Promotion and Protection of Investment Bill, 2013 – A Review

On 1 November 2013, the South African Department of Trade and Industry published the draft “Promotion and Protection of Investment Bill” (the “Draft Bill”) for comments.

The Draft Bill comes shortly after South Africa decided to unilaterally terminate its bilateral investment treaties (“BITs”) with certain European states and specifically Belgium, the Netherlands, Luxemburg, Germany, Spain and Switzerland.

The Draft Bill is intended to promote investment by modernising the current investment regime and getting investors, whether foreign or local, to achieve a balance of rights and obligations that apply to all investors when investing in South Africa.

The Government has stressed that the Draft Bill contains “more than enough clarity, transparency and certainty around the domestic investment regime” and that it provides “adequate protection to all investors, including foreign investors.”

Trade and Industry Minister Dr Rob Davies said on the Polity blog that “[the] DTI can expect opposition to certain proposed sections of the Investment Bill which are deemed not to provide sufficient protection or recourse to foreign investors aggrieved by the conduct of the South African government,” but negated this concern by stating that the provisions on expropriation and compensation were aligned to the Constitution, in which property may only be expropriated in terms of law of general application, for a public purpose, or in the public interest” and “[this] is also subject to compensation, which must be just and equitable, and in line with international best practice.”  (Read the full article here)

It is clear from the contents of the Bill, however, that the Bill does not provide the same standard of protection for foreign investors as provided under South Africa’s various BITs, nor is it subject to compensation, which is just and equitable, and in line with international best practice in all instances:

• In the event of destruction or loss of property resulting from requisition by forces or authorities of the republic investors must be accorded restitution or appropriate compensation (s7 (3) of the Bill) and in case of expropriation, investors are no longer assured of compensation at full market value, but in line with the constitution, which says compensation must be “fair and equitable” (S8 (1) of the Bill). It must consider both market value and a range of public interest concerns, such as redress for the past.
• Certain acts (and these are not limited, which creates uncertainty as to what the “other limitations” may be) do not amount to acts of expropriation:

a) A measure or series of measures taken by the government of the Republic that have an incidental or indirect adverse impact on the economic value of an investment;

b) A measure aimed at protecting or enhancing legitimate public welfare objectives, such as public health or safety, environmental protection or state security;

c) The issuance of compulsory licences granted in relation to intellectual property rights, or to the revocation, limitation or creation of intellectual property rights, to the extent that such issuance, revocation, limitation or creation is consistent with applicable international agreements on intellectual property; and

d) Any measure which results in the deprivation of property but where the State does not acquire ownership of such property provided that-

i. there is no permanent destruction of the economic value of the investment; or

ii. the investor’s ability to manage, use or control his or her investment in a meaningful way is not unduly impeded

The effect is that investors (both local and foreign) will not be entitled to compensation under the Bill if these exclusions apply.

• The Bill removes the obligation on the government to enter into international arbitration in the event of a dispute. Investors can ask the Department of Trade and Industry to facilitate mediation or can approach the courts for relief. The trade and industry minister will draft further regulations on the settlement of disputes.
• The Bill removes a provision contained in most bilateral investment treaties, namely that investors are entitled to “fair and equitable treatment”. This is commonly used to provide investors with an avenue to contest new legislation or regulation that alters, in a prejudicial way, the conditions under which investments are made.

The inclusion of S8(2) in the Bill appears to be a form of implementation of a catch all for some components of the recently published South African Draft National Policy on Intellectual Property wherein the DTI specifically addressed the introduction of compulsory licensing in the interest of public health. On the face of it S8 (2) appears to be unconstitutional.

This paper will focus specifically on Section 8 of the draft Bill insofar as far as it relates to intellectual property.

Interpretation of the Bill

Under the section “Interpretation of the Act” in section 2 of the Bill it is stated that the Act must be interpreted and applied with due regard to:

(a)  The Constitution

(b)   international law consistent with the Constitution;

(c)  customary international law consistent with the Constitution; and

(d)  any other relevant convention or international agreement to which the Republic is or becomes a party.

Protection of foreign investment is set out in Section 7 of the Act. The Bill specifically provides for compensation or restitution for loss or damage of property (including intellectual property) under certain circumstances and includes the provision that an investment may not be expropriated except in accordance with the Constitution and in terms of a law of general application for public purposes or in the public interest against equitable compensation in a timely manner (S8 (1)).

The Bill continues into S8(2) wherein certain acts (and there may be others as the list is non-limiting) do not amount to expropriation and as such no “just and equitable compensation” is due as the acts do not amount to expropriation.

This in itself firstly contradicts our national laws of patent protection and secondly is unconstitutional.

