Assignments of trade marks where no prior Treasury approval has been obtained
15/09/2010

Assignments of trade marks where no prior Treasury approval has been obtained – the Reddot / Oilwell conundrum

Commentators have noted that if all the physical assets of The Coca-Cola Company were to be destroyed (e.g. the buildings, the trucks, the bottling companies), the COCA-COLA trade mark and other intellectual property would be sufficiently valuable to enable a positive cash flow within one year. It is a well-known fact that intellectual property rights such as trade marks, patents and designs, are very valuable assets and can generate or sustain income streams, the lifeblood of any business. But do the rights in and to these assets constitute capital? And if so, is exchange control approval required where these rights are exported?

Intellectual property is a species of incorporeal property and the transfer of ownership, or proprietorship, takes place by way of an assignment agreement. In addition, intellectual property is by its very nature territorial, affording the proprietor protection in the territories where that intellectual property exists. When intellectual property is assigned, it is the ownership of the rights in and to that property which changes hands.

The validity of assignment agreements where the rights in and to South African owned intellectual property are assigned to a foreign proprietor have been left hanging in the balance following the recent decision of the North Gauteng High Court in the case of Oilwell (Pty) Limited v Protec International Limited and Others (case no. 44835/08)( “the Oilwell case”).

Regulation 10(1)(c) of the Exchange Control Regulations (“the Regulations”), promulgated in terms of Section 9 of the Currency and Exchanges Act no. 9 of 1933, is aimed at the protection of South African capital reserves and provides that:

“10(1)(c) 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.”

In 2004, the Witwatersrand Local Division of the High Court delivered a decision in the case of Couve and another versus Reddot International (Pty) Limited and others 2004 (6) SA 425 (W) (“the Reddot case”). In this case, the Court was requested to make a decision on the validity of an assignment agreement which brought about a change of ownership in certain patent applications. A foreign company was to acquire 60% of the ownership of the patent applications due to an allotment of shares.

Neither “capital” nor “export” are defined in the Currency and Exchanges Act or the Regulations. The Court held that the rights in and to patent applications have monetary value and these rights as well as the concomitant right to receive royalties constitute “capital”. The foreign company would have gained a direct and material interest in the rights in and to the patent applications and the concomitant right to receive royalties and the Court found that the net effect of the assignment was to directly, or, at the very least, indirectly, export or partially export capital.

The assignment agreement was therefore held to contravene the provisions of Regulation 10(1)(c).

With regard to the effect of the contravention, the ordinary rule, so the Court pointed out, is that, where an enactment says “no person…shall…” the Legislature intends the transaction thus prohibited to be null and void. However, this is not an inflexible rule and the purpose of the legislation must be considered. The Court went on to consider the aim and object of the Exchange Control Regulations and the serious light in which contraventions of the Regulations are viewed by the Legislature as well as the Courts and consequently held that the assignment agreement was indeed null and void.

In light of the Reddot decision, it has until recently been widely accepted that Treasury approval is a prerequisite for an agreement whereby intellectual property is assigned from a South African entity or individual to a foreign proprietor. In November 2006, an amendment was made to the Exchange Control Manual, presumably as a result of the Reddot case, to the effect that the disposal of intellectual property requires prior Exchange Control approval.

Then came the Oilwell case which again involved the validity of an assignment agreement, but this time the subject of the agreement was a registered trade mark.

The applicant, a South African company, was previously the proprietor of various trade mark registrations in South Africa and abroad. On 4 July 1998, an assignment agreement was entered into between, inter alia, it and the first respondent, whereby the trade mark registrations were assigned to the latter.

The applicant sought to set the assignment agreement aside on the basis that the assignment of the trade marks (and, particularly, the South African trade mark registration) amounted to a “transaction whereby capital or any right to capital was directly or indirectly exported from the Republic” and therefore contravened Regulation 10(1)(c) of the Regulations. The applicant contended that the assignment agreement was null and void, ab initio, so that the trade mark registration was, in law, never assigned to the first respondent and was still the property of the applicant. In doing so, it relied on the Reddotcase.
The first respondent raised two arguments in limine, namely, non-joinder (which argument was not proceeded with at the hearing of the matter) and prescription. It contended that the cause of action was based upon a “debt” as intended by the Prescription Act 68 of 1969. As the debt arose at the date of the assignment, it would have become prescribed three years after the date of assignment.

The Court first dealt with the following issues:

1. whether or not the 1998 assignment agreement, entered into without prior Treasury approval, constituted a contravention of Regulation 10(1)(c) of the Exchange Control Regulations; and

2. whether such a contravention of Regulation 10(1)(c), would have rendered the 1998 assignment agreement null and void, ab inito.

Regarding the first question, the Court declined to follow the judgment in the Reddot case. The Court differentiated between the issues in the Reddot case and those in casu, on the facts since the latter case did not involve the allotment of shares or the assignment of rights in and to patent applications in contravention of Regulation 10(1)(c), but the assignment of a trade mark from a South African company to a foreign company.

The Court held that the fact that a foreign entity becomes entitled to exercise certain rights in South Africa, does not mean that these rights have been exported. The territorial nature of the right was, in the Court’s view, decisive.

In addition, the Court lent support from the 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. Contraventions of the Regulation are subject to a fine of R250 000, or a 5 years imprisonment, or both.

Taking the above factors into account, the Court held that to interpret Regulation 10(1)(c) to include the assignment of a trade mark, amounted to an approach that was too expansive and broad and, consequently, that such an approach would be erroneous.

The Court went on to point out that there was no law which explicitly requires Treasury approval for the transfer of intellectual property rights and that the exchange control manual which now specifically refers to intellectual property has no legal status and would in any event not be applicable to this matter as it was published some eight years after the conclusion of the agreement in question.

The Court agreed with the respondent's argument that the drafters of the Regulations had never considered intellectual property to fall within the ambit of the Regulations and that commercial sense, in any event, suggested that Regulation 10(1)(c) was not intended to apply to intellectual property rights because the commercial impact of this would restrict trade and industry.

For these reasons, the Court concluded that no case had been made out that the 1998 assignment agreement constituted a contravention of Regulation 10(1)(c).

Regarding the second point, the Court found that the Legislature intended the penalty imposed in the Regulations to be a sufficient punishment for non-compliance and that it did not also wish to render an agreement invalid in the case of non-compliance. It was of the view that a grave injustice would result if the 1998 assignment agreement were to be declared null and void ab inito, particularly in light of the fact that the agreement had been concluded more than 11 years previously and that there had been no duty on the applicant to tender any form of restitution in exchange for the return of the intellectual property.

Finally, the Court briefly dealt with the issue of prescription and found that the claim for the return of the trade marks had become prescribed.

The factual position in the Oilwell case was not straight forward and the effect of the subsequent conflicting decision of this case is unclear. It seems that the Reddot case remains good authority on, at least, the assignment of patents or patent applications. However, to draw a distinction between the different forms of intellectual property for this purpose, would be artificial. The safest option, until there is clear guidance on the issue, is to obtain prior Treasury approval for agreements whereby rights in and to intellectual property are assigned to a foreign proprietor.

The Oilwell case is being appealed by the applicant and attorneys and proprietors of intellectual property alike await the Supreme Court of Appeal’s direction on the future of assignments of this nature with interest.
Werina Griffiths
Associate
werina-g@adamsadams.co.za