Who dreamt up the idea that licensees must own their improvements?

bonkersIt’s bonkers.

According to the European Commission’s Competition Directorate (DG COMP), which sets competition (antitrust) policy for the European Union (EU), so-called grant-back clauses are potentially anti-competitive (and therefore illegal) in IP licence agreements.

What is a grant-back clause?

What is a grant-back clause? It is a clause in a licence agreement that states that, if the licensee makes any improvements to the licensed technology, the licensee is required to license or assign the intellectual property in those improvements to the licensor.

In many of the licence agreements that IP Draughts encounters, a grant-back clause would be considered normal and uncontroversial by both licensor and licensee. Consider the example of a made in chinatechnology in the consumer electronics field. The licensor is a small start-up business that has lovingly developed this technology over several years, from its origin as the bright idea of an electronics student to the point of bringing to market a commercial product. It doesn’t have the resources or experience to make and sell the product on a large scale, and it appoints an exclusive licensee for the EU territory who has experience of selling consumer electronics, and who will manufacture and sell the product. Or, to be accurate, the licensee will arrange manufacture by a sub-contractor in China.

In a recent transaction between EU-based parties, in which IP Draughts was involved, the parties discussed whether the product might need to be modified by the licensee so as to make it better from a technical or marketing perspective. During this conversation, the licensee commented, without prompting, that “of course” the licensor would own these modifications and would be free to use them after the agreement came to an end. This ownership position would be achieved by including a grant-back clause in the licence agreement.

no brainerSimple, you might think. If the licensee is willing to accept a grant-back clause, how could it possibly be anti-competitive?

Perhaps it wouldn’t, but it would be a brave lawyer who would advise that there was no risk of a breach of Article 101 of the Treaty on the Functioning of the European Union. Let’s consider why this might be.

DG COMP’s view of grant-back clauses

Stating the EU legal position on grant-back clauses accurately requires a host of qualifications, which are tedious but necessary. In the opinion of DG COMP, certain kinds of grant-back clauses, namely assignments-back and exclusive licences-back of licensee improvements, but not non-exclusive licences-back, are potentially anti-competitive. And this only applies if the agreement is sufficiently significant to affect trade between member states of the EU and is therefore subject to Article 101 of the TFEU.

So, you can drive a coach and horses through the qualifications, and the issue goes away, particularly if the licensee is willing to accept the grant-back clause? Not really. Let’s consider the issues in turn.

  1. Does the agreement affect trade between member states, so that it is subject to the Article 101 regime? The case law does not suggest that an exclusive licence agreement covering multiple territories in the EU would fall outside the EU antitrust regime.
  2. Does DG COMP’s opinion matter; surely what counts is whether there is a law prohibiting grant-back clauses? Unfortunately, Article 101 is expressed in rather general terms, and it is necessary to look at case law and practice to understand which clauses – other than the obvious no-nos such as price fixing clauses – would fall foul of Article 101. A significant part of that exercise is looking at what DG COMP considers to be in breach of Article 101.
  3. Surely if the parties have specifically agreed to a term, it can’t be anti-competitive? Unfortunately, this argument is flawed. By definition, parties who have entered into an anti-competitive agreement have agreed the offending terms. There is no principle, as far as IP Draughts is aware, in the jurisprudence, that says that if a licensee volunteers the suggestion of anti-competitive term, that makes it alright.

ice breakerIt is open to parties to undertake their own economic and legal analysis of the market, their position within the market, the effect of the term, etc, and conclude that a term is not anti-competitive. However, this may not cut any ice with the court or DG COMP, if the matter comes to be investigated or litigated. There are so many judgment calls in competition theory – what is the relevant market, how open is the market, etc, etc – that it is difficult to predict how another economist or lawyer would view the matter.

In any case, most parties don’t have the budget or stomach for undertaking an analysis of this kind. Instead, many parties prefer to fit their agreement within one or both of the Technology Transfer Block Exemption Regulation (TTBER) or DG COMP’s Guidelines on Technology Transfer Agreements.

