IP assignments – is mere signature and recordal of assignment required?

Intellectual Property (IP) Acts

South African IP Acts (i.e. Patent, Design, Trademark and Copyright Acts) prescribe certain requirements for an assignment to be perfected. For example, most assignments need to be in writing, signed by the assignor (the seller) and recorded on the relevant registers. Prior to satisfying these requirements, only personal rights exist, enforceable inter-parties. However, once perfected, these rights are converted into real rights that attach to the IP and are enforceable against third parties (including SARS).

Our Income Tax Act

The IP allowance section of our Income Tax Act (s11(gC)) uses the phrase “acquired by assignment”. “Acquired” presupposes an ownership interest. As such, the parties to an assignment must additionally satisfy the common law requirements for transfer of ownership. Merely satisfying the legal pre-requisites imposed by our IP Acts is insufficient.

Although mention is made to our Income Tax Act, it is my opinion that all IP assignments, irrespective of their context, need to satisfy both the common law and specific requirements detailed in our IP Acts.

Common law

According to our common law, transfer of ownership requires: (1) an intention to pass ownership of the property, and (2) delivery.

But what does ownership mean? Ownership is merely a bundle of “incidents of ownership”. Honore summarised such incidents as the right to possess, use and manage the income and the capital, including the rights to alienate, liberate, waste, consume and destroy the asset. The US additionally has regard to the risk of depreciation and hope of appreciation.

In South Africa, many assignments have been concluded that satisfy the requirements in our IP Acts only.

Sale and leaseback transactions

For example, many sale and leaseback transactions have been concluded involving “assignments” in terms of which:

  1. the assignor signs an Deed of Assignment in favour of the assignee (the purchaser) (as required by our IP Acts)
  2. the assignee records the assignment in the relevant IP Register (as required by our IP Acts)

However:

(a) The assignment forms part of a “composite transaction)” (otherwise known as a “package deal”) including an exclusive licence in respect of the IP in favour of the assignor. In so doing:
(i) the assignor retains all rights of use in the intellectual property transferred (to the absolute exclusion of the assignee);
(ii) the assignee is thereby prevented from freely commercialising the intellectual property and maximising its return on investment.

(b) The terms of the licence are such that the assignee accepts no risks or obligations in respect of the IP. For example, the following risks and obligations are typically passed back to the assignor:
(i) the obligations to enforce the IP against infringers;
(ii) the obligations to defend the IP against opposition, revocation or expungement;
(iii) the obligations to prosecute and maintain the IP; and
(iv) the risk associated with revocation or expungement of the IP.

(c) The assignor maintains control over the filling, prosecution and renewal of the IP.

(d) The composite agreement further provides for the return of the bare dominium (i.e. ownership in the IP absent of the rights licensed) to the assignor or another entity within the assignor’s group of companies. In so doing:
(i) the assignee’s right to dispose of the IP is thereby effectively removed; and
(ii) the benefit of appreciation / risk of depreciation consequently rests with the assignor or its group company.

In other words, the assignor continues to act as if it is the owner of the IP and retains nearly all incidents of ownership.

In form, the above transaction is called a “sale/assignment”, but in substance, no “ownership rights” / “incidents of ownership” are transferred. The assignee neither intends to exercise its rights as owner (incidents of ownership) nor to accept any obligations or risks normally associated with ownership. The assignee is merely an owner in name on the IP register. On the other hand, the assignor does not intend to part with any rights in the IP and continues to act as owner for the period of the licence until full ownership is ultimately regained at the end of the licence period (albeit indirectly).

Having said this, is the assignee’s retention of the right to retain royalty income sufficient to satisfy the common law requirements? In my opinion it is not. For instance, I would not expect anyone successfully to argue that an intermediary licensee, which has been given a royalty-free licence by the IP proprietor (and therefore retains all royalties received by it in terms of sub-licences) should be regarded as the owner of the intellectual property.

Support in case law

According to de Villiers JA in McAdams v Fiander’s Trustee & Bell N.O. 1919 AD 207 at p223:

“There can be no contract of purchase and sale without the animus amendi on the part of the purchaser, and the animus vendendi on the part of the seller. And it must be a genuine animus of the one to sell and of the other to buy. It is not enough for the parties to think that they have the intention, the intention must be provided as a fact apart from what they thought. Now, here it is quite clear that neither of the parties had a genuine intention, the one to sell and the other to buy the machinery. The plaintiff did not want the machinery nor did the firm intend to part with it.”

To determine whether the intention to transfer ownership exists, the Courts primarily have regard to surrounding circumstances (including circumstances that reflect incidents of ownership). Where it can only be inferred that no real intention to transfer ownership existed, the Courts have consistently concluded that no sale occurred. (See ERF 3183/1 Ladysmith (Pty) Ltd and another v CIR 1996 (3) SA 942 (AD) at p239 and Zandberg v van Zyl 1910 AD 302 at p309)

What about Conhage?

If anything, the case of CIR v Conhave lends support to my interpretation. In that case, a plant was subject to a sale and leaseback transaction. Despite a challenge by SARS, the transaction was held by our Supreme Court of Appeal to be valid, since (to a large extent) the parties could show that at the end of the lease, the purchaser could exercise some of the incidents of ownership (“it is really the provisions dealing with their fate at the end of the lease that count. …” (at p396[9]).

