Monthly Archives: March 2012

George Clooney on Perpetual Agreements

Last week, the Draughtatrix took IP Draughts to see the latest George Clooney film, the Descendants. IP Draughts was intrigued to see George Clooney playing the role of a low-key property lawyer (albeit one who is the sole trustee, and one of the beneficiaries, of a large family inheritance on a Hawaiian island).

The unlikely premise of the film is that the family inheritance is at risk under the Rule Against Perpetuities, which invalidates certain trusts if the beneficiaries are defined too widely.  George, as trustee, needs to take a decision on whether to sell a large area of beautiful, unspoilt land to property developers.  The beneficiaries, led by a raddled bar-fly played by Beau Bridges, naturally want the land to be sold.

The other main plot-line concerns George’s screen wife, who is in hospital on a life-support machine, after a speedboat accident.

As the film dragged on, IP Draughts felt that it would have been more interesting if George had delivered a lecture on how the rule against perpetuities applied under Hawaiian law.

English lawyers of IP Draughts’ generation were taught at law school to be wary of the English version of the rule.  In an IP context, a provision stating that a licence was “perpetual” rang an alarm bell in the mind of a right-thinking lawyer, and the instinctive reaction was to delete the word “perpetual” and replace it with wording stating a long, but definite, time-period.

IP Draughts recalls doing some research on this point in the 1980s and concluding that the English rule, if it applied at all to IP licences, could only apply to the situation where future improvements of the licensed IP were brought within the scope of the licence for an unlimited period.  Such a provision was also problematic under Article 85 of the Treaty of Rome (now Article 101 of the Treaty on the Functioning of the European Union), and this was the area of law that it was worth spending time on; the perpetuity point was theoretical and of marginal significance.

At around the same time as he did this research, IP Draughts recalls seeing a trade mark licence agreement, drafted by a prestigious firm of lawyers in the City of London, in which there was a clause stating that the perpetuity period, for the purposes of the agreement, was 80 years. Specifying a perpetuity period was a way of avoiding the invalidating effect of the rule.  This is the only time that IP Draughts has seen such a provision in an IP agreement.

English law on perpetuities has been overhauled since the 1980s, most recently by the Perpetuities and Accumulations Act 2009, and the revisions make it even less likely than before that the rule is an elephant trap for the IP contract drafter.  In summary, for instruments created after 2010, the Act only applies to a limit category of trusts and wills.  Most IP licence agreements do not create trusts, so it seems that the rule cannot apply to them.

IP Draughts would be interested to know if the rule has any continuing application to IP agreements under the laws of any other country or US state.  Can any reader enlighten us?

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Filed under Contract drafting, Intellectual Property, Licensing

Arbitration of international contract disputes: which arbitration body is best?

In IP Draughts’ experience, a majority of IP licence agreements, R&D collaboration agreements and other IP-rich contracts are between parties who are incorporated in different jurisdictions.  An issue that often comes up when negotiating such contracts is which law and jurisdiction should apply to the contract.

Many factors come into play when deciding this point, too numerous to cover in this short posting.  A commonly-encountered scenario is that Party A, based in country A, would like the laws of country A to apply, and disputes to be referred to the courts of country A.  However, Party B, based in country B, would like the laws of country B to apply, and disputes to be referred to the courts of country B.

Sometimes, one party gets its own way, or the parties agree on a neutral law and jurisdiction.  Sometimes, the parties are willing to compromise on the jurisdiction point by agreeing to refer the dispute to arbitration, either in country A, country B or some mutually inconvenient location.

Where arbitration is agreed, IP Draughts’ strong advice is to have an arbitration clause in the contract that states (among other things) that the arbitration is to be conducted under the arbitration rules of a named arbitration body.  If this point isn’t covered, and unless the parties agree otherwise when the dispute arises, they will end up with what is known as ad hoc arbitration, which is not a good idea.

