Exchange Control - South Africa

One of the issues I have busy with recently is the structuring of licensing relationships so that they comply with the fairly tight and controversial exchange control regulations imposed by the South African Reserve Bank. As usual there is the law, the practice and the people that require intense consideration - my experience is that each element needs to be considered carefully. For the benefit of readers:

The South African Exchange Control Regulations stipulate that the payment of royalties by a licensee residing in South Africa under an IP licence agreement to a non resident licensor requires exchange control approval from the South African Reserve Bank (SARB). If the terms of the IP licence provide that goods may be manufactured in RSA the SARB will look to the Department of Trade and Industry (DTI) for advice in assessing such approval. In reality this means that a typical licensee resident in RSA must submit an application to the DTI for its consideration. If the DTI approves the agreement, a Certificate of Approval will be issued to the licensee that will enable them to approach their banker directly and instruct the transfer of the royalties. Such a requirement may also be necessary where a licence covers RSA even though the licensee is based elsewhere eg the UK. Beware, licenses without exchange control approval may not be recognized by the RSA courts.

Minimum Payments

Where the licence agreement also contains clauses that stipulate down payments (eg Signature Fees), minimum payments (eg Minimum Guaranteed Royalties) and once off payments or to the extent the manufacture of products may take place offshore (to RSA), the DTI will make a recommendation to the SARB who would then consider whether or not to approve the payment(s). In practice though approval for agreements with these sorts of payments is often very difficult to obtain because the very nature of the clause may mean that it is possible for a situation to occur in which the flow of capital (in this case the royalty or down payment) out of RSA is greater than the value of the IP licensed into RSA. The very purpose of exchange control is therefore defeated. For similar reasons agreements that include Minimum Sales Targets or excessively high royalty rates (see below) are also often rejected.

Structuring to seek as few approvals as possible

In the event that approval is not granted reasons are provided by the DTI/SARB and one then has an opportunity to re-submit the application with the suggested amendments or otherwise contest the decision. If approval is granted such approval is for a maximum period of five years at a time whereupon the extension requests (up to a further five year period) would need to be made. It is obvious therefore that one should structure a licensing regime to as seek as few approvals as possible especially where multiple licensees are contemplated. Often this requires the establishment of a local business who acts as a master licensor who collects royalties and then makes one application to remit the payment or, where possible, pays out a dividend.

In all instances where a resident licensee enters into a new or a substitute agreement or the extension of an existing agreement with a non resident licensor they must submit an application. Applications are in the form of a completed questionnaire/explanation submitted in duplicate together with four copies of the draft/signed agreement and amendments/addendum, if applicable.

• Changes in the name of the licensee and/or licensor (submit the relevant "Certificate of change of name of company issued by the Registrar of Companies"); and

• Changes in the local bankers or branch with whom the SARB may communicate regarding the transfer of payments under the agreement.

Royalty rates

The guidelines for the SARB/DTI application state that royalty rates for trade marks of up to 4% on consumer goods will be approved. This often means that is necessary to structure the royalty clause so that each of the different types of IP is separate eg for a logo trade mark one may need to carve out the royalty for the copyright in the artistic work and that pertaining to the trade mark to ensure that one comes under the threshold. In addition threshold royalty calculations for subsidiary licensees create lower thresholds on the basis of this calculation: R = A(115-.5B)/100. For a 100% wholly owned subsidiary (B) charged a 5% royalty (A) the adjusted royalty rate (R) is calculated as = 5(115 - 50)/100 ie 3.25%. For a 50% subsidiary licensee (B) charged a 5% royalty (A) the adjusted royalty rate (R) is calculated as = 5(115 - 25)/100 ie 4.5%.

Time delays

The rationale behind exchange control is frequently the subject of heated debate and adding to the arguments for those that favour less/the abolition of control will be the time it takes to get approval. Despite the DTI promise of an assessment of the exchange control application within 10-14 days, most experience a two month waiting time for feedback from the SARB. In the context of the fast moving commercial world such a waiting time is ridiculously long. Take for instance a simple transaction involving the assignment of a trade mark to a non RSA resident – one needs to get a valuation (and incur the cost) and then wait for two months before approval is/is not granted. I have sat in meetings where local RSA IP advisors have simply said “do not transfer your IP assets to RSA because it is such a schlep if you ever want to get them back out” – a subject for another article perhaps!

A Call to Readers for Assistance

Stimulus overload: It is one of the terms that I fondly remember from my first course in Psychology in college and which continues to instruct me both personally and professionally. In considering subjects for this blog, I look for inspiration from multiple sources. However, I never seem to get to all of the academic and professional articles that I would like to read. Twitter has its advantages, but the sheer volume of "TinyURL" links that bombard my Twitter home page daily bears daily witness the meaning of stimulus overload in this connection.

