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Exhaustion of rights: how to capitalise on UK’s intellectual property rights and parallel imports, post-Brexit

While the London Book Fair is back in full swing at Olympia in London, which is a pleasant sight since the fair was cancelled in 2020 and only held online in 2021, I was reminded, yesterday, of the seminar I attended, on 10 March 2022, on ‟exhaustion of rights and downstream uses”, organised by the British Literary and Artistic Copyright Association (‟BLACA”). The presentations made by the speakers during this seminar, and in particular by Catriona Stevenson, general counsel of the book publishing trade body Publishers Association, gave me cause for concern. While I could not pinpoint exactly why their arguments on the best United Kingdom (‟UK”)’s future regime on exhaustion of intellectual property rights (‟IPRs”) were troubling me, I decided to zero in and focus on analysing this topic, in the article below.

1. What is exhaustion of rights?

IPRs (i.e. patents, trademarks, designs and copyright) exist to incentivise innovation and creation of new technology, products or creative works. However, these IPRs need to be balanced against enabling competitive markets, consumer choice and fair access to IPRs-protected goods for the benefit of society.

Enters the concept of exhaustion of IPRs, also sometimes referred to as the ‟first sale doctrine” (‟Exhaustion of rights”).

It is one of the mechanisms to strike this balance, between incentivising creativity and innovation, and enabling more competition, consumers’ choice and access to goods. While owners of IPRs can control distribution of their creation in terms of the first sale of their product, the principle of exhaustion of rights puts some limits on how far that control extends.

So the principle of exhaustion of rights essentially provides that, once goods have been placed on the market by a rights holder or with their consent, this rights holder cannot then assert their IPRs to prevent the onward sale of those goods into the territory. For example, once you have bought a book, the owner of the copyright in that book cannot then stop you from selling this book to another person, in the same territory.

Exhaustion of rights underpins parallel trade. Parallel trade is the cross-border movement of genuine (i.e. not counterfeited) physical goods that have already been put on the market. This is the import and export of IPRs-protected goods that have already been first sold in a specific market. As a result to exhaustion of rights, where the IPRs relating to goods have been exhausted, there will be an opportunity for others to engage in the parallel trade of those goods. For example, a distributor moves a good that had been sold in Germany, to import that good into the UK.

Prior to Brexit, when the UK was one of the 28 member-states of the European Union (‟EU”), the regime of exhaustion of rights applying in the UK had been organised by Brussels’ technocrats, via the European Commission and European Parliament legislative processes.

But post-Brexit, the UK is a free agent (allegedly), empowered to decide its own fate, and stance, on its future exhaustion regime and rules relating to the parallel trade of goods into the UK.

2. What was the deal, pre-Brexit, on exhaustion of rights?

Pre-Brexit, the UK was part of the EU, which operates a EU-wide regional exhaustion of rights regime, in compliance with the EU principle of free movement of goods.

Indeed, once goods have been put on the market, anywhere in the EU single market, these goods can flow freely in the then 28 (now 27) member-states of the EU, as well as in the European Economic Area (‟EEA”) (which, in addition to all EU member-states, is constituted by Iceland, Liechtenstein and Norway). Right holders cannot assert their IPRs to prevent this free movement of goods anywhere in the EEA. So, for example, a German right holder could not complain that his or her goods were being imported in the UK, pre-Brexit.

All this means that IPRs in goods first placed on the market anywhere in the EEA, by or with the right owners’ consent, would be considered exhausted in the rest of the EEA. As a result, goods could be both parallel imported in the UK from the EEA, and parallel exported out of the UK to the EEA. 

However, IPRs can be asserted to prevent goods from outside of the EEA entering the European market, without the rights holder’s consent. This is because, for non-EEA goods, the IPRs are not considered ‟exhausted” when the goods are first put on the EEA market. Therefore, goods can move around within the EEA market, but not in respect of those goods put on the market by rights holders in non-EEA markets. So, for example, a US right holder could, and still can, complain that his or her goods were being imported in the UK, from Italy, without his or her consent.

On 31 December 2020, the UK left the EU, via its Brexit, therefore also leaving the EU’s regional exhaustion of rights regime. Or did they?

3. What is the current deal, post-Brexit, on exhaustion of rights?

On 31 December 2020, the UK ceased to be part of the EEA and therefore, since then, IPRs relating to goods put on the UK market are not considered ‟exhausted” from the perspective of EEA countries.

Consequently, right holders can prevent the flow of goods they put on the UK market, into any EEA country.

However, the UK and the EU decided to maintain, for now, the ‟status quo”. This means that, although the UK is no longer part of the EEA, the rights in goods put on the EEA market are considered exhausted in the UK. So, if a product protected by an IPR in the EEA is sold with the permission of the IPR owner anywhere in the UK or EEA, then the exclusive right of the IPR owner to control sale or commercial use of the product can no longer be asserted. For example, rights holders cannot prevent the flow of goods they put on the EEA market, into the UK. Additionally, UK rights holders cannot prevent the flow of goods from the EEA, into the UK.

Although parallel imports from the EEA to the UK remain freely importable (with the UK unilaterally participating in the EEA regional exhaustion regime for now), the same is not true of parallel imports from the UK into the EEA. IPRs in goods first placed on the market in the UK are not considered exhausted in the EEA. Consequently, right owners can stop the parallel export of these goods into the EEA, and UK businesses exporting IPRs-protected goods to the EEA need to ensure that they have requisite permission. 

This is called the ‟UK+” EEA-wide exhaustion of rights regime.

As far as goods from outside the EEA are concerned, the case law of the Court of Justice of the European Union (‟CJEU”) which determined that, save for patents, international exhaustion of rights cannot apply in respect of goods put on the market outside of the EEA, still applies in the UK as retained EU law. Although the court of appeal in England & Wales and the UK supreme court may decide to diverge from such CJEU case law, it is likely that, in respect of goods put on the UK market both outside the EEA and within, the position on exhaustion of rights in the UK will remain as it is until the UK government directs a change of approach.

4. How may exhaustion of rights change, in the UK, post-Brexit?

Such moment for a new approach to exhaustion of rights is looming on the horizon.

The current UK+ exhaustion of rights regime may be a temporary solution until, following a consultation, a more permanent regime may be fixed by the UK government.

Therefore, further to a feasibility study commissioned to EY, the UK intellectual property office (‟UKIPO”) – the official UK government body responsible for IPRs – launched a consultation, which concluded on 31 August 2021, asking respondents whether the UK should keep the current exhaustion of rights regime on genuine (i.e. legitimate, not counterfeited) goods and materials (i.e. not services or digital goods), or change it (the ‟Consultation”).

In the Consultation, four possible options were under consideration, as follows:

  • option one: UK+ to maintain the status quo. This would be a continuation of the current unilateral application of an EEA-wide regional exhaustion regime, in the UK;
  • option two: national exhaustion. This national exhaustion regime would imply that only goods put on the market in the UK can flow around the UK. Goods put on the market in any other country, European or otherwise, could be stopped from entering the UK market by relying upon UK IPRs;
  • option three: international exhaustion. In an international exhaustion regime, goods put on the market in any country, anywhere in the world, could be automatically parallel imported in the UK, and IPRs could not be asserted to prevent the first sale of that product in the UK; or
  • option four: mixed regime. Under a mixed regime, certain IPRs, or certain types of goods, may have a different exhaustion regime applied to them. Switzerland, for example, which is neither part of the EU nor of the EEA, but is part of the European single market via bilateral agreements, has a mixed regime. Switzerland has adopted a unilateral EEA-wide regional exhaustion regime, with the exception of fixed price goods, primarily medicines, for which national exhaustion applies.

While the UKIPO sought views on the four above-mentioned regimes, in the Consultation, it also made it clear that it considered a national regime incompatible with the Northern Ireland protocol and, as such, ruled out adopting that option.

Hang on, what? The Northern Ireland protocol?

As with the rest of the UK, Northern Ireland adopted the same UK+ EEA-wide regional exhaustion of rights regime, from 31 December 2020 onwards. Goods can therefore flow freely from the EU member-state Ireland, or from anywhere else in the EEA for that matter, into Northern Ireland without IPRs holders being able to enforce their rights. This is one of the principles of the Northern Ireland protocol, along with the provision that certain EU legislation must be adopted in Northern Ireland to enable goods to flow around the geographical territory that is the island of Ireland; both in and out of Northern Ireland. However, as part of the EEA, the EU member-state Ireland cannot adopt a different exhaustion of rights regime to the other EEA territories. Therefore, notwithstanding the Northern Ireland protocol, rights holders in Ireland can still enforce their IPRs to stop their goods from being put on the market in Northern Ireland, flowing in the EU member-state Ireland.

So, what was the outcome of the Consultation which, despite mentioning the national exhaustion regime, as one of the four options, ruled out from the outset that such national exhaustion regime could ever be implemented in the UK, going forward?

Inconclusive, to say the least.

There were only 150 respondents to the Consultation, the majority of which came from the life sciences sector and creative industries.

As set out on the summary of responses to the Consultation:

  • most respondents stated that there was parallel trade of goods (materials and products) in their respective sector;
  • however, responses on the impact of parallel imports from the EEA on organisations, varied between those respondents whose livelihoods were dependent on commercialising parallel traded goods, and those who represent, or are, rights holders:
    • those respondents dependents on commercialising parallel traded goods, such as pharmaceutical distributors, commented that parallel imports from the EEA benefitted their organisation by contributing to (a) a greater choice of suppliers to source goods from that could in turn be made available to customers at different price points, (b) the availability, flexibility, and security of supply of goods to support market demand and alleviate supply shortages, (c) a competitive market especially intra-brand competition amongst suppliers of the same branded product (or substitutable products) encouraging price convergence;
    • those respondents representing, or being, rights holders, such as brand owners, replied that parallel imports (a) did not increase choice by providing a greater number of different goods because parallel imports tended to be products already available or approved in the UK, especially licenced branded goods such as branded toys and branded medicines, (b) weakened supply chain resilience due to fluctuations in supply and costs, making demand forecasting particularly difficult for brand owners, and (c) did not always drive competition for the benefit of the consumer but mainly benefitted distributors (through arbitrage opportunities) and resellers (incentivised to purchase lower priced parallel imports, rather than domestically sourced products to achieve higher profit margins).

