Monthly Archives: June 2011

Why are patents so difficult and expensive?

“The UK Intellectual Property Office [UK IPO] should draw up plans to improve accessibility of the IP system to smaller companies who will benefit from it.  This should involve access to lower cost providers of integrated IP legal and commercial advice.” (Hargreaves Review 2011, recommendation number 9)

At the time of writing, we are still awaiting the UK Government’s response to the recommendations made in Professor Hargreaves’ report: Digital Opportunity – A review of intellectual property and growth.  In the meantime, the UK IPO continues to provide assistance to individuals who choose to file patent applications themselves, without taking advice from a professional patent agent.  This is consistent with the IPO’s Five Year Corporate Strategy, which includes the following statement:

“We will …further improve access to the IP system. This will include assessing whether we can do more to help unrepresented businesses and individuals make the right choices when applying for IP rights.”

Some (or perhaps most) UK patent attorneys view the IPO’s advice to self-filers with deep misgiving.  The LinkedIn Chartered Institute of Patent Attorneys discussion group (you need to be a member of the group to read its discussions) has recently been discussing this guidance from the IPO on using academic papers as the basis for a patent application.  Several patent attorneys thought this advice was unhelpful, if not downright negligent.  Some queried whether the IPO should be giving any advice to self-filers, other than to engage a patent attorney.  There was a view that “dumbing-down” advice to the level of a consumer simply wasn’t possible in the area of patents, and that the IPO should not be attempting to make it easy for self-filers.

More generally, one patent attorney, Tom Hutchison, commented:

“Here’s the crux: it takes a trainee patent attorney, who is immersed 35+ hours per week in the ‘patent process’, on average, 4 years to pass the UK and European drafting exams. The failure and attrition rate is high and that’s because the exam is hard, and that’s because drafting is just plain difficult.”

This comment prompts IP Draughts to ask some dumb questions. Why is it so difficult?  Could it be made any easier?  And will Government accept the view that it is impossible to make it simpler, cheaper and more user-friendly for inventive consumers?

On the last of these questions, the Hargreaves recommendation quoted above suggests a different direction of travel.  Governments are inherently suspicious of professionals arguing for the status quo, as solicitors know only too well.  Might the examples of licensed conveyancers and professional will-writers, relatively new breeds of quasi-professionals who compete with solicitors, provide Government with a template that they feel could be extended to patent writing?  Could we see the emergence of a new, paralegal-level adviser on patents who will provide a cheap, consumer-focussed service?  Or will the IPO expand its help-desk services to the point where self-filers can find all the advice they want under one roof in Newport?

UK Governments have extensively reformed the market for legal services in recent years.  In some areas, patent agents have benefitted from the reforms, eg through rights of audience in the courts.  The most intrusive development for patent agents has probably been the formation of IPReg and all that goes with it.  It remains to be seen whether Government will introduce major reforms to the market for patent services in response to the Hargreaves recommendations.

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Filed under Intellectual Property, Legal policy

Inappropriate use of indemnities

Too many contracts include indemnities.  IP Draughts has noticed a increasing trend to include indemnities in commercial contracts, in recent years.

First, we need to distinguish between two types of indemnity.  Take the example of a contract between A and B, under which A is engaged to manufacture a pharmaceutical drug for B, to B’s specification, which B will use in human clinical trials.

A third party indemnity allocates responsibility between A and B for dealing with third party claims or liability.  In the present example, a patient might be injured by the drug.  The manufacturing contract may provide that, if a patient brings a claim in respect of that injury:

(a) if the injury arose because the drug was inherently toxic or harmful, B will indemnify A against the patient’s claim; or

(b) if the injury arose because A introduced some contaminent into the drug during the manufacturing process, or otherwise failed to make the drug to B’s specification, A will indemnify B against the patient’s claim.

Third party indemnities can be contrasted with an inter-party indemnity, e.g. where A indemnifies B against any loss or damage suffered by B, if A fails to perform its obligations under the agreement or is in breach of a contractual warranty.  In the present example, if A fails to deliver the drug by the contractual delivery date, B may have a claim against A for any losses suffered by B arising from that breach.  The contract may provide that A will indemnify B against such losses.

IP Draughts is happy to see third-party indemnities in contracts such as the manufacturing contract described above.  Our concern relates to the over-use of inter-party indemnities.

In the past, a conventional response among English lawyers would have been to query the need for inter-party indemnities.  If A is in breach of contract, B will have remedies under the general law of contract.  There is no need for an indemnity as well.

