Category Archives: Contract drafting

adams onOccasionally, IP Draughts provides a link to another blog article that he has found interesting.  The link below is to an article by Ken Adams, reviewing the book: The Three and a Half Minute Transaction: Boilerplate and the Limits of Contract Design.

The book focuses on a contract clause that is commonly used in financing transactions, known as a pari passu clause, which was the subject of a famous court case. The authors research and discuss why this clause has remained in common use, mostly unchanged, despite the court case seeming to establish that the clause had a different meaning to what everyone in the industry thought.

If you are interested in understanding the dynamics of contract drafting and how “Big Law” goes about preparing and negotiating contracts, IP Draughts recommends that you read both the book and Ken’s article reviewing it. The book has been sitting on IP Draughts’ desk for some months, and he has contemplated writing a review of it, but now there is no need to do so.

Link to Ken’s blog post (with review article embedded): here.

The book can be bought from Amazon here.

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by | 14 April 2014 · 10:54 am

And breathe out… information is still not property

...but not my database rights

…but not my database rights

IP Draughts has reported before on cases where English courts, high and low, have confirmed that information is not property (though confidentiality “rights” may be treated as a type of intellectual property). Recent examples include Lord Neuberger’s judgment in this case, and  this Court of Appeal case where the court side-stepped the issue. The issue may seem rather academic or philosophical, but it is important for contract drafters who wish to avoid making meaningless statements such as that the “Results” belong to the “Sponsor”.

The issue has emerged again in another Court of Appeal case, Your Response Limited v Data Business Media Limited [2014] EWCA Civ 281, which was published last week. The court was asked to decide two points:

  1. Can a database service provider exercise a common law lien (sometimes referred to in the English cases as an artificer’s lien, and in the US as a mechanic’s lien) over a database, until the client has paid all outstanding fees relating to the provision of database services.
  2. In a contract that has no termination clause, and where there is an implied term allowing termination on reasonable notice (see Martin Baker v Canadian Flight Equipment Company [1955] 2QB 556 and a steady stream of subsequent cases), what is the length of reasonable notice in the present case?

ejector seatThe second point, while interesting for drafters of IP agreements (the Martin Baker case, for example, concerned the termination of a patent and know-how licence agreement), was a purely factual one.  The court decided that 3 months’ notice was appropriate.

On the first point, the main problem with applying a common law lien in the present case was that a database did not amount to goods, and common law liens have traditionally applied to goods. For example, if you have your car serviced, the garage can exercise a lien over your car until the service charge has been paid.

Moore-Bick LJ, who gave the lead judgment in the Court of Appeal in the present case, quoted extensively from Diplock LJ’s analysis of the nature of the lien in an earlier case. That analysis included the following statements:

[Common law lien] is a remedy for breach of contract which the common law confers upon an artificer to whom the possession of goods is lawfully given for the purpose of his doing work upon them in consideration of a money payment. If, pursuant to the contract, the artificer does his work, he is entitled to retain possession of the goods so long as his charges, whether agreed in advance or (if not so agreed) payable upon a quantum meruit, are satisfied.

It is a remedy in rem exercisable upon the goods, and its exercise requires no intervention by the courts, for it is exercisable only by an artificer who has actual possession of the goods subject to the lien. Since, however, the remedy is the exercise of a right to continue an existing actual possession of the goods, it necessarily involves a right of possession adverse to the right of the person who, but for the lien, would be entitled to immediate possession of the goods.

Applying this description (and in particular the phrase “actual possession of the goods”) to the present case led Moore-Bick LJ to a series of legal questions, including:

  • what at common law is understood by actual possession.
  • whether it is possible to have actual possession of an intangible thing,
  • whether it is open to this court to recognise the existence of a possessory lien over intangible property and if so,
  • whether it would be right for it to do so.

chatelaineWith liberal use of Norman French legal expressions, Moore-Bick LJ concluded that a database was a chose in action, and not a chose in possession or chattel. Put another way, the database was intangible property, to which might be attached certain rights of action, eg to sue infringers of database right, but it was not “goods” that could be possessed. Therefore the common law lien did not apply and it was not appropriate for the court to extend the scope of this law to new forms of property such as that in a database. On this last point, the judge disagreed with the views of the learned authors of a legal textbook, The Tort of Conversion, whose arguments were cited in this case.

