New technology & data privacy blog

New technology & data privacy blog

London information technology & internet law firm Crefovi is delighted to bring you this new technology & data privacy blog, to provide you with forward-thinking and insightful information on hot business and legal issues in the digital & high technology sectors.

This new technology & data privacy blog provides regular news and updates, and features summaries of recent news reports, on legal issues facing the global information technology, media and internet community, in particular in the United Kingdom and France. This new technology & data privacy blog also provides timely updates and commentary on legal issues in the hardware, software and e-commerce sectors. It is curated by the IT lawyers of our law firm, who specialise in advising our information technology & internet clients in London, Paris and internationally on all their legal issues.

Crefovi practices in information technology, hardware & software since 2003, in Paris, London and internationally. Crefovi advises a wide range of clients, from start-ups in the tech world requiring legal advice on contractual, tax and intellectual property issues, to large corporations – renowned in the information technology and ‟Consumer discretionary” sectors – which require advice to negotiate and finalise their licencing or distribution deals, or to enforce their intellectual property rights. Crefovi’s ‟Internet & digital media” team participates in  high-profile transactions. It assists leading established and emerging companies in mergers and acquisitions; litigation, including intellectual property litigation; financing transactions; securities offerings; structuring cross-border international operations; technology and intellectual property transactions; joint ventures and in matters involving online speech, privacy rights, advertising, e-commerce and consumer protection, and regulatory issues. Crefovi writes and curates this new technology & data privacy blog to guide its clients through the complexities of information technology, and internet & digital media, law.

The founding and managing partner of Crefovi, Annabelle Gauberti, regularly attends, and is a speaker on panels organised during, important events from the calendar of the world of information technology and internet, such as the tradeshows CES, Slush, SXSW, Viva Technology, Wired and Web Summit.

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. Some of these industry teams are the ‟Information technology, hardware & software”, as well as the ‟Internet & digital media” departments, which curate this new technology & data privacy blog below, for you. 

Annabelle Gauberti, founding and managing partner of London information technology & internet law firm Crefovi, is also the president of the International association of lawyers for creative industries (ialci). This association is instrumental in providing very high quality seminars, webinars & brainstorming sessions on legal & business issues to which the creative industries are confronted.

Crefovi regularly updates its social media channels, such as Linkedin, Twitter, Instagram, YouTube and Facebook. Check our latest news there!

Arbitration & creative industries: what’s new?

Crefovi : 19/04/2022 12:46 pm : Articles, Copyright litigation, Employment, compensation & benefits, Entertainment & media, Gaming, Information technology - hardware, software & services, Intellectual property & IP litigation, Internet & digital media, Litigation & dispute resolution, Trademark litigation, Webcasts & Podcasts

Back in 2018, I wrote an article on the use of alternative dispute resolution (‟ADR”) – in particular, arbitration – in the creative industries. On the back of the California arbitration week, and the Paris arbitration week, which both took place earlier this year in March and April 2022, it is worth revisiting whether ADR is really becoming the tool of choice, for the creative industries, to resolve their disputes.

1. More and more ADR institutions have specialty panels of neutrals specialising in creative industries

One major trend which erupted since 2018 is that ADR institutions (i.e. bodies which have sprung up over the years, specialising in providing either mediation and/or arbitration services) have understood the need to provide a pool of arbitrators and mediators (i.e. neutrals) who are deeply cognisant of the inner workings of a particular industrial sector.

For example, the Court of Arbitration for Art (‟CAfA”) was set up in 2019, in the Netherlands, as a specialised arbitration and mediation tribunal exclusively dedicated to resolving art law disputes. While it is not clear whether CAfA has already been used yet, to resolve many art disputes, its ‟raison d’être” is to administer domestic and international arbitrations conducted by arbitrators with significant expertise in art and art law. On this note, I am an arbitrator and mediator registered on CAfA’s panel of neutrals specialised in art law.

As far as the films and entertainment sector is concerned, the big news from 2021 were that the Independent Film & Television Alliance (‟IFTA”), based in Los Angeles, USA, devolved the whole management of its panel of entertainment law-focused arbitrators to another ADR centre, i.e. the American Arbitration Association (‟AAA”) and its international posting, the International Centre for Dispute Resolution (‟ICDR). So, as a neutral on the IFTA panel, I was inducted into the AAA/ICDR entertainment panel in February 2022, during a mandatory case management training conducted on Zoom, along with most other arbitrators from the IFTA panel.

