Restrictions on assignment in contracts

It may be of marginal relevance to many IP-related contracts. But there will be some situations where, in future, a contract term that prohibits assignment of the benefit of the contract is not enforceable.

The Business Contract Terms (Assignment of Receivables) Regulations 2018 apply to any term in a contract entered into on or after 31 December 2018. In the words of the explanatory memorandum which accompanies the Regulations:

These Regulations deal with terms in contracts to which the law of England and Wales or the law of Northern Ireland applies which prohibit or restrict the assignment of receivables. A receivable is a right to be paid under a contract for the supply of goods, services or intangible assets. Various types of contract are excluded from the scope of the Regulations.

The main purpose of the Regulations is to make is easier for SMEs to enter into debt financing arrangements. If you are an SME, you may want to “sell” to a finance house the right to recover debts you are owed by your customers. The finance house will give you a percentage of the amount of the debt and they will then take on responsibility for recovering the debt. IP Draughts understands that Lloyds Bank is, or has been, a market leader in this sector.

As an aside, this only really works for the sale of routine products. For anything more complicated, a customer who doesn’t want to pay would likely raise allegations that the product or service had not been provided correctly, and the result would be a messy dispute.

Unfortunately, the drafter of the legislation has tried to address much more than this simple situation, and in doing so has ended up with an unlovely mess of detailed definitions, terms, and exceptions, which (in IP Draughts’ view) raise too many questions of interpretation.

Summary of the Regulations

At the heart of these Regulations is Regulation 2(1), which provides:

…a term in a contract has no effect to the extent that it prohibits or imposes a condition, or other restriction, on the assignment of a receivable arising under that contract or any other contract between the same parties.

Thus, if you have a boilerplate assignment clause in your contract that prevents a party from assigning the benefit of the contract, this may in some situations be unenforceable.

Regulation 2(3) lists the situations in which a party is so prevented, and they include terms that prevent the supplier from disclosing certain details about the contract, e.g. the names of the contracting parties and the amount owed. Thus, some confidentiality terms in contracts could potentially be unenforceable to the extent they prevent disclosure of information about the contract itself.

There are some restrictions in the Regulations on when the above-quoted provision applies. They include:

• “Receivable” is defined as a right (whether or not earned by performance) to be paid any amount under a contract …for the supply of goods, services or intangible assets.
• “Intangible assets” are defined as including electricity and data which are produced and supplied in digital form. IP Draughts’ initial reaction is that many software supply agreements should be treated as being for the supply of intangible assets. He also wonders whether research agreements would be treated as contracts for the supply of a research report (if it is supplied in digital form). Alternatively, these may be contracts for services.
• However, Regulation 4 sets out a long list of excluded categories that are not within the scope of the Regulations. This includes, at item (m): “a contract, not falling within paragraph (a), entered into wholly or mainly for the purpose of granting by one person of a right to possession or control of an object to another person in return for a rental or other payment.” IP Draughts speculates that the drafter had in mind things like photocopier leasing agreements. Object is not defined in the Regulation. (Is it defined elsewhere?) Is software an object? IP Draughts’ instinctive view is not, but applying common sense doesn’t always lead to the right legal answer (!)
• The Regulations don’t apply if the supplier is a “large enterprise”. Confusingly, large enterprise is defined as anything other than organisations that fit within the categories in Regulation 3(3).
• Regulation 3(3) sets out a long list of non-large enterprises, which includes: (b) a company to which the small companies regime (within the meaning given by sections 381 to 384 of the Companies Act 2006) applied in the relevant financial year and which was not a member of a large group in the relevant financial year;(c) the supplier is a company which qualified as medium-sized (within the meaning given by sections 465 to 467 of the Companies Act 2006) in respect of the relevant financial year and which was not a member of a large group in the relevant financial year;
• Some other categories are excluded from the Regulations, including, under Regulation 4(c): “a contract where one or more of the parties to the contract is acting for purposes which are outside a trade, business or profession”. Might this conceivably cover some university research contracts?

Comments

The Regulations form part of the present UK government’s initiatives to support small businesses, e.g. when faced with large customers who don’t pay on time. The drafter was presumably mainly focused on simple contracts for the sale of stock items of goods, which is where debt financing is most likely to be available.

As to whether the Regulations cover niche topics like software supply, IP licensing or academic research contracts, it is probably too soon to give a definitive answer – we need to see some case law from the senior courts. IP Draughts looks forward to being instructed to bring such a case to the UK Supreme Court!

