Cancel culture: how the creative industries should ride the storm

Cancel culture is upon us. This is what we are currently being told by British and French mass media, who have finally caught up with the content of the latest, and first non-fictional, book ever published by acclaimed, yet heavily criticised, American author Bret Easton Ellis, ‟White”. The polemic rages on both sides of the pond, ignited by more than 150 public figures signing a controversial letter denouncing cancel culture. So, what’s going on? What is ‟cancel culture”? Why should you pay attention to, and be cautious about it, as a creative professional? Is this even a thing in Europe and, in particular, in France and the United Kingdom? If so, how should you position yourself, as a creative, on, and about, cancel culture?

1. What is it? Where does it come from?

Following the 1990s’ culture wars, which sprung up in the United States of America as a way of denouncing and forbidding contemporary art exhibitions and other medium of creative expression judged by those instigating such culture wars as indecent and obscene, ‟cancel culture” has taken off in the early 2000s on social media, and has since become a cultural phenomenon in the USA and Canada – especially in the last five years or so – pervading every aspect of Northern America’s mass media.

‟Cancel culture” refers to the popular desire, and practice, of withdrawing support for (i.e. cancelling) public figures, communities or corporations, after they have done or said something considered objectionable or offensive. ‟Cancel culture” is generally performed on social media, in the form of group online shaming.

Therefore, as a result of something said or done, which triggered negative reactions and emotions such as anger, disgust, annoyance and hate from some members of the public, a natural person or legal entity or group of natural persons ends up being publicly shamed and humiliated, on internet, via social media platforms (such as Twitter, Facebook and instagram) and/or more localised media (such as email groups). Online shaming takes many forms, including call-outs, cancellation or cancel culture, doxing, negative reviews, and revenge porn.

While the culture wars of the 1990s were driven by right-wing religious and conservative individuals in the US (triggered by ‟hot-button” defining issues such as abortion, gun politics, separation of church and state, privacy, recreational drug use, homosexuality), the cancel culture of our 21st century is actually a left-leaning supposedly ‟progressive” identity movement which has taken hold in recent years due to the conversations prompted by #MeToo and other movements that demand greater accountability from public figures. According to the website Merriam-Webster, ‟the term has been credited to black users of Twitter, where it has been used as a hashtag. As troubling information comes to light regarding celebrities who were once popular, such as Bill Cosby, Michael Jackson, Roseanne Barr and Louis C.K. – so come calls to cancel such figures”.

Yep. Check out your Twitter feed by typing in the search bar the hashtags #cancelled, #cancel or #cancel[then name of the individual, company, organisation you think might be cancelled], and you will be able to review the top current cancellation campaigns and movements launched against Netflix, British actress Millie Bobby Brown, twitter user @GoatPancakes_, etc.

So under the guise of defending laudable causes such as the recognition of the LGBTQ community and fighting against racism, sexism, sexual assault, homophobia, transphobia, etc., some communities of online righteous vigilante use violent methods, such as cancellation, in order to administer a virtual punishment to those who are on their radar.

This call-out and cancel culture is becoming so pervasive and effective that people lose their jobs over a tweet, some upsetting jokes or inappropriate remarks.

The Roseanne Barr’s story is the ultimate cancellation example, since her ABC show, ‟Roseanne”, was terminated with immediate effect, after Ms Barr posted a tweet about Valerie Jarrett, an African-American woman who was a senior advisor to Barack Obama throughout his presidency and considered one of his most influential aides. R. Barr wrote, in her litigious tweet, if the ‟muslim brotherhood & planet of the apes had a baby = vj”. Whilst Ms Barr’s remark was undoubtedly in extreme bad taste, it is fair to ask whether her tweet – which could have easily been deleted from Twitter to remove such kick well below the belt dealt to Ms Jarrett – justified wrecking Ms Barr’s long-lasting entertainment and broadcasting career in one instant, permanently and for eternity.

To conclude, social media channels have become the platforms of virtual trials, where justice (i.e. cancellation) is administered in an expeditious manner, with no possibility of dialogue, forgiveness and/or statute of limitation. This arbitrary mass justice movement is not only cruel, but tends to put everything under the same umbrella, indiscriminately: so a person who cracked a sexist joke on Twitter would become vilified and even ‟cancelled”, in the same manner than an individual effectively sentenced for sexual assault by an actual court of justice.

How did we get to this point? Why does a growing number of Northern Americans feel the uncontrollable need to call-out, cancel and violently pillory some of their public figures, corporations and communities?

A pertinent analysis, although skewed by a European perspective, is that made by French sociologist Nathalie Heinich in French newspaper Le Monde and explained on the podcast ‟Histoire d’Amériques”, dedicated to Bret Easton Ellis’ ‟White”.

According to Ms Heinich, there is no legal limitation to freedom of speech – a personal liberty which is enshrined in the first amendment to the US constitution, in the USA. As a consequence, the US congress cannot adopt laws which may limit or curb freedom of expression, as is set out in this first amendment. Therefore, according to N. Heinich, since the US authorities cannot forbid speech and freedom of expression, it is down to US citizens to take on the role of vigilante and organise spectacular information and public campaigns, in order to request the prohibition of such expression and such speech.

This analysis made by this French sociologist needs to be nuanced: whilst it is true that no US statute or law may curtail freedom of speech in the USA, there is consistent and ample body of case law and common law, which rule on the categories of speech that are given lesser or no protection by the first amendment of the Bill of rights. Those exceptions include:

incitement (i.e. the advocacy of the use of force when it is directed to inciting or producing imminent lawless action, Brandenburg v Ohio (1969));
incitement to suicide (in 2017, a juvenile court in Massachusetts, USA, ruled that repeatedly encouraging someone to complete suicide was not protected by the first amendment);
false statement of fact and defamation (Gertz v Robert Welch, Inc. (1974));
obscenity (Miller v California (1973) established the Miller test whereby speech is unprotected if ‟the average person, applying contemporary community standards, would find that the subject or work in question, taken as a whole, appeals to the prurient interest”, and ‟the work depicts or describes, in a patently offensive way, sexual conduct or excretory functions specifically defined by applicable state law”, and ‟the work, taken as a whole, lacks serious literary, artistic, political or scientific value”), and
child pornography (New York v. Ferber (1982) which ruled that if speech or expression is classified under the child pornography exception at all, it becomes unprotected).

Therefore, there are some common law exceptions to the first amendment consecrating freedom of speech in the USA, but they are few and far between, and they need to be hotly, and expensively, debated in court, probably months or years after the triggering content was made available in the public space in the first instance, before being found, by a court, unprotected by freedom of speech, in favour of higher public policy interests.

As a result, many American and Canadian citizens resort to violent tactics, in order to request the immediate, swiftly-enforced and free of legal fees and court fees, prohibition of controversial art exhibitions, entertainment shows, movies, jokes, remarks, etc. first through the 1990s culture wars, and now through the 21st century’s cancel culture.

This is paradoxical since cancel culture and call-out culture are some of the tools used to advocate for worthy causes such as fighting against racism, sexism, sexual predation and aggression, promoting LGBTQ rights. However, the methods used, through cancel culture and online shaming, to achieve those laudable goals, are very violent and totalitarian, all taking place in the virtual realm of social media, but with very serious and long-lasting ‟real-life” consequences such as loss of employment, loss of reputation, self-harm and sometimes, suicide.

2. Can cancel culture enter through our European borders, in particular in France and the United Kingdom?

I hate to break it to you, but cancel culture is already upon us in France and the United Kingdom. We are in a globalised world, all of us are online and check the media and social media from all over the world, thanks to the internet. So this Northern American trend has, of course, reached our European shores.

It is worth noting that the recognition of ‟cancel culture”, and the realisation that is has become a sizable part of online culture, took place in the United Kingdom (‟UK”) at the beginning of the year 2020, when British television presenter and socialite Caroline Flack committed suicide allegedly because she was vilified on social media and by British tabloids, further to being sacked from British reality show ‟Love Island”. This UK epiphany about ‟cancel culture” arrived earlier than elsewhere in Europe, probably due to the shared language, and culture, that the British have with Americans and Canadians.

France is only now getting familiar with this new concept of ‟cancel culture”, further to hearing about the ‟letter on justice and open debate”, drafted, and signed, in July 2020, by more than 150 global intellectuals and authors (among whom Margaret Atwood, Wynton Marsalis, Noam Chomsky, J.K. Rowling and Salman Rushdie), and denouncing the excesses of online shaming and cancel culture. France is currently going through a phase of introspection, asking itself whether ‟la culture de l’annulation” could take off on its Gallic shores. And it is.

Proof is, I was interviewed for the 8.00pm TV News of France TV on Sunday 20 September 2020, to discuss the attempts made by no less than the new very controversial French minister of the interior, Gerald Darmanin – who was himself under criminal investigation for sexual coercion, harassment and misconduct in 2009, and then again between 2014 and 2017 – to eradicate from all SVoD services platforms such as YouTube, Spotify, Deezer, Dailymotion, the release of the first music album created by Franco-Senegalese 28 years’ old rapper, Freeze Corleone, ‟La Menace Fantôme” (‟LMF”). On which grounds is such cancellation requested? Provoking racial hatred and racial slander, no less.