For the information technology sector, the Silicon Valley Arbitration & Mediation Center (‟SVAMC”) really took off, since 2018. While SVAMC is not an ADR institution providing mediation or arbitration services per se, it publishes the Tech List each year, which it brands as ‟the list of the world’s leading technology neutrals, peer-vetted and limited to exceptionally qualified arbitrators and mediators known globally for their experience and skill in crafting business-practical legal solutions in the technology sector” (sic). While this list is still very US-centric, as well as male-centric, it may prove useful for parties who want to ensure that the arbitrators appointed to resolve their disputes are tech-specialised and understand the international tech business world.

2. More and more disputes taking place in the creative industries are resolved through arbitration

While my 2018 ADR article was a bit of wishful thinking, ADR has since really found its place, as the tool of choice for the creative industries to resolve their disputes, in a confidential, efficient and technology-savvy way.

With the management of the COVID 19 pandemic causing a vast backlog of court cases, on the dockets of almost all courts in the world, for the last two years, and with an inability from public courts to adopt virtual hearings and electronic case management methods, creatives around the world have really started to appreciate using mediation and arbitration services to decisively and efficiently sort out their civil and commercial conflicts.

This is a bonanza for ADR institutions, with Chris Poole, the CEO of Los Angeles-based Judicial Arbitration & Mediation Service (‟JAMS”) bragging, during an interview, that even the Kardashians are using JAMS’ services to resolve their commercial disputes!

As highlighted during the first edition of the California International Arbitration Week, California-based ADR institutions, such as JAMS and AAA/ICDR, and California-located neutrals, have everything to win from this newly-found interest in ADR, from the entertainment, music, information technology and media industries, which stakeholders are majorly based in Los Angeles and Silicon Valley. It is therefore possible that California may become a prominent arbitration location, in the future, on a par with Paris or London.

ADR institutions are also positioning themselves at the forefront of dispute resolution, by adopting tech-solutions and tools, such as:

  • conducting arbitration via virtual hearings;
  • using electronic signatures to sign arbitral awards and other official documents;
  • making the most of proprietary electronic case management platforms that are simultaneously used by neutrals, parties and ADR case managers during arbitrations or mediations, and
  • putting robust data privacy terms & conditions, and cyber-attack firewalls, in place, to protect all stakeholders’ data which is disclosed online, during the resolution of such disputes,

so that parties and neutrals alike may virtually meet, despite the lockdowns and travel restrictions, to get on with the arbitration or mediation processes and issue some timely arbitral awards or mediation decisions.

The 2022 Paris arbitration week hosted several events on sports’ and esports’ disputes and ADR, highlighting how essential arbitration has become to resolve conflicts in sports, and, potentially, esports, via the services of the quasi-monopolistic ADR institution called Court of Arbitration for Sports (‟CAS”). Indeed, established in 1984 by the International Olympic Committee, Geneva-based CAS deals with disciplinary and commercial disputes directly and indirectly linked to sport. Via its two main divisions, the Ordinary Arbitration Division (which functions as a court of sole instance), and the Appeals Arbitration Division (which hear cases brought to it on appeal from federations and sports organisations), CAS has delivered arbitral awards on the most high-profile recent sports disputes, such as the Caster Semenya v International Association of Athletics Federations (‟IAAF”) case and China’s Sun Yang anti-doping saga.

3. Why arbitration is the way to go, to resolve cross-border disputes, post Brexit, between parties located in the European Union and the United Kingdom

As explained at length in my 2021 article ‟How to enforce civil and commercial judgments after Brexit?”, the new regime of enforcement and recognition of European Union (‟EU”) judgments in the United Kingdom (‟UK”), and vice versa, is uncertain and fraught with possible litigation with respect to the scope of application of the Hague convention dated 30 June 2005 on choice of court agreements.

In this context, which is unlikely to change until the UK enters into bilateral agreements with the EU on the enforcement and recognition of court judgments, it is high time for the creative industries to ensure that any dispute arising out of their new contractual agreements are resolved through arbitration.