At this point, the other two judges in the Court of Appeal weighed in, with Davis LJ muttering about the law of unintended consequences not being part of English law (he was concerned about the impact on lenders whose security would be prejudiced if a new form of charge was created), and Floyd LJ (the only intellectual property specialist on the panel) remarking:

If [counsel for the service provider] were right that the database could be possessed and could be the subject of a lien and that its possession could be withheld until payment and released or transferred upon payment, one would be coming close to treating information as property.

In Floyd LJ’s view, this would be a significant departure from established law.

Separately, there was a question of whether the service provider had exclusive control over the database (another essential element for the lien to apply), and Moore-Bick LJ concluded that it did not, in that the client had continuing access to the database during the contract term.

The narrow point from this case is that a common law lien over goods does not apply to intangible property such as a database.  The database service provider does not have any common law right to withhold access to the database until his fees are paid.  The parties can, however, agree such a right as a term of their contract.

The wider point is that a senior English court has made clear, once again, that English law does not recognise intangible property as goods, and nor does it recognise pure information as property.

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Filed under Contract drafting, Databases

Using the right words in contracts: knowing your 3Rs

learningThe 3 ‘R’s – for readers who have not come across this expression – are the basic subjects one first learns at school: reading, [w]riting and [a]rithmetic.

In this article, the 3Rs have a different meaning. We discuss 3 words used in contract law that start with an ‘r’.  They are technical, legal expressions, and many of us get by without using them at all, in contracts or elsewhere. Yet they feature in standard textbooks on contract law and in case law. The larger point is whether it is necessary to understand and use legal terms of art in contracts.

flynnThe 3 words are: revoke, repudiate and rescind. While they have other meanings in everyday life (eg if the authorities revoke – take away – your driving licence for drinking alcohol or speeding), these verbs have specific meanings in contract law. Like the Three Musketeers, they have a colleague who might be one of them, yet is slightly apart.  The noble Gascon of the contract world is (in noun form) restitution. Their colleagues in the corps of musketeers – rectification, release and replevin – will not be discussed in this article. Nor will their decrepit former colleague, rescous, which should not be confused with a type of wheat grain popular in North African cooking.

This article was prompted partly by a question that Ken Adams raised yesterday on Twitter:

adamsKen has followed up his question with a blog posting, titled simply Revoke. He suggests that there is no need to use the word revoke in relation to an IP licence, and that terminate is preferable.  IP Draughts agrees, but on technical questions of law he always keeps an open mind.  Property law has developed in strange ways over centuries (just think of the many types of legal and equitable interest that have been recognised) and there may be some point lurking in the shadows of old case law that he has not considered.

Whenever he hears any of the 3 R-words in a contract law context, IP Draughts has to concentrate to remember what they mean and to make sure he is not mixing them up.  Think of this article as remedial therapy for IP Draughts.  By forcing himself to articulate the different meanings, they may finally sink into his head. References below are to the leading tome, Chitty on Contracts, Volume 1, General Principles (30th edition, 2008).

Revoke

licence revokedOne of the traditional requirements for a binding contract is that one party makes an offer and the other accepts it.  A party can usually withdraw an offer before it is accepted.  The technical term for withdrawing an offer to enter into a contract is to revoke the offer (Chitty, 2-060).  Looking at the word revoke, it appears to have an etymology that suggests another word, “recall”.

This is different to terminating a contract that is already in existence.

Another sense of revoke is where a right or privilege that has been granted is subsequently withdrawn.  A driving licence may be withdrawn by the court for motoring offences such as speeding.  Some people use the term revoke for the termination of an IP licence, as the article linked above mentions.  As IP licences typically form part of contracts, this usage could be said to form part of contract law, but it is not conventional to refer to revoking a contract, and Chitty makes no mention of this usage.

Repudiate

In fact, there seem to be a pair of words with very similar meanings in contract law: repudiate and renounce.

IP Draughts is familiar with the expression “repudiatory breach” where a party acts in such a way as to make clear that he does not intend to perform his obligations under the contract, and the other party is entitled to “accept” this repudiation and terminate the contract.