Artist Freeze Corleone is an uncompromising rapper, abundantly peppering his raps with the French translations of ‟nigger” (‟négro”) and ‟bitches” (‟pétasses”) in the purest Northern American rap tradition (F. Corleone lived in Montreal, Canada, before settling down in Dakar, Senegal). He also obscurely refers to ‟Adolf”, ‟Goebbels”, ‟Ben Laden” and ‟Sion” in his rather enigmatic LMF lyrics. However, qualifying his body of work in LMF as racial slander and/or provoking racial hatred is a stretch. If you do not like it, because this content triggers you, just move on and don’t listen to it.

Freedom of speech is enshrined in the French declaration of rights of the human being and citizen, dated 1789. Article 11 of such declaration provides that the ‟free communication of thoughts and opinions is one of the most precious rights of the human being: any Citizen may therefore speak, write, print freely, except where he or she has to answer for the abuse of such freedom in specific cases provided by law”.

And such specific cases where freedom of speech may be curtailed, under French statutory law, include:

Law dated 1881 on the freedom of the press which, while recognising freedom of speech in all publication formats, provides for four criminally-reprehensible exceptions, which are insults, defamation and slander, incentivising the perpetration of criminal offences, if it is followed by acts, as well as gross indecency;
Law dated 1972 against opinions provoking racial hatred, which – like the four above-mentioned exceptions, is a criminal offense provided for in the French criminal code;
Law dated 1990 against revisionist opinions, which is also a criminal offense in order to penalise those who contest the materiality and factuality of the atrocities committed by the Nazis on minorities, such as Jews, homosexuals and gypsies before and during world war two, and
Law dated July 2019 against hateful content on internet, which provisions (requiring to remove all terrorist, pedopornographic, hateful and pornographic content from any website within 24 hours) were almost completely censored by the French constitutional council as a disproportionate infringement to freedom of speech, before entering into force in its expunged finalised version later on in 2019.

Therefore, according to French sociologist Nathalie Heinich, France does not need ‟cancel culture” because freedom of speech is already strictly corseted by French statutory laws. By this, she means that French individuals won’t have to take to social media platforms, in order to ‟cancel” whoever is misbehaving, since the all-pervading French nanny state will strike the first blow to the ‟offender”, in the same manner than French minister of justice G. Darmanin unilaterally requested all cultural streaming and video platforms, from YouTube to Spotify and Deezer, as well as all French radio and TV channels, to immediately and permanently remove the songs of Freeze Corleone’s LMF, further to opening a criminal inquiry against the latter, for allegedly committing racial slander and/or provoking racial hatred through his lyrics.

Is this above-mentioned French regal method a better tool than having the populace publicly decrying and shaming an individual who ‟steps out of line”, by using ‟cancel culture”? By no means, because, at the end of the day, it’s our collective freedom of speech which is being breached and infringed, on a whim. And that is unacceptable, in a democracy.

On the other side of the channel, the legal framework around freedom of speech is no panacea either. Freedom of expression is usually ruled through common law, in the UK. However, in 1998, the UK transposed the provisions of the European Convention on human rights, which article 10 provides for the guarantee of freedom of expression, into domestic law, by way of its Human rights act 1998.

Not only is freedom of expression tightly delineated, in article 12 (Freedom of expression) of the Human rights act 1998, but there is a broad sweep of exceptions to it, under UK common and statutory law. In particular, the following common law and statutory offences, narrowly limit freedom of speech in the UK:

threatening, abusive or insulting words or behaviour intending or likely to cause harassment, alarm or distress, or cause a breach of the peace (which has been used to prohibit racist speech targeted at individuals);
sending any letter or article which is indecent or grossly offensive with an intent to cause distress or anxiety (which has been used to prohibit speech of a racist or anti-religious nature, as well as some posts on social networks), governed by the Malicious communications act 1988 and the Communications act 2003;
incitement (i.e. the encouragement to another person to commit a crime);
incitement to racial hatred;
incitement to religious hatred;
incitement to terrorism, including encouragement of terrorism and dissemination of terrorist publications;
glorifying terrorism;
collection or possession of a document or record containing information likely to be of use to a terrorist;
treason including advocating for the abolition of the monarchy or compassing or imagining the death of the monarch;
obscenity;
indecency including corruption of public morals and outraging public decency;
defamation and loss of reputation, which legal framework is set out in the Defamation act 2013;
restrictions on court reporting including names of victims and evidence and prejudicing or interfering with court proceedings;
prohibition of post-trial interviews with jurors, and
harassment.

In Europe, and in particular in France and the UK, there is already a tight leash on freedom of speech, whether at common law or statutory law. However, ‟cancel culture” is nonetheless permeating our European online shores, following the trend started in Northern America. As a result, it is a tough time to be a free and creative European citizen, let alone a public figure or corporation, in this 21st century Europe. Indeed, not only could you have trouble with the law, if you were to make triggering or contentious comments or jokes or lyrics in the public domain, but you could also be shot down in flames by the online community, on social media, for your speech and expression.

3. How to ride the storm of ‟cancel culture”, while remaining consistently creative and productive?

In the above-mentioned cultural and legal context, it is crucial for creative professionals to think long and hard before posting, broadcasting, speaking, and even behaving.

As a result, book publishers use the services of ‟sensitivity readers”, before releasing a new work, whereby such consultants read books to be published, in order to look for, and find out, any clichés, stereotypes, scenes, formulations that may offend a part of the readership. This use of sensitivity readers is becoming more and more systematic, especially when the author speaks about themes which he, or she, does not personally master.

For example, an heterosexual author who describes a gay character, or a white author who describes Mexicans, in his or her new book, will most definitely have a sensitivity consultant review his or her output before publication. Almost inevitably, such sensitivity reader will request that some changes be made to the written content, so as to avoid a boycott of the published book, or cancellation of the author and book, altogether.

Whilst some of the classics of global literature were perceived as very shocking when they were first released (think ‟Lolita” from Vladimir Nabokov about the obsession of a middle-aged literature professor with a 12 year’s old girl, which today would probably be described as a glorification of pedophilia), they would probably never see the light of day, if they were to be published in our era.

Therefore, today’s cultural sensitivities push towards the publication and broadcasting, of written, audio and visual creative content which is bland, right-thinking, watered-down, in which the author only refers to what he or she knows, in the most neutral way possible.

This need to use ‟auto-censorship” in any content a creator wishes to publish is compounded by the fact that today, consumers of creative content do not differentiate between the author of the work, and his or her creative output. There is no separation between the author and content creator, and his or her body of work and/or fictional characters. With Millenials and US universities becoming obsessed with identity questions (i.e. the identity or feeling of belonging to a group, such as the gay community, the black community, etc.), it is the person who writes the book, or song, or writes or directs a film, who is now also important, maybe even more important than the work itself.

As a result, any content creator who writes or sings or produces an audiovisual work about a community other than his or her own, may be accused of cultural appropriation (i.e. the adoption of an element or elements of one culture or identity by members of another culture or identity) and even become the object of victimhood culture (i.e. a term coined by sociologists Bradley Campbell and Jason Manning, in their 2018 book ‟The rise of victimhood culture: microaggressions, safe spaces and the new culture wars”, to describe the attitude whereby the victims publicize microaggressions to call attention to what they see as the deviant behaviour of the offenders, thereby calling attention to their own victimization, lowering the offender’s moral status and raising their own moral status).

In this climate, it is therefore easier to publish or broadcast creative content if you belong to a minority (by being, for example, homosexual, black, brown, or a female), while white heterosexual male creators have definitely become disadvantaged, and more susceptible to being targets of ‟cancel culture”.

To conclude, a lot of prior thoughts and research and preparation and planning need to be put into the creation, and then broadcasting and publication, of any creative content today, not only with respect to such output, but also in relation to the identity, and positioning, of his or her author. If this conscious effort of adhering to right-thinking and bland ideologies is appropriately and astutely done, you and your creative output may successfully ride the storm of, not only French and UK legal limitations to your freedom of expression, but also the nasty impact of cancel culture and online shaming, hence maximising your chances that your creative work generates a commercial success.

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Posted on 19/09/202022/09/2020 by Crefovi

How to fight abuses of dominant position done by way of IP claims & denigration?

When a competitor which used to reign as a warlord in a particular market becomes challenged by a new player, this competitor may use tactics such as systematic and heavy-handed enforcement of alleged intellectual property rights, as well as aggressive smearing and denigration campaigns, to deter this new entrant. The situation may soon become untenable for the new kid on the block, as potential customers are scared away and dissuaded by the blows forcefully and repeatedly inflicted upon by the dominant player. What to do if you and your business are targeted by such hyper-aggressive competitor? How can you defend yourself against these abuses of dominant position?