There doesn’t appear to be any sanction for including an unenforceable restriction on assignment in your contract. The consequence of doing so is simply that the term “has no effect to the extent that” it includes such a restriction. Drafters may want to think about the severance clauses in their contracts, with a view to mitigating the possibility that an unsympathetic court might strike out the entire assignment clause. And you might want to think about including wording such as “to the extent permitted by applicable law” in your assignment clause.

This is an other example of politicians eroding the principle of freedom of contract in support of political objectives, here to support the “nation of shopkeepers” who run SMEs. The previous article on this blog, about new EU-derived terms in trade mark agreements, is another example, though in that case the political objective is removing national barriers to trade within the EU.

Back in the 1970s, we had lots of new legislation to protect consumers and workers, such as unfair dismissal legislation and the Unfair Contract Terms Act 1977. Now the focus is on protecting SMEs. In both cases, they create work for lawyers, particularly when the legislation raises as many questions as it answers. So, perhaps IP Draughts should be glad of the government’s latest lawyer-job creation scheme.

 

New laws on trade mark licensing

Hidden by the noise over Brexit and IP, the UK has recently introduced secondary legislation that substantially amends UK trade mark law. The Trade Mark Regulations 2018 came into effect on 14 January 2019. The Regulations are intended to implement EU Directive 2015/2436. Sections 2-33 of the Regulations revise the Trade Marks Act 1994. Later sections revise UK trade mark practice rules.

Many of the changes are technical and of interest mainly to those involved in the details of applying for or litigating UK-registered trade marks. But buried among these changes are a few revisions to the law concerning the assignment and licensing of trade marks, which should be of interest to readers of this blog. See in particular sections 14 to 17.

Implied term on trade marks in sale of business agreements

This article will focus on two of those changes, namely sections 14 and 16. The first is of interest to M&A lawyers. Section 14 reads as follows:

14. In section 24 [of the Trade Marks Act 1994] after subsection (1) insert—

“(1A) A contractual obligation to transfer a business is to be taken to include an obligation to transfer any registered trade mark, except where there is agreement to the contrary or it is clear in all the circumstances that this presumption should not apply.”.

This is presumably intended to apply where the sale of business agreement doesn’t specifically provide that the selling business’s trade marks are included in the sale. If the issue is covered in the agreement, why would one need a statutory provision?

The above provision is designed to comply with Article 22 of the EU Directive, which reads as follows:

A transfer of the whole of the undertaking shall include the transfer of the trade mark except where there is agreement to the contrary or circumstances clearly dictate otherwise. This provision shall apply to the contractual obligation to transfer the undertaking.

Students of legislative drafting have, in the above two extracts, an interesting example of the different drafting styles in the EU and the UK.

IP Draughts has reservations about automatically (i.e. by statute rather than as a matter of interpretation for the judge in the individual case) implying terms into contracts that the parties may not have addressed their minds to. Sometimes, the implied term will reflect what they intended. Other times, it will not. He is aware, for example, that many commercial practitioners don’t realise that transferring property “with full title guarantee” or “with limited title guarantee” automatically introduces the implied warranties and terms respectively described in section 1 of the Law of Property (Miscellaneous Provisions) Act 1994. It can be alarming to discover that a few, innocuous-sounding words in a contract automatically introduce paragraphs of contractual obligation.

Thankfully, there are relatively few instances of “magic words” in commercial contracts made under English law, that have a meaning required by statute. There are more words that have accretions of case law attached, such as “best endeavours”.

In this case, the implied term is introduced into English law to comply with an EU Directive. IP Draughts is conscious that most countries of the EU have a version of civil law, rather than common law. Civil law seems to be more willing than the common law to imply terms into contracts, so perhaps the new law mentioned above will not cause any surprise or consternation among IP Draughts’ continental European readers. He would be interested to hear from them about this point.

Some limited explanations for the changes described in this article appear in the EU Trade Marks Directive to which the UK Regulations relate. For example, Recital (34) of the Directive reads:

For reasons of coherence and in order to facilitate the commercial exploitation of trade marks in the Union, the rules applicable to trade marks as objects of property should be aligned to the extent appropriate with those already in place for EU trade marks, and should include rules on assignment and transfer, licensing, rights in rem and levy of execution.