The most favoured option by respondents was a continuation of the current UK+ regime, because of the difficulties with the national regime and the Northern Ireland protocol. So, if Northern Ireland was out of the picture, most respondents favoured the national exhaustion regime. But because the Northern Ireland protocol is a reality we all have to live with, they favoured the current UK+ EEA-wide regional exhaustion regime.

This is exactly what the two illustrious speakers at the BLACA seminar, Catriona Stevenson, general counsel of the trade body for the UK publishing industry Publishers Association, and David Harmsworth, general counsel of UK music neighbouring rights collecting society PPL, concluded, on 10 March 2022: let’s stick with the UK+ exhaustion regime because it is the least-damaging necessary evil.

More than 50 percent of the respondents to the Consultation opposed an international regime, citing concerns about stifling innovation, the environmental impact, domestic revenue losses, goods of inferior quality or different standards hitting the UK market and the distortion of retail competition in favour of multinationals. Brand owners, manufacturers and those in the creative industries were most opposed to the international exhaustion regime.

More than 20 percent of respondents expressed opposition to a national exhaustion regime, with their primary concerns being isolating the UK market and prices being driven up. Distributors and those who depend upon the supply of goods from Europe – in particular, UK pharmaceutical stakeholders and the National Health Service (‟NHS”) – were most opposed to the national exhaustion regime.

A mixed regime, such as the one in place in Switzerland, was not favoured by respondents to the Consultation.

Further to the Consultation, and the publication of a summary of responses received, the UKIPO decided to do … nothing, merely setting out that it is ‟analysing your feedback” on its website.

Whilst an option on exhaustion of rights, which would reconcile the views of those whose livelihoods depend on commercialising parallel traded goods, and right holders, is nonexistent, the UKIPO invoked the lack of data available to understand the economic impact of any of the alternatives to the current UK+ regime, in order to shelve the Consultation for now.

Consequently, the UK will continue with the current regional UK+ regime for the time being, since ‟further development of the policy framework must take place before the issue is reconsidered” (sic).

5. Why something’s gotta give, in order for the UK to keep its rank as a trade-friendly, competitive and exports-focused nation

The UK government’s decision to stay with the current UK+ EEA-wide exhaustion regime continues the strange asymmetry for IPRs holders in which a first sale in the EEA exhausts their rights in the UK, while a first sale in the UK does not exhaust their IPRs in the EEA.

This may provide continued opportunities for IPRs holders in the EEA to assert those IPRs against parallel importers from the UK. So, anyone engaging in parallel importation of goods from the UK to the EEA must carefully considers whether those goods are protected by unexhausted IPRs in the EEA.

More concerning is that Brexit has left the UK with all the disadvantages of being tied to EU laws, but none of the advantages, as far as parallel imports, parallel exports and exhaustion of rights are concerned. EEA-based companies can easily export their goods to the UK, but UK businesses cannot reciprocate. Why is the UK accepting such unilateral deal? Because it is heavily dependant on exports coming from Europe, being a nation which manufacturing sector is weak. Moreover, a lot of UK businesses, and UK consumers, are reliant on the EEA for the supply of goods and raw materials. 

So, as I predicted in 2016, many UK businesses either moved to the EEA or opened a manufacturing plan or facility in the EEA. 

As a consumer, can you imagine living in London and only having access to UK-produced and manufactured goods, if a national exhaustion of rights regime was ever implemented in the UK? Not only would retail prices for non-UK manufactured products go through the roof, but basic necessities goods would be in scarce supply. The UK could kiss goodbye to all its rich London-based expatriates, unwilling to return to a 1970s’ style shortage-stricken era

Moreover, UK’s borders controls are structurally weak and mismanaged, at best, and have been so for years. Indeed, the UK was recently sentenced by the CJEU to a potentially very heavy fine, after being found negligent in allowing criminal gangs to flood European markets with cheap Chinese-made clothes and shoes, while not collecting the correct amount of custom duties and VAT on these imported Chinese goods, from 2011 to 2017. In this context, how do, exactly, proponents of the national exhaustion of rights regime in the UK, such as the Publishers Association and PPL, intend to implement rigorous controls over IPRs-protected goods entering the UK, at UK borders, especially in respect of copyright which are not registered in any IPRs’ database? 

As far as goods from outside the EEA are concerned, IPRs owners have probably decided to forego the UK market as the place of first sale altogether, focusing their European sales on the EEA territory, which is a much more attractive proposition in terms of potential number of sales and diversity of customer-base. Then, these goods might enter the UK market via parallel imports, from the EEA, later on. But such convoluted distribution strategy has a cost, since all goods imported in the UK from the EEA are now subjected to trade tariffs and custom charges, as well as import duties. 

No wonder every consumer is feeling particularly affected by the ‟supply chain crisis” and ‟inflation”, in the UK.

Also, the resistance, from UK book publishers in particular, to let go of the distribution system territory-by-territory, on the pretense that ‟territorial rights systems support diversity and competition in the publishing sector” and that ‟carving rights allows smaller publishers to compete and acquire sets of rights, in a way that might not be possible if global rights packages became the norm”, is just plain nationalistic and backward-looking protectionism. Compared to other creative industries, such as the music streaming sector, the book publishing business is a dinosaur, refusing to evolve towards digital products such as e-books and digital comics, and towards global rights packages which would no doubt improve worldwide distribution of books at reasonable prices, in particular in emerging countries.

Already, the film industry – which used to be very monolithic itself – is finally forced to evolve towards global rights packages and more digital streaming, with COVID decimating the audience of local cinemas, and with the likes of Netflix and Amazon Prime only agreeing to ‟digital licenses”, where they acquire all worldwide rights in perpetuity to a motion picture prior to production, for a fixed ‟buyout” payment with no additional net profits, royalties or other accountings, before billing it as a ‟Netflix Original” or ‟Amazon Prime Video Original”.

The UK, and in particular its government, needs to master the ability to keep on looking inward, while, at the same time, adopting a much more realistic and pragmatic view and assessment of its own trade bargaining power, as well as strengths and weaknesses, vis-à-vis its main trading partners, worldwide. In particular, the UK government must push UK businesses towards leaner, more digitised and better streamlined worldwide distribution rights of their products and services, in order to keep their competitive edge. It is only at this cost of uncompromising realism and self-awareness, that the UK will keep a seat at the table of the most trade-friendly, competitive and exports-focused nations in the world.

Crefovi’s live webinar: Exhaustion of rights – how can the UK coin the best trade deal? – 12 April 2022

 

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    How to enforce civil and commercial judgments after Brexit?

    As explained in our two previous articles relating to Brexit, ‟How to protect your creative business after Brexit?” and ‟Brexit legal implications: the road less travelled”, the European Union (‟EU”) regulations and conventions on the jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, ceased to apply in the United Kingdom (‟UK”) once it no longer was a EU member-state. Therefore, since 1 January 2021 (the ‟Transition date”), no clear legal system is in place, to enforce civil and commercial judgments after Brexit, in a EU member-state, or in the UK. Creative businesses now have to rely on domestic recognition regimes in the UK and each EU member-state, if in existence. This introduces additional procedural steps before a foreign judgment is recognised, which makes the enforcement of EU civil and commercial judgments in the UK, and of UK civil and commercial judgments in the EU, more time-consuming, complex and expensive.

    How to enforce civil and commercial judgments after Brexit1. How things worked before Brexit, with respect to the enforcement of civil and commercial judgments between the EU and the UK

    a. The EU legal framework

    Before the Transition date on which the UK ceased to be a EU member-state, there were, and there still are between the 27 remaining EU member-states, four main regimes that are applicable to civil and commercial judgments obtained from EU member-states, depending on when, and where, the relevant proceedings were started.

    Each regime applies to civil and commercial matters, and therefore excludes matters relating to revenue, customs and administrative law. There are also separate EU regimes applicable to matrimonial relationships, wills, successions, bankruptcy and social security.

    The most recent enforcement regime applicable to civil and commercial judgments is EU regulation n. 1215/2012 of the European parliament and of the council dated 12 December 2012 on the jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the ‟Recast Brussels regulation). It applies to EU member-states’ judgments handed down in proceedings started on or after 10 January 2015.

    The original Council regulation n. 44/2001 dated 22 December 2000 on the jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the ‟Original Brussels regulation”), although no longer in force upon the implementation of the Recast Brussels regulation on 9 January 2015, still applies to EU member-states’ judgments handed down in proceedings started before 10 January 2015.

    Moreover, the Brussels convention dated 27 September 1968 on the jurisdiction and the enforcement of judgments in civil and commercial matters (the ‟Brussels convention”), also continues to apply in relation to civil and commercial judgments between the 15 pre-2004 EU member-states and certain territories of EU member-states which are located outside the EU, such as Aruba, Caribbean Netherlands, Curacao, the French overseas territories and Mayotte. Before the Transition date, the Brussels convention also applied to judgments handed down in Gibraltar, a British overseas territory.