The right balance between intellectual property rights (“IPRs“) and free competition is very difficult to strike, especially in markets and jurisdictions which are hyper protective of IPRs of right owners, like in Europe. When the right owner is manipulative, hyper-aggressive and unprepared to share his or her turf, they may use the so-called enforcement of IPRs to drive any new entrants in their specific market away; thus creating many abuses of dominant position.

1. What’s going on?

Nowhere as seriously have I witnessed such anti-competitive behaviour from a competitor occur, than in the automotive sector.

I was instructed to attend a trade show in the South of France, last year in September 2019, in order to assist a Chinese automotive company and its Spanish distributor on their stand, as they were systematically and repetitively subjected to court-ordered police raids and interim seizures, on any European trade fair that they had attended, and were attending, since the launch of their new automotive business two years’ prior.

As you might have guessed, it is their competitor, a German company in a monopolistic situation on that particular segment of the automotive sector, which was behind this constant derailing of each one of my clients’ trade exhibitions in Europe.

None of my clients’ trade shows in the USA were perturbed by these court-ordered seizures and police raids and court orders to immediately close down their stand on the tradeshows, based on the allegations of IPR counterfeiting made by such German competitor: no US court was accepting to grant the German competitor such overarching measures to stop free competition on a pretence of infringement of IPRs.

However, each one of the European courts to which such over-the-top interim and immediate measures were requested by such German competitor, in the context of European trade fairs held in Germany, Spain, France and Monaco, happily obliged and granted such court orders. As a result, these interim measures had forced my clients to close down their stand on each of these European trade shows prematurely, because my clients were deprived of their products and prototypes taken away during those police-led raids and seizures on their stands, as well as forced sales and seizures of their prototypes and products, ordered by some of these European courts.

Not only was the German competitor using its monopolistic status to manipulate European courts into driving its Spanish and Chinese competitors (my clients) away, alleging some IPRs infringements right and left, but it also conducted a vast, well-oiled and well-orchestrated denigration and smearing campaign against my clients, through the use of private eyes in various European locations, as well as through listening and taping the phone calls and text messages exchanged by my clients on their mobile phones. As a result, the German monopolist was able to always contact, before my clients, all the trade fair organisers, potential distributors and other third parties and business partners interested in my clients’ products, in order to denigrate my clients as “Chinese counterfeiters” who manufactured “dangerous and unfit automotive sea products” (sic). Consequently, European trade show organisers, potential European distributors and potential European end-consumers of my Chinese and Spanish clients were spooked, and took an enormous amount of convincing and cajoling, in order to establish, or re-establish, a rapport with my two clients.

Thanks to my intervention, during two of my clients’ trade fairs in Cannes, France, and Monaco, in September 2019, the humiliating option of having to close down their stand before the end of these trade shows was spared, since I efficiently liaised with the bailiff instructed by the French lawyers of the German competitor, in order to salvage some of my clients’ prototypes from a forced sale imposed by the Paris “tribunal de grande instance” on some quaint and unfounded allegations of patent and design infringement made by this German competitor.

I had seen some prior abuses of dominant position, in particular in the fashion sector and the fashion textile trade shows’ segment, perpetrated by luxury conglomerates and the largest fashion textile trade fair in the world, in the past. However, this first-hand experience of abuse of IPRs, abuse of dominant position and smearing and denigration campaigns against my automotive clients was on another level.

2. What can you do to protect yourself against some abuses of IPRs and of dominant position perpetrated by a competitor?

The enforcement of IPRs across the European Union (“EU“) has been harmonised, to some extent, by the Directive 2004/48/EC of 29 April 2004 on the enforcement of intellectual property rights (the “Enforcement directive”). However, nothing is set out, in the 21 articles of the Enforcement directive about any restrictions on the enforcement of IPRs due to a breach of competition law by the IPRs owner.

Consequently, and since France is extremely protective of IPRs owners, there are no restrictions on how IPRs may be enforced by right owners against third parties, in the French Intellectual property code; provided that any mandatory prior depositing and registration procedures (which are applicable to industrial IPRs such as design rights, trademarks and patents) have been complied with.

Under English law, there are some key restrictions on the ability to enforce IPRs, which include:

the risk of incurring liability for groundless threats of IPRs infringements, the law of which has been significantly reformed in the United Kingdom (UK) by the Intellectual Property (Unjustified Threats) Act 2017, and
specific defences to infringement and restrictions on available remedies for each IPR.

Therefore, if your dominant competitor raises some alleged IPRs infringement claims against you and your business in the UK, then you may make the most of these legal tools offered to you, from the “actionable threats” defense, to the “unjustified threats” defense, via UK civil court proceedings.

When an IPRs owner abuses its dominant position, it starts with obtaining some interim IPRs measures, such as the seizures and force sales on my clients’ stands in their trade show, against its competitors. Then, the dominant abuser lodges some IPRs infringement proceedings in front of the competent civil – and sometimes criminal – courts, against its smaller competitors, to obtain some damages for the alleged acts of IPRs infringements.

In France, the Tribunaux judiciaires (district courts) have exclusive jurisdiction in hearing cases concerning copyright, national trademarks and national design rights; while the Paris Tribunal judiciaire has exclusive jurisdiction in hearing cases concerning patents and EU rights (i.e. EU trademark and design rights). For example, after the Cannes yachting trade show in September 2019, the German monopolist lodged a fully-fledged patent infringement lawsuit against the Spanish distributor of the Chinese manufacturer, with the Paris Tribunal judiciaire, within 30 days from the day of the seizure and forced sale which took place during the Cannes trade fair. Copyright holders can also take action in the French criminal courts for counterfeiting.

In the UK, IPRs are primarily enforced via civil court proceedings, and the English High Court is the most common venue. IPRs proceedings in the English High Court are heard in the Chancery division, and different specialist lists are available:

the Intellectual Property Enterprise Court (“IPEC“) can hear any IPRs claim of relatively low complexity and value: the IPEC is suitable for claims which can be tried in two days or less, damages are capped at GBP500,000 and recoverable legal costs are subject to a cap of GBP50,000;
the Patent Court can hear claims relating to patents, registered designs, semiconductor rights and plant varieties. There is no cap on damages or recoverable legal costs; and
all other IPRs claims can be heard in the Intellectual Property List of the Chancery Division, of which the Patent Court and IPEC are sub-lists.

The problem, though, is that aside from the above-mentioned “actionable threats” and “unjustified threats” defenses, which can only be invoked in front of UK courts, neither the French Tribunaux judiciaires, nor the English High Court and its specialist lists, can review and decide on any anti-competitive behaviour and abuse of dominant position claims raised, as a counter-offensive, by the new entrant in a particular industrial sector, which is being subjected to IPRs infringement claims in front of these IP courts by the dominant player in that particular industry.

So, to continue with the example of my Spanish and Chinese clients, the Spanish distributor which is now the defendant in the patent infringement lawsuit lodged by the German monopolist in the automotive sector (the claimant), with the Paris Tribunal judiciaire, cannot make some counterclaims of abuse of dominant position and anti-competitive behaviour, as a counter-offensive, within the scope of that lawsuit with the Paris Tribunal judiciaire. Why? Because the Paris Tribunal judiciaire is not competent to review such claims relating to breaches of competition law: like the other French tribunaux judiciaires, it is only competent to review claims in relation to breaches of IPRs and laws on intellectual property.

So what is a quashed new entrant in this industrial sector to do then, under these circumstances? Well, the first priority is to find and retain expert and very aggressive legal counsel who will defend it against the wrongful allegations of IPRs infringement made by the monopolistic competitor. Such lawyer specialised in intellectual property matters shall also file some counterclaims against such abusive competitor, on behalf of its client, for like-for-like breaches of its client’s IPRs, invoking free riding and unfair competition (if in front of French courts) or passing off (if in front of UK courts).

The second priority, for the new entrant being wrongfully sued for alleged IPRs infringement by its dominant competitor, is to simultaneously file a claim against that abusive competitor with the national authorities responsible for reviewing and investigating the competitive effects of conduct related to the exercise of IPRs.

In France, the French Competition Authority (“FCA“) is the independent administrative body that specialises in analysing and regulating the operation of competition on markets to protect the economic public order. Its goal is to supervise the free play of competition in France. It can issue an opinion on the investigations it carries out, which can be subject to appeal only to the Paris Court of appeal. The rulings of the Court of appeal can also be the subject of recourse to the French Supreme court (“cour de cassation”). However, any judicial action relating to an infringement concerning the application of competition law can be taken before the Marseilles, Bordeaux, Lille, Fort-de-France, Lyon, Nancy, Paris and Rennes Commercial tribunals on the first instance jurisdictions.

Therefore, our Spanish and Chinese clients should not only fight the patent infringement allegations lodged by their German dominant competitor in front of the Paris Tribunal judiciaire, but also file some claims against that German competitor with either the FCA, or the Paris Commercial tribunal, for abuse of dominant position and anti-competitive behaviour. The claimants will try to obtain a judgment against these anti-competitive practices, as well as some paid damages for the prejudice suffered.

