Category Archives: Legal Updates

Post-expiry royalties: what’s the problem?

weirdThere are some weird terms in US licence agreements. Let’s leave aside the general peculiarities of US contract wording. Examples such as “indemnify, hold harmless and defend”, “represents, warrants and undertakes”, “successors and assigns”, and a host of other excrescences, appear in many types of commercial agreement and not just IP licences. Instead, let’s focus on wording that deals with the duration of royalties in licence agreements. This issue came into sharp focus last week, with the decision of the US Supreme Court in the case of Kimble v Marvel Entertainment, LLC.

More on that case later. The general issue, in the US and internationally, is whether it is appropriate to require a licensee of IP to pay royalties after the IP has expired, been revoked, or otherwise ceased to exist. A generation or two ago, there seemed to be a consensus among legislators and the courts that it was not appropriate. This attitude could be seen, for example, in:

  • the US Supreme Court case of Brulotte v Thys Co, a 1964 decision that was discussed and followed in the Kimble case linked above. In Brulotte, the court decided that a contractual obligation to pay patent royalties after the patents had expired was “unlawful per se“.
  • the UK Patents Act 1977, which included a provision in section 45, since repealed, that: “Any contract for the supply of a patented product or licence to work a patented invention, or contract relating to any such supply or licence, may at any time after the patent or all the patents by which the product or invention was protected at the time of the making of the contract or granting of the licence has or have ceased to be in force, and notwithstanding anything to the contrary in the contract or licence or in any other contract, be determined, to the extent (and only to the extent) that the contract or licence relates to the product or invention, by either party on giving three months’ notice in writing to the other party.”
  • the 1984 EC Block Exemption Regulation for patent and know-how licences, which black-listed a provision whereby: “the licensee is charged royalties on products which are not entirely or partially patented …without prejudice to arrangements whereby, in order to facilitate payment, the royalty payments for the use of a licensed invention are spread over a period extending beyond the life of the licensed patents …” Recital 22 to the Regulation clarified that this spreading of payments referred to “spreading payments in respect of previous use of the licensed invention” – ie use during the period when the patents were in force.

A possible solution to this issue is to grant a mixed patent and know-how licence, in which royalties can be charged for use of know-how in circumstances where there are no patents, eg because they have expired or not been applied for in a particular country.

While this solution may work in many countries, there has clearly been a strand of opinion that, in the USA, a more nuanced approach to royalty terms is required. It seems to be thought by some that the licence agreement should state separate royalty rates for use of patents and for use of know-how. Presumably this makes it easier to show that there is no disguised patent royalty after the patents have expired. This approach is consistent with a comment from Kagan J in the Kimble case. She said:

That means, for example, that a license involving both a patent and a trade secret can set a 5% royalty during the patent period (as compensation for the two combined) and a 4% royalty afterward (as payment for the trade secret alone).

IP Draughts has seen some very strange royalty terms that try to finess this issue, eg providing separately for X% for use of patents and another royalty of X% for use of know-how, but stating that for as long as both patents and know-how protect the product, only the patent royalty applies. After the patent expires, only the know-how royalty of X% applies. Hey presto, X% applies both before and after the patent expires! IP Draughts has severe doubts about the effectiveness of this type of legal engineering.

More conventional, in IPDraughts experience, is a clause that sets the royalty at X% and reduces it to 50% of X in any country where there is no valid patent.

Ley lines

Ley lines

IP Draughts’ impression is that economists and competition (or in the USA, antitrust) authorities are no longer as concerned about post-expiry royalties as they once were. For example, the European Commission’s 2014 Guidelines on Technology Transfer Agreements state, at paragraph 187:

Notwithstanding the fact that the block exemption [for technology transfer agreements] only applies as long as the technology rights are valid and in force, the parties can normally agree to extend royalty obligations beyond the period of validity of the licensed intellectual property rights without falling foul of Article 101(1) of the Treaty. Once these rights expire, third parties can legally exploit the technology in question and compete with the parties to the agreement. Such actual and potential competition will normally be sufficient to ensure that the obligation in question does not have appreciable anti-competitive effects.

Kimble

In Kimble, the parties had settled patent litigation on terms that the inventor, Kimble, assigned a patent to Marvel in return for royalties. The parties set no end-date for the payment of royalties. Some years later, Marvel “stumbled across Brulotte” and sought and obtained a declaratory judgment that it could cease paying royalties at the end of the patent term. On appeal, the Supreme Court upheld the award of the declaratory judgment. In passing, one wonders how such a defective settlement agreement could have been drafted. Presumably the parties were advised in their patent litigation and settlement negotiations by lawyers who held themselves out as specialists in US patent law.

