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On 8 June 2012 the President of South Africa gazetted a brief,
but far-reaching, amendment to the Exchange Control Regulations
which restricts the transfer of ownership (and possibly licencing)
of intellectual property from a South African resident to a
non-resident.
The amendments were made in a purported attempt to extend the
application of the regulations to "any intellectual property
right, whether registered or unregistered".
This was achieved by expanding the meaning of the otherwise
undefined term "capital". The term "exported from
the Republic" was also extended to include "the cession
of, the creation of a hypothec or other form of security over, the
assignment or transfer of any intellectual property right, to or in
favour of a person who is not resident in the Republic".
This amendment came as a surprise to practitioners in that it was
not promulgated after any consultation, nor did any announcement or
explanation accompany it. It was also surprising in view of
government's stated policy of relaxing exchange controls.
The amendments are clearly an attempt to close the gap created by
the Supreme Court of Appeal (SCA) judgment in Oilwell (Pty) Ltd v
Protech International Ltd (Oilwell Judgment) which held that
exchange control approval is not required when a South African
resident transfers ownership of intellectual property to a
non-resident.
In this regard the SCA held that the term "capital" must
be defined restrictively to mean "cash and money" and
must not include other goods such as intellectual property rights.
It was further held that intellectual property by its nature cannot
be exported.
The amendments appear to create certainty by clarifying that no
intellectual property rights, whether registered or unregistered,
may be assigned from a resident to a non-resident except with the
prior approval of the South African Reserve Bank (SARB).
However, it has also created uncertainty for the following
reasons:
Firstly, no definition has been provided for "intellectual
property right". It is not clear, therefore, whether
intellectual property goes beyond trade marks, copyright, designs
and patents to include intellectual property such as know-how and
trade secrets.
Secondly, uncertainty is created by inclusion of the word
"transfer" in the definition of "exported from the
Republic". "Transfer" is often used loosely to cover
assignments of intellectual property that involve the transfer of
ownership of intellectual property from one person to another
person. However, the term is also often used in connection with
licencing in the context of a technology transfer in terms of a
licence agreement. As a result, any licence of intellectual
property from a South African resident to a non-resident will
possibly also require SARB approval. At this stage, SARB approval
must be obtained for the assignment or transfer of intellectual
property from a resident to a non-resident.
Apart from the uncertainty created by the amendments, there is
concern that the empowering provision to make the Exchange Control
Regulations, namely section 9(1)(a) of the Currency and Exchanges
Act No. 9 of 1933, does not cover intellectual property. The
purported amendment to the Exchange Control Regulations to include
intellectual property is thus potentially unlawful.
Furthermore the section 9 power to create this restriction may
itself be unconstitutional. This is because the power to legislate
is given exclusively to Parliament by the Constitution. Parliament
may in turn prescribe circumstances in which secondary or delegated
legislation can be issued.
The potential of issuing regulations does not however mean that
the President can usurp from Parliament the power to legislate.
This constitutional protection is particularly relevant in respect
of amendments that criminalise everyday activities like the
creation of intellectual property, as alluded to in the Oilwell
Judgment.
The result is arguably that the current exchange control
regulations unlawfully and unconstitutionally restrict the transfer
of ownership (and possibly licencing) of intellectual property from
a South African resident to a non-resident.
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