One of the potential advantages of litigating in the courts rather than in a private arbitration, is that national laws typically provide procedural rules on how the litigation is to be conducted.  The judge typically has sanctions that he can impose on a party to ensure that it complies with those rules.  The combination of binding rules and a strong judge should help to avoid or reduce the opportunity for a party misbehaving in the litigation, eg by missing time limits or failing to supply documents.

In an ad hoc arbitration there are no rules, other than those that a supervising court may impose.  It is much better, in IP Draughts’ view, to specify an arbitration body’s rules in the contract, to avoid this situation arising.

Which arbitration body’s rules should be chosen?  Here are IP Draughts’ thoughts on each of the main arbitration bodies.  These thoughts are based on a mixture of anecdote, advice from others whose views we respect, and some light research that we conducted a few years ago.  Obviously, you should take your own legal advice before deciding what is appropriate in an individual case.

International Chamber of Commerce (ICC): there are many international template agreements in circulation that specify arbitration under the rules of the ICC Court of Arbitration.  In IP Draughts’ view, ICC arbitration is not best suited to most of the contracts with which he is involved.  ICC arbitration is expensive, heavyweight and considered by some to be inflexible, with arbitrations conducted the ICC way, and with insufficient flexibility to accommodate the parties’ preferences.  The ICC has good political influence, which may be useful if one is trying to persuade a national government to enforce an arbitration award.  ICC arbitration may be suitable for a major international contract worth hundreds of millions of pounds, not a small IP contract with a dispute over, for example, whether the right royalties have been paid.

London Court of International Arbitration (LCIA): similar “weight” to ICC arbitrations, but more flexible and less expensive.  Would be a good choice for some IP contracts, but it is sometimes difficult for an English party to negotiate LCIA arbitration with an overseas party in view of the word “London” in the title – this is a shame, as it is a good arbitration body!

World Intellectual Property Organization (WIPO): WIPO is actively trying to make itself the arbitration body of choice for international IP contract disputes.  IP Draughts has attended WIPO’s courses on arbitration and mediation and has been impressed by the quality of the lecturers, who have experience of conducting WIPO arbitrations as either arbitrator or counsel for one of the parties, or both (but not at the same time).  The case studies used in these courses were very relevant to IP Draughts’ practice.  IP Draughts would recommend WIPO arbitration, and not just because he is now on WIPO’s list of arbitrators and mediators…

American Arbitration Association (AAA): this body seems to be the default choice for many US arbitrations.  IP Draughts’ research some years ago led him to the view that AAA were okay but their administration was not the best.

Judicial, Arbitration and Mediation Services (JAMS): some people in the US consider JAMS to be a superior alternative to AAA.

Stockholm Chamber of Commerce: parties sometimes compromise on Swedish law and arbitration.  In such cases, the rules of arbitration of the Stockholm Chamber of Commerce may be the obvious choice.

Do readers agree with the above summaries?  Do they have their own favourites?  Please let us know via comments.

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Filed under Contract drafting

One-sided contract term of the day (7): revising commercial terms on breach

We continue our series highlighting IP Draughts’ “favourite” one-sided provisions in contracts.  These provisions are often found in contracts where there is an imbalance of power between the parties, and where the party with the power (let us call him the “Patron”) seeks to reduce a sometimes theoretical risk by imposing it on the other party (the “Supplicant”).

Today’s one-sided term is:

If the Supplicant is in default of any of its material obligations under this Agreement, and shall fail to remedy any such default or breach within sixty (60) days after written notice from the Patron specifically stating that the Patron intends to terminate this Agreement if the Supplicant fails to remedy the default within such time period, then in the Patron’s sole discretion, the Patron may:

(a)   terminate this Agreement; or

(b)   decide not to terminate this Agreement, in which case the Patron’s obligations to meet the diligence standard under Section [ ] shall terminate, and the Patron’s subsequent royalty obligations to the Supplicant under Section [  ] shall be reduced by fifty percent (50%).

