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Art law blog | Art law firm Crefovi

London art law firm Crefovi is delighted to bring you this art law blog, to provide you with forward-thinking and insightful information on top business and legal issues in the art world.

London art law firm Crefovi has been practising art law since 2003, in London, Paris and internationally. Crefovi advises a wide range of clients, from young artists in search of financing, gallery representation and exhibition spaces, to mature art players such as auction houses, established art collectors, galleries and museums, in need of legal advice to negotiate and finalise licensing or sales agreements and/or to enforce their intellectual property rights.

Crefovi international clients are mainly involved in contemporary art, either as collectors, art galleries, museums or art foundations. Their legal needs, met by London art law firm Crefovi, range from tax issues raised by corporations’ investments in art works, to the execution of wills with a large proportion of art works to be distributed to heirs.

Crefovi regularly attends, and speaks at, important art events such as the TEFAF, Art Basel, Frieze, FIAC & Miami Basel art fairs.

Crefovi is also an active and dedicated collector of contemporary art, maintaining and managing a corporate collection in England and France.

Moreover, Crefovi has industry teams, built by experienced lawyers with a wide range of practice and geographic backgrounds. These industry teams apply their extensive industry expertise to best serve clients’ business needs. One of the industry teams is the Art law department, which curates this art law blog below for you.


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

Crefovi : 02/09/2019 11:01 am : Antitrust & competition, Art law, Articles, Banking & finance, Consumer goods & retail, Emerging companies, Employment, compensation & benefits, Entertainment & media, Fashion law, Gaming, Hospitality, Information technology - hardware, software & services, Insolvency & workouts, Law of luxury goods, Litigation & dispute resolution, News, Outsourcing, Real estate, Restructuring, Tax


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

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

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

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

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

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

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

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

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

 

1. How to lawfully terminate your French lease

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

How do you lawfully terminate such French leases?

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

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

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

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

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

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

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

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

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

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

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

2. How to lawfully terminate your French staff

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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

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

 

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

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

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

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

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

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

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

 

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

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

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


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Art and arbitration: what needs to be done to improve the security of art sales and transactions

Crefovi : 14/05/2019 8:00 am : Art law, Articles, Copyright litigation, Intellectual property & IP litigation, Law of luxury goods, Litigation & dispute resolution, Product liability

There is much room for improvement in securing art sales and transactions, and arbitration can do a lot to make this change happen. What is the state of play? What improvements do art buyers want to see in the future, to adequately resolve art disputes?

art and arbitration, crefovi

As an art lawyer practising in the art law field since 2012, I have drawn the following observations from this experience:

  1. litigation is not the most time-efficient and cost-efficient approach to adequately resolving disputes in the art sector;
  2. the absence of secrecy in court proceedings is a major issue for the buy side of the art market, i.e. art collectors, art foundations and museums, deterring them from suing even bad players in the field and
  3. lawsuits can drag on forever, especially if court-imposed mediation measures are taken, against the parties’ will, or if a party appeals the first-degree judgment handed down by the courts.

Consequently, a better option than litigation is needed in the art sector, such as arbitration. However, there is a lack of effective arbitration services offered to stakeholders operating in this industry. What can be done about it, to increase the trustworthiness of this opaque yet dynamic market?

1. What users want to see in the art world, as far as alternative dispute resolution is concerned

Having advised many buyers of art works and artefacts, I witnessed their deep annoyance at the lack of proper, often any, terms and conditions of sale, provided by dealers, when they made art purchases. While this unlawful practice is reprehensible in itself, in particular for sales made outside the dealers’ premises (such as at art fairs or online via ecommerce), it becomes a major problem when a dispute arises out of a sale. However, such occurrence of a “deal gone wrong” happens on a regular basis in art sale transactions, because of provenance claims, hidden defects issues, lack of resemblance between the description of an art work set out in an auctioneer’s catalogue and the real artwork released to the buyer on delivery, or complete destruction of the art work during storage and/or transport to its new owner. If there are no T&Cs, or if they are badly drafted or incomplete, buyers cannot rely on them to find a way out of the dispute. Moreover, most arbitration bodies can only be instructed by the parties involved in an art sale, if an appropriate arbitration clause had firstly been set out in the T&Cs. Therefore, buyers want dealers and auction houses to provide clear, well-drafted and exhaustive T&Cs, at the time of sale, which set out that any dispute between the parties will be settled under the rules of a clearly defined reputable art-specialised arbitration body, instead of court-led litigation.

Secondly, all good faith stakeholders in the art sector want impartial and seasoned arbitrators, with an inner knowledge of the workings of art transactions, to get involved in resolving disputes in the most time-efficient and cost-efficient manner. Hence, there is a need for reputable and established arbitration bodies in the art sector, which will support the parties in finding the right arbitrator and arbitration setup, in a systematic manner, while operating economies of scale to keep arbitration costs down.

Thirdly, and since nobody has any time to waste, the arbitral award reached by the arbitrator must be fully enforceable, in particular through the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958, by the party whose obtained such award. This is especially important to art work buyers, since, while an arbitral award is final and binding on the parties, it is incapable of direct enforcement. As a result, it is necessary to reach out to the competent court of the country in which the award is to be enforced, which is usually the country where the art dealer or auction house has its assets located.

Fourthly, and this wish is especially close to the heart of art buyers, as mentioned above, such enforceable arbitral award must remain confidential, as arbitration proceedings should be too.

2. What currently exists, as far as alternative dispute resolution is concerned in the art world

The current state of play in the art world is despicable: most dealers see themselves as being above the law and do not provide any T&Cs to their customers, be it buyers or sellers. They merely send invoices out and hope for the best. If some T&Cs exist, in particular in deals brokered through auction houses, they usually set out that the courts of their jurisdiction will have exclusive competence, thereby forcing the parties into court-led litigation.

Consequently, and due to such opacity, regular art world scandals making newspapers’ headlines, and a lack of barriers to entry for dealers in the art market, many potential buyers – especially high net worth individuals – refuse to invest in this asset class and stay away. Whenever they take the plunge, they are often faced with disputes arising out of their purchases or sales, especially with dealers and auction houses.

Finally becoming aware that it is in their interest to add security to transactions being made in their industry, art dealers and auction houses are reluctantly reaching the conclusion that arbitration services are a must-have service.

The following art arbitration bodies have therefore been set up, in the last twenty years.

Internationally, the World Intellectual Property Office (WIPO) Alternative Dispute Resolution for Art and Cultural Heritage service, located in Geneva, provides dispute resolution advice and case administration services to support parties in resolving disputes without the need for court litigation. Since WIPO does not want to disclose any information about the number of disputes being looked at, and hopefully resolved, by its body on a yearly basis, even to neutrals who are on the arbitrators’ and mediators’ panel like myself, its usefulness and relevance are a question mark.

More recently, the Court of Arbitration for Art (CAfA) in the Netherlands was set up as a specialised arbitration and mediation tribunal exclusively dedicated to resolving art law disputes. Having applied to be on its arbitrators’ and mediators’ pool, I know that CAfA is not fully operational yet and it will be interesting to watch what added value it can bring, compared to WIPO’s similar services.

Aside from these two art-focused arbitration bodies, the usual suspects of the arbitration sphere may deal with an art law dispute, such as ICC Paris or London, JAMS in California, USA, l’Association française d’Arbitrage (AFA) in Paris or the London Court of International Arbitration in London. However, these arbitration bodies will not have any art-sector expertise, and their arbitrators won’t have any either, therefore heavily relying on the reports and views made by “art experts” respectively appointed by the parties.

Having looked hard and wide for any precedents in art law arbitration, I came back empty-ended, not having found one mentioned in the public domain. It may well be that this is because a strong confidentiality undertaking has been imposed on all parties, and arbitrators involved. My hunch is that this is more due to the fact that arbitration is still unchartered territory, for the art sector and its stakeholders.

 

To conclude, and taking the standpoint of buyers of art works, the arbitration services on offer in the art sector seem to be disconnected from the market, such as WIPO’s ADR for Art and Cultural Heritage service. While CAfA may potentially be a viable alternative, it remains to be seen whether its ADR services will focus more on arbitration than on mediation, as inferred by its title. There is therefore much room for improvement, for arbitration services in the art sector. Dealers and auction houses should understand that it is in their best interest to pool together and finance adequate arbitration services for their respective clients, if they want the art market to exponentially grow and expand on the demand side.

Dealers and auction houses should also pull together and draft some template terms and conditions of sale and consignment, setting out some standard alternative dispute resolution clauses, which would become the gold standard in the art market. These streamlining and enhanced security efforts are common practice in other industries, such as the banking and finance sector which Loan Market Association and International Swaps and Derivatives Association provide plenty of standard commercial contracts, to trade in securities and capital market products within established practices.

The ball is firmly in the court of art dealers and auction houses, who will keep on shooting themselves in the foot if they ignore the call to action launched by buyers and potential clients, who do not want to bear the risk of lax habits and improvisation in their art assets’ purchases. Growing and expanding the art market will come at the cost of paying for the instauration of appropriate, systemised and impartial alternative dispute resolution services, in particular arbitration services.

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Art and mediation: what needs to be done to improve the security of art sales and transactions

Crefovi : 22/02/2019 8:00 am : Art law, Articles, Copyright litigation, Intellectual property & IP litigation, Law of luxury goods, Litigation & dispute resolution, Product liability

There is much room for improvement in securing art sales and transactions, and mediation can do a lot to make this change happen. What is the state of play? What improvements do art buyers want to see in the future, to adequately resolve art disputes?

art and mediation

As an art lawyer practising in the art law field since 2012, I have drawn the following observations from this experience:

1. litigation is not the most time-efficient and cost-efficient approach to adequately resolving disputes in the art sector;

2. the absence of secrecy in court proceedings is a major issue for the buy side of the art market, i.e. art collectors, art foundations and museums, deterring them from suing even bad players in the field and

3. lawsuits can drag on forever, especially if court-imposed mediation measures are taken, against the parties’ will, or if a party appeals the first-degree judgment handed down by the courts.

Consequently, a better option than litigation is needed in the art sector, such as mediation. However, there is a lack of effective mediation services offered to stakeholders operating in this industry. What can be done about it, to increase the trustworthiness of this opaque yet dynamic market?

1. What users want to see in the art world, as far as alternative dispute resolution is concerned

Having advised many buyers of art works and artefacts, I witnessed their deep annoyance at the lack of proper, often any, terms and conditions of sale, provided by dealers, when they made purchases. While this unlawful practice is reprehensible in itself, in particular for sales done outside the premises of the art dealer (such as in art fairs or online via ecommerce), it becomes a major problem when a dispute arises out of the sale. However, such an occurence of a deal gone sour happens on a regular basis for art sale transactions, because of claims relating to provenance, issues with hidden defects, the lack of resemblance between the description of the art work set out in the catalogue of an auction house and the art work which is really provided to the buyer upon delivery, or because of the complete destruction of the art work during its stockage and/or transportation to its new owner. If there are no T&Cs, or if they are badly drafted or incomplete, buyers cannot rely on them to find a way out of the dispute. Therefore, buyers want dealers and auction houses to provide clear, well-drafted and exhaustive T&Cs, at the time of sale, which set out that any dispute between the parties will first be mediated with a reputable and clearly-defined art-specialised mediation body, before litigation can be started.

Secondly, all good faith stakeholders in the art sector want impartial and seasoned mediators, with an inner knowledge of the workings of art transactions, to get involved in resolving disputes in the most time-efficient and cost-efficient manner. Hence, there is a need for reputable and established mediation bodies in the art sector, which will support the parties in finding the right mediator and mediation setup, in a systematic manner, while operating economies of scale to keep mediation costs down.

Thirdly, and since nobody has any time to waste, the decision reached by the parties with the support of the mediator must be fully enforceable, in particular through an out-of-court settlement agreement signed by the parties. If such agreement is not executed by a defaulting party, the other party will immediately have the right to file a lawsuit in court, not only to resolve the initial dispute, but also to enforce the terms of the settlement agreement. Punitive damages should be paid by the defaulting party, as set out in this settlement agreement reached during the mediation. It is on this basis that good faith stakeholders in the art sector will accept to enter any mediation proceedings, and those rules need being established at the outset of the mediation.

Fourthly, and this wish is especially close to the heart of buyers in the art world, as mentioned above, such enforceable decision reached with the support of the mediator must remain confidential, as mediation proceedings should be too.

2. What currently exists, as far as alternative dispute resolution is concerned in the art world

The current state of play in the art world is despicable: most dealers see themselves as being above the law and do not provide any T&Cs to their customers, be it buyers or sellers. They merely send invoices out and hope for the best.

Consequently, and due to such opacity, regular art world scandals making newspapers’ headlines, and a lack of barriers to entry for dealers in the art market, many potential buyers – especially high net worth individuals – refuse to invest in this asset class and stay away. Whenever they take the plunge, they are often faced with disputes arising out of their purchases or sales, especially with dealers and auction houses.

Finally becoming aware that it is in their interest to add security to transactions being made in their industry, art dealers and auction houses are reluctantly reaching the conclusion that mediation services are a must-have service.

The following art mediation bodies have therefore been set up, in the last twenty years.

Internationally, the World Intellectual Property Office (WIPO) Alternative Dispute Resolution for Art and Cultural Heritage service, located in Geneva, provides dispute resolution advice and case administration services to support parties in resolving disputes without the need for court litigation. Since WIPO does not want to disclose any information about the number of disputes being looked at, and hopefully resolved, by its body on a yearly basis, even to neutrals who are on the arbitrators’ and mediators’ panel like myself, its usefulness and relevance are a question mark. More recently, the Court of Arbitration for Art (CAfA) in the Netherlands was set up as a specialised arbitration and mediation tribunal exclusively dedicated to resolving art law disputes. Having applied to be on its arbitrators’ and mediators’ pool, I know that CAfA is not fully operational yet and it will be interesting to watch what added value it can bring, compared to WIPO’s similar services.

