Category Archives: Legal Updates

Ignore the IP clause. Examine the parties’ conduct.

twiceThis is a tale about a company that sold the same IP twice, according to some contracts that it signed. But don’t worry, children, because the parties didn’t really believe that the second contract was meant to sell the IP, even though it said that it did. Oh, and it’s also about a confidentiality clause in a licence agreement that meant what it said. Even though the defendant argued that it shouldn’t be taken literally.

The case is called Process Components Ltd v Kason Kek-Gardner Ltd [2016] EWHC 2198 (Ch) (05 September 2016). Don’t bother reading it. It’s not going to change the course of English law. It describes some typical legal argy-bargy that happens when a commercial dispute gets to court. IP Draughts has read it, so that you don’t have to. But it does raise some practice-related issues that should be of interest to transactional IP lawyers. These are summarised below.

Selling the same IP twice

First, the sale of the IP. The two contracts in question were for the sale of different parts of a business, to different purchasers. The assets sold in the first contract (Contract 1) included “£1,350,000 for the Goodwill, the IT system and the Intellectual Property Rights”. The Intellectual Property Rights were defined as:

the full benefit (subject to the obligations) of all patents, registered designs, the Trade Marks, service marks, copyrights, know-how, technical and/or research and development information, drawings, specifications, domain names, computer programs and all licences, rights to protection and applications for registration and rights to apply for registration relating to such matters used by the Seller in the Business…

Let’s leave aside the excruciatingly bad drafting of this definition – for example, what is the word “licences” doing in the fourth line, lumped together with pre-registration rights to IP? In court, the parties’ counsel managed to find ways of arguing about the construction of this definition, eg by breaking it up into 3 parts and arguing that the final phrase only qualified one of those parts. All too tedious to discuss further.

Instead, let’s compare this definition with its equivalent in Contract 2. The same solicitor, who is named in the judgment, apparently drafted both contracts and, according to the judge, “plainly used [Contract 1] as a template for [Contract 2]”. Contract 2 provided for the sale of certain assets, including “the Business Name, the Commercial Information, the Contracts, the Equipment, the Goodwill, the Intellectual Property Rights, and the Work-In-Progress”. In Contract 2, Intellectual Property Rights are defined as:

the full benefit (subject to the obligations) of all patents, registered designs, trade and service marks, copyrights, know-how, technical and/or research and development information, drawings, specifications, domain names, computer programs and all licences, rights to protection and applications for registration and rights to apply for registration relating to such matters used by [the seller] in the Business…

Now, there are ways of trying to distinguish the two definitions, eg that the definitions of Business are different in each case, or that the dates of use by the seller are different. But the judge found that these definitions mostly covered the same IP. And at least one of the commercial representatives of the parties to Contract 2 was surprised to see this definition in the draft contract, but preferred not to rock the boat by querying it.

So, the first lesson of this sermon is: take care in drafting IP definitions. Don’t just cut and paste from an earlier contract. Obvious, really. Or it should be.

Legal snowstorm

Given the apparent conflict between the two contracts, what was the judge supposed to do about it? For example, should she:

  1. darlingDecide that Contract 2 couldn’t ‘bite’ on any of the seller’s IP, as it had already been sold under Contract 1? Or
  2. Treat the buyer under Contract 2 as a bona fide purchaser without notice (sometimes quaintly known as ‘equity’s darling’) of Contract 1?
  3. Treat both buyers as purchasers, so that they became co-owners in different fields?

The parties’ respective counsel slugged away at one another, trying every legal principle in the book to persuade the judge to see it their client’s way. Among the principles mentioned in the judgment are:

  • The admissibility of pre-contract negotiations to show a matrix of fact
  • Rectification
  • Construction
  • Common assumption
  • Estoppel by convention
  • Estoppel by misrepresentation
  • Coming to equity with clean hands

On the facts before her, the judge found that the buyer under Contract 2 was estopped from denying that the buyer under Contract 1 owned the relevant IP.

A practice-related lesson here is that focussing just on the wording of the two contracts doesn’t tell us how a court is going to decide on a complex set of facts. Who said (or didn’t say) what to whom may affect the outcome more than the contractual wording.

Licence agreement – estoppel issue

At around the same time as Contract 2 was made, the buyer under that contract entered into a licence agreement with the buyer under Contract 1, under which the Buyer 1 licensed to Buyer 2 a package of IP that seems to have overlapped with the IP that was the subject of the dispute above.

