Brexit and IP transactions

eliteIP Draughts learnt this week that he was part of a metropolitan elite. Which is nice. #lookingforthepositive

Yesterday the UK electorate decided, unexpectedly, to leave the European Union. At this stage, no-one knows what will happen next, or what “leaving” actually means. The possibilities, however far-fetched some of them may be, include:

  • Change of mind. Nothing changes in the EU (except, perhaps, some face-saving remarks by EU leaders or trivial changes in law), following which the UK electorate has a change of heart and decides not to leave after all. Some point to the Irish experience with the Lisbon treaty as a precedent for this outcome.
  • Squeezing some more concessions. Negotiate real “improvements” in the way in which the EU does things, following which the UK electorate has a second vote in which they decide to remain in the EU, either in a referendum or by voting in a general election for a pro-remain political party. These improvements might be concessions for the UK alone, or general changes in the structure of the EU.
  • demographicsAssociate membership. Create a new, “associate member” category of membership of the EU, which the UK would then transfer to, and which would give associate members some exemptions from EU rules, eg on free movement of labour.
  • Leave and join EFTA. Leave the EU and join the European Free Trade Association, and therefore benefit from some but not all of the legal regime that applies in the EU, but without any special concessions for the UK. In other words, have the same relationship with the EU that Norway has as an EFTA member.
  • Leave and expand EU rights for non-EU members. Leave the EU and change the rules of the EU, so that countries that are outside the EU (ie the UK at that point) can benefit from certain aspects of the EU that are currently only available to members (eg participation in the Community Trade Mark regime). The new arrangements might be designed for, say EFTA members (if the UK decided to join that club) or might be made more broadly available to, say, European countries that are outside the EU.
  • Leave and negotiate one-off trade deals. Negotiate individual, arms-length trade treaties between the UK (as a non-EU-member) and the EU.

social-classesIt is fair to say that the Brexiteers have not focussed on IP during the pre-referendum debates. When Brexit is negotiated, IP legislation is likely to be some way down the list of priorities, after immigration, trade tariffs, and other political topics.

In the area of business regulation, much was made during the referendum campaign of so-called “Brussels red tape” but few examples were given. In one televised debate, IP Draughts heard Boris comment scornfully that the remain campaign didn’t want to change any existing EU laws, “not even the Clinical Trials Directive”, as though this was self-evidently a terrible piece of legislation. For some reason, this law seems to trigger a response in Boris, like a mood-altering drug.  The benefits to the UK economy of pan-European regulation of life-science product development seem to have passed him by.

elite2Perhaps Boris is not aware that the UK has a thriving life-science sector, the best in Europe, and that being part of the EU is a significant benefit for that sector. David Cameron seems to be aware of this, as he negotiated for the UK to have the chemistry and life-science part of the central court for the Unitary Patent.

It is impossible to know what the implications of Brexit will be for international IP transactions until the blueprint for Brexiting has been established. Nevertheless, there are some obvious risks that can be addressed when drafting IP-related agreements. They include:

  1. EU research funding. In research agreements that benefit from EU funding (eg under the Horizon 2020 programme) what will happen if the UK party ceases to receive EU funding on Brexit? Is it still obliged to do the work but not get paid for it? Or can it terminate its participation in the project? As a separate issue, what do the terms of funding say about the grant of IP rights to companies that are outside the EU? Is any preference given to EU parties?
  2. EU territory. Does the agreement grant rights to a territory defined as the European Union or the European Economic Area? What are the implications if the UK is no longer part of the EU or EEA?
  3. UK territory. Does the agreement refer to the United Kingdom? What implications are there for the agreement if Scotland decides to withdraw from the United Kingdom (but possibly try to remain in the EU)?
  4. Definition of IP. How is intellectual property defined in the agreement? Is the definition flexible enough to cater for changes to the IP system, or new types of IP, that may emerge following Brexit?
  5. Export of personal data outside EU. Sometimes, agreements have clauses that refer to the export of personal data outside the EU. Have the implications been considered of what this will mean in practical terms if the UK is no longer part of the EU?
  6. Compliance with regulations generally. Some agreements, eg clinical trial agreements, impose an obligation on a party to comply with applicable regulations. Are these obligations worded in a way that is resilient to the possibility of UK regulations being significantly different from those in the EU?
  7. Law and jurisdiction. Does the agreement have a clear law and jurisdiction clause? If not, bear in mind that if the UK is not part of the EU, the Rome and Brussels regulations will probably no longer apply to tell a UK contracting party which law and jurisdiction will govern the agreement.