Chitty seems to prefer the term renunciation for this type of breach (Chitty, 24-018) although the word repudiation appears in the discussion of several types of termination, eg in relation to contracts with minors (Chitty 8-031).

Rescind

voidThe correct use of the term rescind is to describe a situation where the contract is treated as never having come into existence, and not the situation where a contract is terminated part-way through its ‘life’.

For example, if a contract is terminated by acceptance of a repudiatory breach, this is sometimes inaccurately described as a rescission (Chitty 24-027).

Rescission from the start of the contract (ab initio) may occur if a party is induced to enter into the contract by (for example) misrepresentation or mistake (Chitty 6-103).  If rescission occurs after the contract has started, it will have retroactive effect to cancel the contract (Chitty 6-106).

Discussion

The 3 R-words have acquired different meanings in English contract law.  The differences in meaning are quite subtle.  A breaching party may repudiate the contract, but termination only occurs if the other party accepts the repudiation.  If a party is induced to enter into a contract by a misrepresentation, he may be entitled to rescind the contract. Contracts cannot generally be revoked, but an offer to enter into one can be revoked before the other party accepts.  There is also a suggestion that a licence can be revoked.

And this is just what the terms probably mean in one country’s development of the common law.  There is no certainty that these terms have identical meanings in other common law systems. It seems even less likely that there is an identical meaning in civil code systems, and if the words are translated into other languages, the subtleties of meaning may be completely lost.

rwordIP Draughts view is that it is better to avoid using terms such as rescind, revoke and repudiate in a contract, and instead to state specifically what rights and remedies and party has, eg the right to terminate for breach.  If termination is to be retroactive, this should be specifically stated. By using legal expressions of this kind, you may point a court to a particular understanding, based on case law, which may or may not work in the context of the contract under discussion.  Or you may find that the court is not familiar with the meaning you intended, particularly if the case is litigated outside your home jurisdiction. Or you may even use the wrong expression anyway – easy to do when they are so similar.

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Filed under Contract drafting, Legal practice

Assignment of trade secrets: selling moonbeams in a jar?

moonbeam jarA recent article on IPKat, Assignment and licence-back of a trade secret: no yawning matter, has prompted IP Draughts to remove the dustsheets from one of his favourite hobbyhorses.  As discussed briefly on this blog here in 2011, IP Draughts is troubled by the very idea of an assignment of know-how.

First, we need to define our terms.  The title of this article, echoing the IPKat article mentioned earlier, refers to trade secrets, while the earlier article on this blog, linked above, referred to know-how.

In English law and, as far as he understands them, US laws, “trade secrets” are generally regarded as the most sensitive items of confidential information, and are distinguished from less important categories of confidential information. It is not always easy to make the distinction.  Nearly a century ago, Lord Parker in the case of Herbert Morris Ltd v Saxelby [1916] 1 AC 688 came up with a rather simplistic test:

“If the information is of such detail that it cannot be carried in one’s head then it is a trade secret, but if it is just some kind of easily remembered general method then it will not qualify as a trade secret.”

faccendaMore recently, in the landmark case of Faccenda Chicken v Fowler [1985] 1 All ER 724, the Court of Appeal declined to give any general definition, but instead came up with some examples of trade secrets (“or their equivalent”), including information about prices, and:

“secret processes of manufacture such as chemical formulae” and

“designs or special methods of construction”

There is not, as far as IP Draughts is aware, any universally-applied, single definition of trade secrets in English law.

Much of the English case law on the meaning of trade secrets has been about employees and their duties not to disclose their employer’s, or former employer’s, commercial information.  In this context, the courts have found it helpful to distinguish between the most sensitive types of information – labelled trade secrets – and other types, sometimes referred to generically as confidential information. Generally, employees have stronger duties to their employer with respect to trade secrets than they have with respect to any other category of confidential information.

By contrast, reported English cases about general business disputes (ie not involving claims against employees) rarely seem to require a discussion of whether there is any distinction between trade secrets and other categories of confidential information.  Perhaps as a consequence of this, English commercial agreements seldom use the term “trade secrets”.  Instead they tend to refer to confidential information and, in the context of licensing, to know-how.