From A’s perspective, an indemnity in this situation is unattractive.  Depending on how the indemnity is worded, it may remove some of the protections given by general contract law to the party in breach.  Under general contract law principles, B would have to demonstrate that the loss suffered is not too remote from the breach, and B would have to mitigate his loss.  These protections may be swept away by the indemnity (although there is some case law to suggest that mitigation of loss may still be required).

If B’s objective is simply to maximise its legal position, then an indemnity may be attractive.  However, if parties are negotiating on the basis of trying to reach a “reasonable” position, an indemnity may be considered rather one-sided.

IP Draughts believes that the trend towards increasing use of inter-party indemnities has come from the US, where different legal rules operate.  US lawyers have told us that, if a winning party in contract litigation is to recover its legal costs, an indemnity is required.  This is because the courts in the US do not generally award a winning party its legal costs.  English law in this area is very different; usually the winning party is awarded some or all of its legal costs.

If there is a good reason to include an inter-party indemnity in a contract, then it should be included.  However, we have negotiated contracts prepared by the other party, where it appeared that an indemnity was included merely because it formed part of the template agreement on which the draft contract was based, and where the other party had no convincing reason for including the provision.

Our general approach is: if there is no clear reason for including an indemnity, it probably shouldn’t be there.

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Filed under Contract drafting

Confidentiality agreements (part 2): often-seen negotiating issues

Our previous post on confidentiality agreements (CDAs) looked at the terms that should be included in a standard CDA.  This post considers some of the issues that are negotiated in CDAs.

Our starting point is that, in most situations in which CDAs are used, the terms of the CDA should be conventional and parties should try to minimise the transaction costs of negotiating those terms.  But even where the parties have the best of intentions, sticking points can emerge in the negotiations.  Here are some of the issues that we encounter on a regular basis:

  1. “if information is disclosed orally, it must be confirmed in writing, marked confidential and sent to the receiving party within 28 days of the oral disclosure”

This provision protects the receiving party from allegations that confidential information was disclosed orally and has been misused.  By requiring a written record of all disclosed information, the receiving party can better defend itself against spurious claims.  Many multinational companies include this provision in CDAs in which they are the receiving party.

The problem with such a clause is that it ignores the reality of many confidential discussions, in which the party do not routinely keep notes of what has been disclosed and exchange those notes, eg in meeting minutes.  By including such a clause but not following its requirements, the disclosing party may shoot itself in the foot, as (depending on how the clause is worded) the receiving party may end up not have any confidentiality obligations for orally disclosed information.

We have had clients who like the requirement to confirm information in writing, and clients who hate this requirement.  Most of our clients wish the requirement to be removed from CDAs.

  1. “this Agreement is made under [Luxembourg] law and is subject to the exclusive jurisdiction of the [Luxembourg] courts”

If the parties are located in different countries or states, each of them may prefer its own law and jurisdiction to apply to the CDA.

Non-exclusive jurisdiction may be preferable, as the most likely action if a breach of the CDA occurs will be to seek an interim injunction in the receiving party’s home territory.

If the parties reach a stalemate over law and jurisdiction (as can occur when one or more US State universities are involved), parties sometimes agree to stay silent on law and jurisdiction.  Whilst this is not ideal from a legal perspective, the commercial desire to avoid protracted negotiations is understandable.

  1. “the obligations set out in this Agreement shall continue for a period of 36 months from the Effective Date”

A logical argument can be made for having no time limit on confidentiality obligations, particularly when the CDA includes exceptions to the obligations, eg where the information is publicly known.  However, many large companies refuse to accept such an approach.  Therefore, CDAs often include a time limit, which ideally should be linked to the shelf-life of the information as a commercial secret.  In some sectors, eg banking, parties seek very short confidentiality periods eg 1 to 3 years.  This may be much shorter than the shelf life of any technical information that is disclosed.

A possible compromise is to include a clause such as the following:

The obligations on the Receiving Party under this Agreement shall continue in force for a period of [5][10][15] years from the date of this Agreement, [except that any information relating to the Disclosing Party’s technology or products in development shall continue in force for a period of [20] years from the date of this Agreement.

