The Exchange Control Regulations were amended on 8 June 2012 to include within their ambit a prohibition on the export of any intellectual property rights (IPRs) without prior Exchange Control (Excon) approval.

Although the amendment appears at first blush to be a simple one it is based on a lack of understanding of the nature of IPRs and is fraught with difficulties.

The regulations have since time immemorial provided that no one may (“shall” in legislative speak), except with permission granted by Treasury, enter into any transaction whereby (a) capital or (b) any right to capital is directly or indirectly exported from the Republic.

The term “capital” was not defined and the Supreme Court of Appeal in Oilwell v Protec came to the conclusion that the term as used in the regulations did not encompass an IPR, such as a registered trademark.

In an attempt to undo one of the consequences of the judgment, the amendment defines “capital” to include any IPR, whether registered or unregistered, and “export from the Republic” as including the cession of, assignment or transfer of any IPR, to or in favour of a person who is not resident in the Republic.

This means that one may not enter into any transaction whereby an IPR or a right to an IPR is directly or indirectly “exported”, ie transferred (whether by cession, assignment or transfer or whatever), to or in favour of a non-resident.

It is suggested that designating any IPR as “capital” is over-broad and unrealistic. For one, that the term “intellectual property” is vague and dangerously open-ended, a unanimous conclusion arrived at by an all-party committee of the Australian Parliament on 27 June 2012.

IPRs may be registered or unregistered. They could relate to the traditional forms such as patent, copyright, design and trade mark rights. Importantly, however, they could extend to a host of other possible rights which may or may not be considered to be IPRs. These include performers’ rights, personality rights and rights in respect of know-how.

Furthermore, although the right in and to a patent is an IPR, the “right” in and to an invention is probably a mere expectation which might crystallise into an IPR if and when a patent is granted. A South African who has invented something has no duty to patent it locally and may apply for a patent in any country of the world. An assignment of that right is also not disposal of local capital.

The next problem relates to the “export” of an IPR. IPRs are territorial by their very nature and therefore it is not possible to export an IPR. A local IPR, when transferred to a non-South African resident is not “exported”, especially in the case of registered South African IPRs. They remain South African rights enforceable in South Africa only.

That leaves one with the exportation of a “right” to IP. Apart for the fact that IPRs are territorial they are also independent. What this means is that if someone applies for a patent in South Africa and also applies for a patent based on the same invention in the USA, two independent patents may be granted, one by South Africa and the other by the USA. They exist independently. They may belong to different parties.

Transfer of the rights in and to a patent or patent application in the USA consequently does not amount to transfer of a local capital asset and does not differ from the transfer by a South African of property located overseas to a non-resident. The regulations can only apply to local IPRs.

Copyright provides a text-book example. It arises automatically in most if not all countries irrespective where, and by whom, it is created. This means that each copyright work has its own independent copyright in every country that is member of the WTO or the Berne Convention. It cannot be exported. The local copyright may be capital locally but it surely is not elsewhere.

Problems might also arise where an employee, resident in the Republic, is required to assign any IP developed during the course and scope of employment to the employer (a non-resident). In certain of these instances it is not a matter of contract law but by statute law the employer becomes the owner of the IPR created by the employee. A typical case would be that of copyright in a computer program. Is the employment contract a “transaction”?

Another question that arises is whether the grant of a licence can amount to the exportation of an IPR. The relevant IP laws draw a clear distinction between licences and assignments but the use of the word “including” may imply that licencing agreements might be covered.

A problem for academics in particular concerns those cases where the academic writes for a foreign publication or delivers a paper overseas. Often they are required to assign their copyright without remuneration. It could hardly have been the intention to require Excon approval for such eventuality.
These are but a few examples which suggest that the net has been cast too wide, which will result in an unnecessary burden on the commercialisation of IP and lead to unnecessary of litigation.

Finally, some constitutional issues. Excon regulations are promulgated by the President in terms of the Currency and Exchanges Act 9 of 1933. The Act was adopted during the Great Depression and under a completely different constitutional dispensation. It received its teeth during especially the 1960s and 1980s in an attempt to counteract the effects of international sanctions and to prevent the flight of capital.

The Act not only allows 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 but the President may, suspend in whole or in part the Act itself or any other Act of Parliament or any other law relating to or affecting or having any bearing upon those matters; and any such Act or law which is in conflict or inconsistent with any such regulation is to be deemed to be suspended in so far as it is in conflict or inconsistent with any such regulation.

One does not need to be a constitutional expert to realize that the latter power is inconsistent with the Constitution. It then raises the question whether the President did not make use of this power in promulgating the amendment because it in essence limits the right to transfer IPRs as expressly provided for in the various IP statutes.

In addition, apart from the fact that the amendment is counter to Excon’s professed liberalization of exchange control, it is arguably overbroad, discriminatory and irrational. For instance, there is no prohibition on the “exportation” of other assets without Excon permission. Real estate or movables, whether income producing or not, may be sold to non-residents without consent. Why is it different for IPRs?

Written by Alexis Apostolidis
Adams & Adams Partner: Patent Litigation and Head : Competition Law Group

In collaboration with the Centre for Intellectual Property Law, University of Pretoria.