Monthly Archives: July 2011

Replying to audit letters: zzzzzzzzz….

It’s that time of the year again.  IP Draughts has several letters on his desk from clients, asking him standard questions to which he must reply to the client’s auditors directly.

It is obvious that each letter has been prepared using the auditor’s template documentation.  As the auditors are different in each case, the wording of the questions is different, but they tend to follow a similar theme.

IP Draughts is left wondering what value there is in these letters for the company or its shareholders.  Are the letters simply an exercise in job creation for the auditors and for the lawyers who reply to them?

Some, but not all, of these letters start by asking for “details of any title deeds or other documents of title held by you for us…”  That’s an easy one to answer: we don’t hold documents of title for clients.  Part of us wonders whether this standard question pre-dates the registration of land in England and Wales (under the Land Registration Acts), which in the vast majority of cases makes title deeds redundant in the modern era.  We also wonder idly why our possession of such deeds would be relevant to the audit of the client, but we don’t care enough to enquire further.

Next, we are often asked to confirm whether the estimates made by the directors of potential liabilities are reasonable.  Sometimes this question is preceded by a table setting out those estimates.  More often than not the table is blank, making the question redundant.  In one letter on our desk, there is no table and the question just refers to “any estimates made by the directors…”  Excuse me?  How are we supposed to know what estimates they have made?

Usually, we are asked about any litigation involving the company on which we have been consulted.  In principle, this question is understandable.  It seems obvious that litigation involving the company could have an impact on the state of the company’s accounts.  The wording of the question doesn’t always live up to the principle, though.  The three examples in front of us use different words:

Example 1: “Details of any litigation and claims in progress or pending which concerns us and of which you have knowledge.”

Example 2: “Details of any outstanding claims against the companies on which you have been consulted where the individual claim is in excess of £500.”

Example 3: “Details of any outstanding claims, of which you are aware, stating the amounts claimed.”

Draftsmen will notice some significant differences between these three questions.  Presumably we should imply into the third example some connection between the claim and the client?  But should this be a closer or looser connection than that mandated by the first example, which refers to claims that “concerns” (sic) us?  Should we also assume that it is only claims against the client, rather than by the client?  The second example states this directly, unlike the other two.

There are several other anomolies in the three examples.  Some people might argue that we shouldn’t care about the precise wording of the question, and should notify the auditors of any claims or potential claims involving the client of which we have knowledge.

We are left with the impression that writing to the client’s solicitors is a mechanical, “tick box” process for annual audits, where very little thought or care is put into the exercise.  Are we alone in finding it mildly insulting to receive such poorly-considered questions?  Should IP Draughts be taking more anti-grumpiness pills and leave off replying to these letters until the Autumn?

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Filed under General Commercial

Postgraduate course in IP transactions – update

Last Friday we posted about a possible LLM or postgraduate diploma course on the subject of IP transactions, which we would like to establish with a leading university.  IPKat also kindly posted about this idea, on the same day.  This posting is to give you an update on progress.

So far, we have received some very positive responses from 9 people, including several solicitors, a patent attorney, a trade mark attorney, a barrister, and (surprisingly, but very welcome) an IP professor in Turkey.  We have also seen some interesting and useful comments on the IPKat posting.  These responses encourage us to think that there is a market for what we are proposing, and that the course is on the right lines, subject to some fine-tuning.

In order to persuade a leading university to take the course on, we will probably need to demonstrate financial viability.  This, in turn, will depend on support from large law firms who are likely to send their junior associates on the course on a regular basis.  In this context, we are encouraged by the responses we have received from 3 people responsible for sending IP associates on courses at law firms, namely:

  • a leading City/international law firm
  • a leading national/international law firm
  • a leading specialist media law firm

If you are responsible for sending IP associates on courses, or you know someone who is, it would be very helpful to our cause if you or they could send us an email of support (to, to supplement those we have already received.  A response before next Friday (5th September) would tie in with a meeting that we have arranged for that date.

Thank you to those people who have already responded.  This idea has been germinating for several years, and it looks as though we are starting to generate some momentum to make it happen.

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Filed under &Law Updates, General Commercial, Intellectual Property, News

Well stacked wedding cakes…

Well stacked

Before we start, those who know me should not get their hopes up.  This post is not a roundabout way of announcing that I have popped The Question.  No need to go and buy a hat.  Instead, I was revisiting royalty stacking provisions earlier when I came across the notion of a wedding cake clause.

