Considering the Value of Patents in African Countries

The following is a guest post from South African patent attorney Ralph van Niekerk of Von Seidels

Like all IP rights, patents are territorial and if you want to stop a competitor from practicing an invention in a particular country, you need to have a patent there.

Given the global world we live in, successful inventions tend to be adopted widely and used in many countries. This is a fortunate position for patent holders, who can often protect their competitive global position by filing patents in only a few key countries in which patent rights are respected and enforceable.  If a competitor is not able to practice the invention in those markets, the feasibility of doing so in the rest of the world is limited.

For many patent holders, protecting their inventions internationally does not extend much beyond the IP5: China, the United States, Japan, South Korea and Europe. The following graph of patent applications at the top ten offices shows that patent filings drop off very quickly outside of the IP5:

Source: World Intellectual Property Indicators 2017, published by the World Intellectual Property Organization (WIPO)

Given the picture above, is there much value in having patents in other countries in the world? In particular, is there any real value in having patents in Africa, and especially in some of the smaller African countries?

As a South African patent attorney, I am frequently asked a version of this question by clients overseas. Since a patent is a right to exclude others from practicing the invention, I am quizzed as to what the patent litigation landscape is like in Africa and how easily a patent can be enforced against a competitor. Patent litigation in Africa is rare outside of South Africa, however, and objective measures of the strength of enforcement may not be available in many African countries.

But does the fact that a patent gives you the right to bring legal action against a competitor mean that the patent has no value to you unless you plan to enforce it? The answer is a resounding “no”. There are several good reasons to have a patent in African countries even if you never plan to enforce it there. I would go so far as to say that there are even good reasons to have a patent in a country in which enforcement options are limited to non-existent.

Royalty rates and exchange control

Many African countries have strict exchange control requirements that govern the flow of capital into and out of their economies. For a global company doing business in Africa, expatriating profits made from their African operations may not be a simple matter. Local officials may carefully scrutinise cross-border licence agreements and query the royalty rates charged.

Transfer pricing principles must be applied when supplies are made between related entities within a corporate group structure. In particular, when royalties are paid by a local subsidiary to a foreign parent company, the royalty charged must be aligned with what would be charged on an arms-length basis between unrelated parties.

A granted patent held by a parent company in a country of a local subsidiary can be powerful evidence that the technology being licensed is unique and justifies a higher royalty rate to be paid to the parent company. A local patent can be very useful in convincing exchange control authorities of this fact.

Tender processes

If the patented invention is one that will be used by government authorities, a local patent can help avoid what would otherwise be a competitive tender process.

I recently saw an example of this when the City of Cape Town asked my client for evidence that its water filtration system was patented. We provided details of the patent and the City issued my client with a letter confirming that they were the sole supplier of the system. The City did not go through the usual rigmarole of issuing a tender for competitive bids and this resulted in a valuable contract renewal for my client.

Local patents can therefore enable government contracts to be obtained more easily and on more favourable terms for products and services covered by the patent. To obtain single-supplier procurement and avoid an open tender, a patent may be very beneficial indeed.

Competition law liability (Antitrust)

While some countries in Africa may have weak enforcement of IP rights, the same is not true of their competition laws. African competition law regulators are effective in many countries and fines of up to 10% of a company’s turnover may be awarded. In South Africa, amendments to the Competition Act are in the pipeline that would see penalties increase to up to 25% of turnover for second offences.

A patent can justify commercial arrangements that would otherwise be anti-competitive. For example, tying arrangements are situations where a company agrees to supply a first product to another company, on condition that the other company also buy a second product from them. Such arrangements are usually seen as anti-competitive, but if both products are the subject of patent protection and are bundled as part of the same licence this will usually not be a problem. Similarly, boycotting a competitor by refusing to sell them a product may be anti-competitive unless the product is the subject of a local IP right in which case it is the supplier’s prerogative to whom to sell it. If a firm is dominant and has market power, charging an excessive price for a product or service or refusing to grant access to an “essential facility” may also be anti-competitive unless that product, service or facility is covered by an IP right.

South Africa’s Competition Act provides, in section 10(4), that, “A firm may apply to the Competition Commission to exempt from the application of this Chapter an agreement or practice, or category of agreements or practices, that relates to the exercise of intellectual property rights, including a right acquired or protected in terms of … the Patents Act”. An application for exemption under this provision is only available based on a local, South African patent. Similar considerations would apply in other African countries.

As a shield to potential competition law liability, patents in African countries can therefore be extremely valuable.

