NDA with OFQUAL: what’s all the fuss?

Surprising as it may seem, parts of the UK national press have been buzzing with excitement over the terms of a non-disclosure agreement (NDA).

The story so far

There haven’t been any (many?) school exams this year, due to the Covid-19 pandemic. Instead, school pupils were to be awarded grades in their GCSE and A level exams using an algorithm developed by OFQUAL,  the regulatory body for school examinations in England.

The Royal Statistical Society (RSS) had proposed to OFQUAL the inclusion of two independent experts to help develop the algorithm. OFQUAL asked these experts to sign an NDA. RSS objected to the terms of the NDA on the grounds that it would prevent RSS from commenting on the choice of computer model, on how the constraint of grade inflation was set, whether it was appropriate to the statistical task at hand, and who set it.

In fact, following an outcry over the results produced by the algorithm, pupils have been able to claim any higher results predicted by their teachers.

The terms of the NDA

General comments

So, what is so terrible about the NDA that was proposed? IP Draughts has reviewed many hundreds of NDAs over the last 36 years, and one of his books is on the subject of Drafting Confidentiality Agreements, published by the Law Society of England and Wales, and now in its third edition. He thought it might be interesting to review OFQUAL’s NDA.

First, some general comments, before focussing on the special case of an independent academic review of technology being used for public purposes.

IP Draughts’ overall impression is that the NDA was originally based on a simple template with conventional terms, but like many templates it has acquired some accretions over time, and it doesn’t look like it has received a high-quality legal review for some time. He would be embarrassed to put his name to such a scruffy document.

Points that jumped out (in the order in which they appear in the draft) include:

1. Bad formatting, e.g. the definition of the Parties appears in a paragraph about OFQUAL.
2. The definition of Confidential Information is broad. It covers all information provided by OFQUAL unless the information fits within one of the standard exceptions. More often in NDAs there would be a requirement that information must be marked as confidential or if disclosed orally identified as confidential at the time of disclosure.
3. Bad/sloppy choice of language, e.g. “undertakes to do as follows” is followed by a list of items, such as “that copyright …remains the copyright of [OFQUAL]”

In a routine business-to-business (B2B) NDA, these points could be fixed by marking up the draft with conventional changes found in many NDAs, and with drafting corrections.

Other aspects of the NDA seem unremarkable in B2B NDAs, e.g.

• conventional exceptions to confidentiality
• restrictions on use or disclosure of the Confidential Information
• requirement to return information on request and certify destruction
• 5-year term for confidentiality obligations

Conventional as the above terms are, there are still a few drafting suggestions that might be made, e.g. that the receiving party can keep one copy of the confidential information in its legal files.

Special circumstances of this disclosure

OFQUAL’s NDA was proposed for signature by two independent experts suggested by the Royal Statistical Society. It appears from the RSS’s letters (see first link above and documents linked there) that they wanted to be free to publicly criticise the detailed features of the algorithm, and its creators, including OFQUAL. They were concerned that the NDA would prevent them from doing so.

IP Draughts agrees that the NDA probably would prevent them from doing so, but he has some sympathy with the OFQUAL position. It is a public body that was developing a policy, including a methodology for implementing the policy, on an issue affecting many thousands of families in England. As later events showed, the policy was very politically-sensitive.

In those circumstances, looking at it from OFQUAL’s perspective, it seems counter-intuitive to admit people to the policy-making body and then allow them to criticise the policy.

It appears that RSS is a campaigning body that presumably wants both better use of statistics in public bodies and greater transparency about their use. That is an understandable and laudable aim, but if I were running OFQUAL I would be reluctant to create a rod for my own back by giving RSS representatives both privileged access to a policy and freedom to criticise it.

Overall, IP Draughts thinks the issue is not really about the terms of a mediocre NDA, but about whether people involved in developing public policies should be constrained as to what they can say in public about those policies, and when. This is, or should be, itself a matter of public policy rather than something to be governed by private agreements.

 

 

Terminating IP agreements for insolvency

Amid the Covid 19 lockdown, the UK government has pressed ahead with significant changes to insolvency laws. The changes are set out in the Corporate Insolvency and Governance Act 2020, which amends certain provisions of the Insolvency Act 1986.

