Author Archives: Mark Anderson

About Mark Anderson

I am an English solicitor (attorney) who qualified originally as a barrister in 1983. After working as an in-house lawyer and with Bristows in London, I formed Anderson & Company in 1994. Our offices are based in Oxfordshire, on the banks of the River Thames, 50 miles west of London. Outside work, I enjoy walking and canoeing. I met my wife Sara whilst cycling from Land's End to John O'Groats (1,100 miles) in 1991.

Looking for a training contract with a specialist IP firm?

andlaw-logo1Anderson Law LLP has a vacancy for a trainee solicitor, to start later this year. Details on how to apply can be found on our snazzy new website.

This will be the 7th trainee that our firm has taken on. Five of the previous six trainees remain with the firm, and two of them are now partners.

Are you interested in doing the highest quality of transactional work in a pleasant, small firm environment where there are no billing targets, where suits are only worn when necessary, and where you will have plenty of direct responsibility for advising clients (but with plenty of support from more experienced lawyers)?

sidOr do you know someone really good (intellectually able, personable, diligent) who falls into the above category? Ideally with previous experience of science or industry. If so, please let them know about the vacancy!

 

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Disclosing business secrets to share purchasers

lea and perrinsSweet, sour, salty and savoury. Balancing these basic flavours can result in delicious food. A combination of the flavours can be found in natural foods such as tomatoes (well, if you add some salt, as many people do with tomatoes) and Parmesan cheese, and in manufactured products such as Lea & Perrins’ Worcester Sauce.

Balancing the flavours of a High Court judgment can produce similar effects in the mind, if not in the taste buds. The recent case of Richmond Pharmacology Limited v Chester Overseas Limited and others [2014] EWHC 2692 (Ch) illustrates the point.

The case concerned confidential information relating to the business of the claimant, a Clinical Research Organisation (CRO) that specialises in conducting Phase I clinical trials. The defendants included the Levine brothers, who were investors and who controlled a minority shareholding in the claimant company. The Levine brothers were also non-executive directors of the claimant. The first defendant, an offshore company, was that minority shareholder. The main questions before the court were:

(a) were the defendants in breach of confidentiality obligations to the claimant, when they disclosed information about the claimant to potential purchasers of their shares; and

(b) if they were in breach, did the breach cause the claimant any loss?

The background to the case can be summarised as follows:

  1. In 2002, the first defendant subscribed for a 44% shareholding in the claimant. The remaining 56% was owned by the three founders, who ran the company. The parties signed a shareholders agreement. The Levine brothers joined the Board of Directors.
  2. In 2008, the Levines fell out with the founders over a business issue, not related to the present dispute.
  3. In 2009, the Levines appointed a company, known as NWCF, to act as a broker/adviser to sell their shares.
  4. Initially, they tried to sell their shares to the founders, ie by means of a management buyout (MBO). When that proved to be unsuccessful, they asked NWCF to contact unrelated third parties who might want to purchase their shares.
  5. NWCF disclosed non-public information about the claimant (obtained from the Levines) to prospective purchasers under the terms of written confidentiality obligations.

The shareholders’ agreement included conventional confidentiality obligations on the first defendant to prohibit it from disclosing information about the claimant to others. The judge concluded that the Levine brothers owed similar obligations of confidentiality to the company.

The shareholders agreement also included conventional terms that allowed a shareholder to sell their shares to a third party, subject to certain pre-emption rights in favour of the other shareholders.

doctor

Brian Doctor QC of Fountain Court Chambers (note fountain in background)

In court, the defendants’ counsel Brian Doctor QC presented a persuasive commercial argument for why the defendants were not in breach of confidence. In order to sell one’s shares to a third party, it would be necessary to disclose information to them about the company. Therefore the confidentiality obligation should be interpreted as an obligation to disclose information only to trustworthy potential purchasers who had entered into appropriate confidentiality obligations. If there was no right to disclose this information, the right to sell the shares to third parties would be “entirely illusory”.

The judge did not accept this argument. The terms of the confidentiality obligations were clear and did not allow disclosure to a potential purchaser. He considered that any purchaser would want to hold discussions with the founders before investing, and therefore the shareholders would need to agree a sales process. If they couldn’t agree on a sales process, the deadlock provisions of the shareholders’ agreement could be invoked. Therefore it was not necessary to depart from the ordinary meaning of the words used in the confidentiality agreement, and to interpret it in the way that Mr Doctor proposed. The judge’s interpretation of the confidentiality obligations was consistent with commercial commonsense.

This sour conclusion (from the defendants’ perspective) was then balanced by the judge’s sweet view on the amount of loss that the claimant had suffered.