S8(2)(c) provides specifically that the “issuance of compulsory licences granted in relation to intellectual property rights, or to the revocation, limitation or creation of intellectual property rights, to the extent that such issuance, revocation, limitation or creation is consistent with applicable international agreements on intellectual property; and (d) any measure which results in the deprivation of property but where the State does not acquire ownership of such property provided that (i) there is no permanent destruction of the economic value of the investment; or (ii) the investor’s ability to manage, use or control his or her investment in a meaningful way is not unduly impeded.”

S8(2)(d) contradicts the provisions of S8(2)(c) as the “the revocation, limitation or creation of intellectual property rights,” in itself is the deprivation of property, whether the state acquires ownership or not. In addition “to the extent that such issuance, revocation, limitation or creation is consistent with applicable international agreements” renders the provisions of S8(2)(c) unclear as no international agreement on intellectual property (and we assume here the legislature intends to refer to TRIPS in particular) would support the expropriation of an intellectual property right creation, revocation, limitation of intellectual property rights by simply defining that certain acts do no not amount to expropriation or deprivation of such right” without following the appropriate legislation specifically in force to address the issuance, revocation and/or limitation of a right and most definitely not such support the entitlement of an intellectual property right owner to  “just and equitable compensation”

To place this in context it is necessary to discuss a few fundamental aspects of the South African law and the flexibilities of The Agreement on Trade Related Aspects of Intellectual Property Rights (“TRIPS”) of which we are a member and by which we are bound.

Intellectual Property rights and the Constitution of South Africa

There can be no doubt that intellectual property, being assets of a business, are property for the purposes of private law. Whether intellectual property constitutes property in terms of the Constitution of South Africa has been debated (See AJ van der Walt, “Constitutional Property Law”, 3^rd Edition (2011) note 2 at 20).

Section 25 of the Constitution does not contain a definition of property. It simply specifies that for purposes of Constitutional protection, “property is not limited to land” (S24(4)(b)). Van der Walt interprets this to mean “that movable corporeal property as well as intangibles such as commercial interest and intellectual property [are] included under the protection on section 25 as a motive cause.”

As the law treats intellectual property as “property” there is no reason why the interpretation of van der Walt is not acceptable.

As such Section 25 of the South African Constitution applies. For present purposes, the relevant part of the section reads as follows:

(1) No one may be deprived of property except in terms of a law of general application, and no law may permit arbitrary deprivation of property.

(2) Property may be expropriated in terms of law of general application –

(a) for a public purpose or in the public interest; and

(b) subject to compensation, the amount of which and the time and manner of payment of which have either been agreed to by those affected or decided or approved by the court.

(3) ……………….

(4) For the purposes of this section –

(a) ….

(b) property is not limited to land.

Section 36(1) of the South African Constitution also has relevance to the present matter. It contains the following proviso:

(1) The rights in the Bill of Rights may be limited only in terms of law of general application to the extent that the limitation is reasonable and justifiable in an open and democratic society based on human dignity, equality and freedom, taking into account all relevant factors including

(a)  the nature of the rights;

(b)  the importance of the purpose of the limitation;

(c)  the nature and extent of the limitation;

(d)  the relation between the limitation and its purpose; and

(e)  less restrictive means to achieve the purpose.

In First National Bank of SA Limited t/a Wesbank v Commissioner for the South African Revenue Service; First National Bank of SA Limited t/a Wesbank v Minister of Finance 2002(4) SA 768 (CC). (FNB case), the court held in effect that deprivation of the property (section 25[1]) is a genus of which expropriation (section 25[2]) is a species. In considering whether a particular taking of property is an expropriation, the court must first apply the test laid down in section 25(1) for a deprivation of property [1]. Expropriation of property can only conceivably take place in instances where there has been a deprivation of property.

The methodology for determining a constitutional property dispute set forth in the FNB case is summarised by Dr Mikhalien Du Bois [2] in the following terms:

• It must be determined whether the property interest in question qualifies as property for constitutional purposes.
• It must next be determined whether there was a deprivation of property.
• If there has been a deprivation of property, was it arbitrary and therefore in conflict with section 25(1)?
• If there was an arbitrary deprivation, the second step is to determine whether section 36(1) may justify such a deprivation. If not, the enquiry ends here, since the limitation is unconstitutional.
• In the event that the deprivation conflicts with section 25(1) (it is arbitrary) and cannot be justified under section 36(1),it must be determined whether the deprivation is also an expropriation.
• If it does amount to an expropriation, the deprivation must be tested against the requirements set out, for present discussion, in section 25(2). Should these requirements be met, the expropriation is constitutional and the enquiry ends there.
• However, if the requirements of section 25(2) are not met (and the expropriation in principle demands payment of compensation), the expropriation could still in principle be justified under section 36(1). If it may be justified, the expropriation is constitutional, but if section 36(1) cannot justify it, the expropriation is unconstitutional and invalid (Du Bois, op cit, 187).