The majority of the justices in Kimble appeared to recognise that the current thinking of economists (and therefore antitrust authorities) does not object to post-expiry royalties. As the majority judgment put it:

A broad scholarly consensus supports Kimble’s view of the competitive effects of post-expiration royalties, and we see no error in that shared analysis.”

However, that consensus was irrelevant, according to the majority, as the issue before them was one of interpreting statutory patent law, and not antitrust law. The Supreme Court was bound by the principle of stare decisis to follow the decision in Brulotte. If the case had been properly considered as an antitrust case, they might well have been prepared to decide Kimble differently.

IP Draughts found this part of the Kimble decision surprising. Though he has no expertise in US laws, he had always understood the general issue, at least as it is understood in the UK and Europe, to be one of competition (antitrust) law.

The 3 minority justices in Kimble also saw things differently. They commented that the earlier Brulotte case “was an antitrust decision masquerading as a patent case”.

stare decisisGood old stare decisis. IP Draughts remembers being taught about the English version of the rule in his first term as an undergraduate law student, in 1979. Courts are sometimes bound by earlier court decisions on points of law. The English rule is not so constraining as the US one, it seems. The UK House of Lords (now the UK Supreme Court) simply announced in 1966 that it would no longer consider itself bound by its previous decisions.

IP Draughts is left feeling perplexed by the decision in Kimble. It is concerned only with a narrow point on the duration of patent royalties. But on that narrow point, US licensing practice and to some extent (because of the strong, international influence of the US) non-US licensing practice, is frozen in time by the opinions and decisions of an earlier generation of US judges. It matters not whether the decision is based on statutory interpretation or antitrust laws, the practical effect is the same.

Practitioners advising on licence agreements that have a US element to them must consider carefully how the royalty duration is expressed. Many of IP Draughts’ licence agreements provide for royalties to be paid, on a country-by-country basis, for the longer of (a) the duration of the licensed patents, or (b) in the case of know-how, for a period (often 10 years) from the first commercial sale of licensed products. At first glance, this would appear to address the issue. What is troubling IP Draughts is whether the agreement needs to go further, in light of this US case law, and have separate royalty rates for patents and for know-how, as some US templates for patent licence agreements seem to prefer. Readers – do you think this is necessary?

 

 

 

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Subject to the jurisdiction of the English courts: exclusive?

inclusiveA small, but important, contract-drafting point: imagine a contract clause that says that disputes will be subject to the jurisdiction of the English courts. Should we interpret this to mean that the English courts will have exclusive jurisdiction, or might it mean that the English courts have only non-exclusive jurisdiction?

A well-drafted contract will state explicitly which law and jurisdiction governs the contract, and whether the jurisdiction is exclusive or non-exclusive.

If the contract states that English jurisdiction is exclusive, the parties must go to the English courts. If a party starts an action in another court (let’s say in China), the English court may order that party to stop proceeding in the Chinese courts. If the order is not complied with, the English court may commit the non-complying party to prison for contempt of court.

If the contract states that English jurisdiction is non-exclusive, a party can ask an English, Chinese or any other court to hear the case. An English court is likely to accept, based on the jurisdiction clause. If there is no jurisdiction clause at all, an English court might accept jurisdiction simply because the contract states that English law applies. A Chinese court might accept, eg if there is a strong connection with China in relation to the parties, the place of execution of the contract, or the place of performance of the contract.The first court to hear an action over the contract may issue an order to prevent a party from starting an action in another court. This would be on the grounds that the first court is “seised” of the action, and not because of the (non-exclusive) jurisdiction clause.

csav2A recent case in the English Court of Appeal illustrates these points. Hin-Pro International Logistics Limited v Compania Sud Americana De Vapores S.A. [2015] EWCA Civ 401, was reported on BAILII last week.

The case concerned a shipping contract – a bill of lading. Cargo was carried by sea from China to Venezuela. The claim was that the cargo had been released without production of the original bills. The relevant part of the jurisdiction clause read as follows:

This Bill of Lading and any claim or dispute arising hereunder shall be subject to English law and the jurisdiction of the English High Court of Justice in London. If, notwithstanding the foregoing, any proceedings are commenced in another jurisdiction, such proceeding shall be referred to ordinary courts of law.

The Court of Appeal interpreted this clause as giving exclusive jurisdiction to the English courts, even though the word “exclusive” does not appear in the clause. The court reviewed a substantial body of case law that supported this conclusion.

Hin-Pro’s counsel argued that the second sentence of the clause showed that the parties accepted that they could start an action elsewhere, but the court disagreed. This sentence was concerned more with the situation where another country’s court did not accept the exclusive jurisdiction clause. It did not affect the interpretation of the first sentence by the English courts.