Indeed, as explained in our article ‟Alternative dispute resolution in the creative industries”, arbitral awards are recognised and enforced by the Convention on the recognition and enforcement of foreign arbitral awards 1958 (the ‟New York convention”). The New York convention is unaffected by Brexit, since it was signed by the UK as a contracting state. Moreover, London, the UK capital, is one of the most popular and trusted arbitral seats in the world. Conscious of the issues caused by Brexit on the enforcement and recognition of court judgments, the UK government has decided to boost further its country’s attractiveness as an arbitration seat, by reviewing, and upgrading its Arbitration act 1996.

Creative companies and individuals would therefore be well-inspired to set out some arbitration clauses in their contracts, going forward, in order to:

  • preserve long-established relationships with their cross-border trade partners;
  • protect their reputation and goodwill via the confidentiality afforded by arbitration processes;
  • resolve their disputes in tech-savvy environment, which limit any obligation to travel to the arbitration seat, via the wide-use of virtual hearings;
  • entrust specialist arbitrators, who know the creative sector in which the dispute has arisen inside out, with delivering fair, accurate and impartial arbitral awards.

https://youtu.be/TzpMqqrFZSc
Crefovi’s live webinar: arbitration & creative industries – how to make the most of ADR? – 9 May 2022

 

Crefovi regularly updates its social media channels, such as LinkedinTwitterInstagramYouTube and Facebook. Check our latest news there!

 

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    Actor agreements: how power is shifting back to movies studios and streaming platforms

    Crefovi : 13/03/2022 2:59 pm : Articles, Copyright litigation, Employment, compensation & benefits, Entertainment & media, Fashion lawyers, Information technology - hardware, software & services, Intellectual property & IP litigation, Internet & digital media, Litigation & dispute resolution, Webcasts & Podcasts

    The movie industry’s balance of power is strongly impacting actor agreements and how actors and actresses are treated by movie studios, film production companies and streaming platforms. While the current pendulum is shifting back to movie studios, streamers and film producers, actors still have many cards to play, in the new streaming era, to get the best deals.

    1. The star system: how stars were ‟owned” by film studios, from the creation of the movie business at the beginning of the 20th century, up to the mid 1940s

    The film industry was invented at the end of the 19th century, when the Lumière brothers organised the first ever commercial and public screening, of their short films in Paris, on 28 December 1895.

    Then, the movie business blossomed in a more mature industry in the 1900s, with the 1920s being the golden years of German cinema and seeing Hollywood overtake, and triumph over, European film industries (French and Italian, in particular), which had been devastatingly interrupted by the first world war.

    The American industry, or ‟Hollywood” as it was becoming known after its new geographical center in California, then gained the position it has held, ever since: that of the film factory for the world and major exporter of its movie products to most countries on earth.

    Therefore, the Hollywood microcosm, based on its two pillars – the studio system and star system respectively – became the world’s epicenter of the movie industry, from the 1920s onwards.

    The studio system, a method of filmmaking wherein the production and distribution of films is dominated by a small number of large movie studios (i.e. the ‟majors”, divided between the ‟Big 5” RKO Radio Pictures, 20th Century Fox, Paramount Pictures, Warner Bros. and Metro-Goldwyn-Mayer; and the ‟Little 3” Universal Pictures, Columbia Pictures and United Artists), was based on the premise that most creative personnel, and in particular actors and actresses, were under long-term contract to their respective studios.

    While in the early years of cinema (1890s to 1900s), performers were not identified in films, the star system (a method of creating, promoting and exploiting movie stars in Hollywood films) was majorly used from the 1920s until the early 1960s, by the above-mentioned studios. However, from the mid-1940s onwards, the star system started showing some serious cracks, which aggressive and forward-thinking talent quickly infiltrated to regain control over their careers and, ultimately, their lives. More on that later.

    In the star system, movie studios would select promising young actors and actresses, glamorise and create personas for them, often inventing new names and even new backgrounds. Under orders from a studio, stars sometimes even altered their facial appearance and hair color. Examples of stars who went through the star system include Cary Grant (born Archibald Leach), Joan Crawford (born Lucille Fay LeSueur) and Rock Hudson (born Roy Harold Scherer).