In France, the Commissaire du gouvernement près le Conseil des Ventes – the latter being the regulating body of French auctioneers – provides mediation services in art law disputes. Having used the mediation services of the Commissaire on one occasion, to resolve a complex art dispute between an art collector and one of the top French auction houses, I am dubious about the efficacy and motivation of the Commissaire du gouvernement, and French auction houses, to efficiently tackle the issues at end and resolve them through mediation. Another French mediation body focused on the art sector is the one set up by the Comité professionnel des Galeries d’art – a trade association to which practically every French art gallery of a decent size belongs. Having also used their services, to attempt to resolve several disputes with French dealers, my concern is that the mediation service of the Comité lacks impartiality, as well as the necessary clout to tell off one of its (paying) members that its commercial practices may be shady and unlawful. To conclude, the French art mediation services in place are merely here to reassure buyers that, should they face an issue with dealers and auctioneers, they will have a cheap recourse outside the courts. The reality is that these French art mediation services do not deliver on their promises and merely pay lip service to the supply side of the French art industry.

There are no specific art-focused mediation services, set up by impartial actors or regulators, in the UK; the National Association of Valuers and Auctioneers (NAVA) merely being a “self-regulating body”. However, I attended a talk organised by the Professional Advisors to the International Art Market (PAIAM) last week, in which new mediation services branded Art Resolve, were brought to light by the Art Loss Register general counsel and director of recoveries, James Ratcliffe. While Art Resolve seems to fulfil a much-needed mediation niche in the UK art microcosm, it remains to be seen whether it can balance out the interests of mediation services users, and those of the Art Loss Register, in an impartial and efficient manner.

 

To conclude, and taking the standpoint of buyers of art works, the mediation services on offer in the art sector seem to be either disconnected from the market, such as WIPO’s ADR for Art and Cultural Heritage service, or facing partiality issues, such as the French current art mediation bodies and, potentially, new kid on the block Art Resolve. While CAfA may potentially be a viable alternative, it remains to be seen whether its ADR services will focus more on arbitration than on mediation, as inferred by its title. There is therefore much room for improvement, for mediation services in the art sector. Dealers and auction houses should understand that it is in their best interest to pull together and finance adequate mediation services for their respective clients, if they want the art market to exponentially grow and expand on the demand side.

Dealers and auction houses should also pull together and draft some template terms and conditions of sale and consignment, setting out some standard alternative dispute resolution clauses, which would become the gold standard in the art market. These streamlining and enhanced security efforts are common practice in other industries, such as the banking and finance sector which Loan Market Association and International Swaps and Derivatives Association provide plenty of standard commercial contracts, to trade in securities and capital market products within established practices.

The ball is firmly in the court of art dealers and auction houses, who will keep on shooting themselves in the foot if they ignore the call to action launched by buyers and potential clients, who do not want to bear the risk of lax habits and improvisation in their art assets’ purchases. Growing and expanding the art market will come at the cost of paying for the instauration of appropriate, systemised and impartial alternative dispute resolution services, in particular mediation services.

 

 

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Brexit: How to protect your creative business when the UK will crash out of the EU on 30 March 2019

Crefovi : 03/02/2019 8:00 am : Antitrust & competition, Art law, Articles, Banking & finance, Capital markets, Consumer goods & retail, Copyright litigation, Emerging companies, Employment, compensation & benefits, Entertainment & media, Fashion law, Gaming, Hospitality, Hostile takeovers, Information technology - hardware, software & services, Insolvency & workouts, Intellectual property & IP litigation, Internet & digital media, Law of luxury goods, Life sciences, Litigation & dispute resolution, Mergers & acquisitions, Music law, Outsourcing, Private equity & private equity finance, Product liability, Real estate, Restructuring, Tax, Technology transactions, Trademark litigation, Unsolicited bids

On 30 March 2019, the UK will crash out of the EU without a withdrawal deal in place, and without a request for an extension of the 2 years’ notification period of its decision to withdraw. No second referendum will be organised by the current UK government. Therefore, what’s in the cards, for the creative industries, in order to do fruitful business with, and from, the UK in the near future?

Brexit: How to protect your creative businessMy previous article on the road less travelled & Brexit legal implications, published just after the Brexit vote, on Saturday 25 June 2016, delivered the main message that it was worth monitoring the negotiation process that would ensue the notification made by the United Kingdom (UK) to the European Union (EU) of its intention to withdraw from the EU within 2 years.

We have therefore been monitoring those negotiations for you, in the last couple of years, and came to the following predictions, which will empower your creative business to brace itself for, and make the most of the imminent changes triggered by, the crashing of the UK out of the EU, on 30 March 2019. 

1. End of freedom of movement of UK and EU citizens coming in and out of the UK

On 30 March 2019, UK citizens will lose their EU citizenship, i.e. the citizenship, subsidiary to UK citizenship, that provide rights such as the right to vote in European elections, the right to free movement, settlement and employment across the EU, and the right to consular protection by other EU states’ embassies when a person’s country of citizenship does not maintain an embassy or consulate in the country in which they require protection.

Since no withdrawal agreement will be signed by 29 March 2019, between the EU and the UK, UK nationals living in one of the 27 EU member-states will be on their own, as no reciprocal arrangements will have been put in place, in particular in relation to reciprocal healthcare and social security coordination, work permits, right to stand and vote in local elections.

UK nationals living in one of the states which are members of the European Free Trade Association (EFTA), i.e. Iceland, Liechtenstein, Norway and Switzerland, will also have no safety net, as the UK will also crash out of the EU bilateral agreements with EFTA members, such as the EEA Agreement which ties Iceland, Liechtenstein, Norway and the EU together, on 29 March 2019. Meanwhile, “the UK is seeking citizens’ rights agreement with the EFTA states to protect the rights of citizens“, as set out on the policy paper published by the UK Department for exiting the EU.

It therefore makes sense for UK nationals living in a EU member-state, or in one of the EFTA states, to reach out to the equivalent of the UK Home Office in such country, and inquire how they can secure either a visa or national citizenship in this country. Since negotiating some new bilateral agreements with EU member-states and EFTA states will take years, for the UK to finalise such negotiations, UK nationals cannot rely on these protracted talks to get any leverage and obtain permanent right to remain in a EU member-state or an EFTA state.

For example, France is ready to pass a decree after 30 March 2019, to organise the requirement to present a visa to enter French territory, and to obtain a residency permit (“carte de séjour”) to justify staying here, for UK citizens already living, or planning to live for more than three months, in France. Therefore, soon after 30 March 2019, British nationals and their families who do not have residency permits may have an “irregular status” in France.

While applying for a “carte de séjour” is free in France, and applying for French citizenship triggers only a 55 euros stamp duty to pay, EU nationals living in the UK, or planning to live in the UK, won’t be so lucky.

Indeed, it will set EU nationals back GBP1,330 per person, from 6 April 2018, to obtain UK citizenship, including the citizenship ceremony fee. However, there may be no fee to enrol into the EU Settlement Scheme, which will open fully by 30 March 2019, in particular if a EU citizen already has a valid “UK permanent residence document or indefinite leave to remain in or enter the UK”. The deadline for applying in the EU Settlement Scheme will be 31 December 2020, when the UK leaves the EU without a withdrawal deal on 30 March 2019.

Business owners and creative companies working in and from the UK will be impacted too, if they have some employees and staff. It will be their responsibility to ensure and be able to prove that their staff who are EU citizens, have all obtained a settled status: in a display of largesse, the UK government has therefore published an employer toolkit, to “support EU citizens and their families to apply to the EU Settlement Scheme“.

For short term stays of less than three months per entry, the UK government currently promises that “arrangements for tourists and business visitors will not look any different“. “EU citizens coming for short visits will be able to enter the UK as they can now, and stay for up to three months from each entry“.

To conclude, leaving the EU without a withdrawal agreement is going to create a lot of red tape, and be a massive time and energy hassle for EU citizens living in the UK, their UK employers who need to ensure that their staff are all enrolled into the EU Settlement Scheme, and for UK citizens living in one of the remaining 27 EU member-states. There will be no certainty of obtaining settled status from the UK Home Office, until EU citizens have actually obtained it further to enrolling into the EU Settlement Scheme. This is going to be a very anxiety-inducing process for EU citizens living in the UK, and for their UK employers who rely on these members of their staff to get the job done.

Contingency plans should therefore be put in place by UK employers who have EU citizens on their payroll, in particular by setting up offices and subsidiaries in one of the remaining 27 EU member-states, so that EU citizens whose settled status was refused by the UK Home Office may keep on working for their UK employers by relocating to this EU member-state where they will have freedom of movement thanks to their EU citizenships. Besides the Home Office and immigration lawyers’ fees, UK employers need to take into account the legal, accounting, IT and real estate costs of setting up additional offices and subsidiaries in a EU member-state, after 30 March 2019.

2. Removal of free movement of goods, services and capital

The EU internal market, or single market, is a single market that seeks to guarantee the free movement of goods, capital, services and people – the “four freedoms” – between the EU 28 member-states.

After 30 March 2019, the single market will no longer count the UK, as it will cease to be a EU member-state.

While it was an option for the internal market to remain in place, between the UK and the EU, as such market has been extended to EFTA states Iceland, Liechtenstein and Norway through the agreement on the European Economic Area (EEA), and to EFTA state Switzerland through bilateral treaties, this alternative was not pursued by the UK government. Indeed, the EEA Agreement and EU-Swiss bilateral agreements are both viewed by most as very asymmetric (Norway, Iceland and Liechtenstein are essentially obliged to accept the internal single market rules without having much if any say in what they are, while Switzerland does not have full or automatic access but still has free movement of workers). The UK, as well as EFTA members who were less than keen to have the UK join their EFTA club, ruled out such option, not seeing the point of still contributing to the EU budget while not having a seat at the table to take any decisions in relation to how the single market is governed and managed.

2.1. Removal of free movement of goods and new custom duties and tariffs

As far as the removal of the free movement of goods is concerned, it will be a – hopefully temporary – hassle, since the UK does not have any bilateral customs and trade agreements in place with the EU (because no withdrawal agreement will be entered into between the EU and the UK by 30 March 2019) and with non-EU countries (because the 53 trade agreements with non-EU countries were secured by the EU directly, on behalf of its then 28 member-states, including with Canada, Singapore, South Korea).

On 30 March 2019, the UK will regain its right to conclude binding trade agreements with non-EU countries, and with the EU of course.

While the UK government laboriously launches itself into the negotiation of at least 54 trade agreements, including with the EU, customs duties will be reinstated between the UK and all other European countries, including the UK. This is going to lead to a very disadvantageous situation for UK businesses, as the cost of trading goods and products with foreign countries will substantially increase, both for imports and exports.

Creative companies headquartered in the UK, which export and import goods and products, such as fashion, design and tech companies, are going to be especially at risk, here, with the cost of imported raw material increasing, and the rise or appearance of custom duties on exports of their products to the EU and non-EU countries. Fashion and luxury businesses, in particular, are at risk, since they export more than seventy percent of their production overseas.

Since the UK has most of its trade (57% of exports and 66% of imports in 2016) done with countries bound by EU trade agreements, both UK companies and UK consumers must brace themselves for a shock, when they will start trading after 30 March 2019. The cost of life is going to become more expensive in the UK (since most products and goods are imported, in particular from EU member-states), and operating costs are also going to increase for UK businesses.

While some Brexiters claim that the UK will be fine, by reverting to trading with the “rest of the world” under the rules of the World Trade Organisation (WTO), it is important to note that right now, only 24 countries are trading with the UK on WTO rules (like any one of the 28 member-states of the EU because no EU trade deal was concluded with these non-EU countries). After 30 March 2019, the UK will trade with the rest of the world under WTO rules, as long as the other state is also a member of the WTO (for example, Algeria, Serbia and North Korea are not WTO members). Moreover, some tariffs will apply to all UK exports, under those WTO rules.

It definitely does not look like a panacea to trade under WTO rules, so the UK government and its Bank of England will weaken the pound sterling as much as possible, to set off the financial burden represented by these custom duties and taxes.

Creative companies headquartered in the UK, which export goods and products, such as fashion and design companies, should now relocate their manufacturing operations to the EU or low wages and low tax territories, such as South East Asia, as soon as possible, to avoid the new customs duties and taxation of goods and products which will inevitably arise, after 30 March 2019.

While a cynical example, since James Dyson was a fervent Brexiter who called on the UK government to walk away from the EU without a withdrawal deal, UK creative businesses manufacturing goods and products must emulate vacuum cleaner and hair dryer technology company Dyson, that will be moving its headquarters from Wiltshire to Singapore this year.

Moreover, the UK will face non-tariff barriers, in the same way that China and the US trade with the EU. Non-tariff barriers are any measure, other than a customs tariff, that acts as a barrier to international trade, such as regulations, rules of origin or quotas. In particular, regulatory divergence from the EU will make it harder to trade goods, introducing non-tariff barriers: when the UK will leave the EU customs union, on 30 March 2019, any goods crossing the border will have to meet rules of origin requirements, to prove that they did indeed come from the UK – introducing paperwork and non-tariff barriers.

2.2. Removal of free movement of services and VAT changes

On 30 March 2019, UK services – accounting for eighty percent of the UK economy – will lose their preferential access to the EU single market, which will constitute another non-tariff barrier. 