Tax benefits

Some African countries offer tax benefits to encourage local research and development. For example, section 11D of South Africa’s Income Tax Act provides an incentive for conducting R&D in South Africa. The incentive is by way of enhanced tax deductibility of up to 150% for qualifying expenditure incurred in respect of R&D. South African patents may be used to bolster an application made under section 11D, as the definition for R&D includes:

systematic investigative or experimental activities of which the result is uncertain for purpose of discovering non-obvious scientific/technical knowledge, or creating an invention, a registerable design, a computer program (as defined in the relevant IP legislation) or knowledge essential to the use of such invention, design or computer program; or developing or significantly improving any qualifying invention, design, computer program or knowledge if such development or improvement relates to any new or improved function or improvement of performance, reliability or quality. [My emphasis]

So for any patents that relate to developments that occurred at least partially in South Africa, having registered IP rights like patents helps demonstrate that the R&D activities fell within this definition. It is expected that other African countries will also adopt similar progressive measures in future to stimulate local R&D.

Conclusion

A narrow view of patents sees their function as only their ability to exclude competitors, so as to enable the patent owner to either exclusively practice the invention or license it to others.

This article has explored four other good reasons for having patents that may be even more valuable to a patent owner than the right to exclude. None of these reasons involves the quality of the local courts or available enforcement mechanisms, and should be taken into account when deciding where patent protection may be valuable.

36 thoughts on “Considering the Value of Patents in African Countries

  1. 6

    One thing I will say is that I am impressed with the Chinese patent office’s progress in the last five years.

    The quality of the rejections has soared. I’d say that they are approaching the quality of KR and JP.

  2. 5

    The chart of 2016 patent filings is interesting, particularly, if you look at the EPO data. Not many filings in the EPO these days, likely due to cost benefit, and about 50% are filed by European companies and 50% outside EP. I also noticed an uptick in direct German filings from outside EP, which can make a lot of sense for most if your only interest is to minimize competitor sales in the European market

    1. 5.1

      That is interesting. I had a PCT application that I transferred from the EPO and one of the supervisors called to find out why I had transferred it from EPO. They seemed a bit desperate and willing to accommodate me not to transfer more.

      1. 5.1.1

        I should like to understand you, Night, because I’m sure it is interesting. But, sadly, I don’t. What does “transferred from the EPO” mean? Transferred to where?

        And who are “the supervisors”? I often get cold phone calls from somebody who assures me he is from Microsoft. Is he one of those mysterious “supervisors”?

        1. 5.1.1.1

          I transferred a PCT application from the EPO to the PTO.

          The supervisor was a person that worked at the EPO. Someone above the examiner I had been working with.

          Not sure what was confusing about my post.

          1. 5.1.1.1.1

            Thanks for clearing up my question about the “supervisor”. But, sorry, I’m still puzzled by your “transfer”. I guess you do not mean to say that the EPO was your RO and that you “transferred” to the USPTO on entry into the PCT national phase. So what could your “transfer” be? Perhaps the USPTO was the RO and perhaps you originally chose the EPO as ISA but then sought to “transfer” to the USPTO as your chosen ISA. Was that it?

            I’ve never heard of anybody doing that before. Maybe the EPO’s “supervisor” hadn’t either.

            1. 5.1.1.1.1.1

              Perhaps the USPTO was the RO and perhaps you originally chose the EPO as ISA but then sought to “transfer” to the USPTO as your chosen ISA.

              That is what I was taking him to mean. Like yourself, I had never heard of anyone doing that. Honestly, I did not know that one could transfer between search offices once an application is already filed.

              1. 5.1.1.1.1.1.1

                I also did not know one could. I still doubt one can. But what else can one make of this notion of a “transfer”?

    2. 5.2

      Not many filings in the EPO these days, likely due to cost benefit…

      Almost certainly. The EP annuities dramatically affect the cost/benefit calculus relative to the same decision in the U.S.

      [D]irect German filings… can make a lot of sense for most if your only interest is to minimize competitor sales in the European market…

      You are probably right about that. The problem with direct German filing, however, is (1) the excess claim fees (which are calculated based on PCT claim number, without the opportunity that you have in the EPO to cull down the number of claims as one enters the regional phase) and (2) prosecuting the application in German. The convenience of prosecuting in English makes the EPO much more attractive than the German office in my eyes.

  3. 4

    Interesting that more non-resident filings at the PTO than resident filings.

    My guess is that patent applications have been falling for resident US inventors.

      1. 4.1.1

        2013 306,413
        2014 307,985
        2015 304,651
        2016 318,701

        Actually, it shows that patent applications are basically flat for residents of the USA. The growth has come from foreign applications.

        1. 4.1.1.2

          [The data] show[] that patent applications are basically flat for residents of the USA. The growth has come from foreign applications.

          Just to be clear, NW, is it your contention that: (1) filings by U.S. entities are down; or (2) filings by U.S. entities are shrinking as a percentage of total USPTO filings?

