THE SECURITIZATION OF INTELLECTUAL PROPERTY IN KENYA
The World Intellectual Property Organization (WIPO) defines Intellectual Property (hereinafter referred to as “IP”) as, creations of the mind, such as inventions; literary and artistic works; designs; and symbols, names and images used in commerce. IP is protected in law by, for example, patents, copyright and trademarks, which enable people to earn recognition or financial benefit from what they invent or create. Additionally, IP is described as the recognition, protection and promotion of the work or product of the mind; of human creativity embodied in tangible form.
Section 2 of the Moveable Property Security Rights Act, 2017 (hereinafter referred to as the “MPSR Act”) defines IP as:
- Copyright as defined in Section 2(1) of the Copyright Act, 2001;
- Industrial property rights as defined in Section 2(1) of the Industrial Property Act, 2001;
- Trade mark as defined in Section 2(1) of the Trade Marks Act, Cap 506; and,
- Any other related right.
IP is commercialized through securitization. Securitization is the process of consolidating expected future payments, such as royalties, and selling them in the form of securities or collateral including shares, stocks or bonds. Therefore, the securitization of IP is the conversion of an IP asset into a marketable security or collateral, and is utilized by both natural and legal persons who have Intellectual Property Rights (hereinafter referred to as “IPRs”) to obtain financing from financial institutions.
Types of IP
The following are the types of IP recognized in Kenya:
- Copyright under the Copyright Act, 2001;
- Industrial designs under the Industrial Property Act, 2001;
- Trade mark under the Trade Marks Act Cap 506;
- Patents under the Industrial Property Act, 2001;
- Utility models under the Industrial Property Act, 2001;
- Technovation models under the Industrial Property Act, 2001;
- Geographical indications under the Trade Marks Act, Cap 506;
- Plant Breeders Rights under the Seeds and Plant Varieties Act, Cap 326;
- Traditional Knowledge under the Traditional Knowledge and Cultural Expressions Act, 2016; and,
- Trade secrets under the Common Law.
Background of the MPSR Act
Prior to the enactment of the MPSR Act, it was not possible to acquire financing in Kenya on the basis of an intangible asset such as intellectual property. Intangible assets were not recognized as items capable of forming security. Tangible or immovable property was the dominant form of accessing credit in financial institutions due to the security it provided to lenders in case of any default. For this reason, individuals and SMEs with no tangible assets were locked out from accessing credit.
However, the United Nations Commission on International Trade Law (UNCITRAL) promulgated a “Legislative Guide on Secured Transactions” in 2007 to assist states in modernizing their secured transactions law. Realizing the interaction between secured transactions law and IP law, UNCITRAL adjusted the guide in 2010 to cater for intellectual property by promulgating a “Supplement on Security Rights in Intellectual Property”. The supplement states that the intention was “to make credit more available and at a lower cost to IP owners and other IP rights holders, thus enhancing the value of IP rights as security for credit”.
The lack of financial inclusivity of individuals and SMEs who did not own tangible/immovable property necessitated legal reforms in Kenya’s commercial law geared towards the creation of new forms of security to assist both natural and legal persons to secure credit through intangible items. This resulted in the enactment of the MPSR Act in 2017.
Securitization of Intellectual Property Rights (IPRs)
On 10th May, 2017 the MPSR Act was assented into law. Under this new regime, IP is now recognized as a registrable form of security or collateral, which can be used to secure financing from financial institutions. Section 2 of the MPSR Act includes IP within the meaning of “intangible assets”. IP is defined as copyright, trademarks, industrial property rights and any other related right created under law. Furthermore, collateral is described as a movable asset that is subject to a security right.
The MPSR Act provides that an ‘acquisition security right’ means, a security right in a tangible asset or IP, which secures the obligation to pay any unpaid portion of the purchase price of the asset or other credit extended to enable the grantor to acquire it, under Section 2. Having established IP as an acquisition security right, priority is given, under Section 47 of the MPSR Act against a competing non- acquisition security right provided that a notice of the security right is registered with the Registrar. In addition, Section 81(a) of the MPSR Act gives direction that in case of any dispute, the law applicable to the creation, effectiveness or enforcement against third parties, and priority of a security right in intellectual property, is the law of the country in which the intellectual property is protected.