Buyer 2 argued that it didn’t know the content of Contract 1 when it entered into the licence agreement, and did so to protect its position in case it turned out that the IP had been transferred under Contract 1 and not under Contract 2.

It seems that Buyer 2’s acceptance of the licence, and failure to query the ownership of the IP with Buyer 1, led to the estoppel mentioned earlier.

A possible practice point here is that Buyer 2 should have at least sent Buyer 1 a letter in which it flagged up this issue and stated that it “reserved all its rights”.

Licence agreement – confidentiality and termination

It might not have mattered whether Buyer 2 was the owner of the IP, as long as it continued to have a licence from Buyer 1. But Buyer 1 had terminated the licence agreement for breach of a confidentiality obligation.

The relevant clauses of the licence agreement were:

  1. By clause 10.1 of the licence agreement, “each party agrees to keep the terms of this Agreement confidential…”
  2. By clause 11.2, a party could terminate the licence agreement “immediately by written notice to the other” for certain types of breach.
  3. By clause 11.2(a), those breaches included any material breach of the Agreement that was not capable of remedy. The final sentence of 11.2(a) stated that “breach of the confidentiality obligations under clause 10 constitutes a non-remediable material breach”.
  4. By clause 12.3, on termination of the agreement for any reason, the licensee was required to “cease to make any use of the Intellectual Property Rights”.

The facts relied on for termination are not entirely clear from the judgment, but it seems that Buyer 2 disclosed the terms of the licence agreement to a proposed investor.

Buyer 2 argued in court and in correspondence that:

  • it was absurd to allow the licensor to terminate the licence agreement for any disclosure of the terms, as this would include trivial breaches, ie those that were not material
  • the court would interpret these obligations as allowing appropriate disclosure of the terms of the licence agreement “on a confidential basis to a proposed investor”

The judge disagreed, and held that the licence agreement had been validly terminated.

This raises a very interesting practice issue, which has been mentioned on this blog before. IP Draughts understands that it is common for companies to provide details of its contracts to proposed investors or purchasers, even if those contracts include strict confidentiality provisions. Ever since IP Draughts first encountered this issue as a junior lawyer, he has been troubled by the apparent mismatch between commercial practice and contract terms. Sometimes, a pragmatic response to this concern is to point out that the disclosures are typically made in confidence, eg in a data room, or that the party whose confidentiality has been breached won’t suffer any loss from the breach.

etiquetteThe judge in this case dispelled both of these lazy assumptions. She couldn’t see why a term should be implied allowing a party to disclose in confidence to a prospective investor. She pointed out that the CDA between Buyer 2 and the investor didn’t say anything about not using the information in a way that was detrimental to Buyer 1, who was not a party. IP Draughts suspects that the absence of such a clause is likely to be the case in most CDAs in this situation. And finally, the judge pointed out that the obligations under the CDA had expired at the time the licence agreement was terminated, so that the investor was no longer under a confidentiality obligation. This no doubt reflected the typically short duration of CDAs with investors.

The practice lesson here, in IP Draughts’ view, is that contracts mean what they say and a party should not expect the law to intervene to protect it if it is in breach, just because of dodgy commercial practice or bad habits in the market sector in which that party operates.

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Antitrust issues in IP licensing: competing guidelines

ftcVia the IP Finance blog comes news of a proposed update to the current US Antitrust Guidelines for the Licensing of Intellectual Property, which date from 1995. Although he has read the US guidelines in the past, IP Draughts is much more familiar with the equivalent European Commission Guidelines and the associated block exemption regulation for technology transfer agreements.

The European rules seem to require much more attention for run-of-the-mill licence agreements than the US rules require. He doesn’t recall ever having had a US lawyer refer him to the US guidelines in relation to a transaction under negotiation that included a US territory, whereas European lawyers working on a licensing transaction will frequently have recourse to the EU guidelines and block exemption regulation when the territory of the licence includes all or part of the EU.