And so--I turn to the readership of this blog. It is my wish to review relevant academic and professional articles on a regular basis. Indeed, I am working on the first post in this series. To do this well, however, I need your suggestions about appropriate articles. All suggestions are welcome (please email me here). The benefit will be both yours and mine.

High quality fake DVDs "put sex shops out of business"

The BBC, among others, has given prominence to the conviction by Southwark Crown Court (South London) of a father and his sons who between them made £7 million from a pirate DVD scam. The father, Khalid Sheikh, who lived with his sons, was sentenced to four years in prison; the sons were not so lucky, Sami and Rafi each being jailed for six years. The convictions were for conspiring to infringe copyright and trade mark law and to acquire criminal property between 2003 and 2006.

Passing sentence, Judge Martin Beddoe said: "The evidence suggested tens of thousands of burnt counterfeit material was being produced each week in so-called factories [above, right]] where vulnerable immigrants from China were patently [sic] being exploited for substantial financial reward". During the trial the court heard the gang ran a "sophisticated" operation, importing equipment from the Far East to copy new film titles that included Ice Age 2, the Da Vinci Code and Iron Manm to the "best industry standards possible".

Operating fake DVD "factories" from various properties the Sheikhs, who mainly employed illegal Chinese immigrants, produced hundreds of thousands of DVDs which were then sold on the street for as little as £3 before they were released. The father and sons, who were in receipt of state benefits, also produced pornographic and bestiality films to such an extent some sex film shops were driven out of business.

The jury was told that, while their employees were forced to work "round-the-clock in conditions of virtual slavery", the gang took first-class flights on luxury holidays and spent money in lap-dancing clubs. They also bought a £658,000 warehouse in Essex and made it the headquarters of their operation.

Police believe most of the "vast" ill-gotten gains of the scam have been smuggled out of the country. However, regarding such assets as still may be recoverable, a confiscation hearing will take place at a later date.

IP Finance notes the vast scale of the operation. Whether the £7 million was gross rather than net profit, the number of DVDs selling at £3 per unit must have been extremely large. It is not surprising that some sex shops were put out of business; what is more surprising is that the operation did not make more ripples in the local market for DVDs. It would be interesting to know what proportion of the sales was accounted for by internet trade and what other commercial manifestations of the operation could be detected in the course of unlawful commercial activity which the police apparently investigated for three years. This blog hopes that further details of the family's financial arrangements will be made available, to give a valuable insight into the risk v profit calculations which the infringers must have made before opting to counterfeit DVDs rather than engage in any other lawful or unlawful activity.

Nortel sells its patents to Ericsson

I am indebted to Joff Wild who reported on his IAM blog the recent developments on the Nortel asset sale. A few weeks back we discussed the bid by Nokia Siemens Networks on our post and significantly noted that the LTE patent rights were not included in the bid for USD 650 Million. Swedish company Ericsson pipped them with a massive USD 1.13 billion offer which included apparently the patent rights.

This apparently has upset Canadian company RIM and a number of politicians in Canada would like to see the bid overturned on grounds of national security. The Dow Jones Newswire reports, however, that the Canadian industry minister has yet to make a decision.

Our post quoted JPMorganChase who apparently had valued the patent rights at USD 2.9 billion - although a more realistic value might be USD 950 million. If we look at the USD 480 million difference in Ericsson and NSN bids and do a net present value analysis it does look as if those LTE patents would be worth around USD 950 million over their lifetime.

Ericsson have, of course, got their own portfolio of LTE patents. So they probably don't need any more to "swap" with other players. A cynic might suggest that the main reason for purchase would be to ensure that the IP rights remain in safe hands and don't get snapped up by a "troll" who wishes to extract cash from the telecommunications companies.

Opel and its Patents

IP finance ... where money issues meet intellectual property rights: Continued OPEL IP Confusion

This blog has already already reported on the possible separation of Opel from General Motors and the IP ramifications.

The latest news - reported in yesterday's edition of the Financial Times Deutschland - is that one of the bidders for the company has pulled out from the bidding process because it could not agree with GM on access to the patent rights. The FT Deutschland states that Chinese automobile company BAIC could not bridge their differences with GM.

This reminds me of the sale of Rover's patents a few years ago to the Chinese Shanghai Automotive Company. The later sale of the assets to another Chinese company Nanjing then unleashed a dispute in the press about who had the patent rights.

Just to add to the confusion - the trade mark ROVER was apparently sold separately to Tata motors, as reported here.