In the UK, the competition authority is the Competition and Markets Authority (“CMA“), which reviews and investigates compliance with competition law. The CMA’s remit includes the review and control of the exercise of IPRs insofar as they affect competition. The Competition Appeal Tribunal (“CAT“) is a specialist competition tribunal and hears appeals against the decisions of the CMA. An appeal from the CAT can be made to the Court of Appeal. Follow-on and standalone claims for competition law damages can be raised in the High court and in the CAT.

As you might have inferred from the above, the new entrant who is subjected to these various IPRs infringement claims by the abusive and dominant competitor, better have very deep pockets and unlimited wells of patience and resilience, in order to not only fight off an IPRs infringement lawsuit against its monopolistic competitor, but also drive through to completion some well-evidenced abuse of dominant position and anti-competitive behaviour claims in front of the competent competition authorities or courts, in either France or the UK.

It may all be worth it in the long term, though, as the recent high-profile cases dealing with the intersection of competition law and IPRs detailed below attest.

In 2014, the FCA ruled against Nespresso, the market leader for machines and capsules. Nespresso linked the purchase of its capsules with that of its coffee machines, thereby excluding manufacturers of competing capsules. Such exclusionary practices were reported by its competitors DEMB and Ethical Coffee to the FCA, as abuse of dominant position. In the decision issued by the FCA dated 4 September 2014, Nespresso was required to make several commitments intended to remove the obstacles to the entry and development of other manufacturers of capsules that would work with the brands’ coffee machines.

In 2016, the CMA fined GSK and two other pharmaceutical companies (the generic companies) in relation to anticompetitive patent settlement agreements. The CMA also found that GSK abused its dominant position in the UK market, by seeking to delay the generic companies’ entry into the market.

3. What can you do to protect yourself against some the acts of denigration and smearing perpetrated by a competitor?

A new form of abusive conduct has been identified, namely the practice of dominant companies excluding or reducing competition from competitors, by identifying exactly what non-price parameters are important for competition, and setting up some strategic campaigns to influence the purchasing behaviour of customers, typically by portraying competing products or services as unsafe and/or inefficient or of significantly lower quality.

These practices are usually referred to as “denigration” and “smearing campaigns”. Denigration means to criticize a competitor’s products or services in a derogatory manner, ultimately with a view to influencing customers purchasing patterns.

While such practices are usually dealt with under the unfair marketing rules in national legislations, some very serious cases found their way into the competition law arena.

Indeed, in several cases, the denigrating conduct has been part of dominant companies’ communication strategies with the clear object of disseminating information to customers about a competitor in order to create an air of uncertainty and/or doubt regarding either the competitor’s ability to carry out certain activities or putting a question mark on the quality, safety or efficacy of their products and services.

Denigrating conduct is most often seen in the form of dissemination of negative information based on false or misleading assertions in regard to competing products with the intention of having an impact on customers’ purchasing decisions.

Denigration of competitors’ products have long-lasting effects in the market because the unjustified doubts or fears can only be overcome with a significant effort by the target company to (re)educate and (dis)prove the denigrating statements in front of end-customers, distributors, etc.

Whilst at the European level, the European Commission has not yet had the opportunity to take a decision on a dominant company denigrating competitor products, there is considerable body of law at national level under article 102 TFEU, in particular in France.

The French cases have covered not only the pharmaceutical sector, but also the telecoms, electricity and pay-TV industries. Common to all these cases is that the dominant player has attempted to hinder market entry and product switch through denigrating competitor products in a number of different ways. Typically, the dominant company conducted a consistent, widespread strategy of misinformation to people who took or influenced purchasing decisions.

For example, in the matter with my Chinese and Spanish clients, their German dominant competitor would spread the word, before each trade show, that they had been sentenced to paying some counterfeiting damages to such German competitor, by a German court, and that their China-made sea scooters were of inferior quality and breaking all the time. This false information was diffused to the trade fair organisers, by the German competitor, in order to push the trade fairs to refuse access to their show to my clients, who were branded “counterfeiters” by their German competitor. But this denigration was also done with each one of the European potential distributors my clients, with threats made by the German competitor that it would stop trading with the distributor if the latter started any business with the Chinese manufacturer and its Spanish representative.

In France, the FCA has thus in its more than 10 denigration cases consistently held that denigration of competitors or their products, does not constitute competition on the merits and as as result, denigration can constitute an abuse of dominant position in certain circumstances. In French case law, for denigration to infringe article 102 TFEU, four clear elements have to be proven:

there is denigration of a competitor’s product with a view to obtaining a commercial advantage;
a link between the dominance and the practice of denigration has to be established;
it has to be verified whether the statements put forward in the market by the dominant company are based on objective findings or assertions that are not verified, and
whether the commercial statements are liable to influence the structure of the market.

The denigration cases assessed by the FCA and other European competition authorities have so far turned on the dominant company identifying the most important non-price parameters to be able to compete in a market and concluding that the relevant customer decision process could be influenced by instilling fears or concerns that are then conveyed to decision makers and stakeholders in a systematic and consistent smearing campaign.

Therefore, it seems that abuse of a dominant position as a consequence of denigrating conduct is more likely to be sanctioned in sectors where non-price competition parameters are more relevant than price. The more important a given parameter is, the more critical it is when a dominant company tries to exclude competitors through either false or misleading information, or tries to make information credible in a covert manner.

To conclude, a new entrant in a market, which is subjected to an abuse of IPRs and/or a smearing campaign to systematically denigrate its products, by the dominant player in that particular industry, has more than one string to its bow in order to fight back. However, such new kid on the block must brace himself or herself for lengthy, draining and expensive legal battles, both as a defendant against the wrongful alleged claims of counterfeiting of its IPRs, raised by the dominant and abusive competitor, and as a claimant in front of the competent European competition authority, through which it will have raised some claims against such competitor for abuse of dominant position, in particular by way of denigration and smearing campaign.

These various legal battles will eventually neutralise the dominant competitor, while having a rigorous and well-organised IPR registration and maintenance strategy in place, for the new entrant in the market, is essential. All new models, products, brands, services should have their respective IPR registered, and then listed in a catalogue of IPRs maintained by the legal counsel of the new entrant. All evidence, and certificates, of registration should be kept and archived meticulously, to anticipate any IPRs infringement claim that the dominant competitor may bring. Non-disclosure and confidentiality clauses should be set out in all the contracts entered into with new employees, distributors, service providers who will assist the new entrant before and during the trade shows (PR agencies, hostesses’ agencies, logistics companies, etc).

Our law firm Crefovi specialises in dealing with these types of IPRs claims and IP antitrust claims, so don’t hesitate to give us a buzz.

Posted on 23/07/202019/09/2020 by Crefovi

Do you need to put in place an escrow agreement with respect to the software and/or source code that you license?

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In this digital and technological corporate world, having a plan B in case your software or computer program license goes wrong is a must. Can a customer successfully leverage its position, by entering into an escrow agreement with the licensor? How does the source code escrow work, anyway? When can the source escrow be released to the licensee? [hr]

1. What is software escrow and source code escrow?

1.1. What is source code?

Source code is the version of software as it is originally written (i.e. typed into a computer) by a human in plain text (i.e. human readable alphanumeric characters), according to the Linux Information Project.

The notion of source code may also be taken more broadly, to include machine code and notations in graphical languages, neither of which are textual in nature.

For example, during a presentation to peers or potential clients, the software creator may ascertain from the outset that, “for the purpose of clarity, ‘source code’ is taken to mean any fully executable description of a software system. It is therefore construed to include machine code, very high level languages and executable graphical representations of systems”.

Often, there are several steps of program translation or minification (i.e. the process of removing all unnecessary characters from the source code of interpreted programming languages or markup languages, without changing its functionality) between the original source code typed by a human and an executable program.

Source code is primarily used as input to the process that produces an executable computer programme (i.e. it is compiled or interpreted). Hence, computer programmers often find it useful to review existing source code to learn about programming techniques. So much so, that sharing of source code between developers is frequently cited as a contributing factor to the maturation of their programming skills.

Moreover, porting software to other computer platforms is usually prohibitively difficult – if not impossible – without source code.

1.2. Legal status of software, computer programs and source code

In the United Kingdom, section 3 (Literary, dramatic and musical works) of the Copyright, Designs and Patents Act 1988 (“CDPA 1988“) provides that among works which are protected by copyright, are ‘computer programs’, ‘preparatory design material for a computer program’ and ‘databases’ (i.e. collections of independent works, data or other materials which are arranged in a systematic or methodical way and are individually accessible by electronic or other means).

Section 3A of the CDPA 1988 provides that the standard for copyright protection is higher, for databases, than for other ‘literary works’, since they must be original (i.e. by reason of the selection or arrangement of the contents of the database, the database constitutes the author’s own intellectual creation). Since the CDPA 1988 has no equivalent provision for computer programs, it is common knowledge that the provisions of section 3A of the CDPA 1988, relating to originality, apply to both databases and computer programs.