Many of the changes are designed to improve the legal position of an insolvent company, when dealing with suppliers and creditors. Of particular interest to readers of this blog is section 14 of the 2020 Act, which introduces a new section 233B to the Insolvency Act 1986. The text of sub-section 233B(3) follows:

A provision of a contract for the supply of goods or services to the company ceases to have effect when the company becomes subject to the relevant insolvency procedure if and to the extent that, under the provision—

(a) the contract or the supply would terminate, or any other thing would take place, because the company becomes subject to the relevant insolvency procedure, or

(b) the supplier would be entitled to terminate the contract or the supply, or to do any other thing, because the company becomes subject to the relevant insolvency procedure.

In other words, a clause allowing termination of the contract on insolvency will not be effective. For the Latin buffs among you, the government calls these “ipso facto” clauses.

Application to IP agreements

The legislation quoted above refers to contracts for the “supply of goods or services”. This term is not defined in the legislation. Since its first edition in 1996, IP Draughts’ book, Technology Transfer, has ruminated on whether an assignment of IP, or a supply of software, amounts to a supply of goods or service, e.g. in the context of the implied warranties under the Sale of Goods Act 1979 or the Supply of Goods and Services Act 1982. See paragraphs 10.73-10.74 of the 4th edition (Bloomsbury, 2020). In IP Draughts’ view, while a supply of software could amount to a supply of goods or services (and there is some case law to this effect), the assignment or licensing of IP, per se, is not a supply of goods or services.

Accompanying the legislation are various government briefing papers and guidance notes that were generated as the Bill passed through Parliament. These indicate that, in the government’s view, IP licences are included within “goods and services”.

For example in a government response to a consultation exercise on what became the Corporate Insolvency and Governance Act 2020 (see paragraph 5.104 of this response paper, dated 26 August 2018), it said:

The Government intends that contractual licences, such as for use of software or patents, will be covered by the ‘ipso facto’ provisions, acknowledging the importance of these to certain businesses and sectors.

This statement was repeated in Briefing Paper CBP8291, 5 December 2019, where the government stated that it intended that goods and services would include:

Contractual licences, e.g. of software or patents.

Despite these statements of intention, there appears to be nothing in the legislation itself to clarify the point. Nowadays the courts are able to consider Hansard (the official record of Parliamentary debates) when interpreting legislation. IP Draughts is not enough of an expert on statutory interpretation to say how much weight would be given by a court to the assertions quoted above. Looked at in context (responding to a question that seemed to be mainly about regulatory licences), the comment doesn’t show signs of deep reflection on what is not a straightforward legal issue.

IP Draughts thinks there must be at least a respectable argument that the pure licensing of IP (in the absence of deliverables such as software supply) is not a good or a service. Fundamentally, the grant of IP rights, and the relationship between licensor and licensee, is different (in IP Draughts’ view) from a typical “supply”.

He looks forward to be instructed in a UK Supreme Court case to settle this issue! In the meantime, the cautious view may be to assume that the government is right, and that termination-on-insolvency clauses are no longer effective in IP licence agreements.

Analogy with US laws

The 2019 Briefing Paper, quoted above, comments that:

These rules [i.e. on termination-on-insolvency clauses] reflect the US approach to so-called “executory contracts” in Chapter 11 proceedings. Importantly, however, the UK proposals would only cover only supplier arrangements, not general commercial contracts.

It is interesting to see the UK government using the precedent of US laws in support of the new UK rules.

Validity of ipso facto clauses under other countries’ laws

One of IP Draughts’ publications is a loose-leaf (1,500 pages) work, Drafting Agreements in the Biotechnology and Pharmaceutical Industries, which was published by Oxford University Press for about 10 years from 2005. As part of that publication, we asked IP lawyers in other six other jurisdictions (US and Europe) to comment on our template agreements, typically via footnotes to the template agreements. Contributors were free to comment or not comment on whatever they thought useful.

In the case of the main licence agreement in that work (Precedent B.8.c), two of the contributors (Spain and USA) commented on a clause that allowed a party to terminate if the other party became insolvent (insolvency being defined in detail in the clause).