          Number 1 is clearly not true, as shown by PiKa’s citation. Number 2 could well be true. PiKa’s data do not really speak to that point, but I would be surprised if it were not the case that the ex-U.S. share of USPTO filings were not growing year over year. After all, there are a lot more people outside the U.S. than inside the U.S., so it only makes sense if there are more inventions invented outside the U.S. than inside the U.S.

          1. 4.1.1.2.1

            if it were not the case that the ex-U.S. share of USPTO filings were not growing year over year…

            Well, that is a double-negative mess of a sentence. Let’s try that again: I expect that the percentage of total USPTO filings that come from outside the U.S. is growing each year. I would be surprised if it were to turn out that this is not the case.

          2. 4.1.1.2.2

            My position is clear. US filings are flat despite a rise in GDP and high-tech sector.

            It is obvious things are horrible, but I think there is a lot of weakness in those numbers.

            1. 4.1.1.2.2.1

              Night, why not look on the bright side: aliens feel ever more compelled to file in the USA because there the market is open, vibrant and competitive.

              Compare the other four of the Top 5 Offices. Of them, only the EPO is like the USA in that it has more alien than domestic filings. Huge numbers of filings in Japan and Korea but aliens don’t bother to file there. Why’s that then?

              1. 4.1.1.2.2.1.1

                Max,

                I think that is for a number of reasons. 1) The US has very open economy that allows foreigners an almost equal footing in competing with US firms. 2) China is using the filings strategically, and there filings account for a lot of the foreign filings. 3) The US and EP patent offices are relatively fair.

                But the biggest reason is that the EP and US account for something like 40% of the GDP of the world. (And China, Japan, and Korea are hard places to sell. I know from first hand experience.)

                So what else is there? All the other economies are small.

              2. 4.1.1.2.2.1.2

                And I know a lot about why companies file in different countries. I’ve worked with many different type of companies that sell products all over the world (both as a product manager and now as a patent attorney).

                The reality is that often it isn’t even worth it to fight it out in the small economies (like 100 countries).

                So there aren’t many countries where the market is large enough to fight and they have a half way decent legal system.

                I did forget TW above which is often worth filing in.

                I have filed patents in many, many countries. And had to evaluate the cost/benefit analysis.

              3. 4.1.1.2.2.1.3

                MaxDrei,

                Your point is interesting, and worth consideration in a “full view” of the topic.

                I think though that there is a more subtle and nuanced point that differentiates from such a “full view.”

                That is, in the American zeitgeist, “local effects” are highly valued. That is, for any “quantity” of innovation, a factor of locality is an additional metric to be factored in to the promotion that a patent system provides. And like it or not, being an “ugly American” and putting Americans first is an integral part of the sovereign-centric nature of patent law.

                It cannot be emphasized enough that Patent law is — and remains — a sovereign-centric item.

                There IS a difference between “all humanity advances through innovation anywhere and US patents” and “innovation within US borders and US patents.” It is an absolute mistake to think the two are equal.

                Part and parcel of that sovereign-centric is that any such system wants more than “just use” of the system by “just anyone.”

                That’s not to say that the “just use by just anyone” is not important. It is important (for example, for comity purposes).

                It is to say though that it is not the most important aspect.

                This nuance is something that the large scale international corporations absolutely want to obfuscate. This is part and parcel of the Efficient Infringer mantra.

                The larger point here in the smoke/fire that Night Writer is concerned about has to do with both this nature of sovereign-centric AND the eagerness to which any hint of fire is obfuscated and sought to be diminished (for example, with the quick label of “manufactured urban legend”).

                1. But apart from all that, anon, is it a good thing or bad, that applications by aliens at the USPTO outnumber those from Americans? What would Mr Trump say about that?

                  Does The White House admire the stats in CN, KR and JP, (where domestics outnumber filings by aliens)? Is that the end position that it wants to nudge the USA towards?

                2. No idea what Mr. Trump says about that (and frankly, don’t care all that much).

                  What “it wants” is reflected in my words above. You want to place those words to the side though, and I am puzzled why you would want to do that and then follow with the question that you asked.

                  Did you just want a different answer?

                3. [I]s it a good thing or bad, that applications by aliens at the USPTO outnumber those from Americans?

                  Unambiguously a good thing. There are ~7.7 billion people on this planet. About 0.33 billion of those people live in the U.S. That means that we Americans account for ~0.4% of total population. Even if any given American is 10x as creative and inventive as your average non-American, one would still expect the other 99.6% of the world population to invent more inventions than the 0.4%. If U.S. entities really accounted for a majority of USPTO filings, that would imply either that (1) something is deeply wrong with R&D in this world or (2) something is deeply wrong with the US patent system.

                  Mercifully, the data are not consistent with such profound dysfunction on either score.

                4. 4.0% rather than 0.4%.

