regional technology transfer office and NIPMO may provide assistance (including financial coordination and developmental assistance) in regard to such regional technology transfer office.

Section 7 requires the functions of a technology transfer office to be performed by appropriately qualified personnel, with inter-disciplinary knowledge and expertise in the identification, protection, management and commercialisation of IP. The technology transfer office must also –
• development and implement policies for the disclosure, identification, protection, development, commercialisation, etc of the IP, as well as for benefit-sharing arrangements;
• receive and analyse disclosures of potential IP and analyse the commercial potential of such IP and the appropriate form of protection, and attend to the statutory protection;
• attend to all aspects of IP transactions and the commercialisation of the IP, including the geographical regions; and
• report to and liaise with NIPMO.

4.3 Establishment of NIPMO
The IPR Act also establishes (sections 8 and 9) an office within the Department of Science and Technology, to be known as the National IP Management Office (NIPMO). The main function of NIPMO will be to promote the objectives of the IPR Act, including the statutory protection, management and commercialisation of IP.

In carrying out its functions, NIPMO must liaise with recipients (including institutions) to determine the viability of obtaining statutory protection for, and concluding transactions regarding, or commercialising IP. NIPMO must also –
• manage information and data regarding IP and recipients as contemplated in the IPR Act;
• provide incentives to recipients and their IP creators to reward them for proactively recurring protection for any commercialising IP, and for promoting innovation;
• provide assistance to institutions in regard to the matters provided for by the IPR Act;
• define appropriate standards and best practices, and develop guidelines for IP transactions; and
• generally monitor the obligations of recipients under the IPR Act.

The Regulations issued under the IPR Act have further provisions (regulations 4 – 8) in regard to the administration and operations of NIPMO, including the duty to keep an updated register of all institutions to which the IPR Act applies, and a record of all IP referred to it or reported to it in terms of the IPR Act. The Regulations further provide for the manner in which NIPMO is to exercise its discretionary powers; for the appointment by the Minister of an Advisory Board which will be accountable to the Minister; and for the establishment of a Dispute Panel to deal with disputes relating to the administrative decisions of NIPMO.

The IPR Act also provides (section 13) for the establishment of an Intellectual Property Fund to be managed by NIPMO and the purpose of which is to provide financial support to institutions for the statutory protection and maintenance of IP, and to finance the costs of NIPMO when it acquires IP on behalf of the State and/or the costs incurred by NIPMO for obtaining statutory protection of IP.

5. OWNERSHIP OF IP UNDER THE IPR ACT
5.1 General principle as to ownership (section 4)
As indicated above, the IPR Act defines a ‘recipient’ and section 4 provides that IP emanating from publicly financed R&D shall be owned by the recipient (with the exception of the cases provided for in sections 4(4), 15(2) and 15(4) – see paragraphs 5.2 – 5.4 below). This means that all IP emanating from R&D performed by universities and research councils, including confidential information pertaining to research trials or other experimental work carried out by such an institution, will in the first instance belong to the institution. Where the recipient is a natural person or juristic person other than an institution as defined, the IP shall be owned by such natural or juristic person.

The IPR Act contains specific provisions prescribing how such a recipient, including an institution, is to proceed to assess, record, protect and ultimately enter into transactions to commercialise the IP (see paragraphs 4.1 and 4.2 above). A recipient must also decide whether it wants to retain ownership of the IP, or whether it prefers not to retain ownership and not to obtain statutory protection for the IP.

If a recipient (eg an institution) prefers not to retain ownership of the IP or not to obtain statutory protection therefor, it must –
(a) make the choice in accordance with regulations and guidelines to be published by NIPMO, and
(b) notify NIPMO (within a specified period) of its decision and provide reasons for the decision.

NIPMO may then, after considering the reasons provided and any prejudice to be suffered by the State if no statutory protection for the IP is obtained, itself acquire ownership of the IP and where applicable obtain statutory protection for the IP.

5.2 Optional ownership by private entity (section 4(4))
If NIPMO decides not to acquire ownership of the IP, and in cases where a private entity or organisation had provided some funding towards the R&D, such private entity or organisation shall be given an option to acquire ownership of the IP (section 4(4)((b)). If this option is not exercised, the creator of the IP will be given the option to acquire ownership.

However, if the private entity or organisation exercises the option and acquires ownership of the IP and the IP emanated from an institution, this will be subject to the benefit-sharing right granted (in terms of section 10) to the creator of the IP (and his/her heirs). This right makes the creator (and his/her heirs) entitled to a prescribed portion (20% - 30%) of the revenues that accrue to the institution as a result of the commercialisation of the IP. It seems that the private entity or organisation will be bound to give effect, in some way or another, to the benefit-sharing right of the creator in those cases where the private entity or organisation had provided some funding to an institution for R&D to be carried out and then acquired ownership of the IP emanating from such R&D in the circumstances contemplated in section 4(4).

The IPR Act does not give an indication of the basis on which revenue will accrue to the institution in the cases where the ownership of the IP becomes vested in the private entity or organisation in terms of section 4(4)(b). It is possible that the private entity or organisation may be required to purchase the IP; or a royalty-type agreement may be concluded in respect of future commercialisation of the IP. Such a model would also present problems, since the IPR Act does not give an indication of how it will be determined what the proportional contribution of the specific IP will be to the overall basket of IP on which any commercialisation may be based.

