IP, exchange control and 'capital' in South Africa

Note: this post has also been posted on the Afro-IP weblog but, because of its subject-matter and given that very few IP Finance readers also follow Afro-IP, it seemed appropriate to repost it here.

Back in February 2010 a South African High Court ruled that a trade mark assignment entered into without prior exchange control approval from the South African Treasury did not contravene the South African Exchange Control Regulations. The South African Reserve Bank had previously required treasury approval from any South African entity wishing to transfer intellectual property offshore.Without approval the transfer of rights was null and void.

In Oilwell (Pty) Ltd v Protech International Limited (noted by Afro-IP here) the Supreme Court of Appeal (SCA) confirmed that foreign exchange approval was no longer required for an assignment of trade marks. The court based its decision on an interpretation of the term 'capital' in the Exchange Control Regulations, which provide that any transaction whereby capital is exported from the republic requires exchange control approval. The SCA held that a trade mark does not constitute 'capital' as envisaged in Regulation 10(1)(c) and that, accordingly, foreign exchange approval was not required to transfer trade marks offshore.

In response to this, the exchange control authorities have now amended the regulations specifically to state that 'capital' does include an IP right, whether registered or not, and that “exported from the republic” includes the transfer of an IP right to a person who is not resident in the Republic of South Africa. This means that it is again necessary for exchange control approval to be obtained when any intellectual property is assigned to an offshore entity.

Source: "Exchange Control Regulations amended in response to Oilwell decision" by Megan Reimers (Spoor & Fisher, Pretoria), Trademark Law Review, 30 July 2012

A bridge too far?

In Quick Draw LP v Global Live Events LLP and others [2012] EWHC 2105 (Ch), 30 July 2012, Sarah Asplin QC, sitting as a Deputy High Court Judge in the Chancery Division, England and Wales, had to  consider, in the context of a bridging finance agreement, whether there had been a transfer of intellectual property rights.

Quick Draw provided bridging finance by way of a loan agreement and debenture to the first defendant, Global, for the 2011 Michael Jackson Forever tribute concert. The second and third defendants, Hunt and Henry, were the concert organisers. The fourth defendant, Iambic was a company which Global set up and then commissioned to produce film and sound recordings for the concert. Once it transpired that Global was unable to repay the loan, Quick Draw brought claims relating to the financing arrangement and also claimed to have acquired intellectual property rights from Global in relation to the concert way of security for the loan.

In a 226-paragraph judgment Sarah Asplin QC upheld Quick Draw's claim and rejected Global's assertions that the IP rights were not covered by the commissioning agreement or the debenture but were owned by Iambic. The debenture should be construed as though it were a mortgage and not a mere charge; as regards copyright, the commissioning agreement operated as an assignment subject to reassignment on satisfaction of the security, covering both future copyright and debts. The judge went further, holding that there was no licence in favour of Iambic to counter copyright infringement relating to the production of an edited programme which was later made by or for Iambic.

Since Quick Draw enjoyed the IP rights, it followed that Henry had infringed copyright by seeking to authorise others to commit infringing acts and that Iambic had infringed performers' rights by making copies of the concert recordings for the edited programme and by issuing copies of the recordings to the public. There was common design between Hunt, Henry and Iambic to infringe Quick Draw's copyright and performers' rights.

In an ideal world, disputes of this nature would never arise because the terms of the bridging finance would be so crystal clear, so explicit, that the question of ownership or control of copyright and performers' rights would never come close to being in dispute.

Quick grant patents impress investors?

"The green channel patent system adopted by the UK Intellectual Property Office has, from the start, been central to our company patent strategy, allowing us to obtain patents on our innovative green technology within a year of initial conception. This has been of significant importance both in attracting investment and allowing us to demonstrate our leading edge electric vehicle technology to potential customers."

So said Chris Harrison, IP Manager for Protean Electric Ltd, in a piece for the UK IPO's 'IP Insight' newsletter in June 2011.

