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Kenya: Commercialization and monetization of Intellectual Property Rights

11 June 2024
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Overview

  • With Kenya often representing innovation, cultural, creative ingenuity, and technical advancements, understanding the regulatory and commercial landscape in relation to intellectual property rights is increasingly critical.

Introduction:

With Kenya often representing innovation, cultural, creative ingenuity, and technical advancements, understanding the regulatory and commercial landscape in relation to intellectual property rights is increasingly critical.  IP rights are territorial, which means that they are generally afforded protection in the country where the intellectual property is registered and/or used. Various international treaties have harmonized a great deal of intellectual property law, and there are ways of obtaining registrations in international regions.

i. The Kenyan legislative landscape:

Overview

In Kenya, Article 40(5) of the Constitution of Kenya, 2010 (the Constitution) requires the Government to support, promote and protect the intellectual property rights of the people of Kenya. Kenya has in place a legislative regime that protects the right to ownership of intellectual property[1]. These statutes all comply with the international standards and best practices as provided for under TRIPS.

The key government agencies involved in the intellectual property rights landscape in Kenya are the Kenya Industrial Property Institute (KIPI), the Copyright Board of Kenya (KECOBO), the Judiciary, the Kenya Health Plant Inspectorate Services, and the Anti-Counterfeit Agency (ACA). The Anti-Counterfeit Act provides a means of enforcement of IP rights relating to trade marks and copyrights, where these rights are infringed through counterfeiting activities. It provides for the seizure and destruction of counterfeit goods and criminal sanctions and penalties against offenders.

The KIPI and KECOBO primarily regulate IP rights in accordance with their respective mandates; The Industrial Property Tribunal under the Industrial Property Act hears and determines patent, utility model and design infringement cases. Trade mark infringement disputes are however heard, in the first instance, by the High Court.

ii. African and global legislation that enable commercialization of IPR:

The African Regional Intellectual Property Organization (ARIPO) is an inter-governmental organisation that facilitates cooperation among Member States[2] in intellectual property matters. Membership to ARIPO is open to Member States of the African Union (AU), of which Kenya is a member and additionally is also a signatory to the Harare-ARIPO Protocols.  In Kenya, KIPI acts as a receiving Office where a regional application is filed at KIPI by a national or a resident of Kenya. A patent in respect of which Kenya is a designated state, granted by ARIPO, under the ARIPO Protocol, has the same effect in Kenya as a patent granted under the Industrial Property Act except where the Managing Director of KIPI expresses any contrary opinion.

The Madrid Protocol:

Kenya acceded to the Madrid Agreement concerning the international registration of marks and the Madrid Protocol on June 26 1998[3]. In sum, Kenya has enacted legislation governing international trademark registrations designating Kenya as a member state, in which applications are to be processed by KIPI. Any proprietor of an international mark designating Kenya and registered under the Madrid Protocol could restrain the registration or use of a similar mark in Kenya by another party.

Patent Co-Operation Treaty (PCT):

The PCT is an international treaty, overseen by the World Intellectual Property Organization (WIPO). The PCT has 141 contracting states of which Kenya is a member. In Kenya, patent applications may be filed through ARIPO where the applicant may file a single application designating the specific contracting states or through a contracting state/receiving office. The PCT system does not grant patents and it should be noted that the granting of patents remains under the control of the national or regional patent offices, in which case the national laws remain applicable. In Kenya, KIPI can be the receiving office where the relevant PCT application is lodged at KIPI. It should be noted that as part of the international filing fee, the fee is reduced by 90% where the applicant (or if there are two or more applicants), is a natural person and is a national of Kenya and resides in Kenya[4].

The Organisation Africaine de la Propriété Intellectuelle (OAPI) is an intellectual property organisation that was created by the Bangui Agreement of March 2, 1977. OAPI has 17 member countries spanning West Africa and Francophone Africa[5].

The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) is an international legal agreement between all the member nations of the World Trade Organization, which includes Kenya. TRIPS establishes minimum standards for the availability, scope, and use of the various forms of intellectual property i.e., copyrights, trademarks, geographical indications, industrial designs, patents, layout designs for integrated circuits, and undisclosed information (trade secrets). It is the pre-eminent multilateral international text to recognise the nexus between IP and trade. In essence, Kenya has been at the forefront of legislative development to ensure that the country is up to date with the worldwide standards for the protection of intellectual property rights in trade.

Valuation of IP:

IP assets are distinguishable from other intangible assets. They have specific legal protection, and that right can be enforced. Their value is derived from their ability to exclude competitors in their market. This is because their realisation grants an IP owner a valid exclusivity right. To quantify an IP’s value, it should generate significant economic benefit to the IP owner and, enhance related assets.

The factors that influence an IP’s value include; who owns the IPR, whether it generates income, how long is it valid for, what is the market for the IP and, whether a related IP asset increases/decreases its value. For example, a trade mark would have more value where the proprietor also owns the patent for the manufacturer of the goods sold under the trade mark.