    Finally, the Lugano convention dated 16 September 1988 on the jurisdiction and the enforcement of judgments in civil and commercial matters (the ‟Lugano convention”), which was replaced on 21 December 2007 by the Lugano convention dated 30 October 2007 on the jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the ‟2007 Lugano convention”), govern the recognition and enforcement of civil and commercial judgments between the EU and certain member-states of the European Free Trade Association (‟EFTA”), namely Iceland, Switzerland, Norway and Denmark but not Liechtenstein, which never signed the Lugano convention.

    The 2007 Lugano convention was intended to replace both the Lugano convention and the Brussels convention. As such it was open to signature to both EFTA members-states and to EU member-states on behalf of their extra-EU territories. While the former purpose was achieved in 2010 with the ratification of the 2007 Lugano convention by all EFTA member-states (except Liechtenstein, as explained above), no EU member-state has yet acceded to the 2007 Lugano convention on behalf of its extra-EU territories.

    The UK has applied to join the 2007 Lugano convention after the Transition date, as we will explain in more details in section 2 below.

    b. Enforceability of remedies ordered by a EU court

    Before Brexit, the Recast Brussels regulation, the Original Brussels regulation, the Brussels convention, the Lugano convention and the 2007 Lugano convention (together, the ‟EU instruments”) provided, and still provide with respect to the 27 remaining EU member-states, for the enforcement of any judgment in a civil or commercial matter given by a court of tribunal of a EU member-state, whatever it is called by the original court. For example, article 2(a) of the Recast Brussels regulation provides for the enforcement of any ‟decree, order, decision or writ of execution, as well as a decision on the determination of costs or expenses by an officer of the court”.

    The Original Brussels regulation also extends to interim, provisional or protective relief (including injunctions), when ordered by a court which has jurisdiction by virtue of this regulation.

    c. Competent courts

    Before the Transition date, proceedings seeking recognition and enforcement of EU foreign judgments in the UK should be brought before the high court in England and Wales, the court of session in Scotland and the high court of Northern Ireland.

    Article 32 of the Brussels convention provides that the proceedings seeking recognition and enforcement of EU foreign judgments in France should be brought before the president of the ‟tribunal judiciaire”. Therefore, before the Transition date, a UK judgment had to be brought before such president, in order to be recognised and enforced in France.

    d. Separation of recognition and enforcement

    Before the Transition date, and for judgments that fell within the EU instruments other than the Recast Brussels regulation, the process for obtaining recognition of a EU judgment was set out in detail in Part 74 of the UK civil procedure rules (‟CPR”). The process involved applying to a high court master with the support of written evidence. The application should include, among other things, a verified or certified copy of the EU judgment and a certified translation (if necessary). The judgment debtor then had an opportunity to oppose appeal registration on certain limited grounds. Assuming the judgment debtor did not successfully oppose appeal registration, the judgment creditor could then take steps to enforce the judgment.

    Before the Transition date, and for judgments that fell within the Recast Brussels regulation, the position was different. Under article 36 of the Recast Brussels regulation, judgments from EU member-states are automatically recognised as if they were a judgment of a court in the state in which the judgment is being enforced; no special procedure is required for the judgment to be recognised. Therefore, prior to Brexit, all EU judgments that fell within the Recast Brussels regulation were automatically recognised as if they were UK judgments, by the high court in England and Wales, the court of session in Scotland and the high court of Northern Ireland. Similarly, all UK judgments that fell within the Recast Brussels regulation were automatically recognised as if they were French judgments, by the presidents of the French ‟tribunal judiciaires”.

    Under the EU instruments, any judgment handed down by a court or tribunal from a EU member-state can be recognised. There is no requirement that the judgment must be final and conclusive, and both monetary and non-monetary judgments are eligible to be recognised. Therefore, neither the UK courts, nor the French courts, are entitled to investigate the jurisdiction of the originating EU court. Such foreign judgments shall be recognised without any special procedures, subject to the grounds for non-recognition set out in article 45 of the Recast Brussels regulation, article 34 of the Original Brussels regulation and article 34 of the Lugano convention, as discussed in paragraph e. (Defences) below.

    For the EU judgment to be enforced in the UK, prior to the Transition date, and pursuant to article 42 of the Recast Brussels regulation and Part 74.4A of the CPR, the applicant had to provide the documents set out in above-mentioned article 42 to the UK court, i.e.

    • a copy of the judgment which satisfies the conditions necessary to establish its authenticity;
    • the certificate issued pursuant to article 53 of the Recast Brussels regulation, certifying that the above-mentioned judgment is enforceable and containing an extract of the judgment as well as, where appropriate, relevant information on the recoverable costs of the proceedings and the calculation of interest, and
    •  
    • if required by the court, a translation of the certificate and judgment.

    It was incumbent on the party resisting enforcement to apply for refusal of recognition of the EU judgment, pursuant to article 45 of the Recast Brussels regulation.

    Similarly, for UK judgments to be enforced in France, prior to the Transition date, the applicant had to provide the documents set out in above-mentioned article 42 to the French court, which would trigger the automatic enforcement of the UK judgment, in compliance with the principle of direct enforcement.

    e. Defences

    While a UK defendant may have raised merits-based defences to liability or to the scope of the award entered in the EU jurisdiction, the EU instruments contain express prohibitions on the review of the merits of a judgment from another EU member-state. Consequently, while a judgment debtor may have objected to the registration of a judgment under the EU instruments (or, in the case of the Recast Brussels regulation, which does not require such registration, appeal the recognition or enforcement of the foreign judgment), he or she could have done so only on strictly limited grounds.

    In the case of the Recast Brussels regulation, there are set out in above-mentioned article 45 and include:

    • if recognition of the judgment would be manifestly contrary to public policy;
    • if the judgment debtor was not served with proceedings in time to enable the preparation of a proper defence, or
    • if conflicting judgments exist in the UK or other EU member-states.

    Equivalent defences are set out in articles 34 to 35 of the Original Brussels regulation and the 2007 Lugano convention, respectively. The court may not have refused a declaration of enforceability on any other grounds.

    Another ground for challenging the recognition and enforcement of EU judgments is the breach of article 6 of the European Convention on Human Rights (‟ECHR”), which is the right to a fair trial. However, since a fundamental objective underlying the EU regime is to facilitate the free movement of judgments by providing a simple and rapid procedure, and since it was established in Maronier v Larmer [2003] QB 620 that this objective would be frustrated if EU courts of an enforcing EU member-state could be required to carry out a detailed review of whether the procedures that resulted in the judgment had complied with article 6 of the ECHR, there is a strong presumption that the EU court procedures of other signatories of the ECHR are compliant with article 6. Nonetheless, the presumption can be rebutted, in which case it would be contrary to public policy to enforce the judgment.

    To conclude, pre-Brexit, the EU regime (and, predominantly, the Recast Brussels regulation) was an integral part of the system of recognition and enforcement of judgments in the UK. However, after the Transition date, the UK left the EU regime as found in the Recast Brussels regulation, the Original Brussels regulation and the Brussels convention, since these instruments are only available to EU member-states.

    So what happens now?

    2. How things work after Brexit, with respect to the enforcement of civil and commercial judgments between the EU and the UK

    In an attempt to prepare the inevitable, the EU commission published on 27 August 2020 a revised notice setting out its views on how various conflicts of laws issues will be determined post-Brexit, including jurisdiction and the enforcement of judgments (the ‟EU notice”), while the UK ministry of justice published on 30 September 2020 Cross-border civil and commercial legal cases: guidance for legal professionals from 1 January 2021” (the ‟MoJ guidance”).

    a. The UK accessing the 2007 Lugano convention

    As mentioned above, the UK applied to join the 2007 Lugano convention on 8 April 2020, as this is the UK’s preferred regime for governing questions of jurisdiction and enforcement of judgments with the 27 remaining EU member-states, after the Transition date.

    However, accessing the 2007 Lugano convention is a four-step process and the UK has not executed those four stages in full yet.

    While step one was accomplished on 8 April 2020 when the UK applied to join, step two requires the EU (along with the other contracting parties, ie the EFTA member-states Iceland, Switzerland, Norway and Denmark) to approve the UK’s application to join, followed in step three by the UK depositing the instrument of accession. Step four is a three-month period, during which the EU (or any other contracting state) may object, in which case the 2007 Lugano convention will not enter into force between the UK and that party. Only after that three-month period has expired, does the 2007 Lugano convention enter into force in the UK.

    Therefore, in order for the 2007 Lugano convention to have entered into force by the Transition date, the UK had to have received the EU’s approval and deposited its instrument of accession by 1 October 2020. Neither have occured.

    Since the EU’s negotiating position, throughout Brexit, has always been ‟nothing is agreed until everything is agreed”, and in light of the recent collision course between the EU and the UK relating to trade in Northern Ireland, it is unlikely that the UK’s request to join the 2007 Lugano convention will be approved by the EU any time soon.

    b. The UK accessing the Hague convention

    Without the 2007 Lugano convention, the default position after the Transition date is that jurisdiction and enforcement of judgments for new cases issued in the UK will be determined by the domestic law of each UK jurisdiction (i.e. the common law of England and Wales, the common law of Scotland and the common law of Northern Ireland), supplemented by the Hague convention dated 30 June 2005 on choice of court agreements (‟The Hague convention”).

    I. At common law rules

    The common law relating to recognition and enforcement of judgments applies where the jurisdiction from which the judgment relates does not have an applicable treaty in place with the UK, or in the absence of any applicable UK statute. Prominent examples include judgments of the courts of the United States, China, Russia and Brazil. And now of the EU and its 27 remaining EU member-states.

    At common law, a foreign judgment is not directly enforceable in the UK, but instead will be treated as if it creates a contract debt between the parties. The foreign judgment must be final and conclusive, as well as for a specific monetary sum, and on the merits of the action. The creditor will then need to bring an action in the relevant UK jurisdiction for a simple debt, to obtain judicial recognition in accordance with Part 7 CPR, and an English judgment.