The interpretation point is clear, at least for the English courts. However, best practice in contract drafting requires you to state explicitly whether the jurisdiction is exclusive:

  • for the sake of clarity among the parties, not all of whom will have read the English case law
  • to avoid court disputes
  • to cater for the possibility that other courts may not agree with the English Court of Appeal (eg the UK Supreme Court, or a foreign court).

If this blog had any sense of decorum, it would stop there. However, IP Draughts cannot resist mentioning some other points that come up in the judgment.

  1. Catch me if you can. One of the parties in this case, Hin-Pro, was a Chinese company. It started court proceedings in China. At first instance in the English High Court, the judge ordered that Hin-Pro cease participation in the Chinese court proceedings because of the exclusive jurisdiction clause. Hin-Pro’s sole director was a Miss Su Wei. Apparently she ignored the order. The English judge committed her to prison for 3 months for contempt of court. As the Court of Appeal drily noted: “Miss Wei has not yet been apprehended.”
  2. csavContra proferentem rule. The contract was drafted by the other party, known as CSAV. CSAV is a long-established shipping company. The Court of Appeal considered whether the contra proferentem rule might assist Hin-Pro. In certain circumstances, this rule requires that an ambiguous contract term be interpreted against the interests of the party who drafted it. A version of this rule, in the US, seems to have led to a boilerplate clause being included in many US contracts, that states that the contract is a joint drafting effort and it should not be interpreted strictly against either party. The court’s conclusion was that the rule didn’t assist Hin-Pro in this case, for a variety of reasons, not least because the clause was not ambiguous, and it could benefit either party.
  3. No understand English? Hin-Pro’s counsel argued that many of the users of the contract would not have English as their first language, and many would understand the clause as granting non-exclusive jurisdiction. The Court of Appeal disagreed:

I do not accept Hin-Pro’s submission that the fact that the bills of lading will probably be issued to companies staffed by those whose first language is not English should affect the way in which they are to be interpreted, or that the court should endeavour to determine what the words would mean to a person in that category. This would be an exercise fraught with difficulty, not least because it would, potentially, produce different results according to the non-English first language chosen, and require a determination, in many cases incapable of ready resolution, of which first language the reasonable man is to be taken as speaking. In agreeing in English to an English law contract the parties must be taken to have agreed that it shall be interpreted with all the nuances of the English language and in the way that a speaker whose first or only language was English would do so.

But which version of the English language should Miss Wei be taken to understand? UK, US, Australian? IP Draughts has doubts over whether an intimate knowledge of idiomatic English helps you to know whether “subject to the jurisdiction” means exclusive or non-exclusive jurisdiction.

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OMG – new company names %*@!

sheffieldQuiz question: which of the following names requires permission from the authorities before it can be registered as a company name in the UK, and which is automatically permitted?

(a) OMG F**K :–) Limited

(b) Sheffield University Patent Licensing Institute

Answer: (a) is now permitted, (b) requires permission.

Two UK statutory instruments (SIs) came into force on 31 January 2015, each of which has a very boring traditional name, with no use of symbols or accents, and only sensible punctuation:

The first of these SIs (the 2014 Regulations) updates the list of names that require permission before they can be registered with the UK Companies Registry (Companies House). The second SI (the 2015 Regulations) covers various points of detail relating to business names, but for present purposes we are concerned with the relaxation of the rules governing the letters and symbols that can be used in company names.

Sheffield University Patent Licensing Institute

The Government has attempted to “cut red tape” by reducing the number of names that require permission. However, many names still remain on the list. Before giving permission for a company to include those names, Companies House (on behalf of the Secretary of State) must take into account the views of various stakeholders – Government departments and others. The second company name mentioned above is an extreme example, as every part of its name requires permission. Before permitting this name, Companies House would have to consult with:

  • The Company of Cutlers in Hallamshire (for “Sheffield” – because Sheffield Steel is well known)
  • The Department for Business, Innovation and Skills (for “University”)
  • The Patent Office (for “Patent”)

In addition, Companies House would need to give permission for “Licensing” and “Institute” but these names do not require any specific consultation with others.

This company may be permitted to omit the word “Limited” from its name if it is a company limited by guarantee and meets some other criteria described in Regulation 3 of the 2015 Regulations.

In summary, it may be very hard work getting permission to have this name registered.

OMG F**K :–) Limited

frenchBy contrast, the first name mentioned above does not require any specific permissions. Under the 2015 Regulations, one is now able to register company names that include numbers, punctuation, symbols and accented (ie foreign) letters, though in some cases these cannot be used as the first 3 letters of the company’s name.

Companies House continues to have the power to reject a company name if it is offensive. However, as it has previously permitted the registration of FCUK Limited, it would be odd if it rejected a name that includes F**K.