The company has now announced that it is to receive $84 million in new funding from GSR Ventures, New Times Group, Oak Investment Partners and the city of Liyang, Jiangsu Province, China. According to the press release, "This capital will be used to bring Protean's breakthrough electric drive technology to production by establishing manufacturing facilities in Liyang. … We will have the capability to directly supply our motors at lower volume levels, while providing licenses to our higher volume customers and partners."

The press release also notes that "Protean has been awarded 21 patents for its unique technology and design, and more than 70 additional patent applications have been filed internationally and with specific countries in North America, Europe and Asia."

Mega-Patent Portfolio Sales: Chimera or Here to Stay?

I do not usually use this blog platform to offer my counterpoint to a post by one of my IP Finance colleagues. However, I will make an exception this time in connection with Rob Harrison's interesting post of yesterday--"AOL posts profit based on Microsoft patent sale" here. Rob focused on the connection between the $1.056 billion dollar sale by AOL to Microsoft for a large chunk of its patent portfolio (Microsoft then turned around and sold a large portion of these former AOL patents to Facebook) and the rise of AOL's share price to a level not seen in years.

Rob concluded as follows:

"The whole deal has been presented as beefing up Microsoft's patent portfolio in the search business and helping Facebook's patent dispute with Yahoo. Certainly the volume of patents probably means that both companies have probably a better arsenal to defend themselves in this and future patent suits. AOL's shareholders can comfort themselves in having realised value from a substantial IP portfolio built up over the past fifteen years."

I have recently questioned elsewhere ("Of Medieval Marauders, Tulips and and the Sale of Patent Portfolios", here) whether the sale of these mega-patent portfolios, starting with the $12.5 billion sale by Motorola Mobility to Google, is the most graphic example of the potential value to be extracted from a properly developed patent portfolio, or the result of a number of idiosyncratic circumstances that have created a distorted market for patents, bordering on being a full-fledged patent bubble (interestingly, an item this week suggests that, contrary to previous accounts, patents may not have been the sole driver for the Motorola Mobility purchase. As reported by Washingtonpost.com on July 25th, "A report from VentureBeat highlights that Google’s acquisition of Motorola Mobility was only partially fueled by patent acquisitions, which many suspected was the main drive behind the deal. The report says that only $5.5 billion of the $12.5 billion deal went to patent acquisition. Google hasn’t provided much information on its strategy for Motorola, saying only that everyone should expect “some changes” at the hardware maker.").

Circling back to the AOL-Microsoft transaction, I would make the following comments in response to Rob Harrison's observations, to try and get a better understand the nature of the $1 billion plus payment received from Microsoft.

1. How much did AOL expend over the years to register, maintain and enforce these patents over the 15-year period?

2. To what extent did AOL receive licensing fees from third parties with respect to these patents?

3. What portion of salaries and other company resources can be attributed to the invention and registration of these patents?

4. To what extent did expenditures in the patent portfolio constitute forgone investment in other AOL activities?

5. Can we determine a rate of return with respect to these patents? How does it compare with the rate of return on other AOL assets?

6. As a matter of policy, to what extent should patents primarily serve the shareholder's interests in boosting share price by a one-off enhancement of revenue within the company?

7. Is the sale of the patents in the name of shareholder value another way of saying that management did not make effective internal commercial use of its patents?

8. Is it any coincidence that sale of these mega- patent portfolios has occurred about the same time as investment banks have made a push to introject themselves into this market (and earn substantial fees as a result), see "Investment Banks Seek Business in Patent Deals as M&A Work Slows", Bloomberg.com, June 25th here?

It appears that the sale of mega-portfolios of patents is not going away, especially in these difficult economic times and, with it, increasing questions about what is going on.