The above three issues are those that we see most frequently when negotiating CDAs.  Less frequently seen, but potentially important, are the following issues:

  1. “the obligations set out in this Agreement shall not apply to any information that …is developed by any of the Receiving Party’s employees who have not had any direct or indirect access to, or use or knowledge of, the Information imparted by the Disclosing Party”

This can be viewed as one of the “standard” exceptions to confidentiality that is found in many CDAs.  However, sometimes a disclosing party simply does not believe that the other party could develop the same information independently, and that any such development is bound to be through direct or indirect use of the disclosing party’s information.  In such cases, this clause is omitted from the CDA or resisted when the other party proposes it.

  1. “the Disclosing Party warrants and represents that the use of the Information by the Receiving Party will not infringe any rights of any third party”

A possible response to this request is to argue that it is inappropriate to spend time in negotiating warranties at the stage of the CDA, and that any such negotiations should occur if and when a subsequent commercial agreement is negotiated between the parties.

  1. “if the Receiving Party breaches any of its obligations under this Agreement, it shall pay the Disclosing Party the sum of ten thousand Euros as liquidated damages”

Under English law, a clause of this kind would often be unenforceable.  It is often difficult to see what financial basis there is for a payment of this kind, and it may be simply an incentive not to breach.  In our experience, such clauses are resisted and usually deleted from the final agreement.

Other drafting suggestions and commentary on the terms of CDAs can be found in our book, Drafting Confidentiality Agreements (2nd edn, Law Society Publishing, 2004).

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Filed under Confidentiality, Contract drafting

Template agreements: how do you measure their success?

A recent posting on the Koncision blog discusses the following question: how do you measure whether your new template agreement is a success?  The comments on that post suggest some interesting metrics, including:

  • how many people sign the contract without requesting changes?
  • how often is the template used by its owners without deal-specific revisions?
  • does the new template reduce the time taken between quotation and placing of an order?
  • does the new template reduce litigation over the interpretation of the contract?  This is a difficult one to measure, as most contracts do not result in litigation, so there may be no meaningful data on this metric.

Other criteria for success are less easy to measure, including:

  • are the terms of the template agreement clear and understandable?

Some of these criteria probably work better for standard terms of business (eg in sales contracts, MTAs or CDAs) than in more sophisticated contracts such as IP licence agreements.  In our experience, clients do not have formal metrics for measuring the success of their templates (but perhaps you know differently?)  Perhaps senior executives do not consider that contract terms are sufficiently important to justify formal systems of measurement, or that metrics won’t provide useful data.  Generally, we have the impression that some organisations place a low priority on investing in high-quality contract terms, as evidenced by the following:

  1. Companies that copy and paste terms and conditions from other companies’ websites.  Quite apart from copyright and quality issues, and whether the terms are commercially suitable for the stealing company’s business, the other company’s terms and conditions may have been drafted with another jurisdiction in mind.  This can make a big difference to the legal enforceability and interpretation of the terms.
  2. A variant on the above is using a contract that you received from another organisation in an earlier transaction.  We were recently sent a first draft of an agreement by the “other side” in negotiations, where the draft’s “properties” indicated that one of us was the author of the draft (!)  Clearly, the draft had been based on a document obtained from some earlier transaction or conference; we had last seen the source document about 5 years earlier.
  3. Organisations that use the same set of template agreements for a decade or more, without any intervening legal review.  Even worse than this is where the original template agreement has been modified by the addition or deletion of deal-specific terms over the years, so that it only partly resembles the original document.  We call this version creep.

Even in those organisations where standard terms are regarded as important, the drafting and revision of those terms is often viewed as a house-keeping matter rather than an opportunity for a review of commercial strategy.

Coming back to the original question, here are some further, suggested measures of success, which could be relevant to larger transactions:

  • The other party’s lawyers don’t refuse to use the template as the basis for negotiations (this is sometimes encountered in M&A transactions, particularly where the other side uses a Magic Circle law firm)
  • The other party doesn’t complain about the length of the agreement.  Usually this is expressed as a complaint about the number of pages of text.  Where this is likely to happen, a knowledge of formatting techniques in Word can be of great assistance in reducing the page count (eg choice of font, line spacing (including spacing between paragraphs), margins, indentation, paragraphing, formatting of clause numbering, formatting of headings, use of columns etc can all make a difference).
  • The organisation’s commercial managers understand the purpose of each term of the template agreement and can articulate why the organisation considers the term to be important.

We would be interested to know if readers know of any other ways of judging whether a template agreement is successful.

Details of our publications, many of which include template agreements, can be found on the Anderson Law website here.

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Filed under Contract drafting, General Commercial