The comments read as follows:

[Spain]

In Spain, art 61.3 of the Bankruptcy Law 22/2003 of 9 July 2003 provides that clauses establishing thepower to cancel or extinguish the contract triggered solely by the declaration of bankruptcy by either
of the parties shall be considered as not included.

[USA]

Ipso facto termination clauses for bankruptcy (ie clauses providing that the fact of bankruptcy itself may cause the agreement to terminate) are currently unenforceable under the US Bankruptcy Code for executory contracts (ie contracts in which both parties have continuing obligations) (11 USC §362 (1994); see Brunsvold, Drafting Patent License Agreements (2008), pp 207, 216). Under the Code, the trustee of the bankruptcy estate can assume or reject any executory contract (11 USC §365(a)). Regardless of their unenforceability, ipso facto termination clauses are routinely included in US IP agreements with varying approaches.

In the past, IP Draughts has glossed over the fact that the clauses may not work under other countries’ laws, as they were fine under English law. But now the position has changed.

The fact that such clauses have been routinely included in contracts made under laws where the clauses were not legally effective, may be a little puzzling, but they suggest that there is no good reason to stop including them in English law contracts.

Alternative techniques

There are several techniques that a drafter might consider as an alternative to a right to terminate automatically on insolvency, some of them based on exceptions in the new UK legislation. Before using any of these techniques, a close analysis of the legislation may be required. In some cases they may not be commercially achievable or useful. They include:

1. Clauses providing for a fixed term are not affected. So, consider offering a short term licence with a renewal right.
2. It is possible to apply to the court for relief from the obligation to continue the licence after termination.
3. There is to be an exception for small-business licensors.
4. The clause may be drafted widely to allow termination prior to the appointment of a liquidator etc. Termination before a formal insolvency procedure is initiated may be legally effective. How much practical benefit this would provide is debatable.
5. Get a parent company guarantee of performance, or a personal guarantee from the directors of the licensee company.

Reflecting on the above, IP Draughts wonders whether a clause that prohibits assignment or novation of the licence agreement, except in the case of sale of the licensee’s business in circumstances where the licensee is solvent, would pass through the filter of prohibition in section 233(B)3, quoted above. If so, this would at least enable the licensor to prevent the licence agreement being sold by a liquidator or other insolvency official. IP Draughts would welcome the thoughts of practitioners on this point.

 

Getting the basics right

Reviewing a set of agreements recently, IP Draughts was struck (again) by the inability of some drafters to focus on getting the basics right. Examples from this set illustrate the following points:

Stating obligations clearly and precisely, without jargon

Lawyerly phrases like “grant the privileges” should be avoided. The only privilege that IP Draughts can immediately think of is to sit in the front row of court if you are a QC.

Half-baked legal jargon should be avoided, e.g. “Parties hereby acknowledge to enter into a long form agreement…”

Do they mean the Parties intend to enter into an agreement?

Avoiding long, complex sentences

Example:

Notwithstanding anything to the contrary contained herein, each Party represents and warrants that it shall be responsible for reviewing and ensuring that any claims or representations regarding itself and its products/services in finished and final materials approved by such Party are accurate, truthful and appropriately substantiated (if applicable), and that such claims and/or representations in such finished and final materials, used in accordance with such Party’s instructions, comply with statutes, regulations, laws and generally accepted industry standards pertaining to the marketing and promotion thereof, and that the materials contain all applicable disclosures and disclaimers.

Problems with the above:

Where does one start? It is a 94-word sentence – way too long.

Why are the words “represents and warrants” used? See Ken Adams on categories of contract language, as well as on whether this pair of words should ever be used.

Wordy language with a lack of precision: can a statement be accurate without being truthful? If not, the word truthful is redundant. Whatever your eventual choice, think through the wording at this level of detail.

What is the difference between a claim and a representation? Would “statements” be simpler and more all-encompassing?

Do the materials really go through a three-stage process that establishes them to be (1) final, (2) finished, and (3) approved? If not, some of this wording is redundant.

And so on.

Being consistent in use of terminology

A document on IP Draughts’ desk describes itself variously as an MOU and as an “Agreement” – which is it?

The same document describes a party as (with revisions to spare their blushes) AB, ABX, ABXray, ABX Limited, and ABXray Limited.