    Under the star system, actors were literally ‟owned” by the majors, as properties locked into employment contracts with a standard term of seven years, through which they owned a weekly wage, like any other employee of the movie studios. They were asked to work six days a week, for long hours. Their contracts required the actors to participate in every movie, and all publicity, the studio desired.

    Morality clauses were integral to actors’ studio contracts. They curtailed, restrained or prohibited certain behaviours of, and from, the talent. This was justified not only by the fact that the star system put an emphasis on the image rather than the acting skills of its talent, but also by the studios’ reaction to the Roscoe ‟Fatty” Arbuckle criminal case in 1921. One of Hollywood’s most popular silent stars and highest-paid actors of the 1910s, Arbuckle suffered a serious setback when his reputation was irrevocably tarnished by becoming the defendant in three widely publicised trials, between November 1921 and April 1922, for the alleged rape and manslaughter of actress Virginia Rappe. Subsequent to media outcry, Universal Studios decided to add a morals clause to its contracts, which 1921 version read as follows: ‟The actor (actress) agrees to conduct himself (herself) with due regard to public conventions and morals and agrees that he (she) will not do or commit anything tending to degrade him (her) in society or bring him (her) into public hatred, contempt, scorn or ridicule, or tending to shock, insult or offend the community or outrage public morals or decency, or tending to the prejudice of the Universal Film Manufacturing Company or the motion picture industry. In the event that the actor (actress) violates any term or provision of this paragraph, then the Universal Film Manufacturing Company has the right to cancel and annul this contract by giving five (5) days’ notice to the actor (actress) of its intention to do so”.

    Constantly under pressure to ‟behave”, actors and actresses worked together with studio executives, public relations staffs and their agents, to create their star persona … and keep it at all costs, covering up incidents or lifestyles (in particular, homosexuality) that would damage their public image.

    From the 1930s to the 1960s, it was common practice for film studios to arrange the contractual exchange of talent (i.e. actors and directors) for prestige pictures. For example, film director Alfred Hitchcock, who had a difficult working relationship with the head of the film studio to which he was contractually bound via a seven year contract, David O. Selznick, was often lent to larger film studios.

    Things started to unravel when James Cagney, the top billing actor at Warner Bros., sued Jack Warner and his corporation for breach of contract. There had already been some early warning signs that things were heating up, between Cagney and Warner, with the former repeatedly asking for a higher salary for his successful films, at USD4,000 a week, on a par with Edward G. Robinson, Douglas Fairbanks Jr. and Kay Francis. Warner Bros ultimately refused to cave in and suspended Cagney. He then announced that he would do his next three pictures for free if Warner Bros. canceled the five years remaining on his contract. After six months of suspension, film director Frank Capra, acting as a mediator, negotiated a deal that increased Cagney’s salary to around USD3,000 a week, and guaranteed him top billing as well as no more than four films to shoot per year. Things eased off for a while and Cagney went on to make many more hits for Warner Bros. However, when Jack Warner forced Cagney into making five movies in 1934, and denied him top billing on the fifth title, ‟Ceiling zero”, Cagney’s third film with co-star Pat O’Brien, Cagney brought legal proceedings against Warner Bros. for breach of contract. Represented by his brother William Cagney in court, Cagney won. He had done what many thought unthinkable: taking on the studios and winning. Not only did he win, but Warner Bros., knowing that he was still their foremost box office draw, invited him back for a five-year, USD150,000-a-film deal, with no more than two pictures a year. Cagney also had full say over what films he did and did not make with Warner Bros.

    Cagney’s acts of rebellion did not fall on deaf ears, with Bette Davis slamming the door behind her, when Jack Warner asked her to act as a lumberjack in her next feature film. While Davis accepted a film studio competitor’s offer in 1936 to appear in two films in Britain, she was served with court papers in England, for breach of contract, by Warner’s lawyers. The Warner Brothers Pictures Inc v Nelson lawsuit that ensued took place in the English courts, with Davis (who was sued under her married name) invoking slavery, as a result of her 52 weeks’ contract allegedly only being fulfilled when she had – effectively – worked for exactly 52 weeks for Warner Bros. (as opposed to after 52 weeks’ from the starting date of such contract). Warner Bros.’s barrister astutely counterattacked by retorting that, if he received USD1,350 per week, like Davis allegedly did, during the term of her contract with Warner Bros., he, too, would like to be tied up in slavery. The English court found in favour of Warner Bros., deciding that this was a breach of contract on Davis’ part. After the case, Davis returned to Hollywood, in debt and without income, resumed working for Warner Bros. in what became one of the most successful periods of her career.