Looking at the redline version of the proposed US guidelines, issued by the Department of Justice and Federal Trade Commission, IP Draughts had several thoughts:

  1. The US guidelines are more positive about the pro-competitive effects of licensing than the EU guidelines. To take one detailed example, bans on the licensee selling competing products may be acceptable under the US rules (eg see section 4.1.2.1 of the guidelines), but would ring alarm bells in an EU setting, particularly if the competing product was developed by the licensee (eg see section 4.2.7 of the EU guidelines and Article 5(2) of the block exemption). In the absence of careful and detailed economic analysis, IP Draughts would need strong persuading that such a restriction could safely be included in an EU licence agreement.
  2. Many of the proposed changes to the 1995 US guidelines are technical and don’t make major changes to the antitrust analysis of licence agreements. Where substantive changes are made, they tend to move the guidelines in a more liberal direction, that is to say taking a more positive attitude to licensing. For example, the discussion of resale price maintenance indicates that vertical price restraints in licence agreements will be treated under the rule of reason rather than as per-se illegal, following an important Supreme Court decision in 2007.
  3. Particularly helpful to the practitioner are comments in the US guidelines about the main concern being horizontal agreements between competitors. As most IP licensing is not between competitors, and often has no horizontal element, this provides a very useful context to the analysis set out in the document. By contrast, though the EU guidelines express greater concerns about agreements between competitors, there are plenty of rules about agreements between non-competitors, eg in the block exemption, and no general suggestion that vertical agreements are to be treated much more favourably than horizontal ones.
  4. Not only are the US guidelines more positive about IP licensing, they are also more helpful than the equivalent EU guidelines in explaining, with numerous illustrative examples, where no significant antitrust issue will arise. By contrast, the EU guidelines use up far too much space in simply regurgitating what is permissible under the technology transfer block exemption.
  5. Where shall we three meet again? In Brussels or in Luxembourg?

    Where shall we three meet again? In Brussels or in Luxembourg?

    IP Draughts has heard it said that the thinking of those in the European Commission who are responsible for antitrust policy is strongly influenced by the approach of the US authorities. Certainly some of the economic concepts that are seen in the US guidelines, such as innovation and technology markets, have found their way into the EU guidelines and block exemption. But the way in which those concepts are used has a very different flavour in the EU model. It is as though the US concepts have been mixed up in the cooking pot with the desire to promote the EU single market, deep suspicion about IP rights generally as a monopolistic  right, a lack of experience of routine licence agreements, and a Mediterranean statist approach.

  6. IP Draughts was reminded that the US guidelines include a “safety zone” for certain types of agreement, which could be viewed as analogous to the EU block exemption regulation or to the EU Notice on Agreements of Minor Importance. Section 4.3 of the US guidelines places in the safety zone, among other agreements, licence agreements that meet both of the following criteria: (1) they are not “facially anticompetitive” – ie don’t include really bad terms; the equivalent expression in EU law is “hardcore clauses”; and (2) the collective market share of the parties does not exceed 20%. Where market shares cannot be determined, eg in some technology or R&D markets, an alternative to item (2) is that there are at least 4 competing technologies or 4 other parties that can engage in competing R&D.
  7. However, IP Draughts doubts whether this safety zone will be used much, given the more tolerant approach of the US guidelines to most IP licence agreements.

The differences between the US and EU approaches are sometimes found surprising by US clients and their US lawyers. Two points in particular may cause surprise: (1) the extent to which EU lawyers spend time looking at what is permissible under the relevant block exemption (there are other block exemptions for R&D agreements and for distribution agreements, among others), and (2) the difficulty of achieving legal certainty as to whether particular terms will be acceptable under EU antitrust laws. The unsatisfactory state of EU law may make it impossible for their lawyers to provide a quick, cheap and reliable answer to the antitrust questions that arise.

 

 

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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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10 year campaign by Law Society to change IP law: we’re nearly there

queen speechThis week, Her Majesty the Queen nearly used the words “intellectual property” in public. From her throne in the House of Lords, she outlined the Government’s legislative programme for the current Parliamentary term. The speech focussed on matters of general interest. Perhaps it was unrealistic to expect the Government (which writes her speeches on these occasions) to ask Her Majesty to refer specifically to the Intellectual Property (Unjustified Threats) Bill. Instead, it was swept up in the phrase “Other measures will be laid before you.”

Nevertheless, the Government’s supporting papers, issued at the same time as the speech, make clear that this Bill is one of 21 that they will introduce in the coming months.

The announcement gets us very close to a successful conclusion of a campaign that the Law Society’s Intellectual Property Law Committee initiated in about 2006. The exact date on which we started work is lost in the mists of time, but I have managed to find a committee paper on this subject dated February 2006. As that paper noted:

Today we have an illogical and inconsistent assortment of threats actions relating to various IP rights; they run counter to the over-arching encouragement [e.g. in the Civil Procedure Rules] to communicate and settle rather than precipitately issue legal proceeding and they leave clients and solicitors in jeopardy of  being sued for making actionable threats, simply by reason of the sending of what would otherwise be an uncontroversial letter before action.