    Once the judgment creditor has obtained an English judgment in respect of the foreign judgment, that English judgment will be enforceable in the same way as any other judgment of a court in England.

    However, courts in the UK will not give judgment on such a debt, where the original court lacked jurisdiction according to the relevant UK conflict of law rules, if it was obtained by fraud, or is contrary to public policy or the requirements of natural justice.

    With such blurry and vague contours to the UK common law rules, no wonder that many lawyers and legal academics, on both sides of the Channel, decry the ‟mess” and ‟legal void” left by Brexit, as far as the enforcement and recognition of civil and commercial judgments in the UK are concerned.

    II. The Hague convention

    As mentioned above, from the Transition date onwards, the jurisdiction and enforcement of judgments for new cases issued in England and Wales will be determined by its common law, supplemented by the Hague convention.

    The Hague convention gives effect to exclusive choice of court clauses, and provides for judgments given by courts that are designated by such clauses to be recognised and enforced in other contracting states. The contracting states include the EU, Singapore, Mexico and Montenegro. The USA, China and Ukraine have signed the Hague convention but not ratified or acceded to it, and it therefore does not currently apply in those countries.

    Prior to the Transition date, the UK was a contracting party to the Hague convention because it continued to benefit from the EU’s status as a contracting party. The EU acceded on 1 October 2015. By re-depositing the instrument of accession on 28 September 2020, the UK acceded in its own right to the Hague convention on 1 January 2021, thereby ensuring that the Hague convention would continue to apply seamlessly from 1 January 2021.

    As far as types of enforceable orders are concerned, under the Hague convention, the convention applies to final decisions on the merits, but not interim, provisional or protective relief (article 7). Under article 8(3) of the Hague convention, if a foreign judgment is enforceable in the country of origin, it may be enforced in England. However, article 8(3) of the Hague convention allows an English court to postpone or refuse recognition if the foreign judgment is subject to appeal in the country of origin.

    However, there are two major contentious issues with regards to the material and temporal scope of the Hague convention, and the EU’s and UK’s positions differ on those issues. They are likely to provoke litigation in the near future.

    The first area of contention relates to the material scope of the Hague convention: more specifically, what is an ‟exclusive choice of court agreement”?

    Article 1 of the Hague convention provides that the convention only applies to exclusive choice of courts agreements, so the issue of whether a choice of court agreement is ‟exclusive” or not is critical as to whether such convention applies.

    Exclusive choice of court agreements are defined in article 3(a) of the Hague convention as those that designate ‟for the purpose of deciding disputes which have arisen or may arise in connection with a particular legal relationship, the courts of one Contracting state or one or more specific courts of one Contracting state, to the exclusion of the jurisdiction of any other courts”.

    Non-exclusive choice of court agreements are defined in article 22(1) of the The Hague convention as choice of court agreements which designate ‟a court or courts of one or more Contracting states”.

    Although this is a fairly clear distinction for ‟simple” choice of court agreements, ‟asymmetric” or ‟unilateral” agreements are not so easily categorised. These types of jurisdiction agreements are a common feature of English law-governed finance documents, such as the Loan Market Association standard forms. They generally give one contracting party (the lender) the choice of a range of courts in which to sue, while limiting the other party (the borrower) to the courts of a single state (usually, the lender’s home state).

    There are divergent views as to whether asymmetric choice of court agreements are exclusive or non-exclusive for the purposes of the Hague convention. While two English high court judges have expressed the view that choice of court agreements should be regarded as exclusive, within the scope of the Hague convention, the explanatory report accompanying the Hague convention, case law in EU member-states and academic commentary all suggest the opposite.

    This issue will probably be resolved in court, if and when the time comes to decide whether asymmetric or unilateral agreements are deemed to be exclusive choice of court agreements, susceptible to fall within the remit of the Hague convention.

    The second area of contention relates to the temporal scope of the Hague convention: more specifically, when did the Hague convention ‟enter into force” in the UK?

    Pursuant to article 16 of the Hague convention, such convention only applies to exclusive choice of court agreements concluded ‟after its entry into force, for the State of the chosen court”.

    There is a difference of opinion as to the application of the Hague convention to exclusive jurisdiction clauses in favour of UK courts entered into between 1 October 2015 and 1 January 2021, when the UK was a party to the Hague convention by virtue of its EU membership.

    Indeed, while the EU notice states that the Hague convention will only apply between the EU and UK to exclusive choice of court agreements ‟concluded after the convention enters into force in the UK as a party in its own right to the convention” – i.e. from the Transition date; the MoJ guidance sets out that the Hague convention ‟will continue to apply to the UK (without interruption) from its original entry into force date of 1 October 2015”, which is when the EU became a signatory to the convention, at which time the convention also entered into force in the UK by virtue of the UK being a EU member-state.

     

    To conclude, the new regime of enforcement and recognition of EU judgments in the UK, and vice versa, is uncertain and fraught with possible litigation with respect to the scope of application of the Hague convention, at best.

    Therefore, and since these legal issues relating to how to enforce civil and commercial judgments after Brexit are here to stay for the medium term, it is high time for the creative industries to ensure that any dispute arising out of their new contractual agreements are resolved through arbitration.

    Indeed, as explained in our article ‟Alternative dispute resolution in the creative industries, arbitral awards are recognised and enforced by the Convention on the recognition and enforcement of foreign arbitral awards 1958 (the ‟New York convention”). Such convention is unaffected by Brexit and London, the UK capital, is one of the most popular and trusted arbitral seats in the world.

    Until the dust settles, with respect to the recognition and enforcement of EU judgments in the UK, and vice versa, it is wise to resolve any civil or commercial dispute by way of arbitration, to obtain swift, time-effective and cost-effective resolution of matters, while preserving the cross-border relationships, established with your trade partners, between the UK and the European continent.

     

     

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      How to remedy a breach of license which term is overran?

      In the creative industries, many intellectual property rights, such as copyright, trademarks, registered designs and patents, are subjected to licenses, in order for right owners and creators to monetize such rights. However, things do not always go smoothly during and after the term of the licensing agreement, between the licensor and the licensee. Therefore, what are the remedies that the licensor may put in place, in order to ensure that his or her intellectual property rights are fairly monetised? How to remedy a breach of license which term is overran?

      How to remedy a breach of license which term is overran?1. What is a license agreement?

      A license is the contract which authorises the use of a certain intellectual property right (‟IPRs”), be it copyright, a trademark, a design or a patent, for commercial purposes, by a licensee, in exchange for the payment of royalties to the licensor, i.e. the right owner. These royalties are usually computed as a percentage of the turnover generated by the sale of products manufactured, or services provided, by the licensee under this license agreement.

      A license is different from an assignment agreement, in that the former has a limited term, whereby the authorisation to use the IPRs granted to the licensee by the licensor will expire, after a period of time explicitly set out in the license agreement. On the contrary, an assignment is a perpetual and irreversible transfer of ownership of some designated IPRs, from the assignor to the assignee, in exchange for the payment of a consideration (usually, a one-off sum of money).

      To resume, a license is temporary and reversible upon expiry of a term, while an assignment is irrevocable and irreversible if made for consideration.

      2. How are licenses used in the creative industries?

      Licenses are often used in the creative industries, in order for creatives to monetise the IPRs that they created.

      For example, in the music industry, many copyright licenses are entered into, in order for music distributors to distribute the masters of sound recordings to new territories, which are difficult to reach for the music label which owns such masters because this label is located in a totally different geographical area. Therefore, the licensor, the music label, relies on the expertise of the local licensee, the national distributor, to put in place the best local strategy to broadcast the masters of its sound recordings, via radio plays, local streaming websites, TV broadcasting, and then to generate revenues through these various income streams and local neighbouring rights collecting societies.

      Another example of a copyright license, in the fashion and luxury sectors, is when a brand commissions an artist or designer to make some drawings and designs, which the brand will then display on its website(s), as well as in its various stores. These drawings and designs being protected by copyright, the brand, as licensee, will enter into a license agreement with the artist, as licensor, to obtain the right to use these drawings and designs in set locations and premises of this brand.

      Licenses are also extremely widely used in the context of trademarks, especially with respect to distribution of luxury and fashion products on new geographical territories by local distributors (who need to have the right to use the trademark to advertise, market and open retail locations), and also with respect to deals where the licensee manufactures products in which it has a lot of expertise (such as perfumes, cosmetics, children’s garments), which the licensee then sells under the trademark of a famous fashion or luxury brand, i.e. the licensor.

      In the technology sector, patent and/or copyright licenses are the norm. Indeed, softwares and sources codes are protected by copyright, so many tech companies make a living licensing their copyright into such inventions, to their retail or business customers, in exchange for some royalties and/or licensing fees. As far as technological products are concerned, those can be protected by patents, provided that they are novel, that an inventive step was present in creating such products, and that the invention is capable of industrial application. Therefore, most technological hardware products, such as mobile phones, computers, tablets, are protected by patents. And whenever there is a dichotomy between the creator of these products, and the manufacturers and distributors of such products, then some patent license agreements are entered into.