To IP Draughts, this is not a persuasive statement. If it is appropriate to align EU rules on assignment and licensing, there is much larger task to be performed than tinkering with a small and almost random selection of transaction-related provisions as this Directive does (specifically in Articles 22-25). Some of the transaction-related terms that could usefully be addressed in EU legisation are discussed in the two articles on this blog that immediately precede this article – a series that will be continued in the coming weeks.

Licensor’s right to sue licensee for trade mark infringement

The second topic that has attracted IP Draughts’ attention in the UK Regulations concerns the interplay of contractual rights and trade mark rights. Anyone advising on a dispute between a licensor and licensee should be interested in this provision. Section 16 reads as follows:

In section 28 [of the Trade Marks Act 1994] after subsection (4) insert—

“(5) The proprietor of a registered trade mark may invoke the rights conferred by that trade mark against a licensee who contravenes any provision in the licence with regard to—

(a) its duration,

(b) the form covered by the registration in which the trade mark may be used,

(c) the scope of the goods or services for which the licence is granted,

(d) the territory in which the trade mark may be affixed, or

(e) the quality of the goods manufactured or of the services provided by the licensee.”.

This wording tracks very closely Article 25(2) of the EU Directive, so it is not worth reproducing the latter wording here.

If he has understood correctly, this wording is clarifying that activities by the licensee that fall outside the permission granted by the licence may be both:

1. A breach of contract (i.e. of the terms of the licence agreement); and
2. An infringement of the licensor’s trade mark.

It is not clear to IP Draughts why this wording is needed, as a matter of English law, though he sees the merit of stating the position explicitly in English law if it is to be harmonised throughout the EU. Isn’t it obvious that, if a licensee does something that is not permitted by the licence, he could be infringing the trade mark and therefore could be sued for infringement by the licensor?

Well, not according to some legal theories. IP Draughts has seen this point raised by US practitioners but not by English IP lawyers. For example, on a quick Google search, he found the following statement by a US lawyer:

[I]f the license agreement is limited in scope and the licensee acts outside the scope, then the licensor can bring an action for infringement. To prevail, the licensor must establish that the license terms are limitations on the scope of the license, rather than independent contractual covenants, and that the licensee’s actions exceed the scope of the license.

Courts have held that where the licensee has been granted an exclusive license, unlicensed use of the IP is merely a breach of contract. The underlying rationale stems from the understanding that an exclusive license transfers ownership of the IP rights. The licensee is incapable of infringing an interest in IP that he owns.

To IP Draughts’ European mind, the second paragraph quoted above relates to a quirk of US copyright law, that treats an exclusive licence as if it were an assignment. He will avert his eyes from this peculiar idea, and move quickly on.

The first paragraph quote above may have more universal interest. The idea is that if you grant someone a licence, the licence as a matter of property law covers all fields. Any restriction on the field of the licence is a contractual restriction only, i.e. it doesn’t affect the unlimited scope in property law. Therefore if you want to sue your licensee for acting outside the field permitted by the licence agreement, your only remedy is for breach of contract. You can’t sue for infringement.

This is not a concept that IP Draughts has come across in domestic English law, though it has surfaced in EU competition law. Several decades ago, he took a course on competition law, taught by Professor Valentine Korah of UCL. Although much of what he was taught failed to stick in his head, he does remember coming across a theory very similar to that mentioned above. In the words of Professor Korah’s yellow book on EEC Competition Law and Practice (4th edition, 1990, page 174):

The [competition directorate of the European] Commission has gone further and considers that a licence limited territorially is an unrestricted licence, subject to a contractual ban on exploiting outside the territory, which is unlikely to merit exemption [from what is now Article 101 of the EU Treaty].

The commentary around this quotation suggests that Professor Korah didn’t think much of this approach by the Commission, which seems to have been a convenient way of enabling the Commission to challenge territorial restrictions in an anti-competitive contract without challenging IP laws per se. But it is interesting that it was part of the Commission’s thinking. Others, more familiar with EU competition law than IP Draughts, may be able to comment on whether this theory remains part of the Commission’s armoury.

In any event, section 16 / Article 25, quoted above, seems to be clarifying that as a matter of English and EU law, you can sue your licensee for trade mark infringement.

At least that is what IP Draughts assumes is being said by the above provisions. He has not come across any definitive explanation of these provisions or why they were introduced, so he may be barking up the wrong tree. If any reader can point him to a source that confirms (or otherwise) his understanding, he would be grateful.

Do M&A lawyers care about contract drafting?