Read on (please):


A royalty stacking clause is used where a single product is covered by a number of different patents owned by a variety of separate owners (for example, because a range of patents are combined together into one product or because various patents are used in the manufacture of the product).  The licensee will need a series of different licence agreements. The risk for the licensee is that the accumulation of royalties that must be paid will eat away at the licensee’s margins and make it entirely unprofitable for the licensee to make or sell the product.  Obviously, if this happens, nobody is happy because no product is sold.  Royalty stacking clauses protect the licensee by allowing the licensee to reduce the amount payable to the licensor in the event that the licensee has to pay several different royalty streams.

Licensors must approach these clauses with caution. In fact, there are two aspects that licensors should be aware of.

Yes, there really is an HS Lab report on stacked logs (ref ME/98/25)

First, they reduce the amount the licensor receives.  There is a risk that an unscrupulous (or commercially astute, depending upon how you look at it) licensee can use the stacking provisions to reduce the royalty commitment to zero.  The licensee could enter into arrangements with third parties that involve payments calculated to squeeze out the licensor.  To guard against this, the licensor can push for a minimum threshold which imposes a floor below which the level of royalties will not fall.  So, where a licensee is required to take a licence from a third party in order to make the Product, the royalty stacking clause might read: “the Licensee may deduct from royalties due under this Agreement on [the Product] 50% of royalties actually paid by the Licensee to such third party but in no event will the royalties paid to the Licensor be less than 50% of the amount due under clause X”.  (There are other formulae for reducing royalties, but this is a commonly-encountered clause.)

Second, the licensor should ensure that the clause only applies to arrangements that come into force after the commencement of the licensor’s agreement.  Licensors should not be foxed into allowing the licensee to recover past expenses.

Just in case you needed convincing, these clauses can have a significant commercial impact.  In 2005, Cambridge Antibody Technology and Abbott Biotechnology settled an argument over the scope of a royalty stacking provision in a licence relating to Abbott’s HUMIRA drug (HUMIRA is adalimumab to those in the know – a prescription medicine used in the treatment of arthritis and Crohn’s Disease).  The provision allowed Abbott to reduce royalties payable to CAT by 50% of the amount of any royalties paid to third parties “in order to license rights needed to practice or have practiced the technology claimed in the Patents”. Abbott took a wide view and argued that this meant that Abbot could deduct third party royalties in respect of technology used in the development of HUMIRA.  CAT took a narrower view, arguing that Abbott could only deduct royalties that Abbott had to pay to enable Abbott to use the CAT technology.  CAT won the argument in court and Abbott appealed.  Frustratingly (for lawyers), the case never reached the Court of Appeal as the parties settled, reputedly on the basis that Abbott paid CAT US$255 million.

And the wedding cake?

A wedding cake royalty provision is completely different to a royalty stacking clause.  A wedding cakeWedding cake provisions create a royalty stream where the royalty rate decreases as the sales increase – so the first £1million will carry a royalty rate of 5%, the next £1million will carry a royalty rate of 3% and so on.  A tiered effect that somebody somewhere felt was reminiscent of a wedding cake.  Obvious, really.

And finally, a challenge.  There is no prize other than the warm glow of satisfaction that you will get from being right.  Whose wedding cake is this?

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Filed under Licensing

Top 10 howlers when preparing contracts for signature

Few of us can claim never to have made a mistake when drafting, negotiating or even signing contracts.  But some of the mistakes we have seen are in a class of their own.  Here are some of our favourites:

    1. The Chief Executive who signs the contract in the wrong place, on behalf of the other party.
    2. The contract that is signed when the text contains a header saying that it is a “draft” or “subject to contract”.
    3. The contract that names a different party at the top of page 1 to the party named in the signature block.
    4. The contract with missing schedules, or out-of-date versions of schedules.
    5. The contract with two clauses that have the same number.
    6. The contract with a date line left blank.
    7. The contract that has additional signature blocks in a schedule (eg in a proforma contract or letter that will be signed on a future date, after the main contract has been signed), and these are signed as well as or instead of the main signature blocks of the contract.
    8. The contract that is signed by both parties but with manuscript revisions initialled only by one party or by neither party.
    9. The contract that has a signature block indicating that a particular form of signature is required (eg two signatories or the use of a seal) but these requirements are ignored by the signatory.
    10. The contract that is signed with an illegible signature and no information is given as to who has signed or their position within the organisation.

We have seen most of the above examples on more than one occasion.  They usually occur when parties choose not to involve their legal advisers in the final stages of negotiation and signature of the contract.  A related problem is when a party fails to keep, or loses, their signed original of the contract.  It doesn’t take a lawyer to point out most of these mistakes, but it does require someone with an eye for detail.


Filed under Contract drafting