So, what do these documents say about grant-back clauses? First, the Guidelines, which include the following text:

An obligation to grant the licensor an exclusive licence to improvements of the licensed technology or to assign such improvements to the licensor is likely to reduce the licensee’s incentive to innovate since it hinders the licensee in exploiting the improvements, including by way of licensing to third parties.

The application of Article 5(1)(a) [of the TTBER] does not depend on whether or not the licensor pays consideration in return for acquiring the improvement or for obtaining an exclusive licence. However, the existence and level of such consideration may be a relevant factor in the context of an individual assessment under Article 101. When grant backs are made against consideration it is less likely that the obligation creates a disincentive for the licensee to innovate. In the assessment of exclusive grant backs outside the scope of the block exemption the market position of the licensor on the technology market is also a relevant factor. The stronger the position of the licensor, the more likely it is that exclusive grant back obligations will have restrictive effects on competition in innovation. The stronger the position of the licensor’s technology the more important it is that the licensee can become an important source of innovation and future competition. The negative impact of grant back obligations can also be increased in case of parallel networks of licence agreements containing such obligations. When available technologies are controlled by a limited number of licensors that impose exclusive grant back obligations on licensees, the risk of anti-competitive effects is greater than where there are a number of technologies only some of which are licensed on exclusive grant back terms.

Thus, DG COMP’s position on this issue is nuanced, and the risk of a breach may be lower if the licensor pays a market price for the grant-back. For this reason, many licence agreements that IP Draughts sees include an option to acquire rights for market value, rather than a free and automatic grant-back. Judging whether the licensor’s technology has a strong market position may be a more complex issue to resolve.

The above text refers to Article 5(1)(a) of the Technology Transfer Block Exemption Regulation, which reads as follows:

The exemption provided for in Article 2 [ie the block exemption] shall not apply to any of the following obligations contained in technology transfer agreements:

(a) any direct or indirect obligation on the licensee to grant an exclusive licence or to assign rights, in whole or in part, to the licensor or to a third party designated by the licensor in respect of its own improvements to, or its own new applications of, the licensed technology;

greyThis is part of what used to be called the grey list, ie terms which fall outside the block exemption but which are not so bad as to be included in the list of “hardcore” clauses (formerly known as the black list).

Over to you, readers. What would you do in the negotiations described above? Would you include in the licence agreement an obligation to assign back improvements automatically and without further payment? Or an option to acquire the improvements for market value? Or none of the above?

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Contract drafting: art or science?

volunteerContracts are voluntary. Two or more persons come together and agree to be legally bound to one another to do things, such as make payments, perform work or deliver goods.

Subject to a few basic requirements, the law provides remedies to ensure, or at least incentivise, parties to meet their contractual obligations. Those requirements are of different kinds. There are the technical ones for a contract to exist – offer and acceptance, consideration, requirements for writing, etc. There are the public policy ones – eg obligations to do illegal things are not enforceable. There are a few others “at the margins”, eg occasionally contracts may be void for mistake, while insurance contracts are subject to greater obligations of disclosure than most contracts. There are rules on how to bring a breach-of-contract case and as to the remedies that can be obtained, but they need not detain us here.

where's the beefUsually, these requirements and rules are in the background. They provide a context for parties who enter into a contract, but they are not usually at the forefront of the parties’ minds. Instead, they care about the substance of their obligations to one another – the content of the contract.

English law cares little about that content. It is a private matter for the parties to agree. The law implies certain obligations into the contract, usually only the bare minimum to make the deal work and usually only to deal with points that the parties haven’t thought about and agreed explicitly.

The court’s main roles in a contract dispute are to work out what the parties have agreed (including any implied terms), and then work out whether they have done what they agreed to do. Often, these roles require the court to do two things: (1) identify and interpret the terms of the contract, and (2) decide what the relevant facts are, eg as to their conduct in relation to the contract.