The free movement of services and of establishment allows self-employed persons to move between member-states in order to provide services on a temporary or permanent basis. While services account for between sixty and seventy percent of GDP, on average, in all 28 EU member-states, most legislation in this area is not as developed as in other areas.

There are no customs duties and taxation on services, therefore UK creative industries which mainly provide services (such as the tech and internet sector, marketing, PR and communication services, etc) are less at risk of being detrimentally impacted by the exit of the UK from the EU without a withdrawal agreement.

However, since the UK will become a non-EU country from 30 March 2019 onwards, EU businesses and UK business alike will no longer be able to apply the EU rules relating to VAT, and in particular to intra-community VAT, when they trade with UK and EU businesses respectively. This therefore means that, from 30 March 2019 onwards, a EU business will no longer charge VAT to a UK company, but will keep on charging VAT to its UK client who is a natural person. Also, a UK business will no longer charge VAT to a EU company, but will keep on charging VAT to its EU client who is a natural person.

Positive changes on VAT are also in the works, because the UK will no longer have to comply with EU VAT law (on rates of VAT, scope of exemptions, zero-rating, etc.): the UK will have more flexibility in those areas.

However, there will no doubt be disputes between taxpayers and HMRC over the VAT treatment of transactions that predate 30 March 2019, where EU law may still be in point. Because the jurisdiction of the Court of Justice of the European Union (CJEU) will cease completely in relation to UK matters on 30 March 2019, any such questions of EU law will be dealt with entirely by the UK courts. Indeed, UK courts have stopped referring new cases to the CJEU in any event, since last year.

2.3. Removal of free movement of capital and loss of passporting rights for the UK financial services industry

Since the UK will leave the EU without a withdrawal agreement, free movement of capital, which is intended to permit movement of investments such as property purchases and buying of shares between EU member-states, will cease to apply between the EU and the UK on 30 March 2019.

Capital within the EU may be transferred in any amount from one country to another (except that Greece currently has capital controls restricting outflows) and all intra-EU transfers in euro are considered as domestic payments and bear the corresponding domestic transfer costs. This EU central payments infrastructure is based around TARGET2 and the Single Euro Payments Area (SEPA). This includes all member-states of the EU, even those outside the eurozone, provided the transactions are carried out in euros. Credit/debit card charging and ATM withdrawals within the Eurozone are also charged as domestic.

Since the UK has always kept the pound sterling during its 43 years’ stint in the EU, absolutely refusing to ditch it for the euro, transfer costs on capital movements – from euros to pound sterling and vice versa – have always been fairly high in the UK anyway.

However, as the UK will crash out of the EU without a deal on 30 March 2019, such transfer costs, as well as new controls on capital movements, will be put in place and impact creative businesses and professionals when they want to transfer money from the UK to EU member-states and vice-versa. While the UK government is looking to align payments legislation to maximise the likelihood of remaining a member of SEPA as a third country, the fact that it has decided not to sign the withdrawal agreement with the EU will not help such alignment process.

The cost of card payments between the UK and EU will increase, and these cross-border payments will no longer be covered by the surcharging ban (which prevents businesses from being able to charge consumers for using a specific payment method).

It is therefore advisable for UK creative companies to open business bank accounts, in euros, either in EU countries which are strategic to them, or online through financial services providers such as Transferwise’s borderless account. UK businesses and professionals will hence avoid being narrowly limited to their UK pound sterling denominated bank accounts and being tributary to the whims of politicians and bureaucrats attempting to negotiate new trade agreements on freedom of capital movements between the UK and the EU, and other non-EU countries.

Also, forging ties with banking, insurance and other financial services providers in one of the remaining 27 member-states of the EU may be really useful to UK creative industries, after 30 March 2019, because the UK will no longer be able to carry out any banking, insurance and other financial services activities through the EU passporting process. Indeed, financial services is a highly regulated sector, and the EU internal market for financial services is highly integrated, underpinned by common rules and standards, and extensive supervisory cooperation between regulatory authorities at an EU and member-state level. Firms, financial market infrastructures, and funds authorised in any EU member-state can carry out many activities in any other EU member-state, through a process known as “passporting”, as a direct result of their EU authorisation. This means that if these entities are authorised in one member-state, they can provide services to customers in all other EU member-states, without requiring authorisation or supervision from the local regulator.

The European Union (Withdrawal) Act 2018 will transfer EU law, including that relating to financial services, into UK statutes on 30 March 2019. It will also give the UK government powers to amend UK law, to ensure that there is a fully functioning financial services regulatory framework on 30 March 2019.

However, on 30 March 2019, UK financial services firms’ position in relation to the EU will be determined by any applicable EU rules that apply to non-EU countries at that time. Therefore, UK financial services firms and funds will lose their passporting rights into the EU: this means that their UK customers will no longer be able to use the EU services of UK firms that used to passport into the EU, but also that their EU customers will no longer be able to use the UK services of such UK firms.

For example, the UK is a major centre for investment banking in Europe, with UK investment banks providing investment services and funding through capital markets to business clients across the EU. On 30 March 2019, EU clients may no longer be able to use the services of UK-based investment banks, and UK-based investment banks may be unable to service existing cross-border contracts.

3. Legal implications of Brexit in the UK

On 30 March 2019, the European Union (Withdrawal) Act 2018 (the “Act“) will take effect, repeal the European Communities Act 1972 (the “ECA“) and retain in effect almost all UK laws which have been derived from the EU membership of the UK since 1 January 1973. The Act will therefore continue enforce all EU-derived domestic legislation, which is principally delegated legislation passed under the ECA to implement directives, and convert all direct EU legislation, i.e. EU regulations and decisions, into UK domestic law. 

Consequently, the content of EU law as it stands on 30 March 2019 is going to be a critical piece of legal history for the purpose of UK law for decades to come.

Some of the legal practices which are going to be strongly impacted by the UK crashing out of the EU are intellectual property law, dispute resolution, financial services law, franchising, employment law, product compliance and liability, as well as tax.

In particular, there is no clarity from the UK government, at this stage, on how EU trademarks, registered with the European Union Intellectual Property Office (EUIPO) are going to apply in the UK, if at all, after 30 March 2019. The same goes for Registered Community Designs (RCD), which are also issued by the EUIPO.

At least, some clarity exists in relation to European patents: the UK exit from the EU should not affect the current European patent system, which is governed by the (non-EU) European Patent Convention. Therefore, UK businesses will be able to apply to the European Patent Office (EPO) for patent protection which will include the UK. Existing European patents covering the UK will also be unaffected. European patent attorneys based in the UK will continue to be able to represent applicants before the EPO.

Similarly, and since the UK is a member of a number of international treaties and agreements protecting copyright, the majority of UK copyright works (such as music, films, books and photographs) are protected around the world. This will continue to be the case, following the UK exit from the EU. However, certain cross-border copyright mechanisms, especially those relating to collecting societies and rights management societies, and those relating to the EU digital single market, are going to cease applying in the UK.

Enforcement of IP rights, as well as commercial and civil rights, is also going to be uncertain for some time: the UK will cease to be part of the EU Observatory, and of bodies such as Europol and the EU customs’ databases to register intellectual property rights against counterfeiting, on 30 March 2019. 

The EU regulation n. 1215/2012 of 12 December 2012, on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, will cease to apply in the UK once it is no longer an EU member-state. Therefore, after 30 March 2019, no enforcement system will be in place, to enforce an English judgment in a EU member-state, and vice-versa. Creative businesses will have to rely on domestic recognition regimes in the UK and each EU member-state, if in existence. This will likely introduce additional procedural steps before a foreign judgment is recognised, which will make enforcement more time-consuming and expensive.

 

To conclude, the UK government seems comfortable with the fact that mayhem is going to happen, from 30 March 2019 onwards, in the UK, in a very large number of industrial sectors, legal practices, and cross-border administrative systems such as immigration and customs, for the mere reason than no agreed and negotiated planning was put in place, on a wide scale, by the UK and the EU upon exit of the UK from the EU. This approach makes no economic, social and financial sense but this is besides the point. Right now, what creative businesses and professionals need to focus on is to prepare contingency plans, as explained above, and to keep on monitoring new harmonisation processes that will undoubtedly be put in place, in a few years, by the UK and its trading partners outside and inside the EU, once they manage to find common ground and enter into bilateral agreements organising this new business era for the UK. 

 

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Annabelle Gauberti featured in documentary “The man who stole Banksy” | Tribeca Film Festival

Crefovi : 01/04/2018 8:00 am : Art law, Copyright litigation, Entertainment & media, Events, Intellectual property & IP litigation, Internet & digital media, Law of luxury goods, Litigation & dispute resolution, Media coverage, Webcasts & Podcasts

Annabelle Gauberti, founding partner of Crefovi, is featured in the upcoming documentary, written, directed and produced by Crefovi client Marco Proserpio, “The man who stole Banksy”. 

The man who stole BanksyThe documentary will premiere at the Tribeca Film Festival from 20 to 26 April 2018.

 

THE MAN WHO STOLE BANKSY – Trailer from Marco Proserpio.

Synopsis: In 2007, world-renowned street artist Banksy traveled to Palestine and painted a number of politically charged works on walls and buildings all over the city. Some viewed this as a nuisance; others hailed the work as high art; and still more saw a business opportunity. Specifically, a bodybuilder and local taxi driver known as Walid the Beast came up with an entrepreneurial plan: cut out the entire cement wall containing the art and sell it off to the highest bidder. Director Marco Proserpio’s The Man Who Stole Banksy is a provocative story about how works that are created illegally can be stolen, sold, and collected legally. As viewers follow Banksy’s work, they discover a secret art market of stolen walls from around the world. It’s a stylish examination of public space, appropriation, and the commodification of street art and of what happens when Middle East politics meet the Western art market.

 

Annabelle Gauberti is the founding partner of Crefovi, our London and Paris law firm specialised in advising the creative industries in general, in particular on art law. She is a solicitor of England & Wales, as well as an “avocat” with the Paris bar.

Annabelle is also the president of the International association of lawyers for the creative industries (ialci).

 

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Alternative dispute resolution in the entertainment and creative industries | ADR

Crefovi : 07/01/2018 8:00 am : Art law, Articles, Consumer goods & retail, Copyright litigation, Employment, compensation & benefits, Entertainment & media, Fashion law, Intellectual property & IP litigation, Internet & digital media, Law of luxury goods, Litigation & dispute resolution, Trademark litigation

In the aftermath of the Harvey Weinstein’s revelations, which triggered many more about sexual predators killing it in Hollywood and other creative industries, it is topical to look into the pros and cons of alternative dispute resolution in entertainment. While Weinstein and other top brass in the entertainment industry used to do away with accusations of predatory sexual behaviour made against them, by signing non-disclosure and out-of-court settlement agreements with their victims, the crux of the matter is that creative endeavours rely heavily on the goodwill, reputation and other intangible assets owned by the above-the-line personnel (film director, producers, scriptwriter) and by the casted actors.

In this context, how to make the most of ADR, in the entertainment and creative industries, while retaining and respecting work ethics and human values?

How to balance the need for secrecy and protection of the goodwill and reputation of top creatives, with the moral obligation to ensure that they are held accountable for their actions and business endeavours in the creative community and beyond?

 

 

Alternative dispute resolution in the entertainment and creative industries, ADR, Crefovi1. What is alternative dispute resolution in entertainment, and why use it?

Alternative dispute resolution (ADR) is the use of methods such as mediation, negotiation or arbitration to resolve a dispute without resort to litigation.

ADR procedures are deemed to be usually less costly and more expeditious than litigation, especially in Anglo-Saxon countries where merely the court costs represent a substantial portion of the financial budget to allocate, in order to resolve a dispute through litigation.

ADR procedures, unlike adversarial litigation, are often collaborative and strive to allow parties to understand each other’s positions. ADR also allows the parties to come up with more creative solutions than a court may not be legally allowed to impose.

ADR also offers the option of confidentiality and secrecy to the parties involved in a dispute, while such option very rarely exists in court, especially in common law litigation proceedings which rely heavily on broad, expensive and virtually unlimited discovery such as in the USA and, to a degree, England & Wales. Instead of draining the financial resources and competitiveness of your creative business, which could well be invested in job creation or Research & Development for example, why not use ADR to limit the reputational impact and financial consequences of resolving a dispute?

For these reasons above, ADR procedures are increasingly being used in disputes that would otherwise result in litigation, including high-profile labor disputes, divorce actions and personal injury claims.

While arbitration is a process similar to an informal trial where an impartial third party – the arbitrator – hears each side of a dispute and issues a decision, mediation is a collaborative process where a mediator works with the parties to come to a mutually agreeable solution.

2. In which context should you use ADR services?

ADR services are becoming increasingly en vogue, with courts strongly pushing antagonised parties to resolving their disputes out of court, in a move to unclog court dockets. Many judiciary stakeholders complain that court dockets are heavily and unjustifiably congested as a result of the indiscriminate filing and delayed processing of cases in the courts of justice.

While English courts made it compulsory for parties, a long time ago, to have complied with the Practice Direction on Pre-Action Conduct and any relevant of the 14 Pre-Action protocols before commencing legal proceedings, as well as to have considered ADR (such as mediation) both before commencing litigation and during the litigation process, French courts have finally caught up with such trend further to the entering into force of the new articles 56 and 58 of the French civil procedural code: on 1 April 2015, at last, it became compulsory for parties to attempt to resolve their disputes out-of-court, through ADR, and for any claimant to prove and justify that he attempted to solve the dispute out-of-court with the defendant, prior to litigation.

