Category Archives: Legal Updates

Important point of law on patent assignments buried in drossy case

no worriesIP Draughts was idly perusing the recent cases on BAILII this afternoon, when he came across the case of Wright Hassall LLP v Horton Jr & Anor [2015] EWHC 3716 (QB), a decision that was published yesterday.

He probably wouldn’t have bothered to read it, except for the name of the claimant, which he has always found mildly amusing and appropriate for a firm of solicitors. (Note to non-UK readers: in UK idiom, a hassle is an irritating problem or inconvenience, and a right hassle is emphatically so. The conventional US meaning may be different.)

Oh-ho, thought IP Draughts. Could this be a case about solicitors’ negligence? He was even more intrigued when he started to read the case, which concerns the commercialisation of an invention.

Ultimately, the case is a rather boring mess of arguments about the legal effect of various corporate, commercial and IP documents. Only one point stood out for IP Draughts, which was that one of the parties argued that patent assignments are ineffective if consideration is not given for the assignment. See paragraphs 27-49 of the case at the link above.

This is a subject on which this blog has previously commented. For example, see here in the context of discussion of executing assignments as deeds.

IP Draughts is relieved to see that the judge concluded that:

(a) there was no English authority directly on point (ie that IP Draughts might have missed); and

(b) there was no general requirement for consideration in a patent assignment (nor, in IP Draughts view, an assignment of any other type of IP) under English law.

The judge does not get into the question of whether an assignment without consideration is a gift rather than forming part of a contract, presumably because he was not asked to do so.

His conclusion is:

an instrument in writing satisfying s30(6) [of the Patents Act 1977] is effective as a legal assignment without any additional requirement for consideration.

As the judge notes, section 30(6) doesn’t mention consideration. The only requirements of that section are:

(6) Any of the following transactions, that is to say—(a) any assignment… of a patent or any such application, or any right in a patent or any such application… shall be void unless it is in writing and is signed by or on behalf of the assignor…

small winsThis decision by a County Court judge, co-opted to hear a High Court case heard in the Queen’s Bench division (rather than the Chancery Division, where specialist IP cases are usually heard), is not likely to be considered a particularly authoritative decision on this point. In IP Draughts’ view, that is a shame, as it is a sensible decision.

 

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Bob Marley: dud case lost again in Court of Appeal

blue mountainIP Draughts has previously reported on a case in the English High Court, over the ownership of copyright in some Bob Marley songs, including No Woman No Cry.

The claimant lost that case and appealed. Last week, the Court of Appeal’s decision in the same case was handed down. In BSI Enterprises Ltd and another v Blue Mountain Music Ltd [2015] EWCA Civ 1151, the claimant lost again.

The central issue in the case was whether copyright in a set of Bob Marley compositions had transferred under an agreement made in 1992.  The songs were not mentioned by name in this agreement, unlike many other of Bob Marley’s songs. But the agreement included wording that broadened its scope beyond the named songs.

If the answer to that question was “no”, then copyright remained with the seller, and a later assignment from the seller to the claimant was effective. If the answer was “yes”, then the later assignment couldn’t transfer what the seller didn’t own. Thus, the case turned on an interpretation of the 1992 agreement.

The claimant’s counsel in the High Court, Hugo Cuddigan, had argued that the parties to the 1992 agreement had deliberately omitted the songs in question from a schedule to the 1992 agreement, and that this was part of the factual matrix in light of which the agreement should be interpreted. The judge at first instance rejected this argument, preferring to rely on the words of the agreement. These words made clear “almost to the point of redundant repetition” that all Bob Marley songs were included, whether or not they were listed in the schedule.

On appeal, the claimant had a new counsel, Madeleine Heal. She obtained permission from the court to base her case on a different argument. Her line was that a close analysis of the words of the agreement led to the conclusion that the songs in question were not covered by the assignment.