A term of this kind might be requested by a prospective licensee in negotiations over the terms of a licence agreement.  There is nothing particularly controversial about alternative (a) above.  Alternative (b) should not be conceded lightly by a licensor.

In IP Draughts’ experience, part (b) is requested only occasionally in licence negotiations and is far being from a standard clause.  IP Draughts has tended to see the clause being requested in high-value technology licence agreements where the technology is close to market, and where the licensee is also requesting various other clauses that would not be seen in lower-value or earlier-stage technology licensing, eg onerous IP warranties and indemnities.

The licensee’s argument for including such a clause is that, without it, he may not have an effective remedy for breach by the licensor.  While he could terminate for breach, he would then lose his licence, and would therefore be shooting himself in the foot.  The position of the licensee can be contrasted with that of the licensor, whose ability to terminate for the licensee’s breach gives a much stronger remedy.

A licensor could respond to such a request in a number of ways.  He could simply state that the clause is draconian and unacceptable, and may give the licensee a windfall benefit that far outweighs any loss suffered as a result of the breach.  In addition, the licensee has a remedy in damages for the breach, so there is an element of double-recovery.

The licensor might go on to point out that it is unacceptable for an exclusive licensee (and IP Draughts mainly recalls seeing this type of clause requested in negotiations over an exclusive licence) to no longer have diligence obligations, while retaining his exclusive licence.  This would enable the licensee to put the licensed technology “on the shelf” and remove the licensor’s ability to terminate for non-performance.  This, too, is draconian.

This last argument has some dangers for the licensor, however, in that it may lead the parties down the road of negotiating a variant on the above clause in which the licensee’s licence is converted into a non-exclusive licence at a reduced royalty rate, or the licence remains exclusive and with diligence obligations, but at a reduced royalty rate.  These “compromises” may also be unattractive to the licensor.

Termination is not always the best solution

Another possible variant would be to refer the amount of the reduction in royalty rates to an independent arbitrator or expert.  But if the parties go down this road, what advantage is there over using arbitration to decide what loss the licensee has suffered from the licensor’s breach and making an award accordingly?

Over to you, readers.  In what circumstances do you think a clause of this kind is appropriate, looked at from an objective standpoint and not as an advocate for one party or the other?

IP Draughts’ scoring for extremeness: 9/10

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Filed under Commercial negotiation, Contract drafting, General Commercial, Licensing

Vouchers for IP advice: fantastic new scheme from European Commission

IP Draughts is intrigued by one of the proposals by an Expert Group that has recently advised the European Commission on stimulating innovation within the EU: vouchers for IP advice.

The Group considered, and made proposals for improving, the “valorisation” of patents by SMEs in Europe.  By the way, is IP Draughts alone in hating this made-up Franglais word, which looks like it might mean valuation or even validating, but actually means something like creating value from?

The Expert Group made several recommendations, including one about setting up an IP Exchange, which sounds very similar to one of the Hargreaves recommendations.  The Group was keen to find ways of encouraging IP licensing activities.  But what really caught IP Draughts’ eye was the following:

The Expert Group recommends that the European Commission encourage Member States to provide support, including possible financial support to ad hoc services to support patent valorisation by SMEs at Member State level. These services could be set up on a local basis and provide (i) legal, commercial and managerial support to patent valorisation and/or (ii) financial support to help develop technology prototypes… The Expert Group encourages the use of vouchers to externalise support services to accredited private consultants…

IP Draughts is not entirely sure why there needs to be a voucher, rather than just paying SMEs’ legal costs.  Perhaps there is a fear that SMEs will spend the money on beer, rather than investing in legal advice?

It seems unlikely that the UK Government will want to subsidise legal services for business activities, at a time when it is perceived to be dismantling most of the Civil Legal Aid system.

Do readers think this idea will catch on?  Would you be willing for your Government to put some of your tax revenues into a scheme for providing free IP advice to SMEs?

 

 

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Filed under Intellectual Property, Legal policy