The deprivation contemplated in section 25(1) was given a general description by the Constitutional Court in the FNB case as “any interference with the use, enjoyment or exploitation of private property involves some kind of deprivation relating to the entitlement to the property concerned.”

Depriving the owner of property of the use of that property thus constitutes deprivation for the purposes of section 25. Deprivation naturally also encompasses the total destruction of property, which would remove from the owner all the incidents of ownership of that property.

In the words of H Mostert and PJ Badenhorst in “Property and the Bill of Rights, the test for arbitrariness laid down in the FNB case can be summarised as “arbitrary” for purposes of section 25 when the “law” referred to in section 25(1) does not provide sufficient reason for the particular deprivation in question or is procedurally unfair.”

In other words, it is necessary for the law to strike a proportionate balance between the public purpose that it serves and the private property of which it deprives the owner. [3] The deprivation of the property must provide an effective means for achieving the end that is the objective of the law. If the deprivation is not likely to cause that end to be achieved, it will be arbitrary.

When it has been found that an arbitrary deprivation of property has taken place, it is necessary to determine whether the proportionality test provided for in section 36 can justify the deprivation. The question arises whether the proportionality test adds anything to the debate regarding arbitrariness in section 25(1). The view has been expressed that the criteria justifying a limitation of rights in section 36(1) have in effect been included in the demarcation of rights in section 25(1) itself. [4]

According to Mostert and Badenhorst, “proportionality refers to the justifiability and rationality of a particular imposition on property.” [5] It is submitted that in regard to property rights (as distinct from other types of right entrenched in the Bill of Rights), the arbitrariness test in section 25 and the proportionality test in section 36 amount to the same thing. It is difficult to conceive how a deprivation that does not provide an effective means for achieving the objective of the legislation (and is therefore arbitrary) can be justified or rational (and be proportional). Accordingly, once it is found that a deprivation is arbitrary, it will follow as a matter of course that it is not proportional and that it cannot therefore be excused or justified in terms of section 36.

For the purposes of section 25 it is necessary to distinguish between the concepts of ‘expropriation’ and ‘deprivation’. As previously stated, the former is seen to be a species of the genus constituted by the latter. This means that a particular infringement on the property right must in the first place constitute a deprivation and then, depending on its further characteristics, it may also constitute an expropriation. In terms of this approach, it is generally accepted that an expropriation and a deprivation are indeed conceptually continuous notions. [6] There is a spectrum commencing with deprivation at the one extremity and culminating with expropriation at the other extremity. At some point on the axis, deprivation metamorphoses into expropriation.

One of the most important criteria for determining when the metamorphosis takes place is the inferred requirement that expropriation necessarily entails the acquisition of the property by the state. In this regard, Mostert and Badenhorst state that under the common law, compulsory acquisition of property by a public authority for a public purpose is a prerequisite for expropriation. Opinions vary considerably as to whether this common law principle has survived the new constitutional dispensation, especially because no explicit mention is made of it in the constitutional provisions dealing with expropriation. In this regard, the Constitutional Court in the FNB case warned against referring to pre-constitutional judgements on expropriation when interpreting section 25 of the Constitution. It cautioned that circumspection was necessary because such judgements were not necessarily reliable when it came to interpreting the property clauses under the Interim Constitution and the 1996 Constitution. Uncertainty about the applicability of the appropriation requirement may render it difficult to decide whether a particular situation amounts to expropriation or not, especially when property is not taken by the state but is rather regulated to such an extent that basically nothing remains of the ownership entitlement. [7]

Mostert has expressed the view that the notion that for expropriation to take place, it is a prerequisite that deprivation should be accompanied by an acquisition of the benefits by the state seems erroneous in the constitutional context. [8]

The authorities deal with the concept of ‘constructive expropriation’. Mostert describes this concept as follows:

“A legislative or administrative measure, which has the effect of removing and destroying all the rights of the particular property holder (whether or not a corresponding advantage is granted to the expropriator or another party) without envisaging the payment of compensation, can generally be described as constructive expropriation. The intended effect of a specific imposition on an owner or property right holder should therefore be the main consideration; even if nothing in the particular legislative or administrative measure is meant to be an expropriation (or even obviously resembles an expropriation), the effect of the measure may still factually result in expropriation.” [9]

In Steinberg v South Peninsula Municipality, 2001(4) SA 1243 (SCA) the Supreme Court of Appeal said that there may be room for the development of the doctrine of constructive expropriation in South Africa in cases where a public body utilised its power to regulate private property excessively, but it left the question open. This issue was also raised and left open by the Constitutional Court in Reflect-All 1025 CC and others v MEC for Public Transport, Roads and Works, Gauteng Provincial Government and another. [10] The Supreme Court of Appeal likewise again left the question open in Minister of Minerals and Energy v Agri South Africa and another. [11]

It is submitted that there is room and justification for the incorporation of the doctrine of constructive expropriation in South African law, especially in connection with the deprivation of property in the form of intellectual property.

