Exchange control and cross border IP transactions: Is this the end of Couve?

In February 2010 the North Gauteng High Court handed down an important judgement in the case of Oilwell (Pty) Limited v Protec International Limited & Others (Protec), relating to the question of whether prior exchange control approval from Treasury before South African IP can be assigned to a foreigner.

Regulation 10(1)(c) provides:

10(1):- No person shall, except with permission granted by the Treasury and in accordance with such conditions as the Treasury may impose:

(a)...
(b)...
(c) enter into any transaction whereby capital or any right to capital is directly or indirectly exported from the Republic.

Until the Protec case, the only reported case in this field was Couve & Another v Reddot International & Others 2004 (6) SA 425 (W) (Couve). The Couve case concerned the assignment of patent rights and the subsequent allotment of shares to inter alia a foreign entity.

In Couve, the court made two significant conclusions:-

1. An assignment of IP to a person or entity outside the Republic is one whereby capital is exported, and as such contravened Regulation 10(1)(c) unless prior approval from the Treasury was obtained; and
2. Such a contravention would result in the entire underlying agreement being null and void ab initio (ie as if it was never entered into at all).

These consequences are extremely severe, and the Couve decision has been criticised widely over the years. Now, some six years later, the facts in the Protec case are interesting: in 1998, an agreement was entered into for the assignment of a number of trade marks, including a South African trade mark, to a foreign company. This was done without Treasury pre-approval. Oilwell, one of the original assignors, requested the court to find that, since the assignment agreement had been entered into without the prior approval of the Treasury, the agreement contravened Regulation 10(1)(c) and is therefore null and void ab initio. Such a finding would result in Oilwell retaining ownership of the trade mark in question.

The facts in Protec seems to be a clear "Couve scenario". However, In Protec, the court expressly declined to follow the Couve decision, on the basis that each of the two conclusions that it drew were, in fact, wrong.

A Deeper Discussion of the Protec Judgment

The Protec judgment has allowed IP practitioners to breath a huge sigh of relief. The court, in addressing similar principles to that in Couve, has followed a more commercially practicable approach.

The first element of Couve with which the court disagrees is the wide interpretation given to "capital". In looking at the Regulations and the Act, the court found no reference whatsoever to IP. The court also relied on a rule of interpretation of statutes which dictates that, where a contravention is visited by a penalty, the wording of the prohibition must be narrowly and strictly interpreted. On this basis, the first pillar in Couve had to fall.

The court in Protec also spent some time on determining whether, in fact, there had been an "export" from the Republic, in light of the territorial nature of IP rights. It concluded that the assignment of trade mark rights to a foreign party simply means that the foreign party "becomes entitled to exercise rights in the Republic, (and it) does not mean that these rights have been exported". This argument has found favour amongst many IP practitioners.

In accepting this argument, the court accepted the Respondent's defence that, even though the trade mark assignment agreement had beem entered into without Treasury approval, this did not contravene Regulation 10(1)(c) of the Exchange Control Regulations. Accordingly, the underlying agreement was not invalidated.

Is Protec The Final Word?

Despite the clarity and incisiveness of the Protec judgment, there remains uncertainty in this contentious field.

Firstly, although the court pointed out that the rights transferred in that case were trade mark rights, and the rights in Couve were patent rights, it didn't go so far as to say that Regulation 10(1)(c) would apply to the assignment of patents, but not to the assignment of trade marks. Indeed one could be lead to the conclusion that had the court in Protec been required to adjudicate the matter on the basis of an assignment of patent rights (as opposed to trade marks) it would still have arrived at the same conclusion.

The next ground of uncertainty is that both the Protec and the Couve decisions were handed down by courts of equal rank, each attended by a single judge. While it remains to be seen whether Protec will be taken on appeal (to a full bench composed of three judges), it is fairly safe to say that, until such time as the Supreme Court of Appeal creates a binding precedent, the issue of the applicability of Regulation 10(1)(c) to IP transactions will remain firmly ensconced below the surface of murky waters.

One must also take into account the fact that neither the Treasury nor the Reserve Bank was party to these proceedings, and its interpretation of the regulations has not been tested in court. Against this background, the recent amendment to the Exchange Control Manual (which provides that the disposal of intellectual property requires prior exchange control approval) may become of paramount importance to assignments taking place after that amendment was made, despite the manual providing only compelling, but not binding, authority.

In summary, then, while Protec certainly provides relief to many, it may be only temporary relief! This is, almost assuredly, not the final word on the matter, and IP owners would be well-advised, first, to contact specialist practitioners for advice before rushing into commercial transactions – the consequences are simply too extreme to treat lightly.

Disclaimer
This article is intended to provide a brief sketch of certain principles. It is not intended to be a comprehensive statement of the law, nor does it constitute an opinion or guarantee of any kind, and should not be construed as such. It should not be relied upon as a substitute for specific advice regarding particular scenarios. Margo® Attorneys, Inc. cannot accept responsibility for the consequences of any person relying on the contents of this document for any other purpose.