    A very different legal fate happened to Olivia de Havilland, when she, too, sued Jack Warner and Warner Bros. after walking out, refusing to have the time during which she was absent added onto the end of an already long contract. Indeed, in 1943, de Havilland’s seven-year contract ended, but Warner Bros. announced that she was not yet free to move on. The studio claimed that she owed them an additional six months for the time she was under suspension for refusing to perform in certain films. De Havilland argued, in her lawsuit, that the contract was for seven years, suspension or not, and that Warner Bros. was violating labour law. While de Havilland acknowledged that the suspension had taken place, she argued that under California state law, employment contracts were only enforceable for up to seven calendar years. She won the first trial, but Warner Bros. appealed. Yet, the studio lost its case in a decision considered to be such a landmark that it has been dubbed the ‟de Havilland law”, the California court saying that the actress’ contract was a form of ‟peonage”, or illegal servitude. In a big, splashy headline, Variety, noting the ruling, declared on 15 March 1944, ‟De Havilland Free Agent”.

    After that, the floodgates started to open, and the movie business had to change, letting actors and filmmakers strike out on their own and control their own destiny.

    2. The contemporary system: how actors regained power and took control of their professional destiny

    In the long term, the ‟de Havilland law” killed the star system, the publicity accompanying the Davis and de Havilland incidents fostering a growing suspicion among actors that a system more like being a free agent would be most personally beneficial to them, rather than the suffocating and hyper-controlling star system.

    Soon, power began shifting from the studios to the stars. In the 1950s, film studios began to employ actors on a project-by-project basis, often via the actors’ loan-out companies. Agents, such as Creative Artists Agency (‟CAA”) and William Morris Endeavor Entertainment (‟Endeavor”), as well as managers, supported stars to exploit their newfound power. Over the decades that followed, salaries and perks for the industry’s biggest stars skyrocketed.

    In 1959, Shirley MacLaine sued famed producer Hal Wallis over a contractual dispute, contributing further to the star system’s demise. By the 1960s, the star system was in decline.

    In 1966, MacLaine sued Twentieth Century Fox for breach of contract when the studio reneged on its agreement to star MacLaine in a film version of the Broadway musical ‟Bloomer Girl”, based on the life of Amelia Bloomer, a mid-nineteenth century feminist, suffragette and abolitionist, that was to be filmed in Hollywood. Instead, Fox gave MacLaine one week to accept their offer of the female dramatic lead in the Western ‟Big Country, Big Man‟, to be filmed in Australia. The Shirley MacLaine Parker v Twentieth Century-Fox Film Corp. case was decided in MacLaine’s favor, ans affirmed on appeal by the California supreme court in 1970. This case is often cited in law-school textbooks as a major example of employment-contract law.

    These female leads’ highly publicised and mostly successful litigation cases were instrumental in the push for more and more actors forming their own film production companies, or finding movie projects to champion, that suited their tastes and ambitions. Multi-hyphenates, such as Brad Pitt, Robert Redford, Reese Witherspoon, Clint Eastwood and Bradley Cooper, might not have enjoyed the same kinds of careers had Davis, de Havilland and MacLaine not weakened the control of the major studios.

    Indeed, studio heads signed ‟first-look” contracts with production companies founded by stars – Reese Witherspoon’s Pacific Standard, Brad Pitt’s Plan B Entertainment, and Will Smith’s Overbrook Entertainment, for example – giving them additional fees and access to office space on the studio lot, in exchange for the first option to produce or distribute the movies the stars pursued.

    By the mid-2000s, it had become increasingly clear that the tug-of-war between stars and studios was not supporting the profitability of movie studios. In her insightful book ‟Blockbusters: why big hits – and big risks – are the future of the entertainment business”, Anita Elberse cites her research, which suggests that whereas films that starred A-list actors typically had higher box-office revenues, the fees for those actors were so high that they wiped out the extra revenues the stars brought in – leaving studios with the same profits they would have made if they had relied on lesser-known creative talent. In other words, the stars themselves captured most of the surplus that resulted from their involvement. This is the ‟curse of the superstar”.

