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.