Monday, 21 March 2011

The Oilwell valves tightened - SCA adjudicates on exchange control and IP

Last year Afro-IP reported on the latest in a string of controversially conflicting judgements relating to the transfer of IP from RSA residents to non-residents (for background information click here).

Thanks to an email from Adv Ilse Joubert, Afro Leo has now read last week’s Supreme Court of Appeal judgement in the Oilwell case (unfortunately not yet online). The SCA have provided much needed clarity and not shied away from ensuring that the scope of the judgement is likely to be applicable across all forms IP in transactions. The appeal was dismissed; the views in the lower court and those of Tim Ball (Without Prejudice 2005 "Exchange Control and the Assignment of South African Patents") largely upheld.

Prior to the SCA judgement, the big questions were whether exchange control approval was required for the transfer of IP from a resident to a non-resident and what would happen if such approval was not obtained. There was at least one view that the absence of approval would mean that the transfer would be void. This meant that a large number of IP transactions were vulnerable to being declared void and it had the effect of deepening the reluctance to invest in IP in RSA.

The five judge appeal bench lead by Deputy President Harms, dismissing the appeal, held in a lucid judgement that:
  • IP is not “capital” in the financial sense envisaged by the Exchange Control regulations. It however, an asset;
  • IP is territorial in nature and akin to immovables. It cannot be exported. (see comment on the Sting judgement here);
  • A patent per se does not create a right to royalties. Rather, a licence agreement does (but see comment below);
  • Royalties represent “earnings” and not “capital” which, in any event, require exchange control approval under reg 3(1)(c); and
  • The failure to obtain exchange control approval  (where it is required) does not necessarily render a transaction void:

a.     The absence of exchange control approval does not necessarily mean that parties should be punished criminally. Circumstance is important;
b.     The parties in the Oilwell case had negotiated in good faith;
c.      The Treasury could have provided consent retrospectively;
d.     Declaring the transaction void would lead to “greater inconvenience and impropriety“; and
e.     The Regulations impose penalties which should be sufficient to address the wrong.

Comment:

The finding that a patent (or for that matter any other IP right – Harms does not distinguish between them) does not create a right to royalties (see 3 above and para 13, page 6-7 of the judgement) is somewhat tenuous. For example, the infringement of a trade mark creates a right to relief which may include payment of a reasonable royalty (section 34(1)(d)). A similar provision exists in the Patents Act. Consequently, the link between the IP right and a royalty right is established by the relevant Act and not necessarily, only by a licence agreement as suggested by the judgement. Furthermore, the express right to receive a reasonable royalty does not exist under common law action of passing off dealing with unregistered rights. Even so, as Afro Leo reads the SCA judgement, this right is incidental and not of a capital nature under S10 of the Exchange Control Regulations, so no approval is required under this Section.

This judgement is unlikely to mean that exchange control approval is not required in any form of IP transaction between non-residents and residents. Such transactions may take the form of:
  • IP licences
  • Non assert agreements
  • Co-existence arrangements
  • Settlement agreements
  • Copyright assignment reversals eg following a parallel import confiscation; and
  • IP assignments (dealt with above)
It is almost certain that exchange control approval will still be required especially if royalties/payment and/or the right to receive royalties/payment is transferred. However, such approval will not be under regulation 10.  Furthermore, the absence of obtaining consent to date will not necessarily mean that transaction is invalid, which is a significant relief.

5 comments:

Tim Ball said...

I look forward to reading the judgment, but I disagree with the conclusion based on the example in your comment. I am not alone in this; Alasdair Sholto-Douglas SC sent me this comment in this regard:
"I think Harms DP is perfectly correct in saying that (registered IP rights) do not create rights to royalties. The example put up to show that he may be wrong proves the opposite: that infringement may give rise (as an alternative to damages) to payment of an amount determined by assuming a reasonable royalty does not mean that the Acts recognise that IP creates rights to royalties, only that in the event of an infringement, such Acts create a right to claim an amount calculated as if it were a royalty."

Darren said...

It's a pity a blog post is so short because I had edited that argument out of the original post, for brevity. Yes, it is an argument especially as it was inserted because damages are notoriously difficult to prove. However, the argument is less clear in the Trade Marks Act which lists (the strict wording) a reasonable royalty, not as a calculation of damages (as it does in the Patents Act) but as an independent relief in lieu of damages. Same in the Designs Act. The argument is even less clear under the Copyright Act - see for example 9A Royalties - no person may .. without paying a royalty i.e an express right to a royalty is arguably created. 9A(3) even postulates the assignment of such "right to a royalty" created under the Copyright Act. But does it matter ... if it is not "capital"?

Tim Ball said...

As I understood Alasdair's argument, his point was more that, even when considering the reasonable royalty in lieu of damages provisions, there is no automatic, EXISTING right to a royalty by virtue merely of the existence of the IP right. Something more - i.e. infringement - is required to bring the right to a royalty into being. (In respect of the copyright provisions to which you refer, however, you may well be right; I haven't really thought that through.)

But, with regard to the final point in your comment, the real reason why it doesn't matter is that (barring constitutional issues) the SCA is right even if its wrong.

Tim Ball said...

As I understood Alasdair's argument, his point was more that, even when considering the reasonable royalty in lieu of damages provisions, there is no automatic, EXISTING right to a royalty by virtue merely of the existence of the IP right. Something more - i.e. infringement - is required to bring the right to a royalty into being. (In respect of the copyright provisions to which you refer, however, you may well be right; I haven't really thought that through.)

But, with regard to the final point in your comment, the real reason why it doesn't matter is that (barring constitutional issues) the SCA is right even if its wrong.

Jeremy Speres said...

Interesting piece by Andrew Rens covering the judgement from the perspective of foreign investment in SA startups, available here.