                  By that as it may, the “pure number” comparison is a logical fallacy, as it presumes that mere existence provides equal footing for innovation (and patenting thereof).

                  Such is clearly not so. And no reasonable person would expect it to be so.

                  Additionally, the “logic” in “If U.S. entities really accounted for a majority of USPTO filings, that would imply either that (1) something is deeply wrong with R&D in this world or (2) something is deeply wrong with the US patent system.” is false, as the options certainly are not limited to the range given.

      2. 4.1.2

        Thanks for the actual statistics PiKa – “USPTO at link to uspto.gov (tables 7 and 9)” – since the manufactured urban myth that applications from U.S. residents are decreasing keeps getting repeated on this and other patent blogs.

        Nor is it surprising that U.S. applications filed by foreign residents are increasing, since the % of R&D and GDP for the rest of the world vis a vis just the U.S. is also increasing, and filing and examination fees in the U.S. are inexpensive.

        1. 4.1.2.1

          >>Nor is it surprising that U.S. applications filed

          Actually using this argument then applications filed by US resident inventors should be rising as GDP continues to rise and the percentage of GDP that is from high-tech continues to rise.

          And, if you are trying to attribute me to the urban myth, then that is simply not true as what I have been saying is that I suspect it has been falling.

        2. 4.1.2.2

          link to ycharts.com

          Paul Morgan >>>>Nor is it surprising that U.S. applications filed by foreign residents are increasing, since the % of R&D and GDP for the rest of the world vis a vis just the U.S. is also increasing

          Look at the link. What you said is factually wrong. So it looks like you are just making things up to try make it seem like things are OK.

          But the numbers don’t tell us things are OK. They say that despite the GDP growing (and the high-tech sector growing faster than the GDP) in the US that the applications are flat.

          1. 4.1.2.2.1

            The myth was domestic filing decreases, not their lack of increases.
            The assumption that domestic filing should increase is assuming that U.S. R&D is also increasing at the same rate as the rest of the world. I do not know if that is the case or not? But, one also has to look at how much of that U.S. R&D is outside of the software & social media industry? Many other U.S. companies which made many other products have died or shrunk. E.g., Kodak and Xerox used to be both be major U.S. patent application filers. Domestic application filings in China, South Korea and many other countries have greatly increased, far more than domestic U.S. application filings, and have replaced U.S. companies in top ten lists of U.S. applicants.

            1. 4.1.2.2.1.1

              meh,

              While this is not my argument or thrust, a lack of increases (in an era of an expanding pie) are basically near equivalent to shrinking.

              I find the “greater harm” to be the attempt to dismiss outright any possible indicators as mere “manufactured urban myth.”

              Where there is smoke, there is likely fire (that’s not to say there is a raging forest fire, but most likely enough to make sure whatever fire is there does not become a raging forest fire).

              1. 4.1.2.2.1.1.1

                I find the “greater harm” to be the attempt to dismiss outright any possible indicators as mere “manufactured urban myth.”

                Right, it’s not as if the people promulgating this myth have a long and well-documented history of telling l i e s to fire up their m0 uth-breathing base.

            2. 4.1.2.2.1.2

              The assumption that domestic filing should increase is assuming that U.S. R&D is also increasing at the same rate as the rest of the world. I do not know if that is the case or not?

              I do not know if this is the case, but should we not find it alarming if that assumption is not true? I am not typically indulgent of the usual “China is conquering the world” hysteria that one sometimes sees on these boards, but I would have to reconsider my cool skepticism of this line of thinking if there were reason to believe that we were being outpaced on R&D.

              I have no idea whether we are or are not being out R&D’ed by other major economies. If, however, such is the case, that really is cause for panic (and a salutary occasion to reconsider our atrocious recent trends of holding down the NIH and NSF budgets in favor of upper bracket tax cuts).

  4. 3

    I noticed that many foreign countries have a compulsory license clause for exploiting patented inventions. That clause will apply when a product is covered by an umbrella patent that is not owned by the producer, and a later patent that is owned by the producer. Have you seen any examples of negotiations that have been made easier for getting a license to the umbrella patent so that the product covered by the later patent can be commercially exploited?

  5. 1

    It surprises me that more U.S. and other companies do not file more in Canada? It has an honest and effective legal system, not high patent fees, filing in English, and a GDP about 10% of that of the U.S.

    1. 1.1

      I cannot speak of other industries, but in the pharma industry, one has to be really careful about obtaining a patent in Canada. Canada has a fairly strict price regulation scheme for drug prices, and the scheme distinguishes between patented and unpatented drugs. It is frequently the case that the price that one can command in a competitive market (that is to say, a market without patents) is higher than the price that the government will let you charge for a patented drug. Therefore, it is very much possible to wind up with lower revenues in Canada with a patent than one would have if one had not obtained a patent.

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