This reform remains wishful thinking in France though, since these articles 56 and 58 of the French civil procedural code do not even clearly define the notion of “attempting to resolve the dispute out-of-court”. However, I have noticed that my French peers, “avocats a la cour” in France, tend to send one or two “lettres de mise en demeure” (letters before court action) before filing a litigation claim with a French court, instead of merely sending court summons without any warning to helpless defendants being sued for tens of millions of euros by aggressive French claimants and their French counsels, as was usual practice and totally acceptable in France prior to that reform!

Even French bars promote mediation and “collaborative law” to their lawyer members, coaxing them into registering as lawyers trained for ADR.

The entertainment sector is notorious for the considerable number of pending court cases, arguments, disputes it generates, and for the sheer variety of conflicts that arise in this business, as any reader of major trade papers Daily Variety and The Hollywood Reporter would attest. Consequently, the creative industries are a particularly fertile soil for ADR proceedings, and ADR has grown substantially over the past 15 to 20 years in these industrial sectors.

3. Who can provide ADR services?

While the two most common forms of ADR are arbitration and mediation, negotiation is almost always attempted first to resolve a dispute. It is the preeminent mode of dispute resolution. Negotiation allows the parties to meet in order to settle a dispute. The main advantage of this form of dispute settlement is that it allows the parties themselves to control the process and the solution.

As explained below in section 4, negotiations are better conducted by French “avocats” in France, since the without prejudice privilege rule does not apply to any communication exchanged between contractual parties, prior to filing a lawsuit. Only communications exchanged between French lawyers is protected by confidentiality and secrecy.

In England & Wales, however, parties can conduct negotiations directly, by making use of the without prejudice rule explained below in section 4, which will prevent all their attempts and negotiating communications from being used in court by the other party.

Mediation is also an informal alternative to litigation. Mediators are individuals trained in negotiations, who bring opposing parties together and attempt to work out a settlement or agreement that both parties accept or reject. The leading mediation institution in England is the Centre for Effective Dispute Resolution (CEDR).

Arbitration is a simplified version of a trial involving limited discovery and simplified rules of evidence. The arbitration is headed and decided by an arbitral panel. To comprise a panel, either both sides agree on one arbitrator, or each side selects one arbitrator and the two arbitrators elect the third. 

As a result, several bodies have sprung up over the years, specialising in providing either mediation and/or arbitration services and panels to the creative industries, such as:

Even online platforms have been set up, in the last 5 years, to offer ADR services to natural persons and businesses who want to avoid the intricacies, costs and lengthy duration of fully-blown litigation, such as eJust and Mediaconf. It is a little early to assess whether such online ADR platforms do provide adequate resolution services to members of the public and the business community at large, but it is telling that they even managed to get financing from tech investors and venture capital and seed funds.

4. How does ADR support you in resolving your dispute?

ADR refers to any means of settling disputes outside the courtroom. It typically includes early neutral evaluation, negotiation, conciliation, mediation or arbitration.

While the two most common forms of ADR are arbitration and mediation, negotiation is almost always attempted first to resolve a dispute. It is the preeminent mode of dispute resolution.

In England & Wales, any pre-litigation negotiation process should be conducted on a “without prejudice” basis, pursuant to the without prejudice principle. Indeed, if a communication between negotiating parties has been made in compliance with the without prejudice privilege, it will not be admissible in court and therefore cannot be used as evidence against the interest of the party that made it. The rationale behind this form of legal privilege is that it is in the public interest that disputing parties should be able to negotiate freely, without fear of future prejudice in court, with a view to settling their disputes wherever possible.

It works! Many parties in England & Wales who have disputes, in particular employment disputes which can be conducted through the robust ACAS dispute resolution process, make the most of the without prejudice privilege during negotiations, and settle their claims out-of-court.

Even mediation, which, at its most basic level, is nothing more than a negotiation conducted through an intermediary (the mediator) to resolve commercial matters and even, sometimes, family disputes, benefits from the without prejudice privilege rule in England & Wales, according to which no communications made during the proceedings can be disclosed without the express agreement of the mediating parties in the event that no settlement is reached. If successful, a mediation concludes with a settlement agreement, which is enforceable as a contract. 

In France, such without prejudice rule does not apply, which means that any attempt to negotiate and settle out-of-court must be lead by French “avocats à la cour” representing the parties, since only the discussions and negotiations of French lawyers are protected and confidential, and therefore not disclosable in court. This is a serious hindrance to the emergence of sturdy ADR in France, since parties cannot confidentially negotiate an out-of-court settlement without French lawyers and since all their direct communications will be disclosable in court. ADR is therefore a costly process in France because parties must instruct French “avocats” from the get-go, especially when the parties put in the balance the fact that litigation is free in France, i.e. that the French court costs are close to nil. Why then bother with ADR when filing a lawsuit would result in a cheaper process to obtain a 100% enforceable judgment?

Of course, both the UK and France must comply with Directive 2008/52/EC on certain aspects of mediation in civil and commercial matters (the European Mediation Directive), which objective is the facilitation of access to ADR and the promotion of the amicable settlement of cross-border disputes, by the promotion of the use of mediation as well as of a balanced relationship between mediation and judicial proceedings. It seeks to protect the confidentiality of the mediation process and ensures that when parties engage in mediation, any limitation period is suspended.

In England, arbitration proceedings are governed (“law of the seat”) by the Arbitration Act 1996, which applies to both domestic and international arbitration. In France, articles 1442 to 1527 of the French civil procedural code, govern arbitration proceedings. Apart from the Arbitration Act in England and articles 1442 to 1527 of the French civil procedural code in France, and depending on the parties’ arbitration agreement, various institutional arbitration rules may find application, such as the rules of the LCIA, ICC, etc. In England and France, virtually all commercial matters are arbitrable, while disputes involving criminal and family law matters are generally considered non-arbitrable.

Parties can decide to use arbitration when they have agreed to do so in a contract, in particular in the dispute resolution clause (“clause compromissoire” in French) set out in such contract. If there is an international aspect to the commercial transaction, depending on the type of disputes which are likely to arise between the parties, depending on who the parties are as well as the secrecy of their contractual commitments and obligations, parties may be inclined to set out a dispute resolution clause which chooses arbitration over litigation, in their contract. Such dispute resolution clause would ousts jurisdiction of courts except for purposes of supporting and/or supervising arbitration proceedings and would define the seat (legal place) of any future arbitration. In addition, the dispute resolution clause would clearly set out the governing law, the applicable procedural rules (LCIA, IFTA, ICC, etc.), the number of arbitrators, the language of the arbitration and whether some rights of appeal apply.

If and when a dispute arises, the aggrieved party would merely refer to that dispute resolution clause set out in the contract and, probably after a few attempts to negotiate and resolve this dispute directly with the other party, would file an arbitration with the arbitration body designated in this dispute resolution clause, pursuant to the designated institutional arbitration rules.

Arbitration is very often used in the entertainment sector and creative industries, where reputation and goodwill are some of the most important assets owned by a creative business, and therefore where confidentiality and secrecy are of the essence.

For example, on 19 July 2017, an arbitration panel from the Mediation and Arbitration Centre of WIPO decided a matter in dispute between major and independent music publishers BMG, Peermusic, Sony/ATV/EMI Music Publishing, Universal Music Publishing and Warner/Chappell Music as well as AEDEM (over 200 small and medium sized Spanish music publishers), on one side, and the Spanish collective rights society SGAE, on the other side. The binding arbitration focused primarily on two claims:

  • the inequitable sharing of money received by SGAE from a user of music and distributed by SGAE back to the user of that music as a copyright holder and
  • the improper distribution of royalties for the use of inaudible or barely audible music.

After considering the evidence, the three WIPO arbitrators decided:

  • to have an equitable distribution, so as not to prejudice other authors, there must be changes in the SGAE distribution rules. These rules must change so that the broadcasters receive via their publishing companies for music uses in the early morning hours (when there is no significant audience or commercial value) a variance between 10% and 20% of the total collected from them, respectively. The arbitrators unanimously agreed it should be 15%. After applying this limitation, new distribution rules also should reflect an equitable value for music broadcast during other programming blocks of time;
  • Distributions must stop for inaudible music, as identified by the technology used by Spanish company BMAT or a company using similar technology;
  • SGAE should disperse its ‘scarcely audible fund’ as described in the written decision.

5. Are ADR decisions enforceable? How binding are the available methods of ADR in nature?

An arbitral award is final and binding but a party can appeal to the courts on a point of law, unless the arbitration agreement excludes this ability. Leave of the court to appeal the award is severely restricted under the Arbitration Act 1996 in England & Wales, and under articles 1442 to 1527 of the Civil procedural code in France (and can even be excluded by the arbitration agreement) and the applicant must show, among other things, that the determination of the question of law will substantially affect the rights of the parties and that it is just and proper for the court to determine the question/dispute.

The arbitral award may also be challenged on the basis that the arbitral tribunal did not have jurisdiction to decide the dispute, or that there was a serious irregularity affecting the arbitral tribunal, the proceedings or the award (for example, the tribunal failed to deal with all the issues that were put to it or was biased).

The Convention on the recognition and enforcement of foreign arbitral awards 1958 (the “New York Convention“), to which both England and France are parties, allows the enforcement of either an English arbitration or a French arbitration award across the 157 Convention countries in accordance with those countries’ own laws. Likewise, the Arbitration Act provides for enforcement in England of an arbitration award rendered in another New York Convention country. The most common method of such enforcement is to seek judgment of the English court in terms of the award (and that judgement can then be enforced as a judgement of the English court). Meanwhile, articles 1442 to 1527 of the French civil procedural code provide for enforcement in France of an arbitration award rendered in another New York Convention country, further to the issue of an exequatur order (“ordonnance d’exequatur”) by the competent “Tribunal de grande instance” in France. 

Settlement agreements which are reached through mediation or negotiation are contracts and are therefore enforceable if the requirements for a valid contract are satisfied. If, by extraordinary, one of the parties breaches the provisions of the settlement agreement, the other parties will be entitled to file some contractual breach claims with the courts.

 

To conclude, ADR proceedings are especially adapted to the requirements of the entertainment sector and creative industries at large, where cross-border deals are the rule and the need to protect the reputation and goodwill of contracting business partners is paramount. While the legitimacy of non-disclosure and confidentiality provisions set out in existing settlement agreements is hotly debated at the moment, in relation to sexual harassment cases against Harvey Weinstein, Bob Weinstein, Brett Ratner, Dustin Hoffman, James Toback, Kevin Spacey, Louis C.K., etc., it is wise to set out well-drafted arbitration clauses in film production agreements as well as employment agreements with the above-the-line film team and casted actors, in order to avoid promotional and marketing disasters, such as that suffered by Lionsgate upon the release of “Exposed”, a thriller starring Keanu Reeves, after the film’s actual director asked for his name to be removed.

 

Annabelle Gauberti is the founding partner of Crefovi, our London and Paris law firm specialised in advising the creative industries in general, in particular in litigation and ADR. She is a solicitor of England & Wales, as well as an “avocat” with the Paris bar.

Annabelle is also the president of the International association of lawyers for the creative industries (ialci).

 


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How to make your creative business GDPR compliant | General Data Protection Regulation

Crefovi : 16/10/2017 8:00 am : Antitrust & competition, Art law, Articles, Banking & finance, Capital markets, Consumer goods & retail, Emerging companies, Employment, compensation & benefits, Entertainment & media, Fashion law, Gaming, Hospitality, Information technology - hardware, software & services, Intellectual property & IP litigation, Internet & digital media, Law of luxury goods, Life sciences, Litigation & dispute resolution, Mergers & acquisitions, Music law, Outsourcing, Private equity & private equity finance, Product liability, Real estate, Tax, Technology transactions

The GDPR is upon us: what is it? How is it going to impact you and your business? What do you need to do in order to become GDPR compliant?

There is not a moment to waste, as the stakes are very high, and since becoming GDPR compliant will definitely bring competitive advantages to your business.

How to make your creative business GDPR compliant GDPR compliant; GDPR; Crefovi

On 27 April 2016, after more than 4 years of discussion and negotiation, the European parliament and council adopted the General Data Protection Regulation (“GDPR”).

  1. Why the GDPR?

The GDPR repeals Directive 95/46/EC on the protection of individuals with regards to the processing of personal data and on the free movement of such data (the “Directive”).

The Directive, which entered into force more than 20 years’ ago, was no longer fit for purpose, as the amount of digital information businesses create, capture and store has vastly increased.

Data, the bigger the better, is here to stay. Today’s data more and more greases our digital world. Control of data is ultimately about power and data ownership does seriously impact competition on any given market. By collecting more data, a firm has more scope to improve its products, which attracts more users, generating even more data, and so on. Data assets are, today, at least as important as other intangible assets such as trademarks, copyright, patents and designs, to companies[1]. The stakes are way higher, today, as far as data ownership, control and processing are concerned, and GDPR addresses that data flow in the 21st century, as we all engage with technology, more and more.

Moreover, many legal cases, brought up in various member-states of the European Union (“EU”), pinpointed the severe weaknesses and gaps in providing satisfactory, strong and homogeneous protection of personal data, relating to EU citizens, and controlled by companies and businesses operating in the EU. For example, the Costeja v Google judgment, from the Court of Justice of the European Union (“CJEU”), commonly referred to as the “right to the forgotten” ruling, was handed down on 26 November 2014. This ground-breaking judgment recognised that search engine operators, such as Google, process personal data and qualify as data controllers within the meaning of Article 2 of the Directive. As such, the CJEU ruling recognised that a data subject may “request (from a search engine) that the information (relating to him/her personally) no longer be made available to the general public on account of its inclusion in (…) a list of results”. Through this decision, the CJEU forced search engines such as Google to remove, when requested, URL links that are “inadequate, irrelevant or no longer relevant, or excessive in relation to the purposes for which they were processed and in the light of the time that has elapsed”. It was a huge step forward for personal data protection in the EU.

