Protecting trade secrets in South Africa

By Rowan Forster and Wim Alberts, Edward Nathan Sonnenberg
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Consumers seek out branded products as a guarantee of quality or to make a lifestyle statement. An obvious example is the Apple iPad.

The 2010 Interbrand Best Global Brands survey valued the top global brands as being worth billions of US dollars: Coca Cola (US$70 billion), IBM (US$65 billion), Microsoft (US$60 billion), Google (US$44 billion), GE (US$43 billion) and McDonald’s (US$34 billion).

Interestingly, the Milward Brown Brandz 2011 report rates Apple as the most valuable brand in the world, showing that valuation methodology can differ. But whatever methodology is used, brands are of great value to business and are jealously guarded by companies.

Know-how

Rowan Forster, Edward Nathan Sonnenbergs
Rowan Forster
Director
Edward Nathan Sonnenbergs

Confidential information or know-how is another form of intellectual property. A good example is the measures taken by the company Coca-Cola to protect the complete formula of Coca-Cola, the beverage. This formula was described in a US court in a 1985 case, Coca-Cola Bottling Co v Coca-Cola Co, as one of the best-kept trade secrets in the world. The court said that most of the ingredients of Coca-Cola are common knowledge, but the ingredient which gives it its distinctive taste is a secret combination of flavouring oils and other ingredients, known as “Merchandise 7X”.

The formula for Merchandise 7X has been closely guarded since Coca-Cola was invented in 1886. The formula is known to only two people in the company at any one time and only these two people oversee the preparation of Merchandise 7X. Their identity is never disclosed to outsiders, and they are never allowed to fly on the same aeroplane at the same time. It was also said that the written version of the formula of Merchandise 7X is kept in a security vault in a bank in Atlanta, and this vault can only be opened by a resolution of the company’s board of directors.

The company once decided not to produce Coca-Cola in India because the Indian government required disclosure of the secret formula as a precondition of doing business there. It is also rumoured that Kentucky Fried Chicken’s “secret formula” of herbs and spices is made at two locations and blended in a third location.

The legal protection of trade secrets can be problematic. One reason for this is that when a product is placed on the market, it is usually possible to reverse-engineer it and to find out how it works or what it is composed of. Furthermore, it is often stated that there is no copyright in ideas.

Wim Alberts, Edward Nathan Sonnenberg
Wim Alberts
Professor, University of Johannesburg
Special Counsel, Edward Nathan Sonnenberg

Generally, therefore, when someone discloses the idea for an invention to another party, there is no remedy under copyright law to prevent the other party from using it.

Things could be different if the idea was embodied in a patent, which can protect an underlying idea or invention even if others can figure it out. Take as an example the recent sale of patents belonging to Nortel, the Canadian telecommunications company that fell on hard times. Its patents were sold for US$4.5 billion dollars to companies including Apple and Microsoft. Ownership of the patents was said to give Nortel a tight hold on the mobile telephone manufacturing industry. Without patent protection, rivals could simply have copied the underlying technology.

Deposit system

The best form of protection someone can obtain for an idea is to file a patent application. South Africa has a “deposit system” of patent registration. This means that patent applications are granted without being examined substantively. It is not considered whether they are truly new and inventive, which are requirements for patentability in terms of the Patents Act.

The granting of a registration is therefore not an indication of the patentability of the matter applied for. However, even if it was, it would still be open to third parties to attack the validity of a patent.

If there is a need for further experimentation, it is possible to file a provisional application for a patent. The final patent may differ from the provisional application. A provisional patent application will cost between R8000 and R15000, including legal costs, depending on the complexity of the subject matter. A provisional application is valid for 12 months before a complete specification must be filed in order to finalize the application. There is additional cost for this step which is dependent upon any changes needing to be incorporated. It is not necessary to wait the full 12 months before finalizing the application, but once the complete specification is filed it is more difficult to introduce any amendments.

A certificate of registration will be issued approximately a year after filing the complete specification, once the acceptance of the application has been advertised in the Patent Journal and lain open to public inspection for the required three-month period.

IP protection required

Examples abound of young entrepreneurs starting out in garages, then growing their ideas into massive business empires.

It is said that after the University of Oregon changed the surface of its athletics track to a urethane surface, one of the founders of Nike started work on various soles that would best facilitate the athlete’s shoes’ grip on the new track. Apparently, his work paid off one Sunday morning when he used his wife’s waffle iron to produce a particular design, later known as the “waffle sole”. Without proper intellectual property protection, his designs could simply have been copied by a competitor.

In South Africa it would have been possible to file a functional design in order to protect the shape of the sole. Things can, of course develop much further, and it is understood that Nike has filed a patent for a self-lacing shoe. The moral of the story is that when you do business, don’t lose out due to a lack of intellectual property protection.

Wim Alberts is a professor at the University of Johannesburg and a special counsel to Edward Nathan Sonnenbergs

Do the homework before your company merger in South Africa

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