Transfer of Intellectual Property and Exchange Control Approval
In recent years there has been much debate over the question whether the assignment of intellectual property from a South African entity or person to a foreign entity or person requires the exchange control approval. Regulation 10(1)(c) of the Exchange Control Regulations, which was promulgated in 1961 provides that:
“No person shall, except with permission granted by the treasury and in accordance with such conditions as the Treasury may impose, enter into any transaction whereby capital or any right to capital is directly or indirectly exported from the Republic.”
This issue was initially answered in the case of Cove and Another v Reddot International (Pty) Limited and Others 2004 (6) 245 (W) (“Reddot”).
In the case of Reddot, the High Court – Witwatersrand Local Division, as it was known then – decided that were intellectual property assets were assigned or transferred to a foreign entity or person, it would be necessary to produce the necessary exchange control approval. Failure to do so would render the transaction null and void, ab initio.
The cases of Reddot pertained to the assignment of rights to a patent and, in this case, the court found that because the transaction was illegal, in the sense that it was entered into in contravention of Regulation 10(1)(c), it was null and void, ab initio, as the transaction never occurred.
In the recent case of Oilwell (Pty) Limited v Protec International Limited and Others (case number 44838/08 – which judgement was delivered on 17 February 2010) (“Oilwell”), the North Gauteng High Court declined to follow the decision in the Reddot case. The Oilwell case pertained to the assignment of trademarks and, in this case, the court ruled that due to the territorial nature of intellectual property rights registered in South Africa, these rights are not exported. The court ruled that all that may be exported are the proceeds generated by the exercise of the rights pertaining to the intellectual property.
In the Oilwell case, the court found that Regulation 10(1)(c), when enacted in, was not intended to apply to intellectual property rights, because the commercial impact of such application would obviously be restrictive on trade and industry.
Accordingly, it was found that the assignment of intellectual property without the prior treasury approval did not constitute a contravention of Regulation 10(1)(c).
The court further stated that in accordance with the rules of interpretation of status, which dictates that where a contravention is visited by a penalty, as in the present case, the contravention of Regulation 10(1)(c) would be subject to a fine of R250 000 or five years’ imprisonment or both, as imposed in terms of Regulation 22, the wording of Regulation 10(1)(c) must be interpreted both narrowly and strictly.
The court came to the conclusion that to interpret Regulation 10(1)(c) as including the assignment of a trademark, amounts to an approach that is too expensive and broad, and consequently approach that erroneous.
It is of interest to note that in the Oilwell case, the court recorded that the provisions of the exchange control manual have no legal status and is therefore a mere internal guideline and not a source of any legislative power for discretion.
Therefore, following the Oilwell decision, exchange control approval is not required for the assignment of intellectual property; however, exchange control approval would be required for the export of capital/funds resulting from the commercialisation and exploitation of such intellectual property.
It is therefore important that when structuring cross-border transactions involving the commercialisation of South African intellectual property, that the necessary exchange control approval is procured from the exchange control authorities.
DM Kisch Inc. provides a full spectrum of services pertaining not only to registration and protection of intellectual property, but also to the structuring of transactions aimed at the commercialisation and exploitation of intellectual property.
All material subject to our Legal Disclaimers.