Category Archives: Legal Updates

International IP transactions and the effect of local laws

Litigating IP rights is such tiring work!

Litigating IP rights is such tiring work!

You have entered into an IP agreement that applies worldwide. It might be a licence agreement in which the licensed territory is all countries of the world. Or it might be an assignment of all of your IP, in all countries of the world.

The parties have agreed the law and jurisdiction of the contract. For present purposes, let us say that English law is to govern it, and that the English courts have exclusive jurisdiction. But the issues mentioned below are likely to apply irrespective of which law and jurisdiction are chosen.

The contract addresses IP-related issues in each country of the world. Take the example of an exclusive licence agreement that includes a term stating that the licensee can sub-license its rights. To what extent will this term override provisions of national IP law that state whether a licensee is permittee to sub-license?

As far as IP Draughts is aware (but he hasn’t done any worldwide research), on this point national IP laws may provide a fall-back position if the contract is non-specific on the issue, but they tend not to be prescriptive in the sense of overriding what the parties have agreed. For example, section 30(4)(a) of the UK Patents Act 1977 provides:

to the extent that the licence so provides, a sub-licence may be granted under any such licence and any such licence or sub-licence may be assigned or mortgaged

This suggests that, in the absence of a provision in the head licence agreement that permits sub-licensing, sub-licensing is not allowed.

Some years ago, when we wrote our loose-leaf work on agreements in the pharmaceutical sector, our German-law contributor included the following comment as a footnote in the licence agreement template:

Under German law, the right to grant sub-licences in case of an exclusive licence follows by law. Thus the parties need to explicitly exclude such right if desired.

IP Draughts suspects that, in most cases, national IP laws on the interpretation of an IP agreement will not override terms that the parties have expressly agreed in their contract.

If we broaden the subject from IP laws affecting the interpretation of IP agreements, to IP laws more generally, can we still assume that the terms of the contract override national IP laws? Probably not. For example, an IP agreement made under English law might state that the licensee can sue infringers. National IP laws may not allow the licensee to bring an action in its own name. Should the agreement be interpreted as requiring the IP owner to sue an infringer on behalf of the licensee in those countries where a licensee lacks locus standi to sue in its own name? IP Draughts cannot offer any universal answer to this question. It may depend on how the court interprets the contract. And even if the English court (in the above example) says that the answer to this question is yes, how enforceable will this decision be in the jurisdiction where the action is to be brought?

lex luthor

lex luthor

This type of question has long troubled IP Draughts, and he regrets that he didn’t take a course in conflict of laws at university. When, occasionally, he scratches the surface of this subject, he sees the liberal use of Latin expressions such as lex situs and lex fori, realises how dry and complicated the subject is, and leaves detailed study for another day. Even apparently helpful documents that seem to be directly on point, such as this one, cause him mild panic.

It was with mixed feelings, therefore, that IP Draughts read last week’s judgment by Arnold J in the case of Gloucester Place Music Ltd v Le Bon & Ors [2016] EWHC 3091 (Ch) (02 December 2016).

Readers may have seen reports in the national press about this case, and the dissatisfaction of the defendants with the outcome. Boiling it down to its essentials:

  1. The defendants are the members of the 1980s pop group, Duran Duran, and their service companies.
  2. In the 1980s they made an outright assignment of the worldwide IP in their songs to the claimant, a UK company, in return for payments including royalties. The agreements were all made under English law and were subject to the jurisdiction of the English courts.
  3. The assignment was very broad in scope (and used excruciating language, but that is a discussion for another day).
  4. US copyright law (section 203 of the US Copyright Act 1976) allows authors who have assigned their copyright to reclaim it after, typically, 35 years, by serving notice on the assignee. Section 203(5) provides: “Termination of the [assignment] may be effected notwithstanding any agreement to the contrary…”
  5. The defendants have served notices under section 203 on the claimant.
  6. The claimant sought and won a declaration in the English High Court that by serving such notices the defendants are in breach of their contracts with the claimant under which the IP was originally assigned.

The judge managed to use another Latin expression from the conflict-of-laws dictionary, namely lex loci protectionis. Applying English law principles of interpretation he concluded, “not without hesitation”, that he should give effect to the assignment as written, and should not make it subject to the rights given to authors by US copyright law to claim, in effect, a reversionary interest in the copyright.

This brief report omits mention of a number of other issues that the judge considered, including the fact that neither party provided expert evidence from a US lawyer.

IP Draughts hopes that this dispute will be appealed to the UK Supreme Court, so that we can get some guidance from Lord Neuberger and his colleagues on the interplay of national IP laws and IP contracts made under another law. Dare he say it aloud, but he would find this a far more interesting subject on which to get the Supreme Court’s ruling than whether the Prime Minister is required to introduce a Parliamentary Bill (which will almost certainly be approved by the House of Commons) before giving notice under Article 50 to leave the European Union.

 

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IP threats in the House of Lords

hl-committeeThis weekend, IP Draughts has a note from the school doctor: he is excused long runs, contact sports or blogging. He has to prepare for what may be a once-in-a-lifetime event, namely appearing as a witness before a House of Lords committee next Monday afternoon.

The committee is known as a Public Bill Committee, and has been convened as part of the passage of the Intellectual Property (Unjustified Threats) Bill through Parliament. It is chaired by Lord Saville, a retired Supreme Court justice. Previous witnesses to have appeared before this committee include Baroness Neville-Rolfe, the IP Minister, Sir Robin Jacob and Sir Colin Birss.

The committee hearing, which will be taking place on Monday 24 October at about 3.30 pm, is recorded on camera, live-streamed and saved on the UK Parliament website, so if you are a glutton for legal minutiae feel free to stop by. Details of the hearing can be found on the Parliament website here. IP Draughts believes the streaming will be accessible here.

IP Draughts will be giving oral evidence as chairman of the Law Society’s Intellectual Property Law Committee. Also giving evidence will be fellow IPLC member, Matthew Harris, and Vicki Salmon, representing the Chartered Institute of Patent Attorneys.

Now IP Draughts has to do some homework, and prepare for some difficult questions from Baroness Bowles, who is a member of the committee and a patent attorney, possibly the only patent attorney in Parliament.

 

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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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