Moreover, the European Directive on the legal protection of databases (Directive 96/9/EC) and the Computer Directive (Directive 91/250/EEC) confirm these higher standards of originality for computer programs and databases, in the sense that they are the author’s own intellectual creation. This is a higher standard of originality than “skill, labour and judgment”.

Article L112-2 of the French intellectual property code (“IPC“) provides that softwares, including preliminary conception work, are deemed to be ‘works from the mind’ protected by copyright. That copyright protection includes source code.

Both in France and the UK, the duration of copyright for software and computer programs is 70 years after the death of the author or, if the author is a legal entity, from the date on which the software was made public.

Copyright is acquired automatically in France and the UK, upon creation of the software or computer program, without any need for registration of such intellectual property right.

Both under English and French law, computer programs are regarded as not protectable via other registered intellectual property rights, such as patents. Indeed, section 1(2) (c) of the Patents Act 1977 (“PA 1977“) lists computer programs among the things that are not regarded as being inventions “as such”. Article L611-10 of the IPC does the same in France.

1.3. Software escrow / source code escrow

Since authors of software and computer programs – which include source code – own the copyright to their work, they can licence these works. Indeed, the author has the right to grant customers and users of his software some of his exclusive rights in form of software licensing.

While some softwares are ‘open source’, i.e. free to use, distribute, modify and study, most softwares are ‘proprietary’, i.e. privately owned, restricted and, sometimes, kept secret.

For proprietary software, the only way for a user to have lawful access to it is by obtaining a license to use from its author.

When some very large sums of money are exchanged, between the licensor (i.e. the author of the software and source code) and its licensees (i.e. the users of such software and source code), a precautionary measure may be required by the latter: software escrow.

It is the deposit of software source code with a third-party escrow agent, such as Iron Mountain or SES. The source code is securely administered by a trusted, neutral third party to protect the developer’s intellectual property, while at the same time keeping a copy safe for the licensees in case anything happens, such as the licensor no longer being able to support the software or going into bankruptcy. If that situation materialises, the licensees request a release of the source code from the escrow account and are able to keep their businesses up and running. This escrow solution effectively gives the licensee control of the source code and options to move forward.

2. How do you put source code escrow in place?

Many organisations have a standing policy to require software developers to escrow source code of products the organisations are licensing.

Therefore, alongside the licensing agreement to use the computer program, in-house or external lawyers of the licensees also negotiate the terms of an escrow agreement pursuant to which the source code of that computer program will be put in escrow with a trusted third party.

3. Is it worth requesting source code escrow alongside a software license?

Only a small percentage of escrows are ever released: Iron Mountain, the dominant escrow agent in the USA, has thousands of escrow accounts and more than 45,000 customers worldwide that have stored their software and source code with them. Over the 10-year period from 1990 to 1999, Iron Mountain released 96 escrow accounts, less than 10 per year.

Just as well, because escrow agreements are entered into as a kind of insurance policy, only to be used in case something goes very wrong at the licensor’s company, which triggers one of the release events (insolvency, case of force majeure, death of the computer developer, etc.).

However, one valid cons is that most escrowed source code is defective: often, upon release, source code fails to provide adequate protection because it is outdated, defective or fails to meet the licensee’s needs. According to Iron Mountain again, 97.4 percent of all analysed escrow material deposits have been found incomplete and 74 percent have required additional input from developers to be compiled. This is a valid point and licensees of the software, who insist on getting an escrow agreement as well, must insert some clauses in the escrow agreement whereby the escrowed source code is tested on a very regular basis by both the licensee and the licensor, in order to ensure that such escrowed source code will be usable as soon as one “release event”, set out in the escrow agreement, materialises. The licensor should have an obligation of result to maintain the escrowed source code up-to-date and fully operational, throughout the duration of the escrow agreement.

Another point of caution is that licensees may lack the expertise to use the released source code. Even if the licensor has been diligent and the released source code is properly updated, well-documented and fully operational, most licensees lack the technical resources or capability to utilise the source code upon release. The licensees may work around this problem by either hiring an engineer who has the technical knowledge to make the most of that released source code (bearing in mind that most software licensing agreements bar licensees from poaching licensor’s employees during the term of the license) or instructing a third-party software company. The best and most economical approach is to be as autonomous as possible, as a licensee, by developing in-house expertise on the workings of the software, and its source code, even before one of the release events materialises.

Another identified problem is that software licensors may prevent the timely release of the escrowed source code by imposing some unilateral conditions to the release, such as the vendor having to provide its written prior approval before the source code is released by the escrow agent, upon the materialisation of a release event. Additionally, many escrow agreements require parties to participate in lengthy alternative dispute resolution proceedings, such as arbitration or mediation, in the event of a dispute relating to the release of the source code. A commonly disputed issue is whether a release event actually occurred, even when the software licensor has gone into bankruptcy! The long delay and expensive legal battle needed to obtain the source code release, may become very heavy burdens for a licensee, compounded by the difficulty to keep the licensee’s computer program and software working – as the licensor, and its technical support, have faded away. In order to avoid such delays and complications in the release of the escrowed source code, the terms of the escrow agreement must initially be reviewed, and negotiated, by an IT lawyer experienced in this area, so that all clauses are watertight and can be executed immediately and in a smooth manner, upon the occurrence of a release event.

Another cost consideration is that the expenses related to the opening and maintenance of an escrow agreement are high, and typically borne by the licensee. In addition to the fees paid to the escrow agent, the customer will often incur significant legal expenses related to the drafting and negotiation of the escrow agreement, as explained above. Software licensors being really resistant to providing their proprietary source code to anyone, escrow agreements are often subjects of long negotiations, before they are signed. However, while doing a costs/benefits analysis of getting the source code escrow, the licensee must assess how much it would cost, in case a release event occurred (bankruptcy of the licensor, case of force majeure, etc) but no prior software escrow had been put in place. If the licensee has made a considerable investment in the software, the cost to protect this asset via an escrow agreement may be trivial.

Some companies say that, since they now rely on Software-as-a-Service solutions (“SaaS“) for some of their IT needs and functionalities, there is no need for software escrow because the SaaS relies on a cloud-based system. However, SaaS implies that you need to think about both the software and your company’s data, which is indeed stored on the cloud – which adds a level of complexity. Since most SaaS provider’s business continuity/disaster recovery plans do not extend to a company’s application and data, some new insurance products have entered the market, combining both the source code escrow and disaster recovery and risk management solution. For example, Iron Mountain markets its SaaSProtect Solutions for business continuity.

To conclude, licensees need to conduct a costs/benefits analysis of having an escrow agreement in place, alongside the licensing agreement of their major software applications, in respect of each computer program which is perceived as absolutely paramount to the economic survival, and business continuity, of the licensees. Once they have balanced out the pros and cons of putting in place escrow agreements, they need to draft a list of their essential “wants” to be set out in each escrow agreement (for example, a detailed list of the release events which would trigger the release of source code to the licensee, the quarterly obligation borne by the licensor to maintain the source code in up-to-date form and working order, the secondment of a highly qualified computer programmer employee of the licensor to the offices of the licensee, on a full-time or part-time basis, in order to train in-house IT staff about the intricacies of the software and its source code) and then pass on such list to their instructed lawyer – who should be an IT expert lawyer, seasoned in reviewing and negotiating escrow agreements – for his or her review and constructive criticism and feedback. Once the licensees have agreed an “escrow insurance plan” strategy internally, and then with their counsel, they need to contact the licensor, its management and legal team, and circulate to them a term sheet of the future escrow agreement, in order to kick off the negotiation of the escrow agreement.

An escrow agreement is, and should remain, an insurance policy for the licensee, as long as it – in coordination with its legal counsel – has paved the way to a successful and well thought-out escrow rescue plan. This way, the user of the software will avoid all the pitfalls of poorly understood and drafted escrow agreements and source codes, for the present and future.

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How to defend yourself in case the artwork bought at auction does not match its pre-sale description?

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While collecting art works is becoming an increasingly popular & sexy hobby for affluent individuals, the financial & legal risks involved in such activities are very high, especially when such art pieces are bought at auction. Indeed, it is in the interest of auction houses to depict a rosy & partial portrait of any artwork on sale, which often does not reflect the exact provenance and/or condition of such work of art. How can a collector prevent such partial disclosures and inaccurate embellishments relating to the condition or provenance of a coveted artwork on sale, at auction? [hr]

artwork bought at auction

1. A real risk

Our art law firm Crefovi currently advises several individuals – all art collectors – who have fallen into the following trap: they all based themselves on the (proven, later, to be incorrect) information provided by the auction house responsible for the sale of an artwork, to enthusiastically and successfully bid at auction for such work of art. When, or shortly after, they went to collect the artwork, deception ensued, as they found out that they had been the subject of deceit, as far as the condition and/or provenance of the artwork were concerned. Therefore, the artwork you bought at auction does not match its pre-sale description.