Like all generalisations, it can be shot down in flames with counter-examples. But IP Draughts has seen enough evidence to suggest that many M&A lawyers don’t really give a monkey’s about the discipline of contract drafting.

What matters in that world is following a process, using standard templates, and “doing the deal”. The individual M&A lawyer, negotiating the agreement, is not expected to care too much about the words used. Standard contracts are so long and complex, and deals are done at such speed, that “academic” musing over the meaning of words is alien to the usual way of doing business. Drafting is for the back-room boys and girls (professional support lawyers). If the firm has to take a hit occasionally with a professional indemnity claim, well that’s what insurance is for.

This approach is not unique to M&A work. Finance lawyers are also said to be guilty – see this article about the “three and a half minute lawyer” who spends that amount of time on each transaction.

Of course there are exceptions, including Allen & Overy’s former head of banking, the very distinguished Philip Wood CBE, QC (Hon). A smuggled copy of his drafting notes from the 1980s helped to persuade IP Draughts to write his books on contract drafting and boilerplate clauses.

If these negative thoughts reflect a conscious bias on IP Draughts’ part, fuel for the bias is given by a recent case in the English Court of Appeal. Judgment in the case of Hopkinson & Ors v Towergate Financial (Group) Ltd & Ors [2018] EWCA Civ 2744 was published this week. The case was about a claim under an indemnity in a share sale agreement.

Several clauses of the share sale agreement were scrutinised in this case, but the one that received the most attention from the Court of Appeal read as follows:

6.7 The Purchaser shall not make any Claims against the Warrantors nor shall the Warrantors have any liability in respect of any matter or thing unless notice in writing of the relevant matter or thing (specifying the details and circumstances giving rise to the Claim or Claims and an estimate in good faith of the total amount of such Claim or Claims) is given to all the Warrantors as soon as possible and in any event prior to:

6.7.1 the seventh anniversary of the date of this Agreement in the case of any Claim solely in relation to the Taxation Covenant;

6.7.2 the date two years from the Completion Date in the case of any other Claim; and

6.7.3 in relation to a claim under the indemnity in clause 5.9 on or before the seventh anniversary of the date of this Agreement.

The dispute concerned whether the Purchaser had given valid notice of a claim under the indemnity in clause 5.9. In particular, did the notice comply, and did it need to comply, with the obligation to provide details and an estimate of the total amount – i.e. the words in brackets, quoted above?

In the view of the Court of Appeal, “…it cannot be said that …clause 6.7 was well-drafted nor that, as drafted, it fits well with related provisions elsewhere in the agreement.” The court identified several drafting mistakes, which made interpreting the clause difficult.

With some simplification, the mistakes included:

1. The clause uses the defined term Claims. The definition is limited to warranty claims and doesn’t mention indemnity claims. So how do you interpret the word Claims in the quoted phrase in brackets, in relation to claims under clause 6.7.3? Does it mean the details need not be provided? Or that you read “Claims” as meaning “Claims and other claims”?
2. The clause refers to not making claims against the Warrantors. But clause 5.9 (mentioned in clause 6.7.3) doesn’t refer to claims against the Warrantors. Instead it refers to the Vendors and their spouses. Does this mean that clause 6.7 doesn’t apply to people who are not within the definition of Warrantors?
3. Clause 6.7.1 refers to the Taxation Covenant. This is not a defined term. Tax Covenant is defined. But the definition of Claim makes no mention of the Tax Covenant. So should Claim or Taxation Covenant be interpreted broadly?
4. Clause 6.7.1 imposes a 7 year time limit for claims in respect of the Taxation Covenant, while clause 6.7.2 imposes a 2 year time limit for any other Claim. Schedule 4 defines Tax Covenant and separately defines Tax Warranty. One might therefore expect that clause 6.7.2 covers Tax Warranties. But Schedule 4 goes on to provide a 7 year time limit for any claims under either a Tax Warranty or the Tax Covenant. How can one resolve this apparent contradition? By assuming that Taxation Covenant includes Tax Warranties? This was David Richards LJ’s conclusion.

David Richards LJ identified further drafting errors and inconsistencies, in other clauses.

At issue was a letter that purported to give notice of claims. The letter was sent to the sellers within the 7 year time limit but didn’t include any details about the claims or an estimate of losses. The letter referred rather generally to two reviews that the target company had been required to make by the Financial Conduct Authority, and any payments that might be made to customers for misselling of financial services, arising out of those reviews.