AOL posts profit based on Microsoft patent sale

The share price of that old dinosaur of the Internet, AOL, has recently reached levels which haven't been seen for a number of years. The sale of a large proportion of its patent portfolio to Microsoft earlier in the year lead to a major increase in its share price as can be seen by its share price. AOL reported its second quarter earnings a few days ago and the brightest spot was the USD 1.056 billion (milliard) transaction with Microsoft for the sale of the patents (and licence for the rest of the portfolio). This is being returned to AOL's long-suffering shareholders in the form of a Dutch tender in which they will be invited sell their shares back to the company. Intriguingly Microsoft then sold a large proportion of the portfolio onto Facebook. This was not entirely surprising since Microsoft and Facebook have been friendly for a number of years - including allowing Microsoft's Bing search engine to mine into Facebook data. The whole deal has been presented as beefing up Microsoft's patent portfolio in the search business and help Facebook's patent dispute with Yahoo. Certainly the volume of patents probably means that both companies have probably a better arsenal to defend themselves in this and future patent suits. AOL's shareholders can comfort themselves in hang realised value from a substantial IP portfolio built up over the past fifteen years.

Cyprus offers 2% -- can you do better?

A couple of years ago, IP Finance posted a question: "Intellectual property tax havens: where's best?"  This question didn't receive many responses at the time, but IP Finance's readership has grown greatly since May 2010 and the same question, posted today, might attract far more answers.

This slightly historical musing has been prompted by the news, from Stefan Nolte of Shanda Consult, Cyprus, that 2% is the effective tax rate on income from IP in Cyprus. Stefan writes:

"A recent amendment to the tax law, in force since 06 July 2012, provides 80 % tax exemption on income from IP. The remaining 20 % of the income from IP are taxed at ordinary 10 % corporation tax, which results in an effective tax rate of 2 % on the income from Intellectual Property. 

Intellectual Property includes: patents, brand names, software development, copyrights on music, visual productions (film, TV etc), book etc. 

Income from IP: income from the sales of IP or from license fees received for granting the right to use IP. 

Depreciation of IP development costs or IP purchase costs is 20 % annually".

Can readers from other jurisdictions improve on this? And can they also warn of possible downsides that low-tax seekers might not appreciate if locating their IP portfolios in tax havens?

German sublicensees enjoy protection even after termination of main licence

The German Federal Court BGH issued two decisions today aimed at protecting investors in intellectual property licences. Both decisions concerned copyright issues in which the copyright owner licensed the copyright to a licensee, but later terminated the license. The licensee had in the meantime sub-licensed the rights to others. The question in both cases was whether the sub-licensees still had a right to use the intellectual property. The court decided yes - the investments made by the sub-licensees justified the continuation of the licence. The court made it clear that its decision also applied to other IP rights, such as patents, trade marks and design rights.

The first decision concerned a software licence. The owner of the copyright had given a company its exclusive rights to a software program. The licensee in turn sub-licensed a further company to use the software. The main licence was cancelled due to non-payment of licence fees. The copyright owner sued for copyright infringement due to continued use of the software. The court decided that the termination of the main licence did not lead to a resultant termination of the sub-licence agreement. The sub-licensee had a continuing right to use the software.

The second decision concerned the rights to the jazz piece “Take Five” from Paul Desmond. The copyright owner assigned the European rights to a music publishing house, which in turn licensed these rights for Germany and Austria to a sub-licensee. The original licence was terminated in 1986 and the court was asked to rule on whether the sub-licensee still had the rights to the music in Germany and Austria. The court agreed that the rights were still in existence, despite the termination of the main licence.

The court came to its decisions by reviewing German Intellectual Property Laws relating not only to copyright, but also to trade marks, design rights and patents. It concluded that there was a principle under German law according to which licences remained in existence, even if the underlying IP right was assigned to another owner. The sub-licensee would have invested on the basis of the existence of the licence. It could normally neither influence nor foresee the termination of the main licence. It might suffer great economic damage or even be threatened in existence if the continued existence was in doubt.

The owner of the copyright (in this case) would not be adversely affected since it could usually require its former licensee to assign the proceeds from the sub-licence to the copyright owner.