For example, one of our clients is a keen collector of Chinese antics who resides in the United Kingdom, on his Chinese passport and work visa. In an auction sale organised by the French auction house Tajan, he mostly relied on the condition report provided by such auctioneer, which set out that the Chinese vase was in “good aged-related condition (and had) normal age-related traces of wear“, to successfully bid for that lot. When he came to Tajan’s offices in Paris to view this Chinese vase for which he was now the successful bidder, further to obtaining a travel visa to France, he was floored to discover that this vase was not as described in the condition report. The state of the vase is, indeed, poor, since it is damaged by several marks and traces of wear and tear, in many places; there is a large crack at the base of such vase, which means that no water stays in the vase because it escapes from that crack; several enamel parts are missing; certains parts, such as the panels on the inferior part of the vase and the enamels on the neck of the vase, seem to have been added after the manufacturing stage of the vase, etc.

Another example is the successful bid made by another client of our firm, for a painting “attributed to Alighiero e Boetti” as per the catalogue and website of the auction house Bellmans. While our client took the time to view and inspect the painting prior to its auction at Bellmans’ Sussex Room, he was in great turmoil when he was turned down by the Archivio Alighiero Boetti (a cultural association based in Rome, founded by the heirs of the artist Alighiero Boetti, in order to authenticate works of art which are alleged to have been made by Alighiero Boetti) to which he had asked for a certificate of authenticity for that art work. Indeed, when he spoke to Matteo Boetti, son of Alighiero Boetti and president of Archivio Alighiero Boetti, he was told that this painting had already been unsuccessfully submitted to the authentication committee three times before, in order to obtain a certificate of authenticity! Archivio Alighiero Boetti declined to provide such certificate of authenticity to the previous owners of the artwork because, according to Matteo Boetti, it was a fake, a forgery, a counterfeit, and therefore not of the hand of Alighiero Boetti.

This risk of falling prey to the deceit of auction houses (and of their anonymous sellers of such flawed artworks) is definitely not mitigated by the terms and conditions of sale of such auction houses. Indeed, these T&Cs are riddled with liability waivers, such as this one extracted from Bellmans’ T&Cs: “Please note that Lots (in particular second-hand Lots) are unlikely to be in perfect condition. Lots are sold “as is” (i.e. as you see them at the time of the auction). Neither we nor the Seller accept any liability for the condition of second-hand Lots or for any condition issues affecting a Lot if such issues are included in the description of a Lot in the auction catalogue (or in any saleroom notice) and/ or which the inspection of a Lot by the Buyer ought to have revealed” or these gems set out in Tajan’s T&Cs: “If no information on restoration, an accident, retouching or any other incident is provided in the catalogue, the condition reports or labels or during a verbal announcement, this does not mean that the item is void of defects. The condition of the frames is not guaranteed” and “Buyers may obtain a condition report on items included in the catalogue that are estimated at more than €1 000 upon request. Information contained in such reports is provided free of charge and solely to serve as an indication. It shall by no means incur the liability of Tajan”. Of course it is very likely that such liability waivers, which remove any liability from the shoulders of a deceitful auctioneer, are unlawful. But it will take a protracted, expensive and painful lawsuit to demonstrate that such liability waivers are in severe breach of English or French contractual law. Which art collector has the time or appetite for that?

2. To pay or not to pay the hammer price?

In the two above-mentioned examples, our clients faced several scenarios: our fervent Chinese art collector refused to pay for the price of the Chinese vase, immediately rescinding his successful bid by way of a formal email to Tajan, sent on the same day that he discovered that the Chinese vase was not as per the description made of it in the condition report and Tajan’s catalogue. However, our Italian modern art enthusiast client dutifully paid the price of GBP25,912 by credit card to Bellmans, on the day of his successful bid for the painting “attributed to Alighiero e Boetti” (sic).

While not settling the price and not collecting the deceitful lot was the right move to make, for the Chinese art collector who immediately spotted the fraud upon close inspection of the Chinese vase post-auction, it opened the way to court litigation since Tajan and its anonymous seller contested, of course, that their condition report and catalogue had hidden the truth about the poor condition of such lot. Indeed, further to an unsuccessful attempt to mediate this dispute with the (rather useless) “commissaire du gouvernement près le Conseil des ventes volontaires de meubles aux enchères” (i.e. the statutory body which role is to regulate French auction houses), Tajan lodged a lawsuit against our client with the Paris Tribunal de grande instance in early 2017 which is still ongoing, to this day.

Meanwhile, our UK-based collector also did the right thing, by settling the hammer price and buyer’s premium including VAT, and by collecting the painting “attributed to Alighiero e Boetti” since he was still convinced that this was a genuine painting made by the hand of Alighiero Boetti; until he was proved otherwise by the authentication committee of Archivio Alighiero Boetti, a few weeks later.

To conclude on this point, the logical rule is that, as soon as you discover the deceit or forgery, you should let the auction house know that you rescind the successful bid by way of a formal communication with them; be it before you have paid the hammer price and buyer’s premium, or after. Ideally, you want to make such formal disclosure of the deceit or counterfeit to the auction house as soon as possible, since most auctioneers set out, in their T&Cs, that they will not consider claims of forgery by the successful bidder, if these claims are made after a short period following the successful bid. Here is, for example, Bellmans’ liability waiver on this topic: “You may return any Lot which is found to be a Deliberate Forgery to us within 21 days of the auction provided that you return the Lot to us in the same condition as when it was released to you, accompanied by a written statement identifying the Lot from the relevant catalogue description and a written statement of defects“.

3. Preemptive measures to avoid being the unhappy successful bidder of a deceitful lot

Buyers of art works have no mandatory obligations to conduct any due diligence, under French or English law or case law.

However, the principle of caveat emptor (i.e. “buyer beware”, in Latin) applies, by which the onus is on the buyer to investigate the property or object he is acquiring. Since such burden of due diligence rests with buyers, they typically search the stolen art database of the Art Loss Register and conduct enquiries on ownership, authenticity, condition, provenance and lawful export of art. Due diligence depends on the type of asset, its value, and the information volunteered by the seller.

As a rule of thumb, any buyer should, at the minimum, conduct the following searches:

attend the auction’s location in person and inspect the coveted art work before taking part into a bid for it;
research the coveted art work on price databases, such as ArtNet, in order to find some historical data about past sales of such art work;
research lost or stolen art databases, such as the Art Loss Register and Interpol, since such databases include data about art works which authenticity is challenged, and therefore report authenticity issues. The database of the Art Loss Register is not publicly available but it can be searched on request. Some data on the Interpol database can be searched by members of the public and,
if in existence, read the “catalogue raisonné” of the artist who the artwork is attributed to, in order to assess whether such artwork has been indeed recognised by the field as being of the hand of such artist.

If you, buyer, conduct such above-mentioned searches and due diligence steps, and provided that you are a consumer (and not acting as a professional, such as an art dealer or trader), the courts would probably find that you have complied with the principle of caveat emptor (buyer beware).

4. What are your options, after the successful bid and unhappy discovery that the artwork is unlike its description set out in the auctioneer’s documents?

As set out above in paragraph 2. above, you should send an official letter to the auction house, denouncing the forgery and/or poor condition (or any other undisclosed defect) of the art work, very soon after you have discovered it, rescinding the successful bid and requesting to return the disputed lot to the auctioneer, against the full refund of the hammer price, the buyer’s premium including VAT, any other costs associated with the bid (such as transport costs) and the costs relating to the authentication and/or inspection of the artwork.

While it is unlikely that the auction house, recipient of such formal letter of complaint, will accept to cover the authentication and/or inspection costs, any auctioneer who wants to keep his reputation intact would accept to take back the litigious lot and refund the rests of the requested costs; especially if you sent your official communication as close as possible to the date of the successful bid, and if you have gathered much strong evidence that the artwork is indisputably a forgery or not at all like it was described in the condition report and/or the catalogue.

If the French auction house and you, unhappy bidder, cannot see eye to eye, you can lodge a formal complaint and request for mediation with the “commissaire du gouvernement près le Conseil des ventes volontaires de meubles aux enchères” (i.e. the statutory body which role is to regulate French auction houses), bearing in mind, though, that the ‘Conseil des ventes volontaires de meubles aux encheres’ may come across as biased, since it is not in its best interest to annoy its members, the French auction houses.

In the UK, there is no regulatory body in charge of watching and regulating UK auction houses. However, most UK auction houses belong to trade federations, such as the Society of Fine Art Auctioneers and Valuers, which have issued some guidance notes for good practice and often have complaint handling schemes in place, and even mediation services, when one of their members is the subject of a dispute with one of its buyers. Indeed, the strategy of “naming and shaming” is particularly effective in the UK, much less so in France where French auction houses act as if they were in contempt of any regulations or complaints handling schemes that may limit their ability to waive their liability vis-a-vis their buyers.

If the dispute between the auction house and the buyer escalates into a fully-fledged lawsuit, your defense, as a buyer, should be based around proving that the work of art was deceitfully sold at auction, because of gross misrepresentation and negligence committed by the auctioneer and, accessorily, the seller. As much evidence of the forgery, counterfeit and/or poor condition, as possible, should be provided to the court, even by way of requesting an expertise of the deceitful artwork, executed by an art expert, under supervision of the court.