This is unlikely to be a comprehensive list of contractual issues that could be affected by Brexit. If you can think of others, please suggest them in the comments below this posting.

 

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Smart contracts and blockchain technology

hypallageCan contracts be smart or dumb? Isn’t this just hypallagic nonsense?

According to Wikipedia:

Smart contracts are computer protocols that facilitate, verify, or enforce the negotiation or performance of a contract, or that make a contractual clause unnecessary. Smart contracts usually also have a user interface and often emulate the logic of contractual clauses. Proponents of smart contracts claim that many kinds of contractual clauses may thus be made partially or fully self-executing, self-enforcing, or both. Smart contracts aim to provide security superior to traditional contract law and to reduce other transaction costs associated with contracting.

Wikipedia gives the following examples of smart contracts:

Digital rights management schemes are smart contracts for copyright licenses, as are financial cryptography schemes for financial contracts. Admission control schemes, token bucket algorithms, and other quality of service mechanisms help facilitate network service-level agreements.

In other words, we are dealing with a buzz-phrase whose meaning can vary, depending on the context. If you follow social media, you may have noticed an upsurge in references to smart contracts and blockchain technology (more on which, below) in recent weeks.

Sometimes, the buzz-phrase refers to a method of making contracts. The “smart” part is the use of computers to automate the contracting process. Typically, computers are used to authenticate the parties’ approval of the contract, using encryption technology, or to implement the obligations under the contract, eg by automatically transferring ownership of shares and the payment for those shares.

At other times, the term “smart contract” is misleading (at least in the minds of contract lawyers), and “smart transaction” might be a better (and broader) term. IP Draughts has noticed that many of the articles and comments about this subject seem to be written by computer specialists rather than lawyers, and sometimes the references to contracts are surprising from a lawyer’s perspective. For a good introduction to blockchain technology and its application to transactions, written by commercial lawyers, see this paper by the Australian law firm, Allens.

edi.So far, we could be talking about ideas that have been around for decades. IP Draughts recalls reading articles in computer law journals in the mid-1980s about the use of electronic data interchange, or EDI, as a method of entering into contracts, with digital signatures used to authenticate the transaction. See further, chapter 31 of our book, Execution of Documents (Anderson & Warner, Law Society Publishing, 3rd edition 2015).

blockchainIn its current manifestation, the idea of smart contracts tends to be linked with the technology of “distributed ledgers”, and in particular those which use blockchain technology. One of the best known uses of blockchain technology is the cryptocurrency known as Bitcoin.

Distributed ledgers provide a new way of storing information on computer networks. The technology is still in its early days, and requires a huge amount of computing power. Potentially, it could revolutionise the way in which information is stored and used electronically. For example, if (in future) your medical records are stored in this way, it should be possible for you to see instantly which doctors have accessed your records, and by withdrawing permission (or breaking the chain) you can instantly remove access to your records. The records would no longer exist in the computer network of the doctors or health service.

In relation to commercial contracts, one of the examples quoted earlier was digital rights management schemes for copyright works. IP Draughts has previously joked on this blog about receiving £0.37 (less commission of 9.75%) from the Authors’ Licensing and Collecting Society for the photocopying of our book, Drafting Confidentiality Agreements by the British Library. If we, the ALCS and the British Library were connected via a blockchain network, and the right set of “contract” terms were established, those royalties could be transferred automatically by the British Library (or even by the person who asked for the copy to be made) into our bank account as soon as the photocopying is done, and without the need for ALCS to check the sums, prepare a statement and send us a payment.

bank codeThe most obvious applications for smart contracts arise where there is currently a cumbersome, often manual, process that involves several parties. For example, if you as a UK customer make an online payment to a UK supplier, currently it may be necessary to wait for up to 5 days before your bank and the supplier’s bank confirm that the payment has been made. If the payment is made to someone in another country, the delay may be longer. Our firm used an Australian web designer to create the latest manifestation of our website. Paying the designer online seemed to be rather a complex, slow process, and the bank charges were disproportionately large.