The agreement provided for the assignment of copyright in the Compositions, a term that was capitalised in the agreement. But what did this term mean? Clause 1 of the agreement set out a list of definitions. Clause 1.8 was headed “Composition” and “Catalogue”. The text of clause 1.8 included, at the end of a lengthy sentence, the words individually a “Composition” and collectively the “Compositions”. Admittedly the definition slightly muddled up the two terms, Composition and Catalogue, but the wording was broad in scope, and included the phrase including, but not by way of limitation, the Catalogue listed on Schedule 2 hereto. There is no suggestion in clause 1.8 that the definition of Composition is limited to the songs listed in Schedule 2.

no noAccording to Ms Heal, one shouldn’t look at the definitions clause to find the definition of Composition. Oh no, no, no, no. Instead, one should look at the warranty clause, which included, at clause 5.10, a warranty by the seller that “Schedule 2 contains a complete and accurate list of all the Compositions.”

Moreover, continued Ms Heal, a recital to the agreement stated that the seller wished to sell “certain” music publishing rights and interests, which proved that only some, and not all, of the seller’s interests were to be transferred.

Oh dear. Kitchen LJ’s mild response to these and similar arguments was that he was “unable to accept” them, they were “unsustainable”, he was “wholly unpersuaded”, and there was “nothing in this criticism”.

Thank goodness for small mercies.

To IP Draughts’ mind, the court at first instance and the Court of Appeal had a relatively straightforward task to interpret the 1992 agreement, and they performed it well. No new point of law arises from the case. There is no guidance that needs to be given to drafters in light of the case. It is an illustration of how far a party is prepared to go to try to protect its business interests, by pursuing a dud case all the way to the Court of Appeal.

 

 

 

 

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Unconscionably long judgments uphold penalty clause

expensiveCertain phrases in contracts are reassuringly familiar to English commercial lawyers, however weird they may appear to clients. One of these concerns what are known as ‘liquidated damages clauses’. Typically, the clause will say something along the following lines:

 

If the Supplier is late in delivering the Goods, it will pay the Buyer liquidated damages of 1% of the Price for each week of delay. The Parties acknowledge this is a genuine pre-estimate of the loss that the Buyer will suffer from late delivery, and is not a penalty.

By explicitly agreeing that the payment obligation is a ‘genuine pre-estimate of loss’, drafters have hoped to persuade the court (in a future dispute) that it is a liquidated damages clause and not a penalty. It has long been thought that the former are enforceable under English law, but the latter are not.

IP Draughts considers this form of words to be largely pointless and self-serving, but that it does no harm. What should matter to the court is the substance, and not the label. An interesting, if irritating, variant appeared in a publishing agreement that a publisher recently asked IP Draughts to sign:

In the event that the Publisher wishes to cancel or terminate this Agreement prior to the delivery of an acceptable manuscript or the publication of the Work without due cause, then the Publisher’s total liability to the Author shall be capped at £100 (one hundred pounds), such payment being made by the Publisher by way of liquidated damages. The parties confirm that these sums represent a genuine pre-estimate of the loss that the Author would suffer in the event that the Publisher terminated or cancelled this Agreement.

This clause is fundamentally misconceived, in that it is an attempt to limit liability masquerading as a liquidated damages clause. Thankfully, the editor at IP Draughts’ publisher has agreed to go back to the wording of the agreement used for the previous edition of the same work, which didn’t include this kind of lawyers’ nonsense.

The general assumption, that under English law penalties are unenforceable but liquidated damages clauses are enforceable, goes back at least 100 years. One of the leading cases on this subject was a House of Lords decision, Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79. In that case, Lord Dunedin proposed 4 tests for whether a payment obligation was a penalty. One of those tests used the phrase ‘genuine pre-estimate of damage’, and this phrase seems to have been picked up by the courts in subsequent cases.

Last week the UK Supreme Court issued its decisions in two combined cases on the subject of penalties. The judgments and an abbreviated ‘press release’ can be found here. In effect, this is the first time that the Supreme Court (formerly the House of Lords) has looked in detail at this subject

£85? You've got to be codding!

£85? You’ve got to be codding!

in a century. The second of the two cases (Parking Eye Limited v Beavis) concerned the owner of a fish-and-chip shop, who refused to pay an £85 penalty charge for staying in a free, short-term car park connected to a shopping mall for more than the permitted 2 hours. Their lordships’ decision in this case, that the charge was enforceable, was reported in most of the national newspapers earlier this week.