So where does this leave Opel? The German government are desparately trying to find a buyer to keep as much production in Germany as possible. However, the moral of this story seems to be that the rights to the intellectual property may be the most important assets that the company has (or rather does not have, as they are owned by GM). Ultimately any deal that happens is going to need to take into account not just the saving of jobs in an election year in Germany, but also the access to the IP to allow Opel to continue to make cars.

IP in Corporate Communication: Back to Basics

Attention has increasingly been paid as to how IP should be best communicated within an organization. Reduced to its most basic form, the issue is whether IP can be/should be/must be reframed into more general managerial terminology, or whether the terms and concepts are well-enough known to permit the language of IP to be free-standing within corporate communication.

Permit to me elaborate by presenting two exemples: the Direct and Indirect Approaches. The Direct Approach is taken from Subramaniam Vutha, “IP Savvy”. Vutha is an experienced Indian attorney with extensive corporate and high tech experience, including a stint in that mysterious (at least for me) position under Indian company law known as the Corporate Secretary. The Direct Approach goes something like is:

Business Strategy Manager (BSM): “I heard you speak to the management convention on the value of patents. I thought patents were ways to exclude or block rivals. But you said something different.

Prof IP Savvy: “I did say that the role of patents has changed dramatically, Earlier they were stored—and deployed only when needed—to blow up rival plans. Like ICBMs. Now they are used for all forms of co-operation as well.

BSM: Yes, you did mention patent pooling. What is that?

Prof IP Savvy: ….[I]t is only the ability to compete and block your rivals with your patents that gets you invited into a patent pool. Or that empowers you to make an attractive invitation to rivals for a patent pool.”

What is most notable about this discourse is that both the management and IP person use the language of IP as the common denominator. The role of the IP person is to clarify and sharpen the understanding of the business manager, but the assumption is that the business manager has a working knowledge of the operative IP concepts. This approach recognizes that more effective communication may require greater diversity in the language of managerial discourse, which in turn puts additional pressure on managers to gain at least a basic mastery of the IP lexicon.

The Direct Approach: A Schematic

The Indirect Approach can be seen from this excerpt based on Blaxill and Eckardt, “Putting the IAM Function at the Heart of Corporate Strategy”, IAM, July/August 2009. Blaxill and Eckhardt, former senior members at the Boston Consulting Group, are now managing partners at 3LP Advisors. Their comments can be seen as representing the managerial perspective of corporate communications. A portion of their hypothetical discussion can be summarized thus:

IP Language (“Patent/trade mark prosecution; filing fees”).

Management Language (“Asset Investment”)

IP Language (“Negative right/injunction”)

Management Language (“Market power”)

IP Language (“Licensing Expense”)

Management Language (“Cost of Goods of Sold”)

IP Language (“Infringement”)

Management Language (“Negotiating Leverage”)

The driver here are concepts taken from the business management world. It is presumed that the manager does not have the background to manipulate the IP terms without having those terms first translated into managerial language. The risk is that there will be something lost in the translation; the presumed advantage is that the manager is able to fit the IP concepts more easily into its overall managerial lexicon.

The Indirect Approach: Follow the Flow

The challenge in bringing IP to bear to management education is whether we should prefer the Direct or Indirect Approach, thereby including one approach in the classroom to the exclusion of the other, or rather fashion a curriculum that exposes the student to both approaches. In truth, however, the resolution to this question is currently more theoretical than practical, because the typical MBA program has not even begun to recognize the importance of the issue. As such, it’s time to move the issue from the theoretical to the practical, and then to move on the second-order question of which approach to prefer. For me, at least, it has become one of my central pedagogical activities.

Qualcomm's woes

Followers of the telecommunications industry will know that US company Qualcomm tends to go it alone in setting royalty rates for patents considered essential to standards. Qualcomm considers the licensing fees set to be "Fair, Reasonable and Non-Discriminatory" (the mythical FRAND terms), but much of the industry is not so sure. Qualcomm holds a number of patents to the CDMA standard which are considered relevant to UMTS.

Qualcomm is currently facing an EU Commission investigation into its licensing practices, as reported here.

South Korea is in a particularly difficult position. It had not adopted the GSM standard and instead went for CDMA technology - on which Qualcomm owns the basic patents. The Wall Street Journal reports that the South Korean Fair Trade Agency has fined it USD 208 Million for anti-competitive practices. The agency alleges the Qualcomm abused its dominant position on the South Korean market place to offer discounts. Apparently Qualcomm holds 99.4% of the South Korean market for chips (as reported on a German website here)

Just to add to Qualcomm's woes, the Japanese Fair Trade Commission have apparently issued yesterday a negative decision - as reported by Qualcomm itself on its website.