A similar focus on the parties’ position at the end of the lease is found in both Australian and US law. For example, TR 95/30 (Australian Tax Ruling) at par. 39 states: “Factors which would indicate, in some circumstances, that the legal characterisation of a transaction was not of sale and leaseback would include: … (c) all the risks and benefits of ownership of the asset are with the lessee after the termination of the term of the lease (this could occur where the lessee was entitled to any excess of the sale price of the asset over the residual value)”; and the US case of Coleman v Commissioner 16 F.3d 821, 826 (7th Cir 1994) (citing Frank Lyon, 435 US at pp582–84) held that a sale and leaseback will not be respected unless the owner/lessor acquires and retains “significant and genuine attributes” of a traditional owner, including “the benefits and burdens of ownership”.

Degree of control retained by the seller

In addition to having regard to the above rights (or incidents) of ownership, the Court in Commissioner of Customs and Excise v Randles, Brothers & Hudson Ltd 1941 AD 369 also inquired into the degree of control a seller is validly entitled to retain in the asset sold. In the majority decision of Watermeyer JA at p400, the Court held that the retention of “a measure of control” is permitted:

“The argument which the plaintiff is here advancing that ownership did not pass because the importer retained a measure of control over the material is the very argument which the majority of this Court rejected in Dadoo’s case and which was accepted in the dissenting judgment of de Villiers, JA. … [at p401] in the present case, when the regulation uses the words “my own property”, those words cannot be extended to mean “my own property untrammeled by any contractual obligations to manufacture the articles into specific garments and sell them to the importer after they have been manufactured. … [and at p404] The fact that he has contracted to make garments out of the material gives no real right against him and is no deduction from his full and absolute dominium in the material.”

A “measure” is defined in the Oxford English dictionary as: “degree, extent or amount”. Accordingly, the phrase “a measure of control” falls far short of “full or substantial control”. Bearing this in mind, the majority decision of Watermeyer JA in this regard does not necessarily conflict with the following statement from the minority decision of de Wet CJ in the same case at p384:

“A significant feature of the agreements between the defendant and the manufacturers was that, though the latter were supposed to get the dominium of the materials, they had debarred themselves in advance from enjoying practically all the essential benefits of ownership. They could not alienate the material and had to use it solely for the purposes of the defendant. The defendant retained full control of the material. … No doubt there is nothing to prevent an owner limiting his rights as such by contractual obligations but when the admitted owner makes over his property to another subject to such limitations in favour of the former the position is different. In such a case I would adopt the words of Solomon, JA, in Zandberg v van Zyl (at pp318 and 319 of the report):-

“The object which a purchaser of anything has in view is to acquire the dominium in that thing. Conditions of this nature attached to a contract of sale would have the effect of depriving the owner of nearly all the benefits that attach to ownership and they are of so extraordinary a nature as to raise the most serious doubt whether in fact it was ever intended that the property should pass.”

“As I have already stated it is difficult to see how under those circumstances the manufacturer could truthfully certify that the material had become his own property.”

It is submitted that this minority decision (together with the decision of Solomon JA in Zandberg v van Zyl) could prove the looking-glass into corresponding US law. The phrase “nearly all the benefits” finds a parallel in the phrase “substantial rights” in the US case of Waterman v Mackenzie 138 US 252 (1891). In that case, the Court held:

“Every patent issued under the laws of the United States for an invention or discovery contains “a grant to the patentee, his heirs and assigns, for the term of seventeen years, of the exclusive right to make, use and vend the invention or discovery throughout the United States and the Territories thereof. The monopoly thus granted is one entire thing, and cannot be divided into parts, except as authorised by those laws. The patentee or his assigns may by instrument in writing assign, grant and convey either (1st) the whole patent, comprising the exclusive right to make, use and vend the invention throughout the United States; or (2d) an undivided part or share of that exclusive right; or (3d) the exclusive right under the patent throughout a specified part of the United States. A transfer of either of these three kinds of interests is an assignment, properly speaking, and vests in the assignee a title in so much of the patent itself, with a right to sue infringers … Any assignment or transfer short of one of these is a mere license, giving the licensee no title in the patent and no right to sue at law in his own name for an infringement. In equity, as at law, when the transfer amounts to a license only the title remains in the owner of the patent; and suit must be brought in his name … Whether a transfer of a particular right or interest under a patent is an assignment or a license does not depend upon the name by which it calls itself but on the legal effect of its provisions.”

The above precedent was ultimately embodied in s1235 of the US Internal Revenue Code (IRC):

(a) A transfer (other than by gift, inheritance, or devise) of property consisting of all substantial rights to a patent, or an undivided interest therein which includes a part of all such rights, by any holder shall be considered the sale or exchange of a capital asset held for more than 1 year, regardless of whether or not payments in consideration of such transfer are -
(1) payable periodically over a period generally coterminous with the transferee’s use of the patent, or
(2) contingent on the productivity, use, or disposition of the property transferred.

Although the Waterman case was decided in respect of patents, similar considerations apply to trademarks. See IRC s1253 (the trademark equivalent of s1235):

1253 (a) General Rule – A transfer of a franchise, trademark, or tradename shall not be treated as a sale or exchange of a capital asset if the transferor retains any significant power, right, or continuing interest with respect to the subject matter of the franchise, trademark, or tradename.

Since the Waterman case, the US Courts have consistently held that all substantial rights in the intellectual property must be disposed of for a transaction to constitute a sale of intellectual property. Accordingly, sale and leasebacks are not permitted in the US where the transaction is subject to an exclusive licence in favour of the seller.

On the basis of Commissioner of Customs and Excise v Randles, Brothers & Hudson Ltd (minority decision of de Wet CJ) and Zandberg v van Zyl, it is submitted that similar considerations arguably apply in our law.

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