    The most flamboyant example of an actor successfully branching out into film producing, and taking back control over his career, is Tom Cruise. After his breakthrough role in 1986 with ‟Top Gun”, he went on to star in many more commercially and critically successful films such as 1988’s ‟Rain Man” and 1989’s ‟Born on the Fourth of July”. However, Cruise really upped the ante when he partnered with his then CAA talent agent Paula Wagner (who had signed him, and represented him for eleven years), and co-founded the independent film production company Cruise/Wagner Productions in July 1992. For the next thirteen years, Cruise was able to make the most of his newly-found creative freedom over his film projects, and to produce and direct motion pictures. The first three ‟Mission: Impossible” movies were released by C/W Productions (as it was abbreviated), as well as 2001’s ‟Vanilla Sky” and 2002’s ‟Minority Report”. In October 1992, C/W Productions signed an exclusive three-year multi-picture financing and distribution deal with Paramount Pictures. The deal was renewed and expanded several times over the next thirteen years. However, in August 2006, Sumner Redstone, chairman of Viacom (the parent company of Paramount Pictures) terminated that contractual relationship citing Cruise’s ill advised comments in the media about psychiatry, antidepressants, etc. and his fascination with Scientology. While this is a typical example of ‟what to do when celebrities get it all wrong”, Cruise got a lucky break, when Metro-Goldwyn-Mayer (‟MGM”) came knocking at his, and Wagner’s, door, in November 2006. Harry Sloan, chairman and CEO of MGM, signed an agreement with Cruise/Wagner, for them to run United Artists, a dormant studio that was part of MGM’s portfolio and had been founded in 1919 by Charlie Chaplin, Douglas Fairbanks, Mary Pickford and D. W. Griffith, four of the biggest stars in Hollywood at the time. Sloan’s proposed partnership was notable because Cruise/Wagner were given a relatively free hand in determining a direction for ‟the company built by the stars”, United Artists. For instance they could greenlight movie projects costing less than USD60 million without MGM’s approval, and for a term of at least five years they could develop up to six films a year. All films would be distributed and, at least initially, financed by MGM, for which the studio would receive a distribution fee of between seven and fifteen percent of revenues. In exchange, MGM granted the pair a one-third equity stake in United Artists without asking them to invest a penny of their own money. Most remarkably, Cruise was not obligated to appear in any United Artists’ movies himself, and he remained free to star in, and produce, movies at other studios. This experiment, which ultimately did not work out, was viewed by industry experts as an attempt to solve the fundamental problem of the above-mentioned ‟curse of the superstar” – the growing ability of powerful stars to undermine the profits of the studios and other businesses that employ them. Instead of up-front money, Sloan offered Cruise the freedom to pursue the kinds of projects that he and Wagner were most excited about, and the promise of a bigger payday in the future, through an ownership stake in the studio United Artists.

    3. How are actor agreements structured, in the contemporary film business?

    In some ways, actor agreements are the most difficult to negotiate as almost everything is negotiable.

    Assuming the film production is signatory to the Screen Actors Guild (‟SAG”), which is almost always the case, then the first question will be whether the actor is guaranteed USD65,000 or more in total compensation for acting services. If so, then the actor will fall under ‟Schedule F” of the SAG Basic Agreement and the film production company will be free to negotiate many employment provisions that would otherwise be set in stone by the guild (including overtime and meal breaks, scheduling, minimum daily or weekly compensation, etc.). For the rest of this section, we will refer to those above the USD65,000 threshold as ‟Schedule F actors”, and those below the threshold as ‟daily/weekly actors”.

    The two most important deal points when hiring Schedule F actors are the compensations and scheduling.