Robin Fry

Robin Fry

I am now the Chairman of the IPLC, but credit for this campaign lies mainly with others. Among the many committee members who have worked on the project, two names stand out: Robin Fry, a former member of the committee, who led the discussions and drafted our position papers in the early years, and Isabel Davies, who chaired the committee from 2006 until 2015.

Isabel Davies

Isabel Davies

The IP threats provisions are complex and technical, but in essence they provide a legal remedy to someone who is threatened with IP litigation. The recipient  of the threat can sue the threatener for making “unjustified threats”. How you view these provisions may depend on what question is asked. If you are asked, should we have laws that stop aggressive IP owners from using spurious IP claims to bully smaller businesses and consumers into buying their products (or avoiding competing products), the answer may be yes.

If, on the other hand, you are asked whether struggling creative artists, whose IP is being misused by major companies without acknowledgement or compensation, should be inhibited from asserting their IP rights by satellite litigation that focuses on their precise choice of words in correspondence, then the answer may be no.

At this point, and unusually for this blog, I feel the need to issue a dislaimer. To discuss this subject, we need to get technical, but this journalistic overview should not be used as legal advice. Don’t use any of the information in this article when asserting or defending IP claims!

ceaseEnglish IP owners (or their lawyers) who know about these laws have typically drafted “cease and desist” letters (to use an American term) in the most bland of terms, to avoid being accused of making threats. Unless the recipient of the letter is also in-the-know, and can interpret the code, they are left none the wiser by the letter. Some lawyers have taken the view that even a bland letter is too risky, and that the only safe course of action is to issue proceedings before communicating with the infringer; once proceedings are started, the threats provisions no longer apply. These strategies run completely against the spirit of the English civil procedure rules, where clear and open communication is required.

Yet another strategy is to focus, in the letter, on types of IP that are not covered by the threats provisions. For example, a product might infringe both copyright and design rights. A “clever” lawyer might try to draft a letter threatening (only) to sue for copyright infringement which is not covered by the threats provisions, and avoid mentioning design rights, which are covered by threats provisions.

In other words, the threats provisions are the cause of some absurd behaviour by IP owners and their specialist lawyers.

By contrast, the IP owner who cannot afford specialist UK IP lawyers, and who communicates in clear terms with an alleged infringer, is at great risk of being sued for making threats. Note that the previous sentence refers to “specialist UK IP lawyers”: one of the leading cases on this subject in recent years concerned correspondence from a Spanish law firm that might not have been expected to know the quirks of English law in this area. English law is out of line with most other jurisdictions on this subject.

As specialist IP practitioners, our committee saw that this area of English law wasn’t working properly, and needed to be changed. However, we faced several obstacles. First, the subject was very technical, and unlikely to get much political interest. Secondly, several IP judges were against change, at least in the early days. The IP judges have influence with legislators.

From a judge’s perspective, IP threats provisions might be thought useful as a curb on egregious behaviour by aggressive IP owners. But the judge only sees the cases that come before him or her, and not the large number of claims that are settled before they reach court, or which are not made at all, due to the dampening effect of the threats legislation. As practitioners “at the coalface” we could see what the judges apparently could not see.

law commissionSo, we didn’t get much traction for our ideas in the early years. But we persisted, and kept arguing the case for change, for example in our responses to Government-sponsored reviews of the IP system, including the Gowers and Hargreaves reviews. Eventually the Law Commission decided to take up this issue, with our active encouragement. They issued a consultation document, and later a report recommending changes, which our committee largely supported. The Government mostly accepted the Law Commission’s recommendations. The threats provisions are not to be abolished, but they are to be greatly improved, and made more consistent between IP types.

The Law Commission and the Parliamentary Draftsmen’s Office prepared a draft Bill to effect these changes, on which our committee provided detailed comments. Last year, one of our regular committee meetings focussed on this subject; our invited guests included three representatives of the Law Commission, two from the Parliamentary Draftsmen’s Office, and two from the Intellectual Property Office. My main contribution to that discussion, as a transactional IP lawyer rather than a litigator, was to challenge the use of the term “best endeavours” in the draft Bill; the wording was changed in a later draft.

The Bill is now set to be introduced in the House of Lords by a special procedure that is used for uncontroversial measures.

Sometimes, the law is changed through vigorous political activity. Our campaign illustrates a different approach: it is possible to achieve important, but very technical, changes to the law through patient committee work.

 

 

 

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