The three main approaches used by WIPO in the valuation of IP are:

  1. The cost approach: this involves establishing the value of an IP asset by calculating the cost of a similar one.
  2. The market approach: this involves comparison with the actual price paid transfer of a similar asset in similar conditions.
  3. The income approach: this involves valuing the asset based on its expected or generated income.

It is important to note that there is currently no Kenyan Accounting Standard that comprehensively addresses the accounting treatment of IP in Kenya.

Methods of commercialising IPRs:

Some of the methods through which individuals and entities in Kenya and globally commercialise their IPRs include licensing agreements, assignment, securitisation, franchising and collateralisation.

1. Direct exploitation

Direct exploitation of IP refers to using the relevant IP by the IP owner in the course of trade. For example, using a registered trademark to brand all business products. It also refers to the enforcement of an intellectual property right (IPR) against instances of infringement. IPR exploitation through use ensures that there is a justifiable legal claim a proprietor of IPRs has over their asset. To be able to enforce one’s rights through infringement proceedings, an IP owner needs to ensure that all the relevant IP has been duly registered with the relevant authority. Unregistered IP rights, such as goodwill and trade secrets, are however also protected under English Common law, which is applicable in Kenya by virtue of the Judicature Act, Cap 8, Laws of Kenya.

2. Licensing Agreements

In such an arrangement, the owner of IPRs (the licensor) authorises another party (the licensee) to use the IPRs for an agreed period in exchange for monetary consideration in the form of a fee or royalty, or both. In such an arrangement, there is no transfer of ownership of the IPRs, and the licensee can only use and appropriate the IPRs in accordance with the terms of the licensing agreement in place. Licence agreements are more flexible as they define geographical territory, terms of use and time limitations. Licensing of IPRs is a great source of income for a company, especially those operating across multiple jurisdictions where opportunities for considerable revenue generation can be earned through IP licensing.

 3. Assignment

Owners of IPRs can sell their rights in whole or in part to a new owner thus granting them the right to use and commercially exploit the IPR. Such commercial arrangements are common in Kenya, and KIPI regularly issues certificates of assignment to assignees of the relevant IPRs stipulated pursuant to the assignment agreement between the parties concerned. An assignment of IPR is the sale of the IPR or the share of the IPR. Assignments of IPRs do not have to cover all the IPRs. Given that an assignment of IPRs normally deprives the existing IP owner of any possibility of further licensing or commercially exploiting the IP owner’s IPRs, the amount charged for an assignment is usually much higher than the license fee charged for a license.

 4. Securitisation

The securitisation of IPRs enables the intangible assets and their respective income, i.e., from royalties, licenses etc. to be capitalised on, to finance an entity’s activities. The process facilitates the IPRs owner to sell their asset to a Special Purpose Vehicle (SPV) which will then create a marketable security that can be sold to stakeholders in the capital market. In Kenya, SPVs are structured to allow multiple individual and institutional investors to participate in an investment venture without investing large sums of money as is the case with other fixed-income investment instruments such as treasury bills and bonds[6]. Thus, the IP asset acts as an asset-backed security. IP in Kenya is now recognizable as a registrable form of security or collateral, which can be used to secure financing.

 5. Franchising

Franchising of IPRs involves sharing out of a franchisor’s IP asset to distribute goods or services. The franchisor owns the IP rights over the various elements of the franchise and the franchisee pays a fee or royalty for the benefit of the IP. Ideal IPRs for franchising are those that are already very well-known to the public. IP rights in a franchise agreement, often relate to trademarks and trade secrets that represent the franchise ‘brand’. The use of the IP is limited to the terms of the franchise agreement. In Kenya, several fast-food chains, quick-service restaurants, hotels, fuel stations, real estate, clothing, and furniture dealerships operate under IPRs franchise arrangements/agreements.

6. Collateralisation

Collateralisation is the process of securing a loan with the valuable IP asset being used as collateral. The borrower provides the IP asset to secure the loan and in the event of default, the lending institution can take possession of the asset to cover the debt. The Moveable Property Security Rights Act, 2017 provides for the registration of security rights in moveable properties (security or collateral). Prior to 2017, individuals and entities with no tangible assets had difficulty accessing credit facilities since they lacked the collateral required by financial institutions. With the enactment of the Act, it became possible to access credit by using moveable property as collateral. Thus, IPRs can function as collateral for borrowing funds from financial institutions like banks.

Taxation of intellectual property rights transfers/transactions:

Transactions involving the transfer of IPRs attract different types of taxing regimes. Owners of IPRs intending to commercialise their IPRs need to be vigilant about the various tax implications on their IPR transactions or transfers and comply with the relevant applicable laws. A primary benefit of incorporating an IP holding company within a company’s group structure is that it ring-fences the IP from the operations and liabilities of the other affiliated companies within the group.