The judge considered that there were two ways in which loss might have been suffered:

(a) if the disclosed information cast doubt about the financial stability of the claimant, or the commitment of the founders to the business, or its ability to operate from its key hospital sites, this might have deterred potential customers from placing contracts with the claimant; and

(b) if the disclosed information concerned the claimant’s customers, pricing or terms of business, which might have been used by competitors to win business from the claimant.

The claimants did not produce convincing evidence of either of these alternatives, and therefore, in the judge’s view, the claimant had not suffered any loss. The Levines were conscious of the risk that marketing the shares might damage the claimant’s business and “took considerable care to avoid any such damage occurring”.

one poundFinally, the written judgment records the judge’s provisional view, subject to hearing submissions from counsel, that the proper order to make was to award nominal damages of £1 against the first defendant, and to dismiss the claims against the Levines.

Some salt and spice are added to the judgment by the judge’s comments on the reliability of the witnesses’ evidence (he seems to have preferred the Levines over the founders).

Comments

Several points interest IP Draughts in this judgment:

  1. The judge was not prepared to stretch the interpretation of the confidentiality obligation in the way that the defendants’ counsel proposed. Stick to the natural meaning of the words used. If it doesn’t say that you can disclose the information to prospective purchasers of your shares, you are not permitted to do this.
  2. And yet, at a commercial level, Brian Doctor QC was right: if you can’t disclose information to a prospective purchaser, how can you sell your shares? IP Draughts is not entirely convinced by the commerciality of the argument that the shareholders are supposed to agree a sales process and, if they can’t, the deadlock provisions of the shareholders’ agreement can be invoked. This seems like after-the-event rationalisation.
  3. It is sometimes tempting to treat the question of breach of contract as the primary issue, with the question of the amount of damages as something to be calculated at a later point. This judgment reminds us that the two issues run in parallel and, except for the question of legal costs (which are usually borne by the loser), neither is more important than the other.

IP Draughts has previously commented on this blog about the practice of business people when negotiating corporate transactions. Due diligence packs are typically prepared, which enable the purchaser to view and assess the company’s assets. Those assets may include contracts (eg a licence agreement or a clinical trial agreement between the target company and a hospital or CRO), and the contracts may include strict confidentiality obligations that prohibit their disclosure to third parties. There is not usually an exception for disclosure to potential purchasers of the business. In IP Draughts’ experience, parties sometimes include contracts of this kind in due diligence packs, despite the confidentiality restrictions set out in the contracts. In practical terms, this may be necessary for the corporate transaction to happen, and the disclosure may not cause the other contracting party any loss, particularly if the the selling party is careful about its process. Nevertheless, it has long seemed to IP Draughts that there is a strong element of “skating on thin ice” about such arrangements.

jourdanThe other issue that this case raises in IP Draughts’ mind is also one that he has raised before on this blog. It is the practice of the courts, when allocating cases to judges, to ask deputy judges to hear cases that involve the interpretation of contracts. The judge in this case was a practising barrister, Stephen Jourdan QC, sitting as a Deputy High Court judge. In IP Draughts’ view he did a competent job, even though IP Draughts doesn’t entirely agree with his reasoning.

Other examples in recent years that IP Draughts recalls, where a significant case on contractual interpretation was decided by a deputy judge at first instance, include the case of Rhodia vHuntsman (Julian Flaux QC, later a High Court judge; meaning of reasonable endeavours) and Oxonica v Neuftec (Peter Prescott QC; upheld on appeal; interpretation of a definition of Licensed Product in a licence agreement).

Why do the courts sometimes give important questions of contractual interpretation to deputy judges and not to proper (ie full-time) judges? Is it because:

  1. Most judges have little professional experience of drafting and negotiating commercial contracts, and therefore there is no real advantage in giving such a case to a full-time judge. This is unlikely to be an acknowledged reason (!)
  2. Such cases are not considered particularly significant by the judge in charge of the list, as they are considered to raise few questions of public importance. Contracts are mostly private matters for the parties. Therefore they can be delegated to a deputy judge. In IP Draughts’ view, the present case has some public importance in the context of parties’ obligations in mergers and acquisitions, which are a significant part of the commercial life of the country.
  3. Such cases are easy to manage and decide, and therefore suitable for deputy judges. Sometimes the deputy judge is being assessed for his or her suitability for promotion to a full-time role (as happened in the case of Julian Flaux and could well happen to Stephen Jourdan) and cases of this kind are good tests of judicial calibre.

In the interests of transparency, it would be good if a listing judge (past or present) would comment on this issue.

 

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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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