The first of the two joined cases (Cavendish Square Holdings BV v Talal el Makdessi) was a large commercial dispute in respect of a contract to sell a majority shareholding in a major advertising agency in the Middle East. The contract included stage payments, and non-compete obligations on the sellers. If the sellers breached the non-compete obligations, there would be two consequences: (1) later stage payments would not become due, and (2) the sellers would have to sell their remaining shares to the buyers at a pre-determined price. The seller argued that both of these provisions were unenforceable penalty clauses. The Supreme Court disagreed.

7Usually, a panel of 5 justices decides Supreme Court cases. Occasionally, as in this case, where major issues are at stake, 7 are empanelled. Readers who think they could handle the pressure of having difficult legal questions fired at them continuously and for a long period by 7 extremely bright justices may wish to see the recordings of the proceedings, which can be viewed here.

In essence, the Supreme Court has introduced some new tests for whether a contractual penalty is enforceable. Exactly what those tests are needs to be unpicked from the various judgments, which in total run to a staggering 123 pages.

Probably, we should focus on the joint judgment of Lords Neuberger and Sumption, not least because (a) they are brainier than the others, (b) their judgment is clearer than the others (even if it does take up a whopping 49 pages), and (c) Lords Carnwath and Clarke agreed with their judgment, which means that a majority of the justices have agreed that the legal points made in this judgment form the basis of the decision.

numptyLords Neuberger and Sumption (hereinafter collectively referred to as Lord Numpter) considered the previous focus on pre-estimates of loss to have been unsatisfactory, and to have resulted in the law on penalties becoming ‘the prisoner of artificial categorisation’.

Nor is it helpful to consider whether a provision is a ‘deterrent’, as this is just the flip-side of an ‘inducement’ and not inherently bad. Instead, the test of whether something is a penalty should be whether it is ‘penal’. [Duh!]

Unconscionable or extravagent

To determine whether a provision is penal and therefore unenforceable, it is necessary to consider whether it seeks to influence a party’s conduct in an ‘unconscionable’ or ‘extravagent’ way (these words also appear in Lord  Dunedin’s 1915 judgment).

At this point in Lord Numpter’s judgment, and in the equivalent parts of the judgments of the other justices, a selection of words and phrases is used to elaborate on the threshold of unconscionableness. IP Draughts noted the following:

  • out of all proportion to a legitimate interest of the innocent party
  • exorbitant
  • in terrorem

And in the different context of a claim in the Parking Eye case based on the Unfair Terms in Consumer Contract Regulations:

  • significant imbalance in the parties’ rights
  • disportionately high sum in compensation

Several of their lordships referred to the fact that penalty rules also existed in certain civil-code countries, where provisions might be unenforceable if they were:

  • manifestly excessive
  • disproportionately high

Lord Hodge also referred to certain ‘soft law’ principles established by international bodies such as UNCITRAL, which would limit the right to damages that are:

  • grossly excessive
  • substantially disproportionate

He also referred to the tests of exorbitance and unconsionableness as preventing the enforcement of ‘egregious’ contractual provisions.

So much for the adjectives. Lord Numpter’s judgment also focussed on the following points:

Primary or secondary?

Is the financial obligation a primary obligation or merely the (secondary) consequence of failing to comply with a primary obligation? In the words of Lord Numpter:

The penalty rule regulates only the remedies available for breach of a party’s primary obligations, not the primary obligations themselves…

This means that in some cases the application of the penalty rule may depend on how the relevant obligation is framed in the instrument, ie whether as a conditional primary obligation or a secondary obligation providing a contractual alternative to damages at law…

This topic is discussed at greater length in the judgment. In other words, the question of whether a provision is unconscionable and extravagent, and therefore unenforceable, is only relevant if the obligation is a secondary one. If the obligation is a primary one, the penalty rule doesn’t apply.

IP Draughts’ reaction is that this distinction is ‘too clever by half’ and that manoeuvring around the penalty rule on the basis of primary and secondary obligations will be fraught with difficulty for us mere mortals who actually draft contracts.

parking eyeLater in the judgment Lord Numpter concluded that both of the financial provisions at issue in the commercial case – the loss of future stage payments and the obligation to sell the remaining shares at a pre-determined price – were primary obligations and therefore not subject to the penalty rule. In the consumer case, Lord Numpter concluded that the £85 charge was a secondary obligation and therefore the penalty rule was engaged, but on the facts it was justified and not an unlawful penalty.