      Technology licenses are, indeed, so critical, that fair, reasonable and non-discriminatory terms (‟FRAND”) have been set up in order to level the playing field: FRAND terms denote a voluntary licensing commitment that standards organisations often request from the owner of an IPR (usually a patent) which is, or may become, essential to practice a technical standard. One of the most common policies, is for the standard- setting organisation to require from a patent holder that it voluntarily agrees to include its patented technology in the standard, by licensing that technology on FRAND terms. Failing or refusing to license IPRs on FRAND terms could even be deemed to infringe antitrust rules, in particular those of the European Union (‟EU”). For example, the EU commission sent a statement of objections to Motorola Mobility, for breach of EU antitrust rules, over its attempt to enforce a patent infringement injunction against Apple in Germany. The patents in question relate to GPRS, a part of the GSM standard, which is used to make mobile phone calls. Motorola accepted that these patents were standard essential patents and had, therefore, agreed that they would be licensed to Apple on FRAND terms. However, in 2011, Motorola tried to take out, and enforce, a patent infringement injunction against Apple in Germany, based on those patents, even although Apple had said that it was willing to pay royalties, to use the patented technology. Samsung was also the recipient of a statement of objections from the EU commission, after it sought patent infringement injunctions to ‟prevent Apple from infringing patents”, despite Apple apparently being willing to pay a license fee and negotiate a license on FRAND terms.

      3. How to remedy a breach of license which term is overran: what to do if the license has expired but your licensee keeps on using your IPRs?

      Due to poor management and in-house record-keeping, as well as human resources disorganisation and high turnover rate of staff, the licensee may breach the licensing agreement by keeping on using the licensed IPR, although the license agreement has reached its term.

      For example, in the above-mentioned case of the copyright license on some masters of sound recordings, the French local distributors and licensees of such masters overran the term of the license and kept on collecting royalties and revenues on those masters, in particular from French neighbouring rights collecting societies, well after the date of termination of this license. How, on earth, could have this happened? Well, as I experienced first hand at the music trade show Midem, many music distributors, labels and catalogues’ owners, such as music publishers, often mingle together in order to buy and sell to each other music catalogues, be it of copyrighted musical compositions and lyrics, or of copyrighted masters of sound recordings. Therefore, the terms of the first license agreement, between the licensor and the initial first licensee, become more and more blurry and forgotten, with basic provisions, such as the duration of the initial license, being conveniently lost into oblivion by the generation of successive licensees. Yes, I guarantee you, it happens very often.

      Another example, relating to the above-mentioned case of a copyright license granted by an artist, on his drawings and designs commissioned by a luxury brand, which used these drawings on its website(s) and stores, in order to promote its luxury products … even after the termination date of the license!

      So what can a licensor do, when he or she notices that the licensee has, or is, breaching the terms of the license agreement by overrunning its duration? How to remedy a breach of license which term is overran?

      First and foremost, the licensor must gather as much pieces of evidence as possible of such breach of the term of the license agreement, by the licensee. For example, the music label, licensor, may reach out to French neighbouring rights collecting societies and ask for the royalties statements for the French distributor, ex-licensee, up-to-date, in order to have some indisputable evidence that this ex-licensee kept on collecting the neighbouring rights royalties on the sound recordings which were the subject of the license, even after the termination date of this license. The French artist, whose designs and drawings kept on being used by the luxury brand after the term of his license with this brand expired, instructed our law firm to liaise with a French bailiff, in order to have this bailiff execute a detailed report of copyright infringement on internet, by taking snapshots of the webpages of this brand’s website displaying his drawings and designs.

      These pieces of evidence are indispensable, in order to prove the IPR infringement (since the license expired), to show it to the ex-licensee, if necessary, and to use it in any future lawsuit for IPR infringement lodged with a local court, if and when the ex-licensee refuses to settle further to receiving the ex-licensor’s letter before court action.

      You will have guessed by now that, indeed, once the ex-licensor has gathered as much conclusive evidence as possible that his or her IPR is being infringed by the ex-licensee because the latter keeps on using such IPR outside the contractual framework of the now-expired license agreement, the second stage is to instruct counsel, in the country where such IPR infringement is taking place, and have such counsel send a robust, cordial yet frank letter before court action to the ex-licensor, asking:

      • for the immediate cessation of any IPR infringement act, by stopping using the IPR at once;
      • for the evidence of, and information about, turnover and sales, relating to the sale of products and/or services, generated thanks to the use of the IPR beyond the term of the expired license, and
      • for the restitution of all those revenues generated by the sale of those products and/or services, generated thanks to the use of the IPR beyond the term of the expired license, as well as accrued late payment interests at the statutory interest rate,

      within a short deadline (usually, no longer than 14 days).

      Here, the ex-licensee has an option: either it decides to cave in and avoid a tarnished reputation by immediately complying with the terms of the ex-licensor’s letter before court action, or it may decide to act as a blowhard and ignore the requests set out in this letter. The first approach is favoured by anglo-saxon companies, while the second option is usual among French, and all other Mediterranean, ex-licensees.

      If the dispute may be resolved out-of-court, a settlement agreement will be drafted, negotiated and finalised, by the lawyers advising the ex-licensor and the ex-licensee, which will provide for the restitution of a very clearly defined sum of money, representing the sales generated by the ex-licensee during the period in which it overran the use of the litigious IPR.

      If the dispute cannot be resolved out-of-court, then the ex-licensor will have no other option left than to lodge a lawsuit for IPR infringement against the ex-licensee, which – provided the former has strong evidence of such breach of licensing agreement – it will won.

      Once the slate is clean again, i.e. after the ex-licensee has paid damages or restituted sums to the ex-licensor with respect to its use of the IPR after the termination date of the first license agreement, then ex-licensor and the ex-licensee may decide to resume doing business together. Here, I strongly advise that the parties draft a transparent, clear and straightforward new license agreement, which clearly sets out the termination date of this new future license, and foreseeable consequences in case the future licensee keeps on using the IPR beyond the end of such termination date. Using the services of either in-house lawyer or external counsel is very much advisable, in this instance, in order to avoid a repeat of the messy and damaging business situation which occured in the first place, between the licensor and the licensee.

       

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        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?

        abuses of dominant positionThe 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.



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          Why the valuation of intangible assets matters: the unstoppable rise of intangibles’ reporting in the 21st century’s corporate environment

          It is high time France and the UK up their game in terms of accounting for, reporting and leveraging the intangible assets owned by their national businesses and companies, while Asia and the US currently lead the race, here. European lenders need to do their bit, too, to empower creative and innovative SMEs, and provide them with adequate financing to sustain their growth and ambitions, by way of intangible assets backed-lending. 

          valuation of intangible assetsBack in May 2004, I published an in-depth study on the financing of luxury brands, and how the business model developed by large luxury conglomerates was coming out on top. 16 years down the line, I can testify that everything I said in that 2004 study was in the money: the LVMH, Kering, Richemont and L’Oreal of this word dominate the luxury and fashion sectors today, with their multibrands’ business model which allows them to both make vast economies of scale and diversify their economic as well as financial risks.

          However, in the midst of the COVID 19 pandemic which constrains us all to work from home through virtual tools such as videoconferencing, emails, chats and sms, I came to realise that I omitted a very important topic from that 2004 study, which is however acutely relevant in the context of developing, and growing, creative businesses in the 21st century. It is that intangible assets are becoming the most important and valuable assets of creative companies (including, of course, luxury and fashion houses).

          Indeed, traditionally, tangible and fixed assets, such as land, plants, stock, inventory and receivables were used to assess the intrinsic value of a company, and, in particular, were used as security in loan transactions. Today, most successful businesses out there, in particular in the technology sector (Airbnb, Uber, Facebook) but not only, derive the largest portion of their worth from their intangible assets, such as intellectual property rights (trademarks, patents, designs, copyright), brands, knowhow, reputation, customer loyalty, a trained workforce, contracts, licensing rights, franchises.

          Our economy has changed in fundamental ways, as business is now mainly ‟knowledge based”, rather than industrial, and ‟intangibles” are the new drivers of economic activity, the Financial Reporting Council (‟FRC”) set out in its paper ‟Business reporting of intangibles: realistic proposals”, back in February 2019.

          However, while such intangibles are becoming the driving force of our businesses and economies worldwide, they are consistently ignored by chartered accountants, bankers and financiers alike. As a result, most companies – in particular, Small and Medium Enterprises (‟SMEs”)- cannot secure any financing with money men because their intangibles are still deemed to … well, in a nutshell … lack physical substance! This limits the scope of growth of many creative businesses; to their detriment of course, but also to the detriment of the UK and French economies in which SMEs account for an astounding 99 percent of private sector business, 59 percent of private sector employment and 48 percent of private sector turnover.

          How could this oversight happen and materialise, in the last 20 years? Where did it all go wrong? Why do we need to very swiftly address this lack of visionary thinking, in terms of pragmatically adapting double-entry book keeping and accounting rules to the realities of companies operating in the 21st century?

          How could such adjustments in, and updates to, our old ways of thinking about the worth of our businesses, be best implemented, in order to balance the need for realistic valuations of companies operating in the “knowledge economy” and the concern expressed by some stakeholders that intangible assets might peter out at the first reputation blow dealt to any business?

          1. What is the valuation and reporting of intangible assets?

          1.1. Recognition and measurement of intangible assets within accounting and reporting

          In the European Union (‟EU”), there are two levels of accounting regulation:

          • the international level, which corresponds to the International Accounting Standards (‟IAS”), and International Financial Reporting Standards (‟IFRS”) issued by the International Accounting Standards Board (‟IASB”), which apply compulsorily to the consolidated financial statements of listed companies and voluntarily to other accounts and entities according to the choices of each country legislator, and
          • a national level, where the local regulations are driven by the EU accounting directives, which have been issued from 1978 onwards, and which apply to the remaining accounts and companies in each EU member-state.

          The first international standard on recognition and measurement of intangible assets was International Accounting Standard 38 (‟IAS 38”), which was first issued in 1998. Even though it has been amended several times since, there has not been any significant change in its conservative approach to recognition and measurement of intangible assets.

          An asset is a resource that is controlled by a company as a result of past events (for example a purchase or self-creation) and from which future economic benefits (such as inflows of cash or other assets) are expected to flow to this company. An intangible asset is defined by IAS 38 as an identifiable non-monetary asset without physical substance.