In addition, data breaches at, and cyber-attacks of, thousands of international businesses (Sony Pictures, Yahoo, Linkedin, Equifax, etc.) as well as EU national companies (Talktalk, etc.) make the news, consistently and on a very regular basis, dramatically affecting the financial and moral well being of millions of consumers whose personal data was hacked because of these data breaches. These attacks and breaches raise very serious concerns as to whether businesses managing personal data of EU consumers are actually “up to scratch”, in terms of proactively fighting against cyber-crime and protecting personal data.

Finally, the GDPR, which will be immediately enforceable in the 28 member-states of the EU without any transposition from 25 May 2018, unlike the Directive which had to be transposed in each EU member-state by way of national rules, standardises all national laws applicable in these member-states and therefore provides more uniformity across them. The GDPR levels the playing field.

  1. When will the GDPR enter into force?

The GDPR, adopted in April 2016, enters into force on 25 May 2018, ideally giving a 2-year preparation period to businesses and public bodies to adapt to the changes.

While many EU business owners take the view that the changes brought by the GDPR onto their businesses, will be of little or no importance or just as important as other compliance issues, there is not a minute to spare to prepare for  compliance with the new set of complex and lengthy rules set out in the GDPR.

  1. What is at stake? Which organisations are impacted by the GDPR?

A lot is at stake. All businesses, organisations or entities which operate in the EU or which are headquartered outside of the EU but collect, hold or process personal data of EU citizens must be GDPR compliant by 25 May 2018. Potentially, the GDPR may apply to every website and application on a global basis.

As most if not all multinationals have customers, employees and/or business partners in the EU, they must become GDPR compliant. Even start-ups and SMEs must be GDPR compliant, if their business model infer that they will collect, hold or process personal data of EU citizens (i.e. customers, prospects, employees, contractors, suppliers, etc).

The stakes are very high for most businesses and, for many companies, it is becoming a board-level conversation and issue.

To ensure compliance with the new legal framework for data protection, and the implementation of the new provisions, the GDPR introduced an enforcement regime of very heavy financial sanctions to be imposed on businesses that do not comply with it. If an organisation does not process EU individuals’ data in the correct way, it can be fined, up to 4% of its annual worldwide turnover, or Euros 20million – whichever is greater[2].

These future fines are way larger than the GBP500,000 capped penalty the UK Data Protection Authority (“DPA”), the Information Commissioner Office (“ICO”), or the maximum 300,000 euros capped penalty that the French DPA, the “Commission Nationale Informatique et Libertés” (“CNIL”), can currently inflict on businesses.

  1. What are the GDPR provisions about?

The GDPR provides 99 articles setting out the rights of individuals and obligations placed on organisations within the scope of the GDPR.

Compared to the Directive, here are the new key concepts brought by the GDPR.

4.1. Privacy by design

The principle of privacy by design means that businesses must take a proactive and preventive approach in relation to the protection of privacy and personal data. For example, a business that limits the quantity of data collected, or anonymises such data, does comply with the “privacy by design” principle.

This obligation of “privacy by design” implies that businesses must integrate – by all appropriate technical means – the security of personal data at the inception of their applications or business procedures.

4.2. Accountability

Accountability means that the data controller, as well as the data processor, must take appropriate legal, organisational and technical measures allowing them to comply with the GDPR. Moreover, data controllers and data processors must be able to demonstrate the execution of such measures, in all transparency and at any given point in time, both to their respective DPAs and to the natural persons whose data has been treated by them.

These measures must be proportionate to the risk, i.e. the prejudice that would be caused to EU citizens, in case of inappropriate use of their data.

In order to know whether a business is compliant, it is therefore necessary to execute an audit of the data processes made by such company. We, at Crefovi, often execute some audits certified by the CNIL or the ICO.

4.3. Privacy impact Assessment

The business in charge of treating and processing personal data, as well as its subcontractors, must execute an analysis, a Privacy Impact Assessment (“PIA”) relating to the protection of personal data.

Businesses must do a PIA, a privacy risk assessment, on their data assets, in order to track and map risks inherent to each data process and treatment put in place, according to their plausibility and seriousness. Next to those risks, the PIA sets out the list of organisational, IT, physical and legal measures implemented to address and minimise these risks. The PIA aims at checking the adequacy of such measures and, if these measures fail that test, at determining proportionate measures to address those uncovered risks and to ensure the business becomes GDPR compliant.

Crefovi supports companies in performing PIAs and in checking the efficiency of the security and protection measures, thanks to the execution of intrusion tests.

4.4. Data Protection Officer

The GDPR requires that a Data Protection Officer (“DPO”) be appointed, in order to ensure the compliance of treatment of personal data by public administrations and businesses which data treatments present a strong risk of breach of privacy. The DPO is the spokesperson of the organisation in relation to personal data: he or she is the “go to” point of contact, for the DPA, in relation to data processing compliance, but also for individuals whose data has been collected, so that they can exercise their rights.

In addition to holding the prerogatives of the “correspondant informatique et liberté” (“CIL”) in France, or chief privacy officer in the UK, the DPO must inform his/her interlocutors of any data breaches which may arise in the organisation, and analyse their impact.

4.5. Profiling

Profiling is an automated processing of personal data allowing the construction of complex information about a particular person, such as her preferences, productivity at work or her whereabouts.

This type of data processing can generate automated decision-making, which may trigger legal consequences, without any human intervention. In this way, profiling constitutes a risk to civil liberties. This is why those businesses doing profiling must limit its risks and guarantee the rights of individuals subjected to such profiling, in particular by allowing them to request human intervention and/or contest the automated decision.

4.6. Right to be forgotten

As explained above, the right to be forgotten allows an individual to avoid that information about his/her past interferes with his/her actual life. In the digital world, that right encompasses the right to erasure as well as the right to dereferencing. On the one hand, the person can have potentially harmful content erased from a digital network, and, on the other hand, the person can dissociate a keyword (such as her first name and family name) from certain web pages on a search engine.

Crefovi can support and advise a business facing a request of execution of the right to be forgotten.

4.7. Other individuals’ rights

The GDPR supplements the right to be forgotten by firmly putting EU citizens back in control of their personal data, substantially reinforcing the consent obligation to data processing, as well as citizens’ rights (right to access data, right to rectify data, right to limit data processing, right to data portability and right to oppose data processing), and information obligations by businesses about citizens’ rights.

  1. Is there a silver lining to the GDPR?

5.1. An opportunity to manage those precious data assets

Compliance with GDPR should be viewed by businesses as an opportunity, as much as an obligation: with data being ever more important in an organisation today, this is a great opportunity to take stock of what data your company has, and how you can get most advantage of it.

The key tenet of GDPR is that it will give you the ability to find data in your organisation that is highly sensitive and high value, and ensure that it is protected adequately from risks and data breaches.

5.2. Lower formalities and one-stop DPA

Moreover, the GDPR withdraws the obligation of prior declaration to one’s DPA, before any data processing, and replaces these formalities with mandatory creation and management of a data processing register.

In addition, the GDPR sets up a one-stop DPA: in case of absence of a specific national legislation, a DPA located in the EU member-state in which the organisation has its main or unique establishment will be in charge of controlling compliance with the GDPR.

Businesses will determine their respective DPA with respect to the place of establishment of their management functions as far as supervision of data processing is concerned, which will allow to identify the main establishment, including when a sole company manages the operations of a whole group.

This unique one-stop DPA will allow companies to substantially save time and money by simplifying their processes.

5.3. Unified regulation, easier data transfers

In order to favour the European data market and the digital economy, and therefore create a favourable economic environment, the GDPR reinforces the protection of personal data and civil liberties.

This unified regulation will allow businesses to substantially reduce the costs of processing data currently incurred in the 28 EU member-states: organisations will no longer have to comply with multiple national regulations for the collection, harvesting, transfer and storing of data that they use.

Moreover, since data will comply with legislations applicable in all EU countries, it will become possible to exchange it and it will have the same value in different countries, while currently data has different prices depending on the legislation it complies with, as well as different costs for the companies that collect it.

5.4. A geographical scope extended by fair competition

The scope of the GDPR extends to companies which are headquartered outside the EU, but intend to market goods and services in the EU market, as long as they put in place processes and treatments of personal data relating to EU citizens. Following these residents on internet, in order to create some profiles, is also covered by the GDPR scope.

Therefore, European companies, subjected to strict, and potentially expensive, rules, will not be penalised by international competition on the EU single market. In addition, they may buy from non-EU companies some data which is compliant with GDPR provisions, therefore making the data market wider.

5.5. Opening digital services to competition

The right to portability of data will allow EU citizens subjected to data treatment and processing to gather this data in an exploitable format or to transfer such data to another data controller if this is technically possible.

This way, the client will be able to change digital services provider (email, pictures, etc.) without having to manually retrieve all the data, during a fastidious and time-consuming process. By lifting such technical barriers, the GDPR makes the market more fluid, and offers to users enhanced digital mobility. Digital services providers will therefore evolve in a more competitive market, inciting them in providing better priced and higher quality services, as their clients will no longer be hostages to their initial provider.

5.6. Labels and certifications

The European committee on data protection, as well as EU institutions, will propose some certifications and labels in order to certify compliance with the GDPR of data processes performed by businesses.

Cashable recognition and true asset for the brand image of a company, labels and certifications will also become a strong commercial tool in order to gain prospects’ trusts and to win their loyalty.

  1. What are the actionable steps to take, right now, to become GDPR compliant?

There is not a moment to lose to implement the following steps, below:

  • Decide on the ownership of implementing the GDPR provisions in your organisation; assign ownership to the best suited department or team (Legal? Compliance? Technology?);
  • Liaise with your one-stop DPA, as several of them have prepared useful explanatory information or guidance to comply with GDPR, such as the ICO in the UK, the CNIL in France and the Data Protection Commissioner in Ireland (the latter being the DPA of many a digital giant, such as Google, Facebook and Twitter);
  • Draft a map of the data processes in your organisation, and identify the gaps in GDPR compliance in relation to these various processes – we, at Crefovi, have drafted some detailed documents on how to make this mapping of data processes and treatments and to support you on identifying the gaps in GDPR compliance;
  • Value the various data processes and treatments and assess which ones are high risk and make a list of your high-risk data assets;
  • Execute a PIA on those high-risk data assets (such as Human resources’ data, customers’ data) – Crefovi supports companies in performing PIAs and in checking the efficiency of the security and protection measures, thanks to the execution of intrusion tests;
  • Implement legal, technical, organisational and physical measures to lower risks on those data assets and become GDPR compliant;
  • Ensure that your contractors and sub-contractors have put compliant security measures in place, by sending them a list of points to check;
  • Do privacy awareness training for your employees as they must understand that personal data is anything that can be linked directly to an individual and that there will be some consequences if they break the GDPR provisions and steal personal data;
  • Develop a Bring Your Own Device policy (“BYOD”) and enforce it within your organisation and among your employees, since you are accountable for all data user information stored in the cloud and accessible from both corporate devices (tablets, smartphones, laptops) and personal devices. Also, when employees leave or are terminated, make sure that you have included BYOD in your off-boarding process, so that leaving staff lose access to company confidential data immediately on their devices;
  • Check and/or redraft the information notices or confidentiality policies in order that they set out the new information required by the GDPR;
  • Put in place automated mechanisms in order to obtain explicit consent from EU citizens, especially if your business deals with behavioural data collection, behavioural advertising or any other form of profiling;
  • Put in place a solid management plan in case personal data breaches happen, which will allow you to comply with the mandatory requirement to notify your DPA within 72 hours – our in-depth experience of alert, risk management, analytical and notification plans, in France and the United Kingdom, put us, at Crefovi, in a great position to support our clients to prepare for the demanding requirements set out in the GDPR.

 

[1] The world’s most valuable resource is no longer oil, but data”, The economist, 6 May 2017.

[2] Preparing for the general data protection regulation: a roadmap to the key changes introduced by the new European data protection regime”, Alexandra Varla, 2017.

 

Annabelle Gauberti is the founding partner of Crefovi, our London and Paris law firm specialised in advising the creative industries in general, in particular on their personal data and cybersecurity requirements. She is a solicitor of England & Wales, as well as an “avocat” with the Paris bar.

Annabelle is also the president of the International association of lawyers for the creative industries (ialci).

 

 


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Brexit legal implications: the road less travelled

Crefovi : 25/06/2016 8:00 am : Antitrust & competition, Art law, Articles, Banking & finance, Capital markets, Consumer goods & retail, Copyright litigation, Emerging companies, Employment, compensation & benefits, Entertainment & media, Fashion law, Gaming, Hospitality, Hostile takeovers, Information technology - hardware, software & services, Insolvency & workouts, Intellectual property & IP litigation, Internet & digital media, Law of luxury goods, Life sciences, Litigation & dispute resolution, Mergers & acquisitions, Music law, Outsourcing, Private equity & private equity finance, Product liability, Real estate, Restructuring, Tax, Technology transactions, Trademark litigation, Unsolicited bids


On 23 June 2016, during an epic day of flooding in London and South East England, which did not deter a record 72.2 percent of voters to turn out, Little Britain decided to terminate its 43-year membership with the European Union (EU). What are Brexit legal implications that creative industries need to know about?

Brexit legal implicationsNow, the United Kingdom (UK) – or possibly, only England and Wales if Northern Ireland and Scotland successfully each hold a referendum to stay in the EU in the near future – will join the ranks of the nine other European countries which are not part of the EU, i.e. Norway, Iceland, Liechtenstein, Albania, Switzerland, Turkey, Russia, Macedonia and Montenegro. Of these, two countries, Russia and Turkey, straddle Europe and Asia.