Conclusions

Get the basics right. Be clear, accurate, concise and consistent. Keep practising these skills. Recognise and avoid waffle, bullshit and wording that demonstrates unclear thinking.

This will take you over 50% of the way to competent drafting. If you want to get close to 100%:

• read up on, and practise, advanced drafting skills, e.g. those in A Manual of Style on Contract Drafting.
• understand the law that supports contracts, e.g. in the case of English law, read up on the subject in Chitty and in case law (including that mentioned on this blog).
• develop your skills of persuasion, to get colleagues and counterparties to let you focus on getting the drafting right – sometimes there will be resistance, through pride, or a lack of interest in words.

Comic book contracts

There is a view, held by some who are involved in contracts, that there should be  visual illustrations in many contracts, particularly those involving consumers or other non-specialists.

This view is aligned with a view about how universities should teach – that people learn in different ways, and the traditional focus on words and theory disadvantages those who think better in numbers or images, or who learn better when they see the practical aspects. So far, IP Draughts gets the impression that universities pay lip service to this idea; on the whole they don’t do much about it. He would like to see contract law taught through examining contracts, but this practical approach is probably too radical for leading law faculties.

Anyway, back to visual aids. IP Draughts was interested to read about an initiative in Australia, where a large engineering company called Aurecon has generated a standard employment contract in the form of a “comic book contract”. The complete contract can be found here. It appears to have been designed by a company called Creative Contracts.

Reading this contract, and looking at the pictures, several points occur to IP Draughts. First, the use of cartoon-like images is prevalent in consumer advertising in the UK, e.g. it is used by domestic gas companies. This advertising provokes a negative response in IP Draughts, based partly on the attitudes of his (non-intellectual) parents and grandparents, who were disdainful of attempts to treat them and others as children. Perhaps this says more about IP Draughts’ family values than about the merits of the use of cartoons.

Next, much (perhaps a majority) of the Aurecon “contract” is not really a set of contract terms. It describes the company’s values and processes, as well as setting out some very abbreviated contract terms. It probably wouldn’t comply with the requirement under English law that an employer must set out certain core terms in writing – typically done in a schedule to the contract – e.g. when did the period of continuous employment start. (This is relevant when calculating statutory payments for redundancy.)

IP Draughts honed in on the IP terms. Text appears above the following image (original is better quality):

The text reads as follows:

We own any intellectual property rights in things you create in the course of your employment. You help us to apply for any needed patents and to protect our intellectual property.

IP Draughts is always interested in new ways of communicating ideas. His impressions of the above examples are:

1. Does the image increase the reader’s understanding? What is it trying to say? Looked at analytically, rather than impressionistically, it doesn’t convey much, other than someone handing to someone else a big book with the title “IP + Patents”. What does this mean, in relation to IP ownership?
2. The accompanying text skates over the surface of the complexities of IP. It uses several terms that have legal meaning, and which may not be clear to the typical reader: intellectual property rights, things you create, course of your employment, patents, and intellectual property. IP Draughts would be interested to hear about the thought process that led to this choice of words and image, and whether it was intended to make the terms legally binding. The choice of words seems to be “legal lite” – using legal terms of art but avoiding definitions – rather than fundamentally redesigning the language to fit a simplified, non-legal approach

Similarly, there is an image linked to some text that requires the employee to “respect” the company’s confidential information. A separate image (of putting various electronic items in a cardboard box) requires the employee to “remember” that their duty of confidentiality “extends beyond the duration” of their employment.

A question that runs through IP Draughts’ mind is that there is a trade-off between simplicity and legal effectiveness, and he wonder whether the company has written down what this trade-off should be. Is the intention to focus, say, 80% on simplicity and only 20% on legal effectiveness, recognising that the company may lose employment disputes as a result, but thinking this risk is worth taking for the benefits of a simplified contract?

Contracts of this kind are experiments, and not yet part of the mainstream. IP Draughts’ view is that the drafter/designer needs to work really hard to make the meaning clear when the text is so abbreviated. Without seeing the design specification for this contract (if there is one) it is difficult to say, but IP Draughts doesn’t think this is a good template, at least when it comes to complex legal issues such as IP and confidentiality.