RSA: IP Transfers to non residents require approval

RSA: IP Transfers to non residents require approval

By Darren Olivier   Monday, June 25, 2012   No comments:

The latest development in the ongoing tug-o-war (see here and here) between the judiciary and the RSA government on whether IP transfers to non resident's require exchange control permission can be found in this month's Government Gazette (amendments to the Excon Regs by the President), extracted as:

  

"(4) For the purposes of sub-regulation (1 )(c)-

(a) 'capital' shall include, without derogating from the generality of that

term, any intellectual property right, whether registered or unregistered;

and

(b) 'exported from the Republic' shall include, without derogating from the

generality of that term, the cession of, the creation of a hypothetic or

other form of security over, or the assignment or transfer of any

intellectual property right, to or in favour of a person who is not resident

in the Republic.".

Effectively, this means that IP transfers from locals to non residents require exchange control approval. But is the amendment lawful? At least one commentator (Webber Wentzel's Benjamin Cronin) thinks not - see here:

"The reason is that the empowering provision to make the Regulations themselves, which is contained in section 9(1)(a) of the Currency and Exchanges Act 9 of 1933, refers to the ability of the President to "make regulations in regard to any matter directly or indirectly relating to or affecting or having any bearing upon currency, banking or exchanges“. This empowering provision does not cover Intellectual Property, making any purported regulation dealing with Intellectual Property potentially unlawful. [ed - but is it - the IP seems incidental and the IP acts have not changed?]

Even if one were to accept the proposition that Intellectual Property could be the subject of Regulations under the Currency and Exchanges Act 9 of 1933, then the section 9 power to create this restriction may itself be unconstitutional. This is because the power to legislate is given by the Constitution exclusively to Parliament, which in turn may prescribe circumstances in which secondary or delegated legislation (such as Regulations) may be issued. The potential for the issuing of Regulations does not, however, mean that the President can usurp from Parliament the power to legislate [ed - what if that is what Parliament had already legislated in the empowering provision ie it had empowered the President?] ...


While on the face of it, this amendment is a positive step in that it attempts to create certainty by legislating a partial definition of the term "capital" and of the phrase "exported from the Republic", neither is in fact fully defined. Further, the new phrase "any intellectual property right" is itself not defined. Consequently, this amendment creates substantial uncertainty not only because of its doubtful legality, but also because of the lack of definitional detail." [ed - agreed. to take it to the absurd - if a well known local sports star is transferred to Europe, does he need excon approval - after all he/she possesses unregistered image rights, could be brand or have valuable know-how ... and what if a humble lawyer decided to do the same]

Afro Leo is more interested though in whether a protectionist regime so clearly advocated by RSAincentivise innovation & tech transfer in the country ie job creation and growth by creating a rule that IP generated in the country cannot be transferred outside the country without permission? Surely not but then again I am not an economist - comments welcome.

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

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

By Darren Olivier   Monday, March 21, 2011   5 comments:

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.

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A huge sigh of relief

A huge sigh of relief

By Darren Olivier   Thursday, February 18, 2010   No comments:

....just swept through the IP profession in RSA (and the liability insurers).

"The North Gauteng High Court handed down judgment in the case of Oilwell (Pty) Limited v Protec International Limited and Others (case no. 44835/08) on 17 February 2010, ruling that a trade mark assignment agreement entered into without prior Treasury approval, does not constitute a contravention of Regulation 10(1)(c) of the Exchange Control Regulations, 1961, and that a contravention of Regulation 10(1)(c) would, in any event, not render such an assignment agreement null and void, ab initio."

Chris Job and Werina Griffiths summarise the news here. Some Afro-IP background here.

More comment to follow.

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