The 2015 Regulations include provisions about rejecting names that are similar to existing names and use symbols such as “*”. These might be relevant if the proposed company name is “F**K Limited” (ie very similar to FCUK Limited), but the presence of other letters in the first example above brings us outside this territory. There are other companies whose name starts with OMG, but none that is followed by F**K.

While the name may be acceptable as a company name, this blog posting will probably fail to get through your office internet filters. Sorry about that!  &*%!

 

 

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Copyright reform and the bottom line

eames yellowIP Draughts has a comfortable office chair. It is a reproduction of a design by the famous, mid-twentieth-century designers, Charles and Ray Eames. The design is known as the lobby chair, because it was originally designed for the lobby of the Rockefeller Center in New York, in about 1960.

The chair was a bit of a luxury item, as it cost IP Draughts several hundred pounds. It was certainly more than his previous chair, which was also of good quality, but was bought in a clearance sale when Rio Tinto shut one of its offices in London. That one cost £10. The average price paid by IP Draughts for his office chairs is not too unreasonable.

eames redThere must be thousands of reproduction Eames lobby chairs in circulation across the World. They vary in quality and price, but many of them look very similar. You can spend nearly £5,000 on one at the Conran Shop in London, if that is your choice. Or you can get them much cheaper. This one costs AUS$499, while this one seems to cost only US$70-150 if you buy 20 of them, and pay the costs of importing them from China.

With such a disparity of prices, IP Draughts idly wonders whether it is possible to have a reproduction of a reproduction, or a rip-off of a rip-off, to put it less charitably. No doubt, readers who are copyright litigators will be able to answer that one.

IP Draughts is not an expert in US copyright and design laws, but assumes that the Eames design is no longer protected. He is on safer ground discussing the position under UK copyright law. UK copyright law in this area is about to change very significantly, and will make the sale of modern reproduction furniture more difficult (or more expensive).

Let us take the fictional example of a chair designed and first marketed in England in 1960, by the fictional English designers, Karl and Jay Eaves, who both died in 1976. The chair would probably have benefitted from UK copyright, as a type of artistic work known as a “work of artistic craftsmanship”. Usually the period of copyright protection for artistic works is the life of the author plus 70 years. However, section 52 of the Copyright, Designs and Patents Act 1988 limits the period of copyright protection for articles that are manufactured by an industrial process, to 25 years. A statutory instrument states that this provision applies if more than 50 articles are manufactured.

In the above example, assuming that the current law applies, copyright expires in 1985 rather than 2046. (As this is only a blog article, we will skip over the fact that the chair would have first been protected under the Copyright Act 1956 and the effect of the transitional provisions in the 1988 Act for works that existed before the 1988 Act came into effect. This subject is far too boring and complicated for IP Draughts’ brain.)

In principle, this shorter period of protection seems right to IP Draughts. There may be arguments for a long period of copyright protection for creative works such as books and paintings, to give a revenue stream to struggling individual creators and their descendants. But industrially-manufactured items seem to IP Draughts to be in a different category, and the duration of design right (much shorter than copyright) reflects this difference.

morrisThe precise meaning of a “work of artistic craftsmanship” has not been fully established. There has been very little case law on the subject. It probably covers a chair that was designed specially for a building in New York, by leading designers, but this is not certain. This category of works was originally introduced into UK copyright law in response to the UK’s Arts and Crafts Movement, led by William Morris, in the late nineteenth and early twentieth centuries. William Morris wallpaper designs are still selling today.

Part of the problem in deciding what is the right period of protection for works of artistic craftsmanship is that they straddle the line between purely creative works and industrial works. They have both art and craft.

Never mind the historical position, the UK Government is now proposing to repeal section 52, to align UK copyright law more closely with that in the rest of the EU. This will result in a much longer period of copyright protection for iconic furniture designs and other works of artistic craftsmanship. The Government’s detailed proposals, published last week, can be summarised as follows:

  1.  Section 52 will be repealed in the near future. The repeal will take effect from 6 April 2020. In other words, there will be a period of about 5 years in which makers and sellers of reproduction articles can adjust to the new legal regime, in which copyright will last for the life of the designer plus 70 years.
  2. Following the effective date of the repeal, traders will be allowed to sell off existing stocks, and trade in copies that already exist, but will not be allowed to make or import new unlicensed copies.
  3. The Government will issue non-statutory guidance about the types of product that are within the category of works of artistic craftsmanship.

The effect of this change on traders in reproduction furniture and other artistic products is likely to be dramatic. A large number of items will be brought back into copyright. It may be necessary to stop selling items or take licences. It will be interesting to see what happens to the trade in reproduction ‘designer’ chairs. Will the bottom drop out of the market?

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