          There is a specific reference to intellectual property rights (‟IPRs”), in the definition of ‟intangible assets” set out in paragraph 9 of IAS 38, as follows: ‟entities frequently expend resources, or incur liabilities, on the acquisition, development, maintenance or enhancement of intangible resources such as scientific or technical knowledge, design and implementation of new processes or systems, licenses, intellectual property, market knowledge and trademarks (including brand names and publishing titles). Common examples of items encompassed by these broad headings are computer software, patents, copyrights, motion picture films, customer lists, mortgage servicing rights, fishing licences, import quotas, franchises, customer or supplier relationships, customer loyalty, market share and marketing rights”.

          However, it is later clarified in IAS 38, that in order to recognise an intangible asset on the face of balance sheet, it must be identifiable and controlled, as well as generate future economic benefits flowing to the company that owns it.

          The recognition criterion of ‟identifiability” is described in paragraph 12 of IAS 38 as follows.

          An asset is identifiable if it either:

          a. is separable, i.e. capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, identifiable asset or liability, regardless of whether the entity intends to do so; or

          b. arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations”.

          ‟Control” is an essential feature in accounting and is described in paragraph 13 of IAS 38.

          An entity controls an asset if the entity has the power to obtain the future economic benefits flowing from the underlying resource and to restrict the access of others to those benefits. The capacity of an entity to control the future economic benefits from an intangible asset would normally stem from legal rights that are enforceable in a court of law. In the absence of legal rights, it is more difficult to demonstrate control. However, legal enforceability of a right is not a necessary condition for control because an entity may be able to control the future economic benefits in some other way”.

          In order to have an intangible asset recognised as an asset on company balance sheet, such intangible has to satisfy also some specific accounting recognition criteria, which are set out in paragraph 21 of IAS 38.

          An intangible asset shall be recognised if, and only if:

          a. it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and 

          b. the cost of the asset can be measured reliably”.

          The recognition criteria illustrated above are deemed to be always satisfied when an intangible asset is acquired by a company from an external party at a price. Therefore, there are no particular problems to record an acquired intangible asset on the balance sheet of the acquiring company, at the consideration paid (i.e. historical cost).

          1.2. Goodwill v. other intangible assets

          Here, before we develop any further, we must draw a distinction between goodwill and other intangible assets, for clarification purposes.

          Goodwill is an intangible asset that is associated with the purchase of one company by another. Specifically, goodwill is the portion of the purchase price that is higher than the sum of the net fair value of all of the assets purchased in the acquisition and the liabilities assumed in the process (= purchase price of the acquired company – (net fair market value of identifiable assets – net fair value of identifiable liabilities)).

          The value of a company’s brand name, solid customer base, good customer relations, good employee relations, as well as proprietary technology, represent some examples of goodwill, in this context.

          The value of goodwill arises in an acquisition, i.e. when an acquirer purchases a target company. Goodwill is then recorded as an intangible asset on the acquiring company’s balance sheet under the long-term assets’ account.

          Under Generally Accepted Accounting Principles (‟GAAP”) and IFRS, these companies which acquired targets in the past and therefore recorded those targets’ goodwill on their balance sheet, are then required to evaluate the value of goodwill on their financial statements at least once a year, and record any impairments.

          Impairment of an asset occurs when its market value drops below historical cost, due to adverse events such as declining cash flows, a reputation backlash, increased competitive environment, etc. Companies assess whether an impairment is needed by performing an impairment test on the intangible asset. If the company’s acquired net assets fall below the book value, or if the company overstated the amount of goodwill, then it must impair or do a write-down on the value of the asset on the balance sheet, after it has assessed that the goodwill is impaired. The impairment expense is calculated as the difference between the current market value and the purchase price of the intangible asset. The impairment results in a decrease in the goodwill account on the balance sheet.

          This expense is also recognised as a loss on the income statement, which directly reduces net income for the year. In turn, earnings per share (‟EPS”) and the company’s stock price are also negatively affected.

          The Financial Accounting Standards Board (‟FASB”), which sets standards for GAAP rules, and the IASB, which sets standards for IFRS rules, are considering a change to how goodwill impairment is calculated. Because of the subjectivity of goodwill impairment, and the cost of testing impairment, FASB and IASB are considering reverting to an older method called ‟goodwill amortisation” in which the value of goodwill is slowly reduced annually over a number of years.

          As set out above, goodwill is not the same as other intangible assets because it is a premium paid over fair value during a transaction, and cannot be bought or sold independently. Meanwhile, other intangible assets can be bought and sold independently.

          Also, goodwill has an indefinite life, while other intangibles have a definite useful life (i.e. an accounting estimate of the number of years an asset is likely to remain in service for the purpose of cost-effective revenue generation).

          1.3. Amortisation, impairment and subsequent measure of intangible assets other than goodwill

          That distinction between goodwill and other intangible assets being clearly drawn, let’s get back to the issues revolving around recording intangible assets (other than goodwill) on the balance sheet of a company.

          As set out above, if some intangible assets are acquired as a consequence of a business purchase or combination, the acquiring company recognises all these intangible assets, provided that they meet the definition of an intangible asset. This results in the recognition of intangibles – including brand names, IPRs, customer relationships – that would not have been recognised by the acquired company that developed them in the first place. Indeed, paragraph 34 of IAS 38 provides that ‟in accordance with this Standard and IFRS 3 (as revised in 2008), an acquirer recognises at the acquisition date, separately from goodwill, an intangible asset of the acquiree, irrespective of whether the asset had been recognised by the acquiree before the business combination. This means that the acquirer recognises as an asset separately from goodwill an in-process research and development project of the acquiree, if the project meets the definition of an intangible asset. An acquiree’s in-process research and development project meets the definition of an intangible asset when it:

          a. meets the definition of an asset, and 

          b. is identifiable, i.e. separable or arises from contractual or other legal rights.”

          Therefore, in a business acquisition or combination, the intangible assets that are ‟identifiable” (either separable or arising from legal rights) can be recognised and capitalised in the balance sheet of the acquiring company.

          After initial recognition, the accounting value in the balance sheet of intangible assets with definite useful lives (e.g. IPRs, licenses) has to be amortised over the intangible asset’s expected useful life, and is subject to impairment tests when needed. As explained above, intangible assets with indefinite useful lives (such as goodwill or brands) will not be amortised, but only subject at least annually to an impairment test to verify whether the impairment indicators (‟triggers”) are met. 

          Alternatively, after initial recognition (at cost or at fair value in the case of business acquisitions or mergers), intangible assets with definite useful lives may be revalued at fair value less amortisation, provided there is an active market for the asset to be referred to, as can be inferred from paragraph 75 of IAS 38:

          After initial recognition, an intangible asset shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated amortisation and any subsequent accumulated impairment losses. For the purpose of revaluations under this Standard, fair value shall be measured by reference to an active market. Revaluations shall be made with such regularity that at the end of the reporting period the carrying amount of the asset does not differ materially from its fair value.”

          However, this standard indicates that the revaluation model can only be used in rare situations, where there is an active market for these intangible assets.

          1.4. The elephant in the room: a lack of recognition and measurement of internally generated intangible assets

          All the above about the treatment of intangible assets other than goodwill cannot be said for internally generated intangible assets. Indeed, IAS 38 sets out important differences in the treatment of those internally generated intangibles, which is currently – and rightfully – the subject of much debate among regulators and other stakeholders.

          Internally generated intangible assets are prevented from being recognised, from an accounting standpoint, as they are being developed (while a business would normally account for internally generated tangible assets). Therefore, a significant proportion of internally generated intangible assets is not recognised in the balance sheet of a company. As a consequence, stakeholders such as investors, regulators, shareholders, financiers, are not receiving some very relevant information about this enterprise, and its accurate worth.

          Why such a standoffish attitude towards internally generated intangible assets? In practice, when the expenditure to develop intangible asset is incurred, it is often very unclear whether that expenditure is going to generate future economic benefits. It is this uncertainty that prevents many intangible assets from being recognised as they are being developed. This perceived lack of reliability of the linkage between expenditures and future benefits pushes towards the treatment of such expenditures as ‟period cost”. It is not until much later, when the uncertainty is resolved (e.g. granting of a patent), that an intangible asset may be capable of recognition. As current accounting requirements primarily focus on transactions, an event such as the resolution of uncertainty surrounding an internally developed IPR is generally not captured in company financial statements.

          Let’s take the example of research and development costs (‟R&D”), which is one process of internally creating certain types of intangible assets, to illustrate the accounting treatment of intangible assets created in this way. 

          Among accounting standard setters, such as IASB with its IAS 38, the most frequent practice is to require the immediate expensing of all R&D. However, France, Italy and Australia are examples of countries where national accounting rule makers allow the capitalisation of R&D, subject to conditions being satisfied. 

          Therefore, in some circumstances, internally generated intangible assets can be recognised when the relevant set of recognition criteria is met, in particular the existence of a clear linkage of the expenditure to future benefits accruing to the company. This is called condition-based capitalisation. In these cases, the cost that a company has incurred in that financial year, can be capitalised as an asset; the previous costs having already been expensed in earlier income statements. For example, when a patent is finally granted by the relevant intellectual property office, only the expenses incurred during that financial year can be capitalised and disclosed on the face of balance sheet among intangible fixed assets.

          To conclude, under the current IFRS and GAAP regimes, internally generated intangible assets, such as IPRs, can only be recognised on balance sheet in very rare instances.

          2.Why value and report intangible assets?