What are the short-term and long-term consequences, from a legal and business standpoint, for the creative industries based in the UK or in commercial relationships with UK creatives?

The two main treaties of the European Union, which are a set of international treaties between the EU member states and which set out the EU’s constitutional basis, are the Treaty on European Union (TEU, signed in Maastricht in 1992) and the Treaty on the Functioning of the European Union (TFEU, signed in Rome in 1958 to establish the European Economic Community).

The TFEU in particular sets out some important policies which guide the EU, such as:

  • Citizenship of the EU;
  • The internal market;
  • Free movement of people, services and capital;
  • Free movement of goods, including the customs union;
  • Competition;
  • Area of freedom, justice and security, including police and justice co-operation;
  • Economic and monetary policy;
  • EU foreign policy, etc.

How is the ending of those policies, in the UK, going to change and affect UK creative professionals and companies, as well as foreign citizens and companies doing business in the UK?

1. Brexit legal implications: removal of EU citizenship for UK citizens and of freedom of movement of people coming in and out of the UK

Citizenship of the EU was introduced by the TEU and has been in force since 1993.

EU citizenship is subsidiary to national citizenship and affords rights such as the right to vote in European elections, the right to free movement, settlement and employment across the EU, and the right to consular protection by other EU states’ embassies when a person’s country of citizenship does not maintain an embassy or a consulate in the country in which they require protection.

By voting out of the EU, Little Britain has made it difficult for EU citizens to come to the UK, as a visa or work permit may be required in the future, depending on the agreement that the UK will strike with the EU. However, it will also be much more difficult for UK citizens to travel to EU member states, for work, studies or leisure.

Probably, the majority of people in the UK who voted out of the EU do not travel much out of the UK, either for work or leisure, so there was definitely a class battle going on there, during that Brexit referendum, as high flyers and Londoners (who have to be quite wealthy to live in such an expensive city) wanted to remain in the EU, while the working class population and English & Welsh regions were firmly on the Leave side. That’s democracy for you: one individual, one vote and the majority of votes always has the upper hand!

If we look at the example set by some of the other nine European states which are not part of the EU, we see that several options are available. Although Norway, Iceland and Liechtenstein are not members of the EU, they have bilateral agreements with the EU that allow their citizens to live and work in EU-member countries without work permits, and vice versa. Switzerland has a similar bilateral agreement, though its agreement is slightly more limited. At the other end of the spectrum, the decision about whether to permit Turkish citizens to live and work within member countries of the EU is left to the individual member nations, and vice versa.

So what’s it going to be like, for the UK?

Time will tell but as we now know that David Cameron, a relatively “mild” member of the conservative party, will step down as the UK prime minister in October 2016, we are under the impression that his leadership will be replaced with an atypical and highly-strung right-wing and nationalistic team, probably led by hard-core conservatives such as Boris Johnson. Mr Johnson not being renowned for his subtlety and impeccable political flair, we think that negotiations for new bilateral agreements between the UK and EU as well as non-EU countries will be a difficult, protracted and ego-tripped process which may take years to finalise.

The UK will try to reduce immigration from the EU, probably with a points-based system such as the one in place in Australia. It means giving priority to high-skilled workers and blocking entry to low-skilled ones. But first, the UK will have to clarify the status of the nearly 2.2 million EU workers living in the UK. The rules for family reunions may get tougher. Also, 2 million UK nationals also live abroad in EU countries – so any British measures targeting EU workers could trigger retaliation against UK nationals abroad.

This, of course, may have an extremely negative impact on the freedom of movement of people, in and out of the UK, which may have a catastrophic impact on trade, human rights and political relationships with other states, for the UK.

Article 50 of the Lisbon Treaty, another treaty from the set of international treaties between the EU member states and which sets out the EU’s constitutional basis, relates to the rules for exit from the EU and provides that:

1. Any Member State may decide to withdraw from the EU in accordance with its own constitutional requirements.

2. A Member State which decides to withdraw shall notify the European Council of its intention. In the light of the guidelines provided by the European Council, the EU shall negotiate and conclude an agreement with that State, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the EU. That agreement shall be negotiated in accordance with Article 218(3) of the TFEU. It shall be concluded on behalf of the EU by the Council, acting by a qualified majority, after obtaining the consent of the European Parliament.

3. The Treaties shall cease to apply to the State in question from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification referred to in paragraph 2, unless the European Council, in agreement with the Member State concerned, unanimously decides to extend this period.

4. For the purposes of paragraphs 2 and 3, the member of the European Council or of the Council representing the withdrawing Member State shall not participate in the discussions of the European Council or Council or in decisions concerning it. A qualified majority shall be defined in accordance with Article 238(3)(b) of the TFEU.

5. If a State which has withdrawn from the EU asks to rejoin, its request shall be subject to the procedure referred to in Article 49″.

Therefore, the UK nows needs to notify its intention to withdraw from the EU to the European Council. We understand that such notification will be handed over by the new prime minister in the UK, therefore after October 2016.

The UK will have, at the latest, a period of two years from such notification date to negotiate and conclude with the EU an agreement setting out the arrangements for its withdrawal, taking out of the framework for its future relationship with the EU. After this period of two years or, if earlier, the date of entry into force of the withdrawal agreement, the EU Treaties will cease to apply to the UK.

Let’s hope that the new UK government will have the ability and gravitas to strike a withdrawal agreement with the EU, in particular in relation to free movement of people coming in and out of the UK, which will be balanced and ensure fluid and constructive relationships with its fellow neighbours and main import partners.

Companies which have – or plan to have – employees in the UK, or which staff often travels to the UK for business reasons, should monitor the negotiation of the bilateral agreements relating to the freedom of movement of people, between the UK and EU member-states, as well as non-EU countries, very closely, as costs, energy and time to secure visas and work permits could become a significant burden to doing business in and with the UK, in the next two years.

2. Brexit legal implications: removal of free movement of goods, services and capital?

The EU’s internal market, or single market, is a single market that seeks to guarantee the free movement of goods, capital, services and people – the “four freedoms” – between the EU’s 28 member states.

The internal market is intended to be conducive to increased competition, increased specialisation, larger economies of scale, allowing goods and factors of production to move to the area where they are most valued, thus improving the efficiency of the allocation of resources.

It is also intended to drive economic integration whereby the once separate economies of the member states become integrated within a single EU wide economy. Half of the trade in goods within the EU is covered by legislation harmonised by the EU.

Clearly, the internal market and its wider repercussions have gone totally over the head of Little Britain, who wiped out 43 years of hard-won progress towards economic integration in 12 hours on 23 June 2016! “Put Britain first”, which was what the mentally ill racist and right-wing extremist shouted when he murdered Jo Cox, a Labour politician and campaigner for the rights of refugees, a week and a half ago, summarises what Little Britain had in mind, when they voted out of the EU.

Having said that, it is possible that the internal market remains in place, between the UK and the EU, as such market has been extended to Iceland, Liechtenstein and Norway through the agreement on the European Economic Area (EEA) and to Switzerland through bilateral treaties.

Indeed, the EEA is the area in which the agreement on the EEA provides for the free movement of persons, goods, services and capital within the internal market of the EU. The EEA was established on 1 January 1994 upon entry into force of the EEA Agreement.

The EEA Agreement specifies that membership is open to member states of either the EU or European Free Trade Association (EFTA). EFTA states, i.e. Iceland, Liechtenstein and Norway, which are party to the EEA Agreement participate in the EU’s internal market. One EFTA state, Switzerland, has not joined the EEA, but has a series of bilateral agreements with the EU which allow it to participate in the internal market. The EEA Agreement in respect of these states, and the EU-Swiss treaties have exceptions, notably on agriculture and fisheries.

2.1. Free movement of goods?

Thanks to the internal market, there is a guarantee to free movement of goods.

If the UK decides, during its withdrawal negotiations with the EU, to become a party to the EEA Agreement, then such freedom of movement of goods will be guaranteed.

If the UK decides, during its withdrawal negotiations with the EU, to put in place a series of bilateral agreements with the EU, then such freedom of movement of goods may be guaranteed.

Otherwise, there will be no freedom of movement of goods, between the UK and the EU, and non-EU countries, which would be an extremely perilous commercial situation for the UK. The EU is also a customs union. This means that member-states have removed customs barriers between themselves and introduced a common customs policy towards other countries. The overall purpose of the duties is “to ensure normal conditions of competition and to remove all restrictions of a fiscal nature capable of hindering the free movement of goods within the Common Market“.

Article 30 TFEU prohibits EU member-states from levying any duties on goods crossing a border, both goods produced within the EU and those produced outside. Once a good has been imported into the EU from a third country and the appropriate customs duty paid, Article 29 TFEU dictates that it shall then be considered to be in free circulation between the EU member-states.

Neither the purpose of the charge, nor its name in domestic law, is relevant.

Since the Single European Act, there can be no systematic customs controls at the borders of EU member-states. The emphasis is on post-import audit controls and risk analysis. Physical controls of imports and exports now occur at traders’ premises, rather than at the territorial borders.

Again, if the UK becomes a party to the EEA Agreement, or signs appropriate bilateral agreements with the EU and other countries party to the internal market, customs duties will be prohibited between the UK, the EU, the EEA states and Switzerland. Otherwise, customs duties will be reinstated between the UK and all other European countries, including the EU, which would be again a very disadvantageous situation for UK businesses as the cost of trading goods with foreign countries will substantially increase.

The same goes for taxation of goods and products which will be reinstated if the UK does not manage to become a party to the EEA Agreement or to sign appropriate bilateral agreements with the EU.

This is going to become a major headache for the UK’s new leadership: goods exports of the EU, not including the UK, to the rest of the world, including the UK, are about 1,800bn euros; to the UK, about 295bn euros, or a little under 16 percent. So, in 2015, the UK accounted for 16 percent of the EU’s exports, while the US and China accounted for 15 percent and 8 percent respectively.

The UK would, indeed, become the EU’s single largest trading partner for trade in goods. However, this would probably not be the case for trade overall. Including services would probably reduce the UK’s share somewhat (the EU ex UK exports over 600bn euros in services, while the UK imports only about 40-45bn euros in services from the rest of the EU). Moreover, the US will very probably overtake the UK as the EU ex UK’s largest single export market.

What does this tell us about the UK’s bargaining power with the EU after a Brexit?

It certainly confirms that the UK would become one of the EU’s largest export markets, even if not necessarily the largest. But the UK would still be far less important to the EU than they are to the UK – the EU still takes about 45 percent of UK’s exports, down from 55 percent at the turn of the century. And, if you treat the EU as one country, as this analysis does, “exports” become considerably less important overall (intra-EU trade is far more important to almost all EU countries). Indeed, as this Eurostat table shows, only for Ireland and Cyprus does the UK represent more than 10 percent of total (including intra-EU) exports. Brexit legal implications

So how important will exporting to the UK be to the EU economy after Brexit? EU exports to the UK would represent about 3 percent of EU GDP; not negligible by any means, but equally perhaps not as dramatic as one might think. The EU, and even more so the UK, would certainly have a strong incentive to negotiate a sensible trading arrangement post-Brexit. But no-one should imagine the UK holds all the cards here.

Bearing in mind that the EEA Agreement and EU-Swiss bilateral agreements are both viewed by most as very asymmetric (Norway, Iceland and Liechtenstein are essentially obliged to accept the internal single market rules without having much if any say in what they are, while Switzerland does not have full or automatic access but still has free movement of workers), we strongly doubt that currently feisty UK and its dubious future leadership (wasn’t Boris Johnson lambasted for being a womanising buffoon by both the press and members of the public until recently?) are cut from the right cloth to pull off a constructive, seamless and peaceful exit from the EU.

Creative companies headquartered in the UK, which export goods and products, such as fashion and design companies, should monitor the UK negotiations of the withdrawal agreement with the EU extremely closely and, if need be, relocate their operations to the EU within the next 2 years, should new customs duties and taxation of goods and products become inevitable, due to a lack of successful negotiations with the EU.

The alternative would be to face high prices both inside the UK (as UK retailers and end-consumers will have to pay customs duties and taxes on all imported products) and while exporting from the UK (as buyers of UK manufacturers’ goods will have to pay customs duties and taxes on all exported products). Moreover, the UK will face non-tariff barriers, in the same way that China and the US trade with the EU. UK services – accounting for eighty percent of the UK economy – would lose their preferential access to the EU single market.

While an inevitably weaker pound sterling may set off some of the financial burden represented by these customs duties and taxes, it may still very much be necessary to relocate operations to another country member of the EU or EEA, to balance out the effect of the Brexit, and its aftermath, for creative businesses which produce goods and products and export the vast majority of their productions.

Fashion and luxury businesses, in particular, are at risk, since they export more than seventy percent of their production overseas. Analysts think that the most important consequence of Brexit is “a dent to global GDP prospects and damage to confidence. This is likely to develop on the back of downward asset markets adjustments. Hence, more than ever, the fashion industry will have to work on moderating costs and capital expenditures“.

2.2. Free movement of services and capital?

The free movement of services and of establishment allows self-employed persons to move between member-states in order to provide services on a temporary or permanent basis. While services account for between sixty and seventy percent of GDP, legislation in the area is not as developed as in other areas.

There are no customs duties and taxation on services therefore UK creative industries which mainly provide services (such as the tech and internet sector, marketing, PR and communication services, etc) are less at risk of being detrimentally impacted by the potentially disastrous effects of unsuccessful negotiations between the EU and the UK, during the withdrawal period.