In the end, David Richards LJ decided (agreeing with the judge at first instance) that the notice given in this letter was sufficient to bring it within the conditions in clause 6.7, and on this basis dismissed the appeal by the sellers and their spouses. The other two judges in the Court of Appeal agreed with Richards.

Comments

Two observations from David Richards LJ resonate with IP Draughts.

First, the judge speculated (and IP Draughts thinks this speculation is very plausible) that some of the mistakes arose because clause 6.7.3 was bolted onto clause 6.7 as an afterthought, and the drafter didn’t clean up the rest of the agreement to take account of this change.

Drafting detailed agreements is difficult. It requires painstaking care to ensure  clarity and consistency. It is not enough to bolt a clause on to an existing clause and hope it works. Other parts of the clause, associated definitions and other clauses may need to be considered to ensure that the new clause works properly.

Second, the judge discussed that the starting point for interpreting a contract clause was:

the court should assume, unless driven to a contrary conclusion, that the parties who have entered into a professionally drafted agreement in which terms have been elaborately defined intend to use such terms in accordance with the definitions.

In other words, in such circumstances, it may be appropriate for the court to limit its focus to a textual analysis of the words used. This is the traditional approach to contracts drafted by commercial lawyers as distinct from business people.

But just because the contract has been drafted by solicitors from a respectable commercial law firm, that doesn’t necessarily mean that this assumption will hold. In this case, the judge concluded that the relevant clauses were so strewn with errors that rigorous textual analysis was unlikely to reveal the parties’ intended meaning.

A sad indictment of the drafting of a share sale agreement.

 

 

 

 

 

 

G-whizz. Wake me up after May 25!

At this year’s UCL course on IP Transactions, many of the speakers commented to IP Draughts about how busy they were, advising clients on the EU General Data Protection Regulation (GDPR), which is due to come into force later this month. Except for one lucky speaker who said that her firm had a separate department dealing with such matters.

For many IP lawyers, it seems to go with the territory to advise on data protection issues. Perhaps it is because they are really IT and IP lawyers, and GDPR is part of the regulatory regime that protects the “I” part of IT. Or perhaps because they are EU laws, and who better than an IP lawyer to advise on EU laws, when most of the IP laws in the UK are at least tinged with EU influence, even if they are not directly derived from EU legislation.

IP Draughts is not immune from this trend, and has recently been the partner-in-charge of several GDPR projects, advising clients on compliance with the new regime, or revising contracts to take account of the new law. Fortunately we have some GDPR gurus within the firm, so that IP Draughts can be “young Mr Grace”, wheeled out as a figurehead, but sometimes a bit redundant when the detailed discussion starts.

He has picked up enough on the subject to recognise the issues that seem to come up time and again. This is fortunate, as he has agreed to be the moderator of a panel discussion on data protection at an American Bar Association conference in Copenhagen in June.

IP Draughts would appreciate your help, dear reader, in putting together a list of incisive questions (or themes) to ask the panellists, who are a mixture of US and European lawyers and data protection managers. Here are some crude, general questions to get us going. Under the new regime:

1. Is the definition of personal data broader than at present?
2. Should organisations rely on consent, or another lawful basis for processing? Is consent less likely to be used under the new regime than it is at present?
3. Are existing consents going to be sufficient to comply with the new law, or will we need to get fresh consents?
4. Can you rely on more than one lawful basis of processing? Eg if you start off with consents, but the consents are not compliant, can you switch to another basis of lawful processing as a back-up?
5. Is it realistic to suggest that employees can give consent freely to their employer? Won’t they feel pressurised to give consent and won’t this make the consent invalid under GDPR?
6. Do we need to rewrite our privacy statements? Can we rely on small print on website terms and conditions, and if not how “in your face” do we need to be?
7. If you make the right noises, and try to institute new processes to comply with GDPR, will that get you off the hook if the regulator knocks on your door, even if your processes are not, in fact, compliant? Is the sensible course to treat GDPR a bit like many companies treat health and safety issues – going through the motions, without conviction – until you see some case law that shows you exactly what you need to do?

Alas, poor [Y]! I knew him, [H]…

There are many more general questions, though they can only sensitise you to the issues, rather than show you how to comply.

Are these questions on the right lines for a panel discussion? Or should IP Draughts take a different approach? Assume that 60% of the people attending the conference are US lawyers and 40% European, and that some, perhaps many, of them will not have much clue about the subject.