The latter task is often messy and takes most of the time of the court – hearing witnesses, reviewing records etc. At the time of entering into the contract, this messiness is all in the future. Negotiations sometimes seem to assume a strict adherence to the procedures set out in the contract; in practice this rarely happens.

whisperThe task of construing the contract relies more on the analysis of words than the hearing of evidence of who said what to whom etc. Usually. In an ideal world. In reality, the evidence sometimes intrudes and influences the judge in his analysis. Sometimes this is considered necessary to do “justice” in the case. Anyway, judges are not computer programs and are not always consistent in their interpretation of the words used. Whisper it quietly, but some of them are not very good at linguistic analysis.

Yet, it is not a free-for-all. There are some rules on how the contract should be construed. Parties are assumed to have agreed the terms set out in a signed written contract. What those terms mean depends on the words used and how they are interpreted. Words can mean different things to different people. English law is usually interested in what those terms mean to an outsider who has the background facts. In other words, not the subjective views of the parties.

So, when it comes to interpreting contracts, there are some pressures in favour of strict linguistic analysis, and some towards a more human approach that relies partly on how the parties are perceived to have behaved. This makes it difficult to predict how a court will interpret and apply a contractual obligation. It also depends partly on the court. In the past, IP Draughts has challenged a barrister who advised that a County Court would not hold a party to do something within a strict time limit set out in the contract, as a condition of exercising certain contractual rights. Surely the contract was clear and should be enforced by the court, IP Draughts queried. Perhaps you might get that approach from some Chancery judges in the High Court, sniffed the barrister. But not in the County Court. Not on this fact pattern.

There are limits to how far good contract drafting will take you, if your objective is to win in court. But there are other reasons for drafting contracts well. Having clear contract terms may help the parties to avoid a dispute over their meaning, so that they don’t need go to court.

Thus, excellence in contract drafting and excellence as a contract lawyer are overlapping circles in the Venn diagram of commercial life, but they are not identical or even sub-sets of one another. Sometimes, as a lawyer, doing one’s best for a client may involve drafting a contract in a way that could be viewed as sub-optimal from a pure contract drafting perspective. This should never be used as an excuse for shoddy drafting.

So, is contract drafting an art or a science? Viewed as a discipline where clarity, consistency and lack of ambiguity are among the main requirements, it may be more science than art, more like a computer program than a literary essay.  For jobbing lawyers who have to deal with messy realities of life, the scientific approach has its place, but other factors may also need to be considered. These factors may include:

  • being asked to start with a template agreement whose terms have involved over time, and where the client may be both unclear on why some of the terms are present and reluctant to drop provisions that may provide theoretical protection
  • pressure from parties and their lawyers in negotiations, where sometimes it is necessary to keep one’s powder dry for the most important revisions
  • lack of time or budget to improve the drafting to the extent one would like
  • prioritising a favourable interpretation in court over clarity in drafting, if (as sometimes happens) the two conflict, eg by using jargon that one knows the court will understand, even if the parties find it difficult

As conflicting priorities and other human factors intrude into the drafting process, a more ad hoc approach to drafting is likely to be taken. This approach could be viewed as closer to an art form than a scientific process. Whatever approach is taken, the drafting should reflect a set of drafting principles that place a high priority on clarity and accuracy.

 

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Put the dates in your diary (please): 4 & 16 September

courseThe first event in IP Draughts’ Summer and Autumn programme of courses took place earlier this week – Drafting Legal Clauses in Commercial Contracts. This course has been running in different formats for over 15 years.

The next events, subject to bookings, will be:

4 September – Contract Drafting: an Advanced-Level Workshop

16 September – Intellectual Property Licensing: an Advanced-Level Drafting Workshop

Further details on these events, which are held in central London, can be found here.

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Is it career-limiting to practise IP law?

This provocative thought is prompted by considering the careers of two prominent lawyers and judges, and comparing them with those of specialist IP judges. IP lawyers who become judges seem to reach a glass ceiling at appeal court level.