5.3 Co-ownership by private entity (section 15(2))
In terms of section 15(2), a private entity or organisation may become a co-owner of IP emanating from publicly funded R&D if –
(a) there was a contribution of resources, eg a contribution of relevant back-ground IP by the private entity;
(b) there is joint IP creatorship;
(c) appropriate arrangements are made with the IP creator(s) for benefit-sharing; and (d) the institution and private entity conclude an agreement for the commercialisation of the IP.

If the private entity does not commercialise the IP, the State (through NIPMO) may demand assignment of the IP (section 15(3)).

The Regulations in regulation 15, deal with the cooperation between private entities or organisations and institutions. Regulation 15(3) envisages the possibility of an assignment by a recipient of its share of the IP to a collaborator as contemplated in section 15(2) and provides that such a transaction must comply with the provisions of regulations 11 and 12. The main principle is that the transaction must take place on an arms-length basis.

Regulation 15(4) deals specifically with cases where IP emanates from a collaborative R&D project involving an international funding or donor organisation. In that case, the institution must
• retain ownership of all pre-existing IP that it brings into the project
• retain ownership of any IP developed by its IP creators, or jointly own any IP jointly developed
• ensure commercialisation of the IP will take place in accordance with the IPR Act.

5.4 Full ownership by private entity (section 15(4))
The only case when a private entity or organisation will acquire full ownership of IP emanating from R&D done by a publicly financed institution, is where the private entity funded the R&D on a full cost basis (section 15(4)). In this case the R&D will not be deemed to be publicly financed R&D and the provisions of the IPR Act will not apply.

A ‘private entity or organisation’ is defined to include a private sector company, a public entity, an international research organisation, an educational institution or an international funding or donor organisation (section 15(5)).

‘Full cost’ means (section 15(4)(b) the full cost of undertaking R&D as determined in accordance with international financial reporting standards, including all applicable direct and indirect costs. The Regulations (regulation 16) contain further provisions on the manner in which full cost is to be determined. This will, inter alia, entail that an institution must every two years submit to NIPMO formulae for the calculation of its applicable direct costs and indirect costs for undertaking R&D. The direct costs must include the basic costs for R&D in terms of the institution’s financial policies, in accordance with general accounting principles. Where it is not feasible to determine the indirect costs, a surcharge will be determined in the form of a percentage to be levied on the direct costs.

6. COMMERCIALISATION OF IP UNDER THE IPR ACT
The IPR Act contains various provisions dealing with the commercialisation of IP. Although this is not quite clear, these provisions would appear to impact mostly on situations where the IP is owned by the ‘recipient’, ie the institution. In terms of section 11(1) the recipient will determine the nature and conditions of IP transactions, but must take into account certain considerations which are set out in sections 11 and 12. These provisions should have no – or limited – impact on situations where a private entity has acquired full ownership of the IP (see paragraphs 5.2 and 5.4).

How these provisions would impact on situations where the private entity is a co-owner of the IP (see paragraph 5.3) is not quite clear.

The considerations to be taken into account when structuring IP transactions are set out in section 11 (local transactions) and section 12 (offshore transactions).

The conditions for local transactions include the following (section 11):
• preference must be given to non-exclusive licensing;
• preference must be given to BBBEE entities and small enterprises;
• exclusive licence holders must undertake, where feasible, to manufacture, process and otherwise commercialise in the Republic;
• each IP transaction must provide the State with an irrevocable and royalty-free licence authorising the State to use or have the IP used throughout the world for health, security and emergency needs of the Republic;
• if the holder of an exclusive licence is unable to continue with the commercialisation of the IP, the licence may (under certain conditions) be converted to a non-exclusive licence;
• each IP transaction must contain a condition to the effect that, should a party fail to commercialise the IP to the benefit of the people of South Africa, the State will be entitled to acquire ownership of the IP; and
• where an IP transaction involves the assignment of IP by an institution to a small enterprise in return for shareholding, a condition must be included that in the event of the liquidation of the small enterprise, the IP shall revert to the institution.

Further provisions in regard to local IP transactions are contained in regulation 11.

Section 12 deals with offshore IP transactions and provides that all such transactions must –
• provide for prior notice to NIPMO of the intention of a recipient to conclude an offshore IP transaction;
• any offshore IP transaction must comply with prescribed regulations and guidelines issued by NIPMO, and if not, prior approval of NIPMO is required;
• where a recipient intends to enter into an offshore transaction in the form of an assignment or an exclusive licence, NIPMO must be satisfied that there is insufficient capacity in South Africa to develop or commercialise the IP and that South Africa will benefit from the offshore transaction.

Further provisions applicable to offshore transactions are contained in regulation 12.

7. CONCLUSION
Since the IPR Act will have a far-reaching effect on the rights in respect of IP created in cases where a private entity enters into an arrangement with an institution, such as a university or research council, to conduct R&D work, it will be necessary to ensure that the provisions of the IPR Act are taken into account when negotiating and structuring such an arrangement. It does not seem legally possible to avoid application of the IPR Act by merely including a clause to that effect in any agreement concluded with the institution.

Where such R&D work is important and the outsourcing is necessary, it may be necessary to investigate other models, eg to agree on a full-costing funding model, or to contract with a researcher who is not a recipient of public funding and in his/her personal capacity (although the availability of appropriate research facilities would have to be resolved).
E.D. du Plessis
Senior Consultant
edp@adamsadams.co.za