The Exchange Control Regulations (the “Regulations”) have been amended with effect from 8 June 2012 (Government Gazette No. 35430) to provide that transfers of ownership of intellectual property from a South African resident to a non-resident now require prior Treasury approval.  While this amendment to the Regulations has drawn comments or criticisms from commentators, these have principally related to, inter alia, the apparent reversal of the stated policy of relaxing exchange controls or the alleged invalidity of the amendment.  In contrast, the purpose of this note is to briefly examine some of the possible implications of this amendment, particularly the extent to which assignments or transfers of ownership of intellectual property from a South African resident to a non-resident will require Treasury approval.  Although this amendment was effected to address the consequence of a recent judgment of the Supreme Court of Appeal concerning the assignment of trade marks, as noted above, it is not confined to trade marks.  The ownership of copyright will be used to illustrate some of the implications of this amendment.

Background

In Oilwell (Pty) Ltd v Protec International Limited ([2011] ZASCA 29), the brief facts were that Oilwell (Pty) Ltd (“Oilwell”) assigned its trade mark “Protec” in South Africa, and elsewhere (including pending trade mark applications), to Protec International Ltd (“PIL”).  Crucially, however, the case only concerned the South African registered trade mark, which Oilwell sought to reclaim on the basis that the assignment was ineffective because it was in contravention of the Regulations as PIL was a non-resident entity and no Treasury approval had been obtained.

The Regulations (reg 10(1)(c)), issued under the Currency and Exchanges Act, No 9 of 1933 (the “Act”), prohibited the export of capital by a resident to a non-resident without Treasury approval, and one of the issues the court had to determine was whether the assignment of the South African trade mark from a resident to a foreign (non-resident) entity amounted to the export of capital.  In determining what constitutes “capital” in this context, the court considered the purpose of the Act (and the Regulations), and found to be the preservation, and regulation, of foreign currency resources.  Given the purpose of the Act (and the Regulations) and the potential consequences of non-compliance (including criminal liability), “capital” had to be restrictively defined; it therefore meant funds for investment, or money that can be used to produce further wealth, that is, capital in the financial sense.  Capital did not simply mean something with a monetary value, that is, it did not simply mean capital in an economic sense, such as immovable property or other tangible property.  Neither did it mean capital in the accounting sense.

The rights in a trade mark were said to be analogous to immovable property as they are territorial in nature, and, as such, cannot be exported.  Significantly, the court, in an obiter remark, considered that the same principle would apply equally to patents, designs and copyright.  Interestingly, the court held that the rights to ownership of intellectual property rights should be distinguished from the rights to income derived therefrom in the form of royalties, established by contract, which were already regulated in terms of the Regulations (reg 3(1)(c)), and which could not be transferred to a non-resident without Treasury approval.  The underlying logic of the Regulations was that even if the ownership of intellectual property was transferred to a non-resident, any money in the form of royalties or other income payable to the new, non-resident intellectual property owner could not be remitted from the country without exchange control approval (which is what the government sought to prevent), with the result that there was really no need to regulate the transfer of the ownership of such intellectual property.  With respect, it is submitted that the approach adopted in the Oilwell judgment is correct and doctrinally sound.  The position of the state in preventing capital from leaving the country, or preventing the diminution of currency reserves, is not compromised by allowing ownership of intellectual property to be transferred to a foreign person.  Intellectual property, being a creature of South African statutory law (comparable in this respect to a piece of land), cannot physically leave the country, as could, for instance, happen in the case of a painting or similar tangible movable article.  Why therefore seek to restrict the transfer of ownership of intellectual property any more than the transfer of the ownership of land or other tangible property to a foreign resident, when the latter can be freely transferred to a foreigner without Treasury approval?  The court, therefore, correctly held that no Treasury permission was required to assign such rights to a non-resident person.

Amended Regulations

In response to the Oilwell decision the Regulations have been amended to require Treasury approval for assignments of ownership in intellectual property rights.  While not defining what is included in the term “intellectual property rights,” the Regulations now provide that “capital” for purposes of regulation 10(1)(c) includes any intellectual property right, whether registered or unregistered (reg 10(4)).  In addition, the scope of transactions which could constitute an “export” from the Republic has been extended well beyond an assignment or transfer of intellectual property rights to a non-resident person; it also includes the creation of a security interest over any intellectual property right in favour of a non-resident person.