Baron Neuberger of Abbotsbury

Lord Neuberger, before he became President of the Supreme Court

Lord Neuberger, before he became President of the Supreme Court

IP Draughts calls as his first witness Lord Neuberger, the current President of the UK Supreme Court. Lord Neuberger has the necessary skill-set to have been a successful IP barrister, and in fact he has been involved in judging some of the leading UK patent cases of recent years. His scientific aptitude is demonstrated by a chemistry degree from Cambridge, while his clarity of thinking and writing can be seen in his judgments and speeches. When IP Draughts ran Lord Neuberger’s judgment in the recent patent case of Virgin Airways v Zodiac through the BlaBla Meter, he scored 0.15, which is a phenomenally good score. Instead, fate took David Neuberger to Falcon Chambers, a set specialising in property law.

A few years ago, IP Draughts sought advice from specialist insolvency counsel on behalf of a university client. The question was whether patents could be assigned to a spin-out company on terms that enabled an automatic reversion of the patents if the spin-out company went into liquidation.  This is a notoriously difficult objective to achieve. Counsel’s best line of argument – an assignment of a determinable interest – relied for authority on comments from Neuberger J in a non-IP case, Money Markets v London Stock Exchange [2002] 1 WLR 1150, where he said:

It does appear well established that an interest granted on the basis that is inherently limited on insolvency is recognised by the court. In other words, a determinable interest, that is an interest with a limitation until insolvency, is valid, see the discussions in Snell’s Equity, Underwood and Hayton, and Professor Goode’s book and the passage quoted above from Fry LJ in Ex p Barter, ex p Black, ex p Walker (1884) 26 Ch D 510 at 519–520. It must, I think, follow that an interest granted on the basis that it is inherently limited on some other event is effective, even if that event occurs on or after an insolvency.

A full discussion of this legal issue must wait for another day. IP Draughts’ general point is that Lord Neuberger’s stellar career has intersected with IP at various places, but he has not been a specialist IP barrister. Might his career have been more limited if he had practised at the IP bar? Would he have become Master of the Rolls and then President of the Supreme Court? Based on the precedents of specialist IP judges, IP Draughts wonders.

Viscount Alverstone of Southampton

Lord Alverstone

Lord Alverstone

IP Draughts’ second witness may be less familiar to present-day lawyers: Lord Alverstone, who was Lord Chief Justice from 1900 to 1913. His witness statement takes the form of a book of memoirs, titled Memories of Bar and Bench, published in 1914. Some years ago, IP Draughts’ friend Edmund Longshanks QC gave IP Draughts a second-hand copy of this book. Before his elevation to the Bench, Lord Alverstone’s name had been Richard Webster. Webster had a very successful career as a barrister, appearing in most of the leading patent cases of the day, and taking instructions from clients as diverse as Lord Kelvin, Thomas Edison and Florence Nightingale (and from leading firms of solicitors such as Linklaters). The summit of his career as a barrister was being appointed Attorney General, at which point he had to turn his hand to prosecuting criminal cases, including that of the famous murderer, Dr Crippen.

Dr Crippen

Dr Crippen

In his book, Lord Alverstone emphasised the importance to his career of not allowing himself to be typecast as a patent barrister. He maintained a broad commercial practice before becoming Attorney General. For instance, he handled many railway compensation cases (compensating landowners whose land was taken over by the railways) and was leading counsel in a Board of Trade enquiry into the Tay Bridge disaster.

Admittedly the world was less specialised in the late nineteenth century than it is today. But the lesson that IP Draughts takes from these two examples is that if you focus predominantly on IP law, you may find there are some natural limits to your judicial career, no matter how talented you are. IP judges in the UK seem to get no further than the Court of Appeal, while the summit of US IP judges’ careers may be to become Chief Judge of the US Court of Appeals for the Federal Circuit. It would be interesting to see a specialist IP judge in the Supreme Court of either jurisdiction.

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