Free movement of capital is intended to permit movement of investments such as property purchases and buying of shares between countries. Capital within the EU may be transferred in any amount from one country to another (except that Greece currently has capital controls restricting outflows) and all intra-EU transfers in euro are considered as domestic payments and bear the corresponding domestic transfer costs. This includes all member-states of the EU, even those outside the eurozone, provided the transactions are carried out in euro. Credit/debit card charging and ATM withdrawals within the Eurozone are also charged as domestic.

Since the UK has always kept the pound sterling during its 43 years’ stint in the EU, absolutely refusing to ditch it for the euro, transfer costs on capital movements – from euros to pound sterling and vice versa – have always been fairly high in the UK anyway.

Should the withdrawal negotiations between the EU and the UK not be successful, in the next two years, it is possible that such transfer costs, as well as some new controls on capital movements, be put in place when creative businesses and professionals want to transfer money across European territories.

It is advisable for creative companies to open business bank accounts, in euros, in strategic EU countries for them, in order to avoid being narrowly limited to their UK pound sterling denominated bank accounts and being tributary to the whims of politicians and bureaucrats attempting to negotiate new trade agreements on freedom of capital movements between the UK and the EU.

To conclude, we think that it is going to be difficult for creative businesses to do fruitful and high growth business in the UK and from the UK for at least the next two years, as UK politicians and bureaucrats now have to not only negotiate their way out of the EU through a withdrawal agreement, but also to negotiate bilateral free trade deals that the EU negotiated on behalf of its 28 member-states with 53 countries, including Canada, Singapore, South Korea. Moreover, it would require highly-skilled, seasoned, non-emotional and consensual UK leadership to pull off successful trade negotiations with the EU and, in view of the populist campaign lead by a now victorious significant majority of conservative politicians in the UK up to Brexit, we think that such exceptional and innovative UK leaders are either not yet identified or not in existence, at this point in time. The pains and travails of the UK economy may last far longer than just two years and, for now, there is no foreseeable light at the end of the tunnel that all this fuss will be worth it, from a business and trade standpoint. Did Little Britain think about all that, when it went out to vote on 23 June 2016? We certainly do not think so.


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Taxation of acquisition & sale of art works: auctions & private sales | Art tax law

Crefovi : 05/11/2015 8:00 am : Art law, Articles, Hostile takeovers, Mergers & acquisitions, Tax, Unsolicited bids

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Everything you always wanted to know about taxation of acquisition & sale of art works: auction and private sales.

Taxation of acquisition & sale of art works1. Taxation of acquisition & sale of art works: general overview

1.1. Key elements

The acquisition and sale of art works, by legal entities or natural persons, are done either during public auction sales, or during private sales by mutual agreement. There are therefore two categories : public and private sales.

Article L. 321-2 et seq. of the French commercial code provides that voluntary sales of furniture at public auctions may be organised and conducted :

  • either by professional operators acting as agents of the owner of the piece of furniture, in order to best knock it down, practising as sole practitioners or under the form of companies of voluntary sales of furniture at public auctions (“sociétés de ventes volontaires de meubles aux enchères publiques“) ;
  • or by notaries and bailiffs who comply with training criteria set by regulations,

who act as agents to the owner of the piece of furniture or his representative.

During a private sale by mutual agreement, the art work can be bought directly to the artist or through a third party, who can be an art gallery, a broker, a dealer or one of the sales operators above-mentioned, provided that, in this last case, as set out in article L. 321-5 of the French commercial code, the operator has first informed in writing the seller of the option to conduct a voluntary sale at public auctions.

The acquisition and sale of art works raise many questions under tax law, and have moreover a wide tax effect, notably in terms of VAT to be paid by the buyer, as well as artist resale right and capital gain tax to be borne by the seller.

French tax authorities also incentivise legal entities which are tax residents in France, subject to corporation tax or not, to take up art sponsorship (“mécénat“), by investing in art and by acquiring art works.

1.2. Texts

1.2.1. Codified texts

  • French tax code, art. 150 VI to art. 150 VM
  • French tax code, art. 238 bis AB
  • French tax code, art. 238 bis-0 A CGI
  • French  tax code, art. 278-0 bis
  • French tax code, art. 278 septies
  • French tax code, art. L. 122-8 and L. 334-1

1.2.2. Non-codified texts

  • BOI-TVA-SECT-90-60, 12 Sept. 2012 : “TVA – Régimes sectoriels – Biens d’occasion, œuvres d’art, objets de collection ou d’antiquité – opérations effectuées entre deux états-membres
  • BOI-TVA-SECT-90-50, 12 Sept. 2012 : “TVA – Régimes sectoriels – Biens d’occasion, œuvres d’art, objets de collection et d’antiquité – Ventes aux enchères publiques
  • BOI-RPPM-PVBMC-10, 1er Apr. 2014 : “RPPM – Plus-values sur biens meubles et taxes forfaitaires sur les objets précieux – cession de biens meubles

1.2.3. European directives 

  • EU Council, Dir. 94/5/EC, 14 Feb. 1994 (7th European directive)
  • PE and EU Council,  Dir. 2001/84/EC, 27 Sept. 2001

1.3. LexisNexis library

1.3.1. Practical forms

1.3.2. JurisClasseur booklets

  • JCl. Fiscal Chiffres d’affaires, Booklet 2060-4 : “Régimes particuliers. – Biens d’occasion, objets d’art, de collection ou d’antiquité. – Définitions. – Principes d’imposition
  • JCl. Propriété littéraire et artistique, Booklet 1262 : “Droits des auteurs. – Droits patrimoniaux. Droit de suite (art. L. 122-8 French intellectual property code)

1.3.3. Reviews

  • Annabelle Gauberti, “Fiscalité des œuvres d’art : une arme à double tranchant“: RFP 2013, study 13
  • P. Schiele et E. Talec, “La taxe sur les oeuvres d’art : une législation elliptique qui nécessitait une «consolidation législative»“: Dr. fisc. 2006, n° 26, study 49

2. Taxation of acquisition & sale of art works: preparation

2.1. Prior information

Counsel will act to advise either the buyer or the seller in relation to the conditions of execution of the acquisition or sale of art works, antiques and cultural assets, but also and especially in relation to the tax consequences of such transaction.

2.1.1. When the practitioner advises the seller

In this case, the following questions should be asked :

  • Is the seller a natural person or a legal entity? Is the seller a tax resident in France, within another member-state of the European Union (EU), or outside the EU?
  • Is the seller the artist who has created the artwork? Is this seller-artist subject to VAT?
  • Will the sale by private or public?
  • Who will organise the sale? An agent? The seller directly?
  • In which country will the sale occur?
  • Where is the artwork that will be sold? In France? The EU? Outside the EU? In a free port?
  • In a private sale, who is the buyer? Is it a natural person or a legal entity? Is this buyer a tax resident in France, in another member-state of the EU, outside the EU?
  • What is the sale value of the art work?

2.1.2. When the practitioner advises the buyer

In this case, the following questions should be asked:

  • Is the buyer a natural person or a legal entity? Is he a tax resident in France, in another member-state of the EU, outside the EU?
  • Will the acquisition be private or public?
  • Who will organise the sale? The artist or the collector directly? An agent, such as an intermediary, a “société de ventes publiques aux enchères“?
  • In which country will the acquisition occur? In France, in the EU, outside the EU?
  • Where is the artwork which will be sold? In France? In the EU? Outside the EU? In a free port?
  • In case of a private sale, who is the seller? Is it a natural person or a legal entity? Is it the artist, author of the art work? Is this seller a tax resident in France, in another member-state of the EU, outside the EU? Is this seller-artist subject to VAT?
  • If the buyer is a legal entity, is it subject to corporation tax or income tax?
  • What is the price of the art work?

2.2. List of solutions and decision criteria

From the information gathered, counsel must inform and advise his client about the tax effects deriving from the acquisition or sale of the art work(s), and in particular explain the pros and cons of such transaction.

Moreover, it is advisable to let clients know about the option to organise the transaction on a particular geographical territory, in order to maximise the tax regime applicable to such transaction.

2.2.1. VAT

2.2.1.1. For transactions done on the French market

The sale of an original artwork by the author or his beneficiaries is subject to a VAT rate of 5.5%, pursuant to the provisions of article 278-0 bis of the French tax code. All other sales (by third parties, such as collectors, galleries, brokers, etc.) are subject to the standard VAT rate of 20%.

2.2.1.2. For sales done in the EU

The 7th European directive (Cons. EU, dir. 94/5/EC, 14 Feb. 1994) relating to the particular regime applicable to VAT on art works, collecting items and antiques, is based on two principles:

  • taxation of the beneficiary margin (i.e. the sale price minus the buying price, or, for auction house companies, the hammer price including premiums minus the net amount paid to the seller) is the standard VAT regime for these types of goods;
  • in intra-community trade, applicable VAT is that of the country where the delivery is made (« TVA pays de départ »).

Article 278-0 bis of the French tax code provides that intra-community acquisitions of art works, collecting items or antiques, performed by a natural person or a legal entity either subject, or not subject, to VAT; who imported the goods on the territory of another member-state of the EU, are subject to a reduced VAT rate of 5.5% on the beneficiary margin.

The same article provides that the intra-community acquisitions of art works, collecting items or antiques, which have been delivered in another member-state by natural persons or legal entities subject to VAT but other than resellers subject to VAT, are also subject to a reduced VAT rate of 5.5% on the beneficiary margin.

A reseller subject to VAT refers to all natural persons or legal entities subject to VAT whose business consist in trading said goods: second-hand goods dealers, art galleries, antique dealers, bric-a-brac traders, “sociétés de ventes volontaires de meubles aux enchères publiques“.

All other intra-community acquisitions of art works, collecting items or antiques are subject to the standard VAT rate of 20% on the beneficiary margin.

Of course, intra-community acquisitions of art works which are delivered with no beneficiary margin are exempt from VAT.

2.2.1.3. For sales done outside the EU (and therefore outside France)

No VAT in France is due.

2.2.2. Wealth tax

In addition to VAT, it is worth checking whether the buyer of an art work may become subject to the French wealth tax, following such purchase.

To date, and despite many aborted bills leaning in this direction, art works are not included in the basis of the wealth tax. Article 885 I of the French tax code provides that antiques, art works or collecting items are not included in the basis of the wealth tax.

Therefore, a recent buyer of an art work, tax resident in France, does not have to disclose such art work or the sums of money used to pay for such art work, to the tax authorities. Such buyer could not be prosecuted by the tax authorities to pay the wealth tax on the basis of this new acquisition.

2.2.3. Artist resale right

Pursuant to the provisions of Article L. 122-8 of the French intellectual property code, artist resale right allows the author of fine art works, resident in a member-state of the European Union or a state part of the European Economic Area, to receive a percentage which goes from 0.5% to 4% of the sale price of an art work (sold either in a private or public sale), when an art market professional intervenes as a seller, buyer or intermediary. On the death of the artist, the artist resale right is passed on to his beneficiaries during a period of 70 years after his death.

Artist resale right being a right to share the profit in any sale, it is the seller who bears such artist resale right, as follows:

  • 4% up to 50,000 euros ;
  • 3% between 50,000.01 and 200,000 euros ;
  • 1% between 200,000.01 and 350,000 euros ;
  • 0,5% between 350,000.01 and 500,000 euros ;
  • 0,25% above 500,000.01 euros.

The basis of such profit sharing is «exclusive of tax, the hammer price in case of public sale and, for other sales, the sale price perceived by the seller» pursuant to the provisions of article R. 122-5 of the French intellectual property code.

Artist resale right is not due when the sale price is lower than 750 euros.

Artist resale right cannot exceed 12,500 euros, which excludes any profit sharing pursuant to the artist resale right for the share of price above 2 million euros.

2.2.4. Capital gain tax

Capital gain occurring further to the sale of art works is taxable income, under the income tax regime for natural persons and legal entities subject to income tax.

If the seller has written evidence of the date and price of purchase, he will be able to choose the standard regime for capital gain. The rate is 34.5% (inclusive of social security deductions) with a 5% discount per year beyond the second year. There is therefore a full exemption after 22 years of ownership.

If the seller cannot justify either the price or date of purchase, or if he requests it, the tax flat-rate regime applies. Pursuant to the provisions of article 150 VI et seq. of the French tax code, sales of art works and collecting items are subject to a flat-rate tax.

This flat-rate tax is 6% of the selling price, for the sale of art works and collecting items. This tax is due at the time of the sale.

The capital gain tax is paid by the seller of the art work. This tax is due, under their liability, by the intermediary who is tax resident in France and who participates in the sale or, in case no intermediary is involved, by the buyer when such buyer is subject to VAT and tax resident in France; in other cases, capital gain tax is due by the seller.

However, sales of art works or collecting items are exempted from capital gain tax when the sale price of the art work is not above 5,000 euros or when the seller of an art work outside the territory of the member-states of the EU, does not have his tax residence in France.

Article 219 of the French tax code provides that if the seller of an artwork is a legal entity subject to corporation tax, capital gain tax derives from a special regime, according to which:

  • if the artwork was owned for less than 2 years, capital gain tax is the same than taxes on the company’s benefit: 33.33%, with a first ladder of 15% up to the cap of 38,120 euros for companies with a turnover below 7,630,000 euros, a shareholding capital fully paid up and held for at least 75% by natural persons or legal entities owned by natural persons;
  • if the artwork was owned for at least 2 years, and was not amortised: 15%.