In their judgments, Lords Mance and Hodge seemed unconvinced that the obligations in the commercial case were primary obligations. But this ultimately didn’t matter, as they found them not to be unconscionable or extravagent in the circumstances of the case. Lord Toulson seemed to agree with this analysis.

If we take the Mance/Hodge/Toulson line, it may be risky to make any assumption about a clause being a primary obligation. If we take the Neuberger/Sumption line, it should be possible to draft many penalty-like clauses so that they fall outside the penalty rule altogether. Which line represents the current state of English law?

agreeYour guess is as good as mine. In his short judgment, Lord Clarke “agree[d] with the reasoning of Lord Neuberger and Lord Sumption, Lord Mance and Lord Hodge.” With respect, you can’t agree with all of them on this point, as they had different views. Rather oddly, Lord Carnwath says nothing in the official judgment; there is simply a laconic statement, in parenthesis and as part of the heading, before Lord Numpter’s judgment, that Lord Clarke and Lord Carnwath ‘agree’ with that judgment.

Relief against forfeiture

Lord Numpter spends some time discussing the differences between (a) the law on relief against penalties and (b) the law on relief from forfeiture, but declines to reach any conclusions on whether relief from forfeiture might be available in a contract case, even if the penalty rule doesn’t apply. Lords Mance and Hodge expressed the view that relief from forfeiture could be available in these circumstances, and Lord Clarke’s single paragraph of judgment is mainly devoted to saying that his “present inclination” is to agree with them. In other words, an obligation might not be so bad as to amount to an unlawful penalty, but might be avoided under the rule on relief against forfeiture. However, this was not the basis of the decisions in the present, joined cases.

Conclusions

Their lordships declined counsels’ invitations to abolish or significantly expand the rule on penalties. Instead they sought to ‘explain’ the rule, which had been misunderstood by an undue emphasis, over the previous century, on Lord Dunedin’s 4 tests, including the phrase ‘genuine pre-estimate of damage’.

Where the penalty rule is engaged (and it may well not be engaged if the obligation is a ‘primary’ one), the test for whether an obligation should be struck down as a penalty is, in the words of the press release that accompanied the judgment, the following:

The true test is whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation

Following this judgment it will be easier, in IP Draughts’ view, to enforce what the world knows as penalty clauses . In English law agreements, there will be less emphasis on formulaic drafting of clauses that refer to genuine pre-estimates of loss.

allenFinally, congratulations to the lawyers at Allen & Overy who advised Cavendish Square Holdings in 2008 and presumably drafted the clauses that the Supreme Court upheld in the commercial case. Job well done. Does anyone know who the individuals were who drafted these clauses?

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No copyright for ‘Solicitor at a Desk’ yoga position

Lord Neuberger, President of the Supreme Court, demonstrates I Can Read Text at This Distance

Lord Neuberger, President of the Supreme Court, demonstrates his mastery of I-Can-Read-Text-at-This-Distance. Baroness Hale is impressed.

IP Draughts is relieved to hear that the US Court of Appeals for the 9th Circuit has recently rejected the appeal of Bikram Chaudhury in the case of Bikram’s Yoga College of India LP v Evolution Yoga LLC No. 13-55763, D.C. No. 2:11-cv-05506-ODW-SS.

Millionaire yoga guru Chaudhury is famous for his ‘hot yoga’ classes, in which the room is heated to 40 degrees Centigrade. According to newspaper reports, he leads the classes wearing nothing but a pair of Speedos® and a Rolex®. In this case he sought to prevent his former pupils from teaching approximately two dozen yoga positions that he had invented. The court decided, unsurprisingly, that there is no copyright in a yoga position.

Readers may not be aware that, in his spare time, IP Draughts has been developing his own set of yoga moves. The IP Draughts system of yoga is typically conducted at 20 degrees Centigrade, wearing Smart Casual™ clothing, though it can be done in Speedos® and a Rolex® if no-one is watching. Remember to switch off the camera on your computer.

The best-known move in the IP Draughts system is his Solicitor at a Desk™ position, which involves sitting on a fake Charles Eames chair in a slightly hunched position, leaning forward with fingers moving on a keyboard, while squinting at a computer screen. Other moves include Collecting a Draft Agreement from the Printer™, and Bending Down to Plug in the Headset for a Skype® Call™.

 

 

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