Many of the examples that are given of smart contracts are concerned with financial transactions. Generally, the advantages of smart contracts seem more obvious where the transaction is simple to describe but the process for implementing it is currently complex. The benefits are less obvious where the contract is one that has many complex obligations that cannot be simply reduced to a computer code.

Even if the transaction is simple, there remains the issue of whether the parties fully understand it and should be bound by it. Automating the implementation of a contract may remove or reduce opportunities for a party to hold their hand up and say “no, this is not what I meant”. The current litigation in the English High Court between the Libyan Investment Authority and Goldman Sachs is said by some to illustrate this point. See the recent news item by Bloomberg, Blockchain Company’s Smart Contracts Were Dumb.

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Resolving disputes over IP agreements

friendsHow should the parties to a licence agreement, or other IP agreement, resolve their contract disputes?

Some would reply: amicably, quickly, reasonably. If they can, all well and good, and no special contract terms are needed. But the drafter of the IP agreement needs to cater for the possibility that they can’t.

If you know what the dispute is about, you can form a view on the most favourable dispute resolution mechanism to protect your client’s interests. For example, do you want a thorough examination of the legal issues by a superb court that leaves no stone unturned, and comes up with a magisterial (and public) conclusion? Or would you prefer something cheap, quick and private, focussed more on commercial outcomes than legal precedent?

At the time the agreement is made, it may be difficult or impossible to predict whether any disputes will arise, and what they will be about. So, any dispute resolution clause is a bit of a gamble. It may be best to stick to something ‘plain vanilla’ and, if a more fancy mechanism is needed, try to negotiate it with the other party when the dispute arises.

But what is a plain vanilla solution? Should you go for litigation in court, or arbitration? In the latter case, do you opt for a 3-person arbitration panel which will be expensive but reduce the risk of a quirky decision, or is it best to have a single arbitrator?

In the middle of negotiations, and depending on one’s bargaining position, the priority may be to find a solution that is not obviously terrible. The issue is important, and may justify two or three rounds of proposal and counter-proposal, but probably not many more.

IP Draughts’ preferences tend to reflect the type of clients that instruct him, and his background as an English solicitor. Others may have a different starting point that is better for them and their clients.

There is no absolute right or wrong on this issue, but the closer one can get to a list of preferences, the easier it is to strike a deal.

Trial by Ducking Stool - not part of the ADR toolkit

Trial by Ducking Stool – not part of the modern ADR toolkit

Remember that the final method of dispute resolution is either to go to court or arbitration. Other methods of ADR, such as mediation, can only be viewed as intermediate steps. If you want to force the parties to go to mediation or to have the CEOs negotiate, fine, but IP Draughts doubts the value of such an obligation. It may be better to include these as voluntary options that the parties must consider, but not be obliged to follow.

For the final dispute resolution mechanism, IP Draughts’ preferences, if English law and jurisdiction are not acceptable, include:

Choice of law

Dealing with European parties

  • A large trading nation with a ‘North European’ approach
  • Laws that are not too prescriptive
  • Difficult to get a common law legal system (there aren’t many in Europe)
  • Possible solutions: Swedish or Dutch law
  • Second choices: German or Swiss
  • To avoid: French, Italian, Greek, smaller nations

Dealing with US parties

  • Try to avoid US, offer European alternative
  • But if forced to choose US, go for large State with reputation re commercial disputes
  • Preferably East Coast
  • Preferably laws as close as possible to English law
  • Possible first choice: New York law
  • Second choices: Massachusetts or Delaware

Dealing with parties in the Far East, India, etc

  • Common law system if possible, eg Australia, Hong Kong, Singapore

Choice of dispute resolution mechanism

Generally

  • No overall, strong preference for courts or arbitration
  • In England, courts are efficient so may be preferable
  • Arbitration may be preferable in countries whose court systems are unattractive
  • If confidentiality is a major issue, this may point to arbitration