Analysis

Although the amended Regulations have not defined “intellectual property rights,” they expressed to include registered and unregistered intellectual property rights (reg 10(4) sv “capital”).  While it obviously applies to registered intellectual property like trade marks, patents and designs, it is not clear whether applications for the registration of such intellectual property will be covered by the regulations.  The Oilwell case emphasised that, in relation to intellectual property rights which are required to be registered, until registration, no rights exist.  While this would, for example, mean that an applicant for a patent, trade mark or design registration would not have any assignable rights, the question arises whether such an applicant could now cede its prospective rights to its registration (contractually bind itself to assign such rights on registration, or in the case of a pending trade mark application, the application itself) without Treasury approval.  It is not clear whether the reference to “unregistered” intellectual property rights is intended to include applications for registration intellectual property rights, or whether it simply refers to intellectual property which requires no registration such as copyright.  If cession of prospective rights without Treasury approval is permitted, would the subsequent assignment of rights on registration require Treasury approval?  Additionally, it is not clear whether unregistered intellectual property is simply a reference to copyright or whether it includes other intangibles such as trade secrets, know-how or goodwill.  The Oilwell decision expressed no view on whether intangibles such as trade secrets, know-how or goodwill are territorial in a manner analogous to immovable property.

More significantly, the Oilwell decision was at pains to emphasise that it only concerned the South African registration of the Protec trade mark.  In other words, the case only concerned the assignment of South African intellectual property rights, owned by a South African resident, to a non-resident person.  The court held that because of the territorial nature of intellectual property rights, at least, those rights which are registered, they cannot be exported.  If the intention of the amended Regulations were to provide clarity, they appear to have failed to achieve that result.  As the amended Regulations have not defined intellectual property rights as being South African intellectual property, it is arguable that, as drafted, Treasury approval is required in respect of any intellectual property rights owned by a South African resident which is to be assigned to a non-resident, irrespective of territory in which such intellectual property is deemed to be located.  For example, an author of a literary work such as a novel, who is resident in South Africa, will own the copyright in such work.  Given the reciprocal obligations of the states who are signatories to the Berne Convention for the Protection of Literary and Artistic Works, 1886, the author will be afforded the ownership of copyright in numerous other countries, allowing the author the exclusive right to exploit such work in each of such jurisdictions.

The consequence of the Oilwell decision was that such an author would be able to assign the South African copyright in such work without Treasury approval because there would be no export of such rights.  Similarly, no Treasury approval would have been required in relation to the assignment of the ownership of the copyright vesting in the author in any other jurisdictions, as such rights would presumably be located in each of the respective jurisdictions.  Accordingly, there could be no suggestion that such rights were being exported from South Africa.  However, following the amended Regulations, it is arguable that Treasury approval may now be required not only respect of the assignment of the ownership of the South African copyright in such work, but also in respect of the ownership of copyright vesting in the author in any other jurisdiction.  This result would, in any event, be consistent with the treatment of the rights to income derived from such works in the form of royalties, pursuant to regulation 3(1)(c).

Unfortunately, the amended Regulations are simply another example of sub-standard drafting; something we have become accustomed to seeing in legislation or regulations over the past few years.  It is submitted that the root cause of this problem is that the responsible individuals lack the requisite expertise of the substantive issues which they are seek to regulate, and fail to adequately consult on the proposed course of action.  Most undesirable legal uncertainty is thereby created and this is detrimental to all.  It results in an inefficient use of resources because an inordinate amount of human effort is spent on trying to determine the meaning and implications of such drafting, and possibly costly litigation.

Another alarming trend signified by the amendment to the Regulations is the introduction of unwanted and undue formalities, and complications into the commercial exploitation of intellectual property.  This trend has manifested itself in recent legislation affecting intellectual property like the Intellectual Property Rights from Publicly Financed Research and Development Act, 2008 and the Intellectual Property Laws Amendment Bill (the infamous so-called “Traditional Knowledge Bill”) which introduce a plethora of bureaucratic measures such a state approval of the content of licence agreements and the like.  Measures of this nature complicate and impede forging commercial relations in respect of intellectual property and could lead to the providers of much needed and desired foreign investment questioning whether it is worthwhile to do business in South Africa.  Our country’s competitors for foreign investment do not have measures of this nature and may well be more attractive.

What actually is the government seeking to achieve with this legislation?  If its objective is to discourage would-be foreign investors and to retard business activity involving intellectual property it is going about matters in the right way.

Sadulla Karjiker