2.2.5. Deductions from corporation tax or income tax paid by legal entities

Article 238 bis AB of the French tax code provides that legal entities subject in France to corporation tax or income tax can deduct from their operating result a sum equal to the buying price of original art works made by living artists, during a period of 5 years, provided that:

  • these works are set out in a fixed asset account;
  • the deduction done for each fiscal year does not exceed a tax discount equal to 60% of the amount of the buying price, with a cap of 5 for one thousand of the turnover, less the total of the payments set out in article 238 bis of the French tax code;
  • the legal entity exhibits in a location accessible to the public or its employees, but not in its offices, the acquired art work during the period corresponding to the fiscal year of the acquisition as well as the 4 following years.

This tax incentive to art sponsorship (“mécénat d’entreprise“) focuses on legal entities which either have a commercial purpose or offer professional services.

Moreover, article 238 bis-0 A of the French tax code provides that legal entities subject to corporation tax on their real profit (“bénéfice réel“) can benefit from a tax credit equal to 90% of the payments made to buy cultural assets presenting the features of national treasures, having been refused the delivery of an export certificate by the French administration and for which the French state made a purchase offer to the owner. This tax credit is also applicable to payments made for the purchase of cultural goods located in France or abroad which acquisition would present a major interest for the national estate from a historical, artistic or archeological standpoint. The tax credit applies on corporation tax due for the fiscal year during which the payments were accepted. This tax credit cannot be above 50% of the tax amount due by the legal entity for this fiscal year.

3. Taxation of acquisition & sale of art works: implementation

Let’s have a look at the tax regime for each case, before examining the tax return declaration formalities and the payment of tax charges.

3.1. Tax regime

Each case below is studied taking into account, as a starting point, the fact that the sale transaction of the art work happens in France.

3.1.1. In case of a transaction where both the buyer and the seller are tax residents in France

If the artwork acquisition is done directly between the buyer and the seller, without the intervention of an agent, it is necessary to check whether the seller is the artist author of the sold artwork, or one of his beneficiaries.

If the seller is the artist author of the art work or one of his beneficiaries, subject to VAT, then the sale is subject to VAT at 5.5% and no artist resale right will be due by the buyer, following such transaction.

Otherwise, all other sales (done by third parties, such as collectors, gallerists, traders, etc.) are subject to the standard VAT rate of 20%. In case where those other sales trigger the involvement of a art market professional, as seller, buyer or intermediary, and where the artist is a resident in a member-state of the European Union or a state from the European Economic Area, the seller must pay the artist or his beneficiaries an artist resale right as soon as the sale price is above 750 euros.

The seller, tax resident in France, and subject to income tax, must pay capital gain tax, if there is any capital gain, to the French tax authorities, either by paying a flat-fee tax of 6% of the selling price, or, if this is preferable for him and if the seller has written evidence justifying the buying price and date of the sold artwork, by paying tax through the standard capital gain tax regime. The rate is therefore 34.5% (including social security payments) with a 5% discount per year beyond the second year. There is therefore a full exemption of payment of capital gain tax after 22 years of ownership of the art work.

If the seller is a legal entity subject to corporation tax, capital gain tax from the special tax regime applies. If the legal entity owned the artwork for less than 2 years, and that its shareholding capital has been fully paid up and is owned in full by either a natural person or a legal entity subject to income tax, then that legal entity will be able to include the capital gain generated by the sale of the art work to its earnings. The first ladder, up to the cap of 38,120 euros, will be subject to 15% tax for legal entities having a turnover below 7,630,000 euros. Above 38,120 euros, the tax rate of 33.33% applies. If the artwork was detained for at least 2 years, and was not amortised (i.e. the artwork was not classified as a fixed asset by the legal entity), this rate of 15% applies.

If the buyer is a legal entity, French tax resident, it can deduct from its profit a sum equal to the purchase price of any original artwork produced by living artists, during a period of 5 years, provided that the conditions set out in article 238 bis AB of the French tax code are met.

3.1.2. In case of a transaction where either the seller or the buyer is tax resident in another member-state of the EU

This case targets artwork acquisitions taking place in France, by parties where at least one of them is a tax resident in another member-state of the EU than France. This or these parties resident in another member-state of the EU can be an intermediary (the reseller subject to VAT), the buyer or the seller.

Indeed, transactions performed outside France are not subject to French VAT, payable to French tax authorities.

If no beneficiary margin occurs, during the artwork transaction happening in France, then the delivery will be exempted of VAT.

If a beneficiary margin occurs, and if the intra-community acquisition of art works, collecting items or antiques is performed by someone subject to VAT or a legal entity not subject to VAT, and if said works were imported in the territory of another member-state of the EU, then the transaction we be subject to a reduced VAT rate of 5.5% on the beneficiary margin.

If a beneficiary margin is realised, and that the intra-community acquisition of art works, collecting items and antiques was subject to a delivery in another member-state by other people subject to VAT than resellers subject to VAT, then that beneficiary margin will also be taxed at a reduced VAT rate of 5.5%.

All other intra-community acquisitions of art works, collecting items and antiques during which a beneficiary margin is realised, will be taxed at the standard VAT rate of 20% on the beneficiary margin.

Article R. 122-2 of the French intellectual property code provides that the sale, in any case, triggers the payment of artist resale right pursuant to article L. 122-8 of the French intellectual property code only if at least one of the following two conditions are met: « 1° the sale is performed on the French territory ; 2° the sale is subject to VAT». Therefore, when the intra-community transaction has occurred in France, artist resale right must be paid by the seller, within the conditions set out in paragraph 3.1.1 above.

Capital gain tax is due in France if the seller is a French tax resident since that tax is borne by the seller of the art work. It is due, under their liability, by the intermediary who is a tax resident in France, and who participates in the transaction or, in case no intermediary gets involved, by the buyer when  that buyer is subject to VAT and tax resident in France; in other cases, capital gain tax is due by the seller.

If the buyer is a legal entity tax resident in France, tax credits incentivising art sponsorship (“mécénat”) set out in article 238 bis AB of the French tax code apply, as explained in paragraph 3.1.1. above.

3.1.3. In case of transactions where either the seller or the buyer is tax resident outside the EU

If the buyer is a legal entity tax resident outside the EU, no VAT is due by the seller.

If the buyer is a natural person tax resident outside the EU, VAT is due at the standard rate, by the seller subject to VAT.

As set out above in paragraph 3.1.2., artist resale right must be paid when the sale has been conducted in France, within the conditions set out in paragraph 3.1.1. above.

As set out above in paragraph 3.1.2., capital gain tax is due in France if the seller is a French tax resident. However, sales of art works or collecting items are exempted from capital gain tax when the seller of an art work outside the territory of the member-states of the EU does not have its tax residence in France. Therefore, if the sale was conducted outside the EU territory and the seller is a French tax resident, such seller must pay capital gain tax in France, to the French tax authorities.

Tax credits incentivising art sponsorship (“mécénat“) set out in article 238 bis AB of the French tax code  apply to the buyer if the latter is a legal entity tax resident in France.

3.2. Tax return declaration formalities and payment of tax charges

3.2.1 VAT

VAT is paid during the occurrence of the sale of the art work, by the buyer.

Both the seller and the buyer, if they are subject to VAT and tax residents in France, have the obligation to declare such VAT (as revenue for the seller and as expense for the buyer) during the filling out of the CA3 declaration (monthly or quarterly) to their respective tax center (“centre des impôts des entreprises“).

3.2.2. Artist resale right

Artist resale right, paid on the sale price, is borne by the seller. However, the liability of the payment of such artist resale right lies with the «professional who intervenes during the sale». In case of a public auction sale, article R. 122-9 of the French intellectual property code explicitly allocates the liability of the payment of artist resale right to the art market professional, who is either a “société de ventes volontaires” or the judicial auctioneer. In other cases, it is the art market professional intervening in the sale who bears such liability.

Article R. 122-10 of the French intellectual property code looks at two cases, relating to the obligations of this professional. If the professional responsible for the payment of the artist resale right is contacted for payment by the beneficiary of the artist resale right, the professional must pay such sum within 4 months. If the professional is not contacted by the beneficiary of the artist resale right for payment, he must inform, within 3 months from the end of the civil quarter during which the sale has occurred, one of the collecting societies registered on the list maintained by the French ministry of culture,  setting out the sale date, name of the author and, if applicable, information relating to the beneficiary of the artist resale right.

3.2.3 Capital gain tax

3.2.3.1. French tax resident subject to income tax

The seller of an art work, French tax resident subject to income tax, becomes liable to capital gain tax due under income tax, at the occurrence of the sale.

However, this tax will only be paid after the seller has informed French tax authorities, by filling out and sending his income tax annual declaration form, of the existence of such capital gain, and after French tax authorities will have sent the seller his income tax notice, setting out the sum to be paid in relation to the capital gain tax.

3.2.3.2. French tax resident subject to corporation tax

The seller of an art work, French tax resident subject to corporation tax, becomes liable to capital gain tax due under corporation tax, when the sale occurs.

However, this capital gain tax will only be paid after the seller has informed the French tax authorities, through the filling out and sending of its annual corporation  tax declaration form, of the existence of such capital gain.

3.2.3.3. Deductions from corporation tax and income tax for legal entities

Legal entities tax resident in France can deduct from their operating result an amount equal to the purchase price of original art works produced by living artists, during a 5 year’ period, if certain conditions set out in paragraph 2.2.3. above are met.

In relation to legal entities subject to income tax, they must enclose a special declaration form n°2069-M-SD to their operating result declaration form for the fiscal year during which the expenses triggering the tax credit were made, pursuant to article 238 bis AB of the French tax code.

In relation to self-employed individuals (“entreprises individuelles”), and independently from the “entreprise individuelle” sending the special declaration form n° 2069-M-SD, natural persons who benefit from the tax credit must set out, on their income tax declaration forms, the amount of the tax credit set out on the special declaration form and enclose to their income tax declaration form, when they benefit from tax credits from tax sponsorship (“mécénat“) non attributed to previous tax years, a follow-up statement of their tax credit.

In relation to legal entities subject to corporation tax, legal entities not belonging to a tax group within the meaning of article 233 A of the French tax code, as well as parent companies of such groups, must fill out and send a special declaration form and, whenever they benefit from tax credits of the same nature not attributed to corporation tax on the previous fiscal years, a follow-up statement of such tax credits (form n°2069-MS1-SD) to the accountant in charge of the payment of corporation tax. Moreover, parent companies of a tax group must enclose, with all these documents, a copy of the special declaration forms for their subsidiaries.

In relation to legal entities subject to corporation tax, the special declaration form is no longer enclosed to the net profit declaration form, except for special declaration forms subscribed by legal entities members of a tax group but without the status of parent company, which must annex the special declaration form to their operating result declaration form and send a copy to their parent company. The parent company will send a copy of such special declaration form, along with the statement of payment of corporation tax, to the accountant in charge of the payment of corporation tax.

The tax credit defined at article 238 bis AG of the French tax code is set off against either the income or corporation tax owed by the taxpayer. As far as corporation tax is concerned, tax credit is set off against the tax balance.

However, whenever the amount of tax credit is higher than the amount of tax to pay, the unattributed balance can be used for the payment of tax during the next 5 fiscal years after the fiscal year during which the tax credit was granted.

These provisions apply both for legal entities liable for income tax or corporation tax.

4. Taxation of acquisition & sale of art works: tools

Checklist

  • Inform the client of the tax rules applicable to the different cases of business transactions on art works;
  • Ensure that the acquisition or sale is structured in a manner which is tax advantageous for the client;
  • Ensure that the client complies with his tax obligations to declare and inform the French tax authorities, if need be;
  • Ensure that the client settles, within the allocated time frame, all tax due by himself, on the sale or purchase of art works, to the French tax authorities;
  • Ensure that the client, legal entity, makes the most of the advantageous tax regime, relating to tax credits and tax incentives to art sponsorship (“mécénat“) and art works’ acquisition.

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Legal 500 recommends Crefovi in intellectual property category

Crefovi : 08/04/2015 8:00 am : Art law, Consumer goods & retail, Copyright litigation, Entertainment & media, Fashion law, Fashion lawyers, Gaming, Hospitality, Information technology - hardware, software & services, Intellectual property & IP litigation, Internet & digital media, Law of luxury goods, Life sciences, Litigation & dispute resolution, Media coverage, Music law, Technology transactions, Trademark litigation


London IP law firm Crefovi recommended by Legal 500 in the practice area “Intellectual property – boutique”. Awesome!

Legal 500 recommends Crefovi in intellectual property categoryLegal 500 recommends Crefovi in intellectual property category! Indeed, Legal 500 Europe, Middle East & Africa 2015 has recommended London IP law firm Crefovi in the following practice area: “France – Intellectual property – Boutiques – Other recommended firms”.

Since Crefovi was founded three years ago, we are super proud to already be ranked in the prestigious guide and directory Legal 500.

This important recognition, coming from such a prominent legal guide, is a testament to the pioneering work and proprietary research that London IP law firm Crefovi has always strived to accomplish since its foundation, in particular in the growing legal field of the law of luxury goods and fashion.

Crefovi’s founding partner Annabelle Gauberti has acquired extensive knowledge and experience in the legal field, as it applies to the fashion and luxury industries, either in litigation related or non-litigation related matters.

She is delighted that her legal and sectoral expertise, as well as the quality of the services provided by London IP law firm Crefovi, are recognised as being outstanding. She is proud that Legal 500 recommends Crefovi in intellectual property category. 

London IP law firm Crefovi has an ambitious programme of seminars, entitled the “law of fashion and luxury goods series” which it is rolling out from 2014 to 2016, in partnership with the international association of lawyers for the creative industries (ialci), which it sponsors.

The third seminar to this programme of the law of fashion and luxury goods series is going to be announced soon, so stay tuned to snap up your attendance ticket to this high-profile event for the fashion and luxury industries, to be hosted in London.


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