Section 14 of the MPSR Act provides for tangible assets with respect to which intellectual property is used. It states that, a security right in a tangible asset with respect to which IP is used does not extend to the intellectual property, and a security right in the intellectual property does not extend to the tangible asset.
With regards to the methods of executing security rights against third parties, Section 15 of the MPSR Act provides that a security right in any movable asset is effective against third parties if a notice with respect to the security right is registered with the Registrar. The procedure for registration of a notice and the required information in an initial notice is highlighted under Section 26 and 27 of the MPSR Act respectively.
Priority among competing security rights created by the same grantor in the same collateral is determined according to the time of registration, according to Section 38 of the MPSR Act. On the issue of competing security rights created by different grantors, Section 39 of the MPSR Act provides that, a security right created by a grantor is subordinate to a security right in the same collateral created by another person, if the grantor acquired the collateral subject to the security right created by the other person and made effective against third parties before the grantor acquired the collateral.
Lastly, Part 7 of the MPSR Act provides for the enforcement of a security right by a grantor and a secured creditor upon the failure of a debtor to pay or otherwise perform a secured obligation.
Objectives of the MPSR Act
According to Section 3 of the MPSR Act, the objectives of the Act include to:
- Promote consistency and certainty in secured financing relating to movable assets;
- Enhance the ability of individuals and entities to access credit using movable assets; and,
- To establish the office of the Registrar and a Registry to facilitate the registration of security rights in movable assets.
Impact of the MPSR Act’s provisions on IPRs in Kenya
The MPSR Act has been key in promoting financial inclusion in Kenya, by widening the scope of assets that can be used as security or collateral. The use of IP as collateral is a great alternative source of capital for both legal and natural persons who have valuable IP assets. It has empowered both legal and natural proprietors to use their IP assets, that is, trademarks, copyright, patents, industrial designs, utility models or other related rights, as collateral to obtain financing from financial institutions. It has revolutionized and eased how business is conducted in Kenya, by depicting the strength of credit reporting systems and the effectiveness of collateral and bankruptcy laws in facilitating lending in the country.
The enactment of the MPSR Act is in line with the constitutional obligation of the state to support, promote and protect the IP rights of the people of Kenya, under Article 40(5) of the Constitution of Kenya, 2010. This is an indicator of the importance of IPRs in the country’s economic growth and innovation agenda envisaged in Vision 2030. In general, the MPSR Act provides support to the Constitution and Kenya’s IP laws, by creating a channel through which IPRs can be used for the benefit of right holders as tools for financing.
Challenges of the use of IPRs as a security or collateral
- Lack of capacity of IP asset valuation services in Kenya: The Act is silent on the issue of the valuation of intangible assets. Valuation is key because assigning a monetary value is necessary for any collateral to be useful. A financial institution ordinarily seeks comfort from the fact that the collateral put up is valuable in relation to the amount it advances to a borrower.
- Intangible nature of IPs: The intangible nature of IPs is what prevents lenders from granting credit to both natural and legal persons, as it does not provide security in case of any default.
- Infringement risk: The IP infringement affects the unpredictability of IP or royalty cash flow. Any unpredictability of royalty income due to such infringements may diminish the attractiveness of the future royalty/cash flow/receivables-based securitization.
- Absence of a liquid market for IPs: A liquid market for IPs in Kenya is yet to be established. Hence lenders are not able to ascertain the market price and dispose the asset. Lenders are subjected to taking a huge risk when they accept IPs as collateral as they have no liquid cash value.
- Lack of a unified law regulating Intellectual Property in Kenya: The lack of a definite law regulating the securitization and enforcement of IPs poses a great risk to the lenders. This is due to the existence of numerous laws which regulate the different types of IP in Kenya.
Commercialization of IP has become more extensive in Kenya through securitization as a result of the MPSR Act that extensively provides for the creation of a security right, third-party effectiveness of a security right, registration of notices relating to security rights, priorities, rights and obligations of the parties, and third-party obligations and enforcement of a security right. However, there is a great need for more regulations to address the challenges and a unified law which will ensure the successful implementation and enforcement of IPs as collateral in Kenya’s commercial sector.