    • With respect to the scheduling, it is often overlooked. However, an actor is someone selling his or her time. Actors will not make a binding commitment to block out time for a film production (and therefore pass on other opportunities) unless they are guaranteed payment even if you end up not using them. They also cannot make an indefinite commitment to a film production. Unless the studio is paying a sizable sum in guaranteed compensation, the actor will expect some kind of guaranteed date after which he or she can accept new work without having to get the studio’s approval first. So, an important negotiation point in an actor’s deal, revolves around the total number of days or weeks that the film production will need the actor to actually render services (rehearsal and shooting days, etc.) and the window of time in which the film company needs the actor to be available to them (e.g. three consecutive weeks of services, commencing within two weeks before or after a specific date, within which the services will be rendered). As production schedules change frequently, especially on independent productions and/or if the director is relatively inexperienced, the film production or movie studio needs to negotiate for some additional ‟free” days that can be used consecutively with principal photography, as well as some ‟free” days non-consecutive to principal photography where the film production company can bring the actor back for post-production work (e.g. dialogue replacement, dubbing). The actor’s representatives will probably require that, after the scheduled days and free days are exhausted, the actor be entitled to ‟overage” compensation at the same rate as the fixed compensation represents in relation to the originally scheduled period of services. In other words, if an actor was paid USD100,000 for ten days of scheduled work, and they agreed to two free days, but the production required five days beyond the originally scheduled ten, then the actor would be entitled to USD30,000 in overages. With respect to the window of time in which the film company needs the actor to be available, to render services to the production (which is sometimes referred to as the actor being in ‟first position” to the production), some negotiations also take place. Because an actor is selling time slots, he or she is not going to want to give the film production a large cushion in which to get its work done. Instead, he or she will try to collapse the window to what the schedule currently allows, so that he or she remains available for other projects outside of this narrowed window. Even if the film production is not able to negotiate for many ‟free” days, the production should still be able to require the actor to continue rendering services through the completion of principal photography of the picture – the overages may be expensive, but at least the film production will not lose the actor entirely. Agreeing to any kind of stop date for the actor (i.e. the production guarantees the actor will be released by a certain date, or agrees the production will be in ‟second position” to another production starting on a certain date) is problematic and should not be agreed unless approved by the line producer, the film production company, the cast insurance provider and the completion guarantor (if any).

    • Fixed compensation is usually the first deal point discussed. For Schedule F actors, it is usually a fixed amount payable in equal weekly installments over the scheduled period of the actor’s services, with overages payable at the same rate for any services required beyond the originally scheduled days and any agreed ‟free” days. The actor’s agent will often negotiate for the fixed compensation to be put in escrow with the agency’s or a law firm’s trust account before the actor even travels, to ensure the production actually has the ability to pay the agreed amount. If escrow is agreed by the film production company, then it will need to enter into an escrow agreement with the agency or law firm. Such escrow agreement must provide that the agency/law firm will suspend payments in the event the actor is suspended or terminated, pursuant to the terms of the actor agreement. It is best practice for the film production company to only deposit the actor’s fixed compensation in escrow once the acting and escrow agreements are fully executed.

    • Contingent compensation on a project is typically largely paid to actors, who get the lion’s share. As discussed above in paragraph 2., since actors are usually the driving factor in terms of distribution revenues on a picture, they have the bargaining power to negotiate for the most in up-front and contingent compensation. They are four different categories of contingent compensation, as follows. Box office bonuses, which are straightforward contingent bonuses based on the theatrical performance of the picture – if the picture reaches certain theatrical revenue thresholds, then certain bonuses become payable. Box office bonuses are appealing to talent, because box office numbers are widely reported and there are no complicated accounting calculations involved. Gross Participations are the second category of contingent compensation. As with box office bonuses, a participation in the gross revenues of the picture is appealing to talent, because it does not require the cost of production to be calculated or recouped. Instead, the actor is entitled to a percentage of every dollar that the producer receives (after the distributor and/or sales agents deduct their fees, costs and expenses ‟off the top”). However, the investors on an independent production may be unwilling to share the picture’s revenues until they have recouped their entire investment. Therefore, they are more likely to only going to approve a gross participation for a top-level star who is going to drive sales of the picture. Deferments are the third type of contingent compensation. They tend to be a fixed dollar amount payable out of a pool at a defined point in the revenue waterfall (with each stage in the waterfall representing a different level of fee or cost/expense recoupment or profitability of the picture). The most generic deferment pool would be paid at the time immediately prior to net profits – after the distributors, sales agents and collection account managers have taken their fees and expenses off the top, the production has recouped the negative cost of the picture (which may include interest on loans and/or a premium return on equity investments), and any gross participations and/or box office bonuses have been paid. Then, the fourth and final category of contingent compensation are net participations. It is simply the amount that remains after all of the production’s other costs, expenses and contingent participations (e.g. box office bonuses, gross participations and deferments) have been deducted, recouped and paid. This is the least likely form of contingent compensation to be paid to the talent. Typically, an independent producer will hire a collection account management company to collect and administer all of the revenues on the project, and so the collection account manager will be responsible for allocating and paying the applicable participations and deferments. The actor’s representatives will often try to require that the film production company make the actor a party to the collection account management agreement.