In the premises, it is eminently arguable that a deprivation of property that is so far-reaching or extreme as to effectively nullify or destroy all the attributes of property without actually passing ownership of a property to the state can constitute at least constructive expropriation, if not expropriation per se, for the purposes of section 25(2) of the Constitution.

Intellectual Property Rights

The rights for the different forms of intellectual property are defined in the national laws of each country and for members of the WTO incorporating aspects of TRIPS into national legislation.

In the case of a patent a valid right can be obtained if the invention meets the requirements of novelty, inventive step and industrial applicability (section 25 of the Patents Act).  In order to be registrable, aesthetic designs must be new and original (section 14(1) (a) of the Designs Act) and Functional designs must be new and not commonplace in the art in question (section 14(1) (b) of the Designs Act).

A patent (or design) can only be revoked if by means of application of revocation in terms of S61 (Article 31 in the Designs Act) or as a counter claim in an infringement action in terms of S65(4) (S35(5) of the Designs Act)).

With reference to the “applicable international agreements”, Article 32 of TRIPS provides that for any revocation/forfeiture of a patent an opportunity for judicial review of any decision to revoke or forfeit a patent shall be available and in Article 33 that the term of protection available shall not end before the expiration of a period of twenty years counted from the filing date.

As such, it is submitted that the revocation (or invalidation), or limiting of an intellectual property right without legal basis as such is a deprivation and/or expropriation of property and requires to be protected by the fundamental rights as set out in the Constitution of South Africa.

Compulsory licensing

Compulsory licensing is where a government, or other jurisdictional body, forces the holder of a patent, copyright, or other exclusive right to grant use to the state or others. Usually, the holder does receive some royalties, either set by law or determined through some form of arbitration.

TRIPS allows certain flexibilities with respect to compulsory licensing and in Article 31 of the TRIPS agreement it is stated that where WTO member states provide in their patent legislation for compulsory licences the following provisions must be made:

• each case must be decided on its own merits;
• the applicant for the compulsory licence must have made efforts to take a licence from the patentee on reasonable commercial terms;
• the scope and duration of the compulsory licence must be limited to the purpose for which it was granted, such that it may be terminated or amended if the circumstances which led to the grant of the compulsory licence change or cease to exist; in the business unit that enjoys the compulsory licence);
• the patentee must be paid adequate remuneration for use under the compulsory licence;
• the decision to grant a compulsory licence and the determination of what is adequate remuneration shall be subject to judicial review;
• where a compulsory licence is granted in order to enable a second patent to be exploited, the invention claimed in the second patent must involve an important technical advance of considerable economic significance in relation to the invention claimed in the first patent and the patentee of the first patent must be entitled (on reasonable terms) to a cross-licence in respect of the second patent.

In terms of South African law we find the provisions for compulsory licensing in S21 Act NO. 195 OF 1993 (the Designs Act of 1993) in the event of abuse of rights and in S56 of the Patents Act of 1978 as amended.

These Acts provide that in the case of abuse of rights by the right holder any person may apply to the court in the prescribed manner for the granting of a compulsory licence in respect of the registered design and/or patent.  In determining the conditions on which any licence is granted the court shall have regard to all relevant facts, including the risks to be undertaken by the licensee, the research and development undertaken by the registered proprietor or his predecessor and the terms and conditions usually stipulated in similar licence agreements in respect of registered designs/patents between persons who voluntarily enter into such agreements.

An abuse of rights is defined in the act and in essence can be summarised as follows – The patent holder is abusing his/her right when the patent holder is preventing the invention from being exploited by a third party and such exploitation:

• is necessary to meet national market demands; and
• is particularly dictated by public interest considerations; and
• consumers are supplied with the product (subject of the patent) in insufficient quantity or of inadequate quality, or at excessively high prices.

S8(2)(c) of the Promotion and Protection Bill has the effect that the current Patents and Designs Act provisions with respect to compulsory licenses will be ignored, i.e. the process to follow as well as the form of application and the provision for compensation. It further has the direct effect of depriving the intellectual property owner of the constitutional right with respect to enjoyment of the unfettered right of property.

Conclusion

S8 (2) (c) needs to be carefully reworded to incorporate reference to South African intellectual property rights laws and a clear reference included as to the specific international agreements of intellectual property that the Promotion and Protection Bill intends to include. It will have to include a reasonable form of compensation that is aligned with the Constitution, national laws, international intellectual property standards and agreements. Due care will have to be taken that the county does not breach its obligations under the TRIPS Agreement.

It is submitted that Section 8 in its present form is unconstitutional.

Prof Owen Dean and Dr Madelein Kleyn

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