Meanwhile, you, as a buyer and defendant in the lawsuit, should request and attempt mediation all the way, during the lawsuit, in order to demonstrate that you are ready to compromise and find a constructive, time-efficient and cost-effective resolution to this dispute. The other side, however, may not agree to such alternative dispute resolution, out of cheer stupidity or because their legal fees may not be covered by their legal insurance policy, should a mediation or any other alternative dispute resolution process be put in place between the parties.

To conclude, you really want to avoid finding yourself in the situation of an unhappy successful bidder who discovers, post-auction, that he has overpaid for an artwork which is not at all what it seemed, or was presented to be, by the auctioneer and its anonymous seller. Our guidelines, above, should save you from that headache and situation. However, if that is not the case, don’t worry and call us, since we are here, at Crefovi, to service you to find a solution to your bad auction experience and deceitful transaction, in the most cost-efficient and time-efficient way.

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Posted on 28/10/201907/04/2020 by Crefovi

How to restructure your creative business in France | Restructuring & insolvency law firm Crefovi

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Almost any medium-sized and large creative business has overseas operations, in order to maximise distribution opportunities and take advantage of economies of scale. This is especially true for fashion & luxury businesses, which need strategically-located brick & mortar retail outlets to thrive. However, such overseas boutiques may need to be restructured, from time to time, in view of their annual turnover results, compared to their fixed costs. What to do, then, when you want to either reduce, or even close down, your operations set up in France? How to proceed, in the most time and cost efficient manner, to restructure your creative business in France? [hr]

One thing that needs to be clear from the outset is that you must follow French rules, when you proceed onto scaling back or even winding up your operations set up in France.

Indeed, in case you have incorporated a French limited liability company for your business operations in France, which is a wholly-owned subsidiary of your foreign parent-company, there is a risk that the financial liability of the French subsidiary be passed onto the foreign parent-company. This is because the corporate veil is very thin in France. Unlike in the UK or the US for example, it is very common, for French judges who are assessing each matter on its merits, to decide that a director and/or shareholder of a French limited liability company should become jointly liable for the loss suffered by a third party. The judge only has to declare that all the following conditions are cumulatively met, in order to pierce the corporate veil and hold its directors and/or shareholders liable for the wrongful acts they have committed:

the loss has been caused by the wrongful act of a director or a shareholder;
the wrongful act is intentional;
the wrongful act is gross misconduct and
the wrongful act is not intrinsically linked to the performance of the duties of a director or is incompatible with the normal exercise of the prerogatives attached to the status of the shareholder.

The specific action of liability for shortfall of assets is generally the route that is chosen, to pierce the corporate veil and trigger the director and/or shareholder liability of a French limited liability company. However, there is numerous French case law, showing that French courts do not hesitate to hold French and foreign parent companies liable for the debts of French subsidiaries, especially in case of abuse of corporate veil, by way of intermingling of estates, either by intermingling of accounts or abnormal financial relations. This usually leads to the extension of insolvency proceedings, in case of intermingling of estates, but could also trigger the director and/or shareholder liability in tort for gross misconduct.

Indeed, if a shareholder has committed a fault or gross negligence that contributed to the insolvency of, and subsequent redundancies in, the French subsidiary, that shareholder may be liable to the employees directly. Pursuant to recent French case law, the shareholder could be held liable in the event its decisions:

hurt the subsidiary;
aggravate the already difficult financial situation of the subsidiary;
have no usefulness for the subsidiary, or
benefit exclusively to the shareholder.

Of course, any French court decisions are relatively easily enforceable in any other European Union (“EU“) member-state, such as the UK, thanks to the EU regulation 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters. This regulation allows the enforcement of any court decision published in a EU member-state without any prior exequatur process. Therefore, the foreign parent-company will not be protected by the mere fact that it is located in the UK, for example, as opposed to France: it will be liable anyway, and the French courts’ judgments will be enforceable in the UK against it. Moreover, a new international convention, the Hague convention on the recognition and enforcement of foreign judgments in civil or commercial matters was concluded, on 2 July 2019, which will become a ‘game changer’ once it becomes ratified by many countries around the world, included the EU. It will therefore become even easier to enforce French court decisions in third-party states, even those located outside the EU.

So what is the best route to restructure or wind up the French operations of your creative business, if so much is at stake?

1. How to lawfully terminate your French lease

Most French commercial operations are conducted from commercial premises, be it a retail outlet or some offices. Therefore, leases of such commercial spaces were entered into with French landlords, at the inception of the French operations.

How do you lawfully terminate such French leases?

Well, it is not easy, since the practice of “locking commercial tenants in” has become increasingly common in France, through the use of pre-formulated standard lease agreements which impose some onerous obligations on commercial tenants, that were not subject to any negotiation or discussion between the parties.

This evolution is rather surprising since France has a default regime for commercial leases, set out in articles L. 145-1 and seq. of the French commercial code, which is rather protective of commercial tenants (the “Default regime”). It defines the framework, as well as boundaries between, the landlord and its commercial tenant, as well as their contractual relationship.

For example, article L. 145-4 of the French commercial code sets out that, in the Default regime, the term of the lease cannot be lower than nine years. Meanwhile, articles L. 145-8 and seq. of the French commercial code describe with minutia the Default regime to renew the lease after its termination, declaring null and void any clause, set out in the lease agreement, which withdraws the renewal right of the tenant, to the lease agreement.

But what does the Default regime say about the right of a tenant to terminate the lease? Nothing, really, except from articles L. 145-41 and seq. of the French commercial code, which provide that any clause set out in the lease agreement in relation to the termination of the lease will only apply after one month from the date on which a party to the lease agreement informed the other party that the latter had to comply with all its obligations under the lease agreement and, should such request to comply with its contractual obligations be ignored, the former party will exercise its right to terminate the lease agreement within a month. However, in practice, it is very difficult for French commercial tenants to invoke such articles from the French commercial code, and subsequently prove that their landlords have not complied with their contractual obligations under the lease. This is because such French lease agreements often set out clauses that exonerate the landlords from any liability in case the premises are defective, obsolete, suffer from force majeure cases, etc.

To summarise, the Default regime does not provide for any automatic right for a commercial tenant to terminate the lease agreement, for any reason. It is therefore advisable, when you negotiate the clauses set out in such lease agreement, to ensure that your French entity (be it a branch or a French limited liability company) has an easy way out of the 9 years’ lease. However, since the balance of power is heavily skewed in favour of commercial landlords – especially for sought-after retail locations such as Paris, Cannes, Nice, and other touristic destinations – there is a very high probability that the landlord will dismiss any attempts made by the prospective commercial tenant to insert a clause allowing such tenant to terminate the lease on notice, for any reason (i.e. even in instances when the commercial landlord has complied with all its obligations under the lease).

Still included in the Default regime, on the topic of termination of leases, is article L. 145-45 of the French commercial code, which sets out that the institutionalised receivership or liquidation (i.e. “redressement ou liquidation judiciaires”) do not trigger, in their own right, the termination of the lease relating to the buildings/premises affected to the business of the debtor (i.e. the tenant). Any clause, set out in the lease agreement, which is contradictory to this principle, is null and void, under the Default regime. While this article sounds protective for commercial tenants, it also infers that there is no point in placing the tenant’s business in receivership or liquidation, to automatically trigger the termination of the lease. Such a situation of court-led receivership or liquidation of the French entity will not automatically terminate the lease of its premises.

Consequently, the most conservative way out may be to wait the end of the nine years’ term, for a commercial tenant.

In order to have more flexibility, many foreign clients that set up French commercial operations prefer to opt out of the Default regime, which imposes a nine years’ term, and instead enter into a dispensatory lease (“bail dérogatoire”) which is not covered by the Default regime.

Indeed, article L. 145-5 of the French commercial code sets out that “the parties can (…) override” the Default regime, provided that the overall duration of the commercial lease is not longer than three years. Dispensatory leases, which have an overall duration no longer than 3 years, are therefore excluded from, and not governed by, the Default regime set out in articles L. 145-1 and seq. of the French commercial code, and are instead classified in the category of “contrats de louage de droit commun” i.e. civil law ordinary law contracts of lease, which are governed by the provisions set out in the French civil code, relating, in particular, to non-commercial leases (article 1709 and seq. of the French civil code).

Therefore, if a foreign parent negotiates a dispensatory lease for its French operations, it will be in a position to call it a day after three years, instead of nine years. However, it will not be able to benefit from the tenants’ protections set out in the Default regime and will therefore need to negotiate very astutely the terms of the commercial lease with the French landlord. It is therefore essential to seek appropriate legal advice, prior to signing any lease agreement with any French landlord, in order to ensure that such lease agreement offers options, in particular, for the tenant to terminate it, in case of contractual breaches made by the landlord, and, in any case, upon the end of the three years’ term.