    For daily/weekly actors, the film production can continue to employ them as long as it continues paying them at the negotiated daily/weekly rate, provided that the actor has not negotiated a specific stop date or something similar. The costs add up, but at least the film production will be able to keep the actor in first position to the production, if need be. Also, as far as fixed compensation of daily/weekly actors is concerned, it is set at a daily/weekly rate, and the actor is paid at that rate (plus overtime and other SAG-mandated amounts/penalties) for the duration of employment. In the case of a daily/weekly actor, his or her agent may negotiate for a guaranteed minimum number of weeks of employment, in which case the actor must be paid the full amount for the guaranteed period, unless they are terminated for cause.

    The next issue when negotiating actor agreements is credit. The relative position of actor’s credits is determined by negotiation, but usually depends on the size of the role and the stature of the actors. So, if a film project has two main characters, the bigger ‟star” will often get first position credit and the other actor will be in second position. The distributor of the picture will have very specific opinions about who needs to be used for marketing purposes to help sell the picture, and the film production company needs to liaise efficiently with the distributor’s marketing department, in order to clarify what kind of credit can be given to the actors, while retaining top marketability and revenues maximizing.

    It is customary to agree that an actor will have the right to approve the still photographs that will be used in the marketing of the picture (with the actor required to approve at least fifty percent of stills in which they appear alone, or seventy five percent of stills in which they appear with others who have approval rights).

    It is also normal to agree that the actor has a right of approval over any blooper footage (SAG requires this anyway) or behind the scenes footage in which the actor appears that the production company is going to use in the marketing of the film or in the added value materials for the home video release of the picture (e.g. DVD extras).

    Under SAG rules, actors have a right of prior written approval over any scenes that require them (or their double) to appear nude or as engaging in sexual conduct. The actors’ representatives will often ask that the contract sets this out explicitly (including specific descriptions of the scenes being filmed, and limitations on what can and cannot be shot).

    ‟Pay or play” is a concept created to protect above-the-line talent, and in particular actors, from being terminated without receiving their full fixed fee. The parties will agree that, at a certain point in the production process (often well before principal photography commences), the talent becomes ‟pay or play”. If they are subsequently terminated without cause, they will be entitled to their entire fixed fee, regardless of whether it has accrued at the moment of termination. Since the actors have blocked out their schedules for this production, they want to ensure that they will be compensated for that time even if the producer decides to go a different direction or the production does not move forward. The contract will set out that the talent can be terminated at any time, for any reason, with or without cause, but if the talent has become ‟pay or play” and is then terminated for any reason other than force majeure and/or the talent’s default or disability, the actor will be entitled to their full fee. Typically, a contract will say that talent becomes ‟pay or play” on the earlier of commencement of principal photography, or the hiring company electing to proceed to production of the picture with the actor in the specified role. While the ‟pay or play” provision does help protect the actors, it also provides a clear way for the producer to terminate the talent’s services, even without cause – the producer can merely pay the balance of compensation owed and send the talent packing (subject to any applicable guild rules). Contrast this with ‟pay and play”, where the talent – usually, the director – is not only guaranteed his or her compensation, but also the right to render services without being suspended or terminated (unless for cause) for a specified period of time.

    4. How film streaming and streamers are disrupting the industry, shifting the balance of power away from the stars, and back to film production companies and studios

    As film distribution evolved away from movie theatres and towards streaming platforms, the tectonic shift of power between various stakeholders has changed. Such change accelerated with the COVID 19 pandemic, when various lockdowns prevented movie goers to attend their local cinemas, for almost two years.

    Netflix is the undisputed market leader in the video streaming sphere, having achieved world domination in 2018 (i.e. its streaming-only plan can be watched by Netflix members in over 190 countries, except in China, Crimea, North