Category Archives: General Commercial

International IP transactions: how best to manage the differences?

shapesThe legal aspects of international IP transactions can be challenging. Do you ignore the differences in approach to drafting and interpreting contracts, treating every deal as if it were a domestic transaction between parties in your home territory? As a variant on this, do you run a late draft of the agreement by a local lawyer in the jurisdiction where the agreement is to be performed or (if it comes to that) litigated, for a ‘quick and dirty’ legal review? Or do you try to grapple with the issues yourself, and draft the agreement with one eye out for the approach that it likely to be taken by the foreign court or arbitrator? In most cases, employing an international team of lawyers to be fully involved in the drafting and negotiation of the agreement is unlikely to be acceptable to the client on cost grounds.

The third of these alternatives – keeping an eye out for the overseas laws while you draft – may be the most cost-effective, and in your client’s best interests, but you are only qualified to advise on the law in your home jurisdiction, and dabbling in another country’s laws is frowned upon by regulators and professional indemnity insurers. You also need to know your client – are they employing you to reduce their risk (as some in the banking sector may do), or are you part of their team, so that they will they appreciate whatever insights you can bring, irrespective of whether they are 100% accurate, complete or up-to-date? For obvious reasons, IP Draughts prefers to deal with the latter type of client, who will see the benefits of imperfect knowledge about overseas legal systems, rather than blame you for what you don’t know.

Those insights are learnt throughout one’s career – each international deal that you work on can bring a few snippets of useful information that can be used on later transactions. Reading up on the subject can also help – the comments of the 6 overseas contributors to our book on biotech transactions have been immensely helpful to IP Draughts’ understanding of the approach taken in civil codes jurisdictions.

In IP Draughts’ experience, these hard-won snippets of information can fall into several categories, including the following:

  1. Rummaging in the bottom of the IP cupboard. Only a small part of national IP laws tends to be concerned with transactional issues.  Those issues typically include: first ownership; problems with employees and consultants; co-ownership and associated problems; recognised types of transaction, particularly assignment, licensing and charge; quasi-IP rights, including Government walk-in rights, compulsory licences, rights for developing countries, and incentives such as orphan drug status; and implied terms in licences and assignments.
  2. Pushing a square peg into a well-worn, roundish hole. Applying long-established, national contract law principles to the facts of IP transactions, in circumstances where there may be little case law that is specific to IP transactions to guide the drafter. Examples include interpreting terminology (eg “exclusive”), implied terms (eg IP warranties, duties to exploit, reasonable royalties and rights of termination), and generally the willingness of judges in civil code countries to ‘fill in the gaps’ of the parties’ contract drafting.
  3. Escaping the deathly clutches of US legal drafting. Recognising that many ‘international’ transactions incorporate US-style contract wording. Some of that wording is sub-optimal yet rarely challenged in the US, eg the use of the terms ‘indemnify and hold harmless’, ‘successors and assigns’, or ‘sole and exclusive’. Outside the US, there is even less justification for using imperfect wording that is cosily familiar and therefore often accepted in a US context.
  4. Talking Euro-babble with confidence. Drafting IP agreements to take account of the peculiar and detailed concerns of the European Commission’s Competitition Directorate, as set out in documents such as the Technology Transfer Block Exemption Regulation and the Guidelines on Technology Transfer Agreements.
  5. discoDisco-dancing dad. Knowing enough of the moves to get by, in quirky areas of national law that affect the terms of IP agreements, including employment, insolvency, tax, and security interests, and generally having a view on which laws to choose or avoid for an international contract, if your home territory’s laws cannot be negotiated.

 

 

 

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Confidentiality obligations in the parallel universe of M&A

familiarFor many technology-based companies, confidentiality agreements (CDAs) are routine documents that present few surprises.  Some of IP Draughts’ clients sign dozens, or even hundreds, of the things each year.  Often, they are signed as a first step in business discussions that may or may not lead to the parties signing a commercial agreement, such as a services agreement, research collaboration agreement, or IP licence agreement. A few issues tend to be negotiated, including duration, and law and jurisdiction, but most of the CDAs that one encounters are mostly on the right lines.

The conventions that are followed in relation to confidentiality in general business discussions do not always seem to flow through into the world of corporate mergers and investment transactions.  As an IP lawyer, IP Draughts has been surprised by some of the differences that he has seen.  They have included:

  1. Disclosure of a company’s trading contracts to potential purchasers or investors, despite the presence of provisions in those contracts that forbid the disclosure of the contracts’ terms.  Sometimes this issue is mitigated by limiting the disclosure to access in a data room, without the right to copy the agreements, but this doesn’t affect the fundamental issue  that the documents are being disclosed in breach of a confidentiality obligation.  If the transaction is consummated, perhaps the issue goes away, but in other cases …
  2. brokerBrokers and other finance professionals who refuse to sign CDAs, arguing that they must be free to do business with multiple companies in the same market sector, and CDAs would prevent them from doing this. Instead, clients should trust them to behave honourably.  Of course, this doesn’t protect the client, and sometimes highly sensitive, technical information about a client’s products in development is disclosed to these organisations.
  3. Other finance professionals who are not willing to sign CDAs whose obligations last longer than a year or two.  This may be okay if only financial information is provided but, again, technology-based companies sometimes find themselves disclosing technical information that is valuable as a secret for much longer periods.  Sometimes, those professionals can be persuaded to agree to a longer period in respect of “trade secrets” but in IP Draughts’ experience this cannot be assumed.
  4. Finance professionals who insist (as do some major companies, particularly those headquartered in the US) that if information is disclosed orally, it will only be treated as confidential if it is confirmed in writing within a period such as 28 days.  Yet in practice most of the subsequent discussions are held in meetings and by phone, and no confirmatory record is prepared.  Admittedly this problem is not unique to the financial sector.

secretsLawyers who work with the financial sector on a regular basis will no doubt be very familiar with its practices, which seem remote from the business world.  IP Draughts wonders whether these practices (of which the terms of CDAs form a very small part) will change in light of the recent upheaval in the world of finance.

What are you seeing?

 

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Government procurement in IP contracts: a dreadful waste of money?

fit for purposeWhat is the purpose of a Government procurement office?  Silly question – to save money, of course.  According to the home page of the UK Government Procurement Service, its mission is simple:

Savings for the Nation

Our role is to provide procurement savings for Government and the UK public sector, including Health, Local Government, Devolved Administration, Education and Not for Profit organisations.

Note the repetition of the word “savings” in both the title and the text above.  The focus of procurement offices, in IP Draughts’ experience, is monetary.  Yet as all good commercial managers and commercial lawyers know, the price is only one part of a negotiation.  Value for money can mean getting a high-quality product or service at a higher price than for a comparable, medium-quality or low-quality product.  Other factors such as brand reputation, user-friendliness, product reliability, service levels, and compatibility with other products, may also affect the market price.

Ah, but procurement is about much more than price, the procurement manager may cry.  It is also about defining responsibilities and allocating risk, through suitable contract terms.  And it is certainly true that the contracts prepared by Government and other procurement procurement serviceorganisations tend to be weighty affairs with detailed provisions about performance, warranties, indemnities, financial penalties (however dressed up to make them legally enforceable), insurance obligations, termination rights, and so on.  IP Draughts recalls negotiating a 350-page contract produced by the UK Ministry of Defence, which was full of these kinds of terms. This approach is not confined to the public sector.  Some large commercial companies have procurement departments that produce lengthy and one-sided contractual documents.

circumlocutionYet for all their training and professionalism (and some are very skilled at negotiating contracts), procurement managers have a limited perspective on the supply of goods and services.  They cannot guarantee that, through their efforts, a supplier will provide the desired product or service.  All they can do, ultimately, is point to a contract that requires the supplier to do so.

For some types of supply, this approach may be sufficient.  If a supplier of bulk products – office chairs, say – doesn’t perform its obligations, the contract can be cancelled, penalties enforced, and a new contract placed with another, eager supplier at a price that reflects the size of the order.  The consequences of failure are usually limited.  In the worst case, some personal injury claims may be made for back injury due to faulty chair design, but this risk may be low and the liability contained.

With other types of supply, including some IP-related supplies, this kind of procurement approach is deeply flawed.  In all procurements, before a supplier can be selected and contract terms negotiated, someone needs to decide upon a specification for the products or services, and on selection criteria for potential suppliers.  In practice, the way these criteria are framed tends to favour large suppliers over small suppliers, but that is another story.

use your noodleWith complex procurements, these preliminary stages take on a much greater significance than they do for routine supplies.  Defining clearly in advance what is required, finding a supplier whose capability and commitment you trust, setting a price mechanism that enables them to make a reasonable profit, and working closely with them to ensure that the project is managed and completed successfully: these factors may be critical, and the detailed contract terms irrelevant.

If any of these critical factors is absent, the contract is likely to collapse.  This may result in adverse consequences that cannot be compensated by the application of financial penalties or other onerous contract terms, even assuming that the fault can be laid at the door of the supplier.  Familiar examples from newspaper reports include:

  • NHS Direct withdrawing from supplying the “111″ non-emergency health telephone service because the price was too low for the work involved;
  • The provision of language interpreters in the English courts, where Government switched to a single procurement contract with a large supplier and promptly lost more money than they saved, because interpreters didn’t turn up for trials and court hearings had to be rescheduled; a House of Commons committee concluded that the Government had not been an intelligent purchaser of services and the result was “chaos” in the court system
  • numerous examples of expensive IT procurement contracts that failed, sometimes due to changing (or ill-thought-out) specifications or requirements

partnershipIn IP Draughts’ experience, many IP-related contracts fall into this category, i.e. what is required is intelligent purchasing, and collaboration between purchaser and supplier, not onerous contract terms.  Government departments sometimes pay lip service to this idea.  IP Draughts recalls, during the negotiation of the 350-page contract referred to above, a civil servant telling him that the MOD took a “partnership approach” in its dealings with suppliers.  IP Draughts bit his tongue to avoid saying what he really thought, which was that this was complete bollocks, as evidenced by the ridiculously one-sided, antagonistic, and patronising contract terms that they were discussing.