The tenant should keep a paper trail and evidence of any contractual breaches made by the landlord during the execution of the lease, as potential “ammunition” in case it decides to later trigger the termination clause under the lease agreement, for unremedied breach of contract.

2. How to lawfully terminate your French staff

Once the termination of the lease agreement is agreed, it is time for the management of the French operations to focus their attention on termination the employment agreements of French staff members (the “Staff“), which can be a lengthy process.

An audit of all the employment agreements in place with the Staff should be conducted, confidentially, before making a move, in order to assess whether such agreements are “contrats à durée indéterminée”, or “CDI” (i.e. indeterminate duration employment agreements) or “contrats à durée déterminée”, or “CDD” (i.e. fixed term employment agreements).

As part of this audit, the legal and management team should clarify the amount of the sums due to each member of the Staff, relating to:

any paid leave period owed to her;
in case of CDDs, if no express agreement is signed by the member of Staff and the employer upon termination, all outstanding remunerations due during the minimum duration of the CDD;;
in case of CDDs, an end of contract indemnity at a rate of 10% of the total gross remuneration;
in case of CDIs, any notice period salary owed to her;
in case of CDIs, any severance pay owed to her and
any outstanding social contributions on salary.

This audit will therefore enable the French business, and its foreign parent-company, to assess how much this Staff termination process may cost.

In France, you cannot terminate Staff at will: you must have a “lawful” reason to do so.

Justifying the termination of a CDD ahead of its term may be pretty complex and risky, in France, especially if the relevant members of Staff have behaved in a normal manner during the execution of such CDD, so far. It may therefore be worth for the employer to pay all outstanding remunerations due during the minimum duration of the CDD, in order to avoid any risk of being dragged to any employment tribunal, by such members of Staff.

As far as CDIs are concerned, there are three types of termination of CDIs, as follows:

“licenciement pour motif économique” (i.e. layoff for economic reasons);
“rupture conventionnelle du CDI” (i.e. mutually agreed termination of the employment agreement);
“rupture conventionnelle collective” (i.e. collective mutually agreed termination of the employment agreement).

A “licenciement pour motif économique” must occur due to a real and serious economic cause, such as job cuts, economic difficulties of the employer or the end of the activity of the employer.

This option would therefore be a good fit for any French entity that wants to stop operating in France. It does come with strings attached, though, as follows:

the employer must inform and consult the “représentant du personnel”, or the “Comité d’entreprise”;
the employer asks the relevant Staff to attend a preliminary meeting and notifies them of the termination of their CDIs as well as the reasons for such termination;
the employer sends a termination letter to the relevant Staff, at least 7 business days from the date of the preliminary meeting, or at least 15 business days from the date of the preliminary meeting if such member of Staff is a “cadre” (i.e. executive), which sets out the economic reason which caused the suppression of the job occupied by the employee, the efforts made by the employer to reclassify the employee internally, the option for the employee to benefit from reclassification leave and
the employer informs the French administration, i.e. the relevant ‘Direction régionale des entreprises, de la concurrence, de la consommation, du travail et de l’emploi’ (“DIRECCTE“) of the redundancies.

Another route to lawfully terminate the Staff is via a “rupture conventionnelle du CDI”, i.e. mutually agreed termination of the employment agreement. This is only open to French operations where the Staff is ready to cooperate and mutually agree to the termination of its employment agreements. This situation is hard to come by, in reality, to be honest, by why not?

If the French entity manages to pull this off, with its Staff, then the “convention de rupture conventionnelle” must be signed, then homologated by the DIRECCTE, before any employment agreement is officially terminated.

If the DIRECCTE refuses to homologate the convention, the relevant Staff must keep on working under normal conditions, until the employer makes a new request for homologation of the convention and … obtains it!

Finally, in case an “accord collectif”, also called “accord d’entreprise”, was concluded in the French company, then a “rupture conventionnelle collective” can be organised. If so, only the Staff who has agreed in writing to the “accord collectif” can participate to this collective mutually agreed termination of its employment agreements.

It’s worth noting that French employees are rather belligerent and often file claims with employment tribunals, upon termination of their employment agreements. However, the Macron ordinances, which entered into force in September 2017, have set up a scale that limits the maximum allowances which could be potentially be paid to employees with minimal seniority, in such employment court cases. Thus, employees having less than one year’s seniority are allowed to collect a maximum of one month of salary as compensation. Afterwards, this threshold is grossed up by more or less one month per year of seniority up to eight years. However, such scale does not apply to unlawful dismissals (those related to discrimination or harassment) or to dismissals which occurred in violation of fundamental freedoms. While many French lower courts have published judgments rejecting such Macron scale, the “Cour de cassation” (i.e. the French supreme court) validated such Macron scale in July 2019, forcing French employment tribunals to comply with such scale.

While this should come as a relief to foreign parent companies, it is worth noting that the more orderly and negotiated the departure of the Staff, the better. Having to fight employment lawsuits in France is no fun, and can be cost and time intensive. They therefore must be avoided at all cost.

3. How to restructure your creative business in France: terminate other contracts with third parties and clean the slate with French authorities

Of course, other contracts with third parties, such as suppliers, local service providers, must be lawfully terminated before the French operations are shut down. The takeaway is that the French entity and its foreign parent company cannot leave a chaotic and unresolved situation behind them, in France.

They must terminate and lawfully sever all their contractual ties with French companies and professionals, before closing shop, in compliance with the terms of any contracts entered into with such French third parties.

Additionally, French companies must pay off any outstanding balances due to French authorities, such as the French social security organisations, the URSSAF, and the French tax administration, before permanently closing down.

4. How to restructure your creative business in France: you must properly wind up your business

Once all the ongoing obligations of the French operations are met, by lawfully terminating all existing agreements such as the commercial lease, the employment agreements, the suppliers’ agreements and the service providers’ agreements, as discussed above, it is time to wind up your business in France.

French limited liability companies have two options to terminate their business as an ongoing concern due to economic grounds, i.e. proceed to a “cessation d’activité”.

The first branch of the alternative is to execute a voluntary and early termination of the French business as an ongoing concern. It can be exercised by the French company, its shareholders and its board of directors, when it can still exercise its activity and pay back its debts. If the articles of association of such French company provide for the various cases in which the company may be wound up, such as the end of the term of the French company, or upon the common decision made by its shareholders, then it is possible for the French limited liability company and its directors to execute a voluntary and early termination of the business as an ongoing concern.

The second branch to the alternative, opened to French limited liability companies, occurs when a company cannot pay its debts anymore, and is in a situation of “cessation de paiements” i.e. it cannot pay its debts with its assets, in cessation of payments. In this instance, the French company must file a notification of cessation of payments with the competent commercial courts within 45 days from the date on which it stopped to make payments. Also, within that time frame of 45 days, the board of directors of the French company must open a “procédure de redressement ou de liquidation judiciaire” (i.e. receivership or liquidation institutionalised process, monitored by French courts) with the competent commercial court. This court will decide, further to examining the various documents filed with the “déclaration de cessation des paiements”, which institutionalised process (receivership? liquidation?) is the most appropriate, in view of all the interests that need being taken into account (debts, safeguarding employments, etc.).

If you want to exit the French territory in a graceful manner, you do not want to find yourself in a situation of cessation of payments, and then receivership or liquidation monitored by French courts. Not only this guarantees a protracted and painful judiciary process to terminate your French operations, but this may lead to situations where the money claims made against the French company would be escalated to its shareholders, directors and/or parent company, as explained in our introduction above.

Not only the parent company, and any other shareholder, could be dragged in the mud and found liable, but its directors, and in particular its managing director, too. French commercial courts have no patience for sloppy and irresponsible management, and many managing directors (“associes gerants”) have seen their civil liability triggered because their actions had caused some prejudices to the French company or a third party. Even criminal liability of an “associe gerant” can be triggered, in case the French court discovers fraud. In particular, it is frequent that in collective insolvency proceedings, if the judicial liquidation of a French limited liability company shows an asset shortfall (“insuffisance d’actif”), the courts order its managing director to pay, personally, for the company’s social liability, if she has committed a management error.

To conclude, the French company acts as a shield for its managing director, except if such director commits a personal mistake detachable from her mandate, in case the company is still solvent. However, if the company is in receivership, both the shareholders’, and the directors’ liability may be triggered in many ways, by French courts, the French social security contributions entity URSSAF and the French tax administration.

It is therefore essential to leave France with a clean slate, because any unfinished business left to fester may hit your foreign company and the management like a boomerang, by way of enforceable and very onerous French court decisions.

Don’t worry, though, we are here, at Crefovi, to service you to achieve this, and you can tap into our expertise to leave French territories unscathed and victorious.

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Posted on 02/09/201907/04/2020 by Crefovi

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1. How to lawfully terminate your French lease

2. How to lawfully terminate your French staff

3. How to restructure your creative business in France: terminate other contracts with third parties and clean the slate with French authorities

4. How to restructure your creative business in France: you must properly wind up your business

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