In Kenya, relevant tax considerations in transactions involving the transfer of IPRs, extend to:

  • Applicability of capital gains tax[7];
  • Existence of a Double Tax Treaty between the jurisdictions of a non-resident entity transferring IP and a Kenyan recipient entity;
  • Value Added Tax (VAT) aspects to be considered. Where a Kenyan entity transfers IPRs to a non-resident entity, the transfer of the IPRs will comprise an exported service which carries tax liability implications;
  • IP transactions may attract Stamp Duty depending on the nature of the documents used for the transfer. If the transfer is by way of a deed of assignment, or licensing agreements, nominal stamp duty would be levied on the transaction. Where transferred by way of an instrument under the Movable Property Security Rights Act, (2017), the instrument of transfer will be exempt from Stamp Duty in Kenya; and
  • Where a Kenyan entity is charged licensing fees by the IP rights holder, withholding tax will apply on such payments which will then constitute royalties under the Income Tax Act. The applicable withholding tax rate will depend on whether the payment is made to Kenyan resident persons, non-resident persons with a permanent establishment in Kenya or non-resident persons without a permanent establishment in Kenya.

Potential challenges faced during the commercialization of IPRs:

1. Systemic barriers in enforcing IPR:

Registration of IPRs and enforcing those rights in instances of violation or infringement are costly processes. This limits the commercialization and prosecution of IPRs to mostly blue-chip companies with the ability to pursue costly or lengthy litigation in certain instances.

2. Lack of valuation professionals:

Kenya lacks adequate IPRs valuation professionals as well as a framework that governs the valuation of IP assets. For many entities, this means that lenders undertake the valuation and may not apportion a fair and accurate amount for the assets when an IPRs holder wishes to exploit the commercial value of their IPRs.

3. Competition issues affecting the commercialization of intellectual property rights:

IPRs provide the owner with exclusive ownership of the protected right and the owner controls access and use of the IPRs. However, in Kenya, the Competition Act (No. 12 of 2010) prohibits an owner of IPRs from using the IPRs in a manner that would prevent or distort competition in the market in which it operates. The Consolidated Guidelines on the Substantive Assessment of Restrictive Trade Practices under the Competition Act states that agreements on IPRs that directly or indirectly fix purchase or selling prices, allocate markets or indicate the way IPRs are used by the concerned parties; are expressly prohibited under the Competition Act.

What does the African Continental Free Trade Area (AfCFTA) mean for the commercialization of IPRs?

The AfCFTA has been widely touted as the catalyst for enhanced economic growth and integration on the African continent. Under the AfCFTA, the phase two negotiations deal with Protocols on Investment, IPRs, and Competition Policy. However, for this integration to be fully efficient and work seamlessly, African countries need to also review their unique approaches to the protection of IPRs, ease of doing business and competition/anti-trust law. The African Union members will hopefully develop an IP framework that caters to the unique and nuanced needs of the African economy.

African countries have consistently advocated for the universal recognition of traditional knowledge, indigenous cultural expressions, and genetic resources in the various multilateral IP treaties. Unfortunately, the recognition and protection from misappropriation of such unique IPRs is yet to be realized in the form of legislative instruments that may also foster a commercialization of such traditional knowledge and genetic resources.

The Protocol on Intellectual Property Rights for the African Continental Free Trade Area is a draft protocol that can be utilised to promote intellectual property rules and standards that are tailor-made for Africa’s level of industrialisation and consistent with AfCFTA’s objectives. The draft Protocol will afford African Union member states an opportunity to develop an Intellectual property framework that addresses the needs of African countries such as technology transfer within the innovation ecosystem, technology diffusion and Africa’s economic transformation to one that is driven by knowledge, information sharing and ideas.

In conclusion, IP is an asset to any business, and its commercialization enables IPRs owners to enjoy the financial benefits from the commercialization of the IPRs therefore enabling them to recoup the time and costs expended in the investment and at the same time ensuring technology transfer and information dissemination amongst the general public.

We remain available to provide further guidance on regulatory updates, compliance and other assistance.


[1] Trade Marks Act (Chapter 506) (the TM Act), Copyright Act (Chapter 130), Protection Of Traditional Knowledge And Cultural Expressions Act (No. 33 of 2016), Anti-Counterfeit Act, 2008, Seeds and Plant Varieties Act, Cap 326, Industrial Property Act, 2001

[2] The ARIPO Member States are; Botswana, Cape Verde, Kingdom of Eswatini, The Gambia, Ghana, Kenya, Kingdom of Lesotho, Liberia, Malawi, Mauritius, Mozambique, Namibia, Rwanda, Sao Tome and Principe, Seychelles, Sierra Leone, Somalia, Sudan, Tanzania, Uganda, Zambia and Zimbabwe.

[3] https://www.worldtrademarkreview.com/article/kenyas-accession-madrid-system-effective-last

[4] https://www.kipi.go.ke/index.php/pct

[5] Benin, Burkina Faso, Cameroun, Central African Republic, Comoros, Congo, Côte d’Ivoire, Gabon, Guinéa, Guinéa Bissau, Equatorial Guinéa, Mali, Mauritanie, Niger, Sénégal, Chad, and Togo

[6] https://www.businessdailyafrica.com/bd/markets/spvs-the-best-option-to-develop-infrastructure–1944546

[7] the chargeable gain is determined by offsetting the transfer price/consideration against the initial acquisition cost of the IPRs, along with costs incurred in improving/defending the IP and any transaction expenses with respect to the transfer/assignment of the IP