If arbitration is chosen

  • Essential to specify arbitration body
  • Consider WIPO arbitration
  • Avoid ICC – too expensive, heavyweight, not user friendly
  • Prefer single arbitrator
  • Sometimes prefer expedited arbitration procedure (eg for smaller claims)
  • Need to specify seat of arbitration – procedural laws in that jurisdiction will govern

If court litigation is chosen

  • Should be same as law – don’t have law of country A and courts of country B
  • Overlapping issues with choice of law, above
  • Avoid corrupt, biased, slow, jury trials, difficult to get to from Heathrow Airport

 

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Diversity in IP law

hug a lawyerAsk the public whether they like and trust lawyers in general, and the answer may be distressingly negative. Ask them about a lawyer they have used, and the answer tends to be more favourable.

The same contrast is found in other areas. The current debate in the UK about ‘Brexit’ has a strong focus on immigration. Ask (some) people about immigration in general, and the answer may be very negative. Ask them about the Romanian tradesmen who did an excellent job tiling their bathroom recently, and the answer may be much more positive.

Since he became the chairman of a Law Society committee, IP Draughts has become more conscious of the Society’s approach to diversity. It is difficult to object to the general principle that the legal professions should encourage diversity in their membership and leadership. This theme resonates with the principles of fairness and meritocracy that our profession is likely to support.

And to the extent we are concerned with trends at the macro-level, such as the recruitment practices of major firms that employ thousands of people, we can encourage more diversity and learn from the statistics whether this encouragement is bearing fruit. In IP Draughts’ view, the efforts of the Law Society and of CIPA in this area should be commended.

At the personal level, though, the merits of a strong focus on diversity are not always so obvious. English firms of solicitors are required to report their diversity data to their regulator, and publish the results. For instance, Anderson Law LLP’s most recent data can be found on our website here. It so happens that we have people from a variety of backgrounds. But some might say that in a firm as small as ours, the data is not useful. It is affected too much by who were the candidates for employment in a particular year, and who met our requirements. In even smaller firms (and much of the English solicitors’ profession is made up of small firms) this is true with knobs on.

whiskasSimilar thoughts were prompted by our recent recruitment exercise for new members of the IP Law Committee of the Law Society. Following open advertising of the vacancies, we received 6 applications. IP Draughts has no official data on the candidates’ backgrounds, but the vast majority were male, and the vast majority would probably classify themselves as White British. How far should a diversity agenda influence the Law Society’s choice? How far can it, when the candidates mostly come from particular categories? Should the questions asked of interviewees be designed to bring out their attitudes to diversity, as a substitute for actual diversity, or is this a ridiculous way of selecting people for a committee of technical experts?

Sometimes, it seems that the diversity agenda has so much momentum in organisations that to question its relevance to a situation is to put oneself beyond the pale (and no, that is not a reference to skin colour).

Gender and race are, in some respects, easier to determine than other, well-known diversity categories. Educational background is a particularly knotty one. Some would say that the virtual extinction of selective grammar schools in the UK a generation or two ago, done in the name of equality, has resulted in the legal profession becoming less diverse in recent years.

One aspect of diversity that we are required to report on is whether our lawyers were the first generation in their families to go to university. But what of the lawyers who tick this box but (as in the case of IP Draughts) their parents saw fit to save hard-earned money to send them to a fee-paying school to improve their chances in life? Are they good or bad from a diversity perspective?

numbersIf we focus resources on the extreme cases – the bright kid with hopeless parents who needs a huge amount of help – we may end up achieving less in the name of diversity than if we make incremental improvements that benefit those who are a few rungs higher up the ladder of opportunity and whose families support them. Or is that taking too quantitative an approach, despite the diversity industry’s apparent interest in statistics?

Yes, the legal professions, and the IP professions, need to keep improving on diversity. But we also need to be brave enough to object when a heavy, bureacratic approach is taken that focuses on process and being seen to do the right thing, rather than gently encouraging best practice.

 

 

 

 

 

 

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