          As developed in depth by the European Commission (‟EC”) in its 2013 final report from the expert group on intellectual property valuation, the UK intellectual property office (‟UKIPO”) in its 2013 ‟Banking on IP?” report and the FRC in its 2019 discussion paper ‟Business reporting of intangibles: realistic proposals”, the time for radical change to the accounting of intangible assets has come upon us. 

          2.1. Improving the accurateness and reliability of financial communication

          Existing accounting standards should be advanced, updated and modernised to take greater account of intangible assets and consequently improve the relevance, objectivity and reliability of financial statements.

          Not only that, but informing stakeholders (i.e. management, employees, shareholders, regulators, financiers, investors) appropriately and reliably is paramount today, in a corporate world where companies are expected to accurately, regularly and expertly manage and broadcast their financial communication to medias and regulators.

          As highlighted by Janice Denoncourt in her blog post ‟intellectual property, finance and corporate governance”, no stakeholder wants an iteration of the Theranos’ fiasco, during which inventor and managing director Elizabeth Holmes was indicted for fraud in excess of USD700 million, by the United States Securities and Exchange Commission (‟SEC”), for having repeatedly, yet inaccurately, said that Theranos’ patented blood testing technology was both revolutionary and at the last stages of its development. Elizabeth Holmes made those assertions on the basis of the more than 270 patents that her and her team filed with the United States patent and trademark office (‟USPTO”), while making some material omissions and misleading disclosures to the SEC, via Theranos’ financial statements, on the lame justification that ‟Theranos needed to protect its intellectual property” (sic).

          Indeed, the stakes of financial communication are so high, in particular for the branding and reputation of any ‟knowledge economy” company, that, back in 2002, LVMH did not hesitate to sue Morgan Stanley, the investment bank advising its nemesis, Kering (at the time, named ‟PPR”), in order to obtain Euros100 million of damages resulting from Morgan Stanley’s alleged breach of conflicts of interests between its investment banking arm (which advised PPR’s top-selling brand, Gucci) and Morgan Stanley’s financial research division. According to LVMH, Clare Kent, Morgan Stanley’s luxury sector-focused analyst, systematically drafted and then published negative and biased research against LVMH share and financial results, in order to favor Gucci, the top-selling brand of the PPR luxury conglomerate and Morgan Stanley’s top client. While this lawsuit – the first of its kind in relation to alleged biased conduct in a bank’s financial analysis – looked far-fetched when it was lodged in 2002, LVMH actually won, both in first instance and on appeal.

          Having more streamlined and accurate accounting, reporting and valuation of intangible assets – which are, today, the main and most valuable assets of any 21st century corporation – is therefore paramount for efficient and reliable financial communication.

          2.2. Improving and diversifying access to finance

          Not only that, but recognising the worth and inherent value of intangible assets, on balance sheet, would greatly improve the chances of any company – in particular, SMEs – to successfully apply for financing.

          Debt finance is notoriously famous for shying away from using intangible assets as main collateral against lending because it is too risky.

          For example, taking appropriate security controls over a company’s registered IPRs in a lending scenario would involve taking a fixed charge, and recording it properly on the Companies Registry at Companies House (in the UK) and on the appropriate IPRs’ registers. However, this hardly ever happens. Typically, at best, lenders are reliant on a floating charge over IPRs, which will crystallise in case of an event of default being triggered – by which time, important IPRs may have disappeared into thin air, or been disposed of; hence limiting the lender’s recovery prospects.

          Alternatively, it is now possible for a lender to take an assignment of an IPR by way of security (generally with a licence back to the assignor to permit his or her continued use of the IPR) by an assignment in writing signed by the assignor[1]. However, this is rarely done in practice. The reason is to avoid ‟maintenance”, i.e. to prevent the multiplicity of actions. Indeed, because intangibles are incapable of being possessed, and rights over them are therefore ultimately enforced by action, it has been considered that the ability to assign such rights would increase the number of actions[2].

          Whilst there are improvements needed to the practicalities and easiness of registering a security interest over intangible assets, the basic step that is missing is a clear inventory of IPRs and other intangible assets, on balance sheet and/or on yearly financial statements, without which lenders can never be certain that these assets are in fact to hand.

          Cases of intangible asset- backed lending (‟IABL”) have occurred, whereby a bank provided a loan to a pension fund against tangible assets, and the pension fund then provided a sale and leaseback arrangement against intangible assets. Therefore, IABL from pension funds (on a sale and leaseback arrangement), rather than banks, provides a route for SMEs to obtain loans.

          There have also been instances where specialist lenders have entered into sale and licence-back agreements, or sale and leaseback agreements, secured against intangible assets, including trademarks and software copyright. 

          Some other types of funders than lenders, however, are already making the ‟intangible assets” link, such as equity investors (business angels, venture capital companies and private equity funds). They know that IPRs and other intangibles represent part of the ‟skin in the game” for SMEs owners and managers, who have often expended significant time and money in their creation, development and protection. Therefore, when equity investors assess the quality and attractiveness of investment opportunities, they invariably include consideration of the underlying intangible assets, and IPRs in particular. They want to understand the extent to which intangible assets owned by one of the companies they are potentially interested investing in, represent a barrier to entry, create freedom to operate and meet a real market need.

          Accordingly, many private equity funds, in particular, have delved into investing in luxury companies, attracted by their high gross margins and net profit rates, as I explained in my 2013 article ‟Financing luxury companies: the quest of the Holy Grail (not!)”. Today, some of the most active venture capital firms investing in the European creative industries are Accel, Advent Venture Partners, Index Ventures, Experienced Capital, to name a few.

          2.3. Adopting a systematic, consistent and streamlined approach to the valuation of intangible assets, which levels the playing field

          If intangible assets are to be recognised in financial statements, in order to adopt a systematic and streamlined approach to their valuation, then fair value is the most obvious alternative to cost, as explained in paragraph 1.3. above.

          How could we use fair value more widely, in order to capitalise intangible assets in financial statements?

          IFRS 13 ‟Fair Value Measurements” identifies three widely-used valuation techniques: the market approach, the cost approach and the income approach.

          The market approachuses prices and other relevant information generated by market transactions involving identical or comparable” assets. However, this approach is difficult in practice, since when transactions in intangibles occur, the prices are rarely made public. Publicly traded data usually represents a market capitalisation of the enterprise, not singular intangible assets. Market data from market participants is often used in income based models such as determining reasonable royalty rates and discount rates. Direct market evidence is usually available in the valuation of internet domain names, carbon emission rights and national licences (for radio stations, for example). Other relevant market data include sale/licence transactional data, price multiples and royalty rates.

          The cost approachreflects the amount that would be required currently to replace the service capacity of an asset”. Deriving fair value under this approach therefore requires estimating the costs of developing an equivalent intangible asset. In practice, it is often difficult to estimate in advance the costs of developing an intangible. In most cases, replacement cost new is the most direct and meaningful cost based means of estimating the value of an intangible asset. Once replacement cost new is estimated, various forms of obsolescence must be considered, such as functional, technological and economic. Cost based models are best used for valuing an assembled workforce, engineering drawings or designs and internally developed software where no direct cash flow is generated.

          The income approach essentially converts future cash flows (or income and expenses) to a single, discounted present value, usually as a result of increased turnover of cost savings. Income based models are best used when the intangible asset is income producing or when it allows an asset to generate cash flow. The calculation may be similar to that of value in use. However, to arrive at fair value, the future income must be estimated from the perspective of market participants rather than that of the entity. Therefore, applying the income approach requires an insight into how market participants would assess the benefits (cash flows) that will be obtained uniquely from an intangible asset (where such cash flows are different from the cash flows related to the whole company). Income based methods are usually employed to value customer related intangibles, trade names, patents, technology, copyrights, and covenants not to compete.

          An example of IPRs’ valuation by way of fair value, using the cost and income approaches in particular, is given in the excellent presentation by Austin Jacobs, made during ialci’s latest law of luxury goods and fashion seminar on intellectual property rights in the fashion and luxury sectors.

          In order to make these three above-mentioned valuation techniques more effective, with regards to intangible assets, and because many intangibles will not be recognised in financial statements as they fail to meet the definition of an asset or the recognition criteria, a reconsideration to the ‟Conceptual Framework to Financial Reporting” needs being implemented by the IASB.

          These amendments to the Conceptual Framework would permit more intangibles to be recognised within financial statements, in a systematic, consistent, uniform and streamlined manner, therefore levelling the playing field among companies from the knowledge economy.

          Let’s not forget that one of the reasons WeWork co founder, Adam Neumann, was violently criticised, during WeWork’s failed IPO attempt, and then finally ousted, in 2019, was the fact that he was paid nearly USD6 million for granting the right to use his registered word trademark ‟We”, to his own company WeWork. In its IPO filing prospectus, which provided the first in-depth look at WeWork’s financial results, WeWork characterised the nearly USD6 million payment as ‟fair market value”. Many analysts, among which Scott Galloway, begged to differ, outraged by the lack of rigour and realism in the valuation of the WeWork brand, and the clearly opportunistic attitude adopted by Adam Neumann to get even richer, faster.

          2.4. Creating a liquid, established and free secondary market of intangible assets

          IAS 38 currently permits intangible assets to be recognised at fair value, as discussed above in paragraphs 1.3. and 2.3., measured by reference to an active market.

          While acknowledging that such markets may exist for assets such as ‟freely transferable taxi licences, fishing licences or production quotas”, IAS 38 states that ‟it is uncommon for an active market to exist for an intangible asset”. It is even set out, in paragraph 78 of IAS 38 that ‟an active market cannot exist for brands, newspaper mastheads, music and film publishing rights, patents or trademarks, because each such asset is unique”.