The expression “know-how” tends to be used in reference to technical or commercial information about products or services that is protected under the law of confidence, although other usages are seen.  IP Draughts finds it convenient to refer to the definition that appears in Article 1(1)(i) of the EU Technology Transfer  Block Exemption Regulation, ie:

‘know-how’ means a package of non-patented practical
information, resulting from experience and testing, which
is:
(i) secret, that is to say, not generally known or easily
accessible,
(ii) substantial, that is to say, significant and useful for the
production of the contract products, and
(iii) identified, that is to say, described in a sufficiently
comprehensive manner so as to make it possible to
verify that it fulfils the criteria of secrecy and substantiality;

Items (ii) and (iii) of the above definition are more concerned with competition law issues than commercial definition, in that the European Commission is concerned to avoid anti-competitive restrictions being agreed behind the smoke-screen of a dubious know-how licence.

Out for a stroll...

Supreme Court goes for a wander…

Under English law, in IP Draughts’ view there is no special category of property right called trade secrets or know-how.  The law of confidence may protect a trade secret or know-how.  Separately, recognised types of intellectual property, such as patents or copyrights, may provide protection.  However, confidential information as such is not recognised as property.  As Lord Neuberger, President of the UK Supreme Court, commented in a 2012 case that IP Draughts reported on here:

In my view, the upshot of this summary of the current position as discussed in the cases and the books is that, while the prevailing current view is that confidential information is not strictly property, it is not inappropriate to include it as an aspect of intellectual property.

By contrast, IP Draughts understands that some US state laws recognise trade secrets as a type of property. It seems to be more common for US commercial agreements to refer to trade secrets than is the case in English agreements.

Drawing together the threads of the above discussion, under English law the following propositions can be made:

  1. Where confidential information is viewed as a business asset, it is conventional to refer to it as know-how.  The term “trade secrets” is less frequently encountered, outside the niche area of employee duties.
  2. Know-how and other types of confidential information are not “property” and therefore it is questionable whether “title” in know-how can be transferred from one person to another via an assignment.
  3. Despite this questionable legal status, it is common to see know-how being licensed, as illustrated by the provisions on know-how in current and former EU Technology Transfer Block Exemption Regulations.

So, what is an assignment of know-how, and should documents of this name be used?  As this 2011 article on IP Draughts comments, what should definitely not be done is to take a patent assignment and do a “search and replace” of the word “patent” with the word “know-how”. Instead, if a know-how assignment is required, IP Draughts recommends that thought be given to the different components of the transaction, as discussed in the last-linked article.  In some situations, it may be appropriate to include some or all of the following wording in the assignment.  In other situations, different wording may be required – eg to impose obligations on individuals as well as the assigning institution.

To the extent that the Assigned Property includes any know-how protected under the laws governing confidential information, references to the assignment of such know-how include the following obligations on the Institution:

(a)          The Institution shall transfer to the Company such rights as it may have in law to prevent the unauthorized use or disclosure of such know-how;

(b)          to the extent that such rights cannot be or are not transferred by virtue of the provisions of Clause [ ], the Institution shall agree to be joined in any action (whether as claimant or otherwise) brought by the Company or its assignee against any third party that is alleged to infringe such rights, subject to the Company effectively indemnifying it against any damages, costs and expenses incurred in relation to any such action;

(c)          the Institution shall neither use nor disclose any such know-how without the prior written consent of the Company, but these obligations of non-use and non-disclosure shall cease upon the know-how becoming publicly known (other than as a result of breach of this clause by the Institution);

(d)      the Institution warrants that it is not aware of any disclosure of such know-how to any third party before the date of this Assignment, except under written obligations of confidentiality;

(e)    if required to do so by the Company, the Institution shall make such acknowledgements to third parties as the Company may reasonably require, stating that the Company owns all such know-how and that the Institution does not retain any ownership rights in such know-how; and

(f)     the Institution shall: (i) inform the Company of all technical information concerning the Assigned Property; (ii) supply the Company with any documents or drawings relevant to the Assigned Property; and (iii) license the Company to use such documents, information and drawings.

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Filed under Contract drafting, Intellectual Property