If an intelligent and collaborative approach to purchasing is followed, it is unlikely to be accompanied by aggressive contract terms that assume a kind of master-and-servant relationship.  Examples of contracts in which intelligent purchasing is required, in IP Draughts’ experience, include:
  • Contracts to run academic training courses, eg for medical students
  • Contracts for the provision of specialist technical services, eg research and consultancy, or the development of “state of the art” products
  • Contracts for the provision of legal services

IP Draughts is not sure why Government procurement departments seem, increasingly, to be proposing very one-sided contract terms for these types of project.  But they do seem to be doing so.  Some recent contracts with the UK Department of Health have been particularly one-sided.  He suspects it is a mixture of factors, including:

  • increasing use of procurement departments, and political pressure to reduce costs
  • a lack of discrimination between projects that suit onerous terms and those that don’t, combined with a general trend towards longer and more one-sided contracts
  • it is easier for Government departments to manage the contract negotiation process than it is to manage the earlier stages of defining requirements, choosing good suppliers, etc.  The former is a process that can be reduced to a measurable system; the latter is sometimes a very complex task that requires skills that are not always present in Government departments

Is this your experience or is IP Draughts being unfair on procurement departments?

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Legal requirement as a negotiating position

Dead-batting

The forward-defensive shot

Most experienced contract negotiators have encountered it.  The deadbat response to a request to change a contract term: we can’t change that, it’s a legal requirement.  The responder usually then goes on to explain that the term (or sometimes, the deal structure) is required by competition laws, tax, statutory warranties, industry regulation, or some other aspect of commercial law.

Sometimes, the response is legitimate.

For example, a licensor of intellectual property may want to own any improvements to the licensed IP that are generated by his licensee while working the licence.  This may be perfectly understandable from a commercial perspective.  However, if the licence agreement is subject to European competition laws – in particular Article 101 of the Treaty on the Functioning of the European Union – such a provision is likely to be problematic.  Assignment-back clauses are outside the scope of the EU Technology Transfer Block Exemption Regulation (TTBER).  The European Commission seems to be tightening up this area of law, rather than relaxing it, if one considers their proposed revisions to the TTBER, the current version of which is due to expire next year.

Even with this example, it might be argued that an assignment-back clause is not per se illegal, as evidenced by the fact that it is not a hardcore or black-listed provision under the TTBER and instead is grey-listed (under Article 5).  But most well-advised parties are likely to avoid such a provision in light of Article 5 of the TTBER.  So a cry of it’s a legal requirement to justify a non-exclusive licence back of licensee improvements, rather than an assignment back, has some legal merit.

unfairOn other occasions, the response has some basis in law, but there is more than one way of addressing the issue.  For example, it might be argued in negotiations that a contract clause excluding all liability would be unenforceable under the Unfair Contract Terms Act 1977.  This might well be true, depending on the detailed facts of the case.  But a slightly different clause with ‘safety valve’ wording, making clear that the clause does not attempt to exclude liability for death or personal injury caused by negligence, might be acceptable.  In this case, an objection to a clause based on it’s a legal requirement might be true but not provide the complete picture, and a skilled negotiator might find a satisfactory way around the objection.

A variant on this type of response is where a party has a company policy of including a clause to address a real legal issue, but it is not strictly necessary to have that clause.  For example, US parties often include template clauses addressing issues such as export controls and corrupt practices.  Within Europe, large organisations sometimes include lengthy clauses in contracts dealing with data protection issues.  These clauses are often designed to demonstrate to legal one sizeauthorities that the party who drafted the clause is doing its best to comply with the laws in question, and putting an onus on the other party to comply with those  laws and cooperate with the drafting party.  In practice, these clauses tend to be a ‘one-size-fits-all’ approach to addressing the legal issues and they are not always appropriate  for the facts of the individual contract.  Ultimately, though there may be a legal requirement, it is not necessary to address it in the way proposed.  However, the drafting party’s company (commercial) policy may make it very reluctant to change the wording.

call my bluffOn yet other occasions, the response is merely an attempt to bamboozle the other party and win a negotiating point, knowing that the other party’s negotiator is not a lawyer and not involving one in the negotiations.  One way of calling the responder’s bluff in this situation is to ask them for a full citation of the law – most laws can readily be found on the internet nowadays.  If the point seems to be a valid one, legal advice can be sought on how to address it.

 

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