          Markets for resale of intangible assets and IPRs do exist, but are presently less formalised and offer less certainty on realisable values. There is no firmly established secondary transaction market for intangible assets (even though some assets are being sold out of insolvency) where value can be realised. In addition, in the case of forced liquidation, intangible assets’ value can be eroded, as highlighted in paragraph 2.2. above.

          Therefore, markets for intangible assets are currently imperfect, in particular because there is an absence of mature marketplaces in which intangible assets may be sold in the event of default, insolvency or liquidation. There is not yet the same tradition of disposal, or the same volume of transaction data, as that which has historically existed with tangible fixed assets.

          Be that as it may, the rise of liquid secondary markets of intangible assets is unstoppable. In the last 15 years, the USA have been at the forefront of IPRs auctions, mainly with patent auctions managed by specialist auctioneers such as ICAP Ocean Tomo and Racebrook. For example, in 2006, ICAP Ocean Tomo sold 78 patent lots at auction for USD8.5 million, while 6,000 patents were sold at auction by Canadian company Nortel Networks for USD4.5 billion in 2011.

          However, auctions are not limited to patents, as demonstrated by the New York auction, successfully organised by ICAP Ocean Tomo in 2006, on lots composed of patents, trademarks, copyrights, musical rights and domain names, where the sellers were IBM, Motorola, Siemens AG, Kimberly Clark, etc. In 2010, Racebrook auctioned 150 American famous brands from the retail and consumer goods’ sectors.

          In Europe, in 2012, Vogica successfully sold its trademarks and domain names at auction to competitor Parisot Group, upon its liquidation.

          In addition, global licensing activity leaves not doubt that intangible assets, in particular IPRs, are, in fact, very valuable, highly tradable and a very portable asset class.

          It is high time to remove all market’s imperfections, make trading more transparent and offer options to the demand side, to get properly tested.

          3. Next steps to improve the valuation and reporting of intangible assets

          3.1. Adjust IAS 38 and the Conceptual Framework to Financial Reporting to the realities of intangible assets’ reporting

          Mainstream lenders, as well as other stakeholders, need cost-effective, standardised approaches in order to capture and process information on intangibles and IPRs (which is not currently being presented by SMEs).

          This can be achieved by reforming IAS 38 and the ‟Conceptual Framework to Financial Reporting”, at the earliest convenience, in order to make most intangible assets capitalised on financial statements at realistic and consistent valuations.

          In particular, the reintroduction of amortisation of goodwill may be a pragmatic way to reduce the impact of different accounting treatment for acquired and internally generated intangibles.

          In addition, narrative reporting (i.e. reports with titles such as ‟Management Commentary” or ‟Strategic Report”, which generally form part of the annual report, and other financial communication documents such as ‟Preliminary Earnings Announcements” that a company provides primarily for the information of investors) must set out detailed information on unrecognised intangibles, as well as amplify what is reported within the financial statements. 

          3.2. Use standardised and consistent metrics within financial statements and other financial communication documents

          The usefulness and credibility of narrative information would be greatly enhanced by the inclusion of metrics (i.e. numerical measures that are relevant to an assessment of the company’s intangibles) standardised by industry. The following are examples of objective and verifiable metrics that may be disclosed through narrative reporting:

          • a company that identifies customer loyalty as critical to the success of its business model might disclose measures of customer satisfaction, such as the percentage of customers that make repeat purchases;
          • if the ability to innovate is a key competitive advantage, the proportion of sales from new products may be a relevant metric;
          • where the skill of employees is a key driver of value, employee turnover may be disclosed, together with information about their training.

          3.3. Make companies’ boards accountable for intangibles’ reporting

          Within a company, at least one appropriately qualified person should be appointed and publicly reported as having oversight and responsibility for intangibles’ auditing, valuation, due diligence and reporting (for example a director, specialist advisory board or an external professional adviser).

          This would enhance the importance of corporate governance and board oversight, in addition to reporting, with respect to intangible assets.

          In particular, some impairment tests could be introduced, to ensure that businesses are well informed and motivated to adopt appropriate intangibles’ management practices, which should be overseen by the above-mentioned appointed board member.

          3.4. Create a body that trains about, and regulates, the field of intangible assets’ valuation and reporting

          The creation of a professional organisation for the intangible assets’ valuation profession would increase transparency of intangibles’ valuations and trust towards valuation professionals (i.e. lawyers, IP attorneys, accountants, economists, etc).

          This valuation professional organisation would set some key objectives that will protect the public interest in all matters that pertain to the profession, establish professional standards (especially standards of professional conduct) and represent professional valuers.

          This organisation would, in addition, offer training and education on intangibles’ valuations. Therefore, the creation of informative material and the development of intangible assets’ training programmes would be a priority, and would guarantee the high quality valuation of IPRs and other intangibles as a way of boosting confidence for the field.

          Company board members who are going to be appointed as having accountability and responsibility for intangibles’ valuation within the business, as mentioned above in paragraph 3.3., could greatly benefit from regular training sessions offered by this future valuation professional organisation, in particular for continuing professional development purposes.

          3.5. Create a powerful register of expert intangible assets’ valuers

          In order to build trust, the creation of a register of expert intangibles’ valuers, whose ability must first be certified by passing relevant knowledge tests, is key. 

          Inclusion on this list would involve having to pass certain aptitudes tests and, to remain on it, valuers would have to maintain a standard of quality in the valuations carried out, whereby the body that manages this registry would be authorised to expel members whose reports are not up to standard. This is essential in order to maintain confidence in the quality and skill of the valuers included on the register.

          The entity that manages this body of valuers would have the power to review the valuations conducted by the valuers certified by this institution as a ‟second instance”. The body would need to have the power to re-examine the assessments made by these valuers (inspection programme), and even eliminate them if it is considered that the assessment is overtly incorrect (fair disciplinary mechanism).

          3.6. Establish an intangible assets’ marketplace and data-source

          The development most likely to transform IPRs and intangibles as an asset class is the emergence of more transparent and accessible marketplaces where they can be traded. 

          In particular, as IPRs and intangible assets become clearly identified and are more freely licensed, bought and sold (together with or separate to the business), the systems available to register and track financial interests will need to be improved. This will require the cooperation of official registries and the establishment of administrative protocols. 

          Indeed, the credibility of intangibles’ valuations would be greatly enhanced by improving valuation information, especially by collecting information and data on actual and real intangibles’ transactions in a suitable form, so that it can be used, for example, to support IPRs asset-based lending decisions. If this information is made available, lenders and expert valuers will be able to base their estimates on more widely accepted and verified assumptions, and consequently, their valuation results – and valuation reports – would gain greater acceptance and reliability from the market at large.

          The wide accessibility of complete, quality information which is based on real negotiations and transactions, via this open data-source, would help to boost confidence in the validity and accuracy of valuations, which will have a very positive effect on transactions involving IPRs and other intangibles.

          3.7. Introduce a risk sharing loan guarantee scheme for banks to facilitate intangibles’ secured lending

          A dedicated loan guarantee scheme needs being introduced, to facilitate intangible assets’ secured lending to innovative and creative SMEs.

          Asia is currently setting the pace in intangibles-backed lending. In 2014, the intellectual property office of Singapore (‟IPOS”) launched a USD100 million ‟IP financing scheme” designed to support local SMEs to use their granted IPRs as collateral for bank loans. A panel of IPOS-appointed valuers assess the applicant’s IPR portfolio using standard guidelines to provide lenders with a basis on which to determine the amount of funds to be advanced. The development of a national valuation model is a noteworthy aspect of the scheme and could lead to an accepted valuation methodology in the future.

          The Chinese intellectual property office (‟CIPO”) has developed some patent-backed debt finance initiatives. Only 6 years after the ‟IP pledge financing” programme was launched by CIPO in 2008, CIPO reported that Chinese companies had secured over GBP6 billion in IPRs-backed loans since the programme launched. The Chinese government having way more direct control and input into commercial bank lending policy and capital adequacy requirements, it can vigorously and potently implement its strategic goal of increasing IPRs-backed lending. 

          It is high time Europe follows suit, at least by putting in place some loan guarantees that would increase lender’s confidence in making investments by sharing the risks related to the investment. A guarantor assumes a debt obligation if the borrower defaults. Most loan guarantee schemes are established to correct perceived market failures by which small borrowers, regardless of creditworthiness, lack access to the credit resources available to large borrowers. Loan guarantee schemes level the playing field.

          The proposed risk sharing loan guarantee scheme set up by the European Commission or by a national government fund (in particular in the UK, who is brexiting) would be specifically targeted at commercial banks in order to stimulate intangibles-secured lending to innovative SMEs. The guarantor would fully guarantee the intangibles-secured loan and share the risk of lending to SMEs (which have suitable IPRs and intangibles) with the commercial bank. 

          The professional valuer serves an important purpose, in this future loan guarantee scheme, since he or she will fill the knowledge gap relating to the IPRs and intangibles, as well as their value, in the bank’s loan procedure. If required, the expert intangibles’ valuer provides intangibles’ valuation expertise and technology transfer to the bank, until such bank has built the relevant capacity to perform intangible assets’ valuations. Such valuations would be performed, either by valuers and/or banks, according to agreed, consistent, homogenised and accepted methods/standards and a standardised intangible asset’s valuation methodology.

          To conclude, in this era of ultra-competitiveness and hyper-globalisation, France and the UK, and Europe in general, must immediately jump on the saddle of progress, by reforming outdated and obsolete accounting and reporting standards, as well as by implementing all the above-mentioned new measures and strategies, to realistically and consistently value, report and leverage intangible assets in the 21st century economy.

          [1] ‟Lingard’s bank security documents”, Timothy N. Parsons, 4th edition, LexisNexis, page 450 and seq.

          [2] ‟Taking security – law and practice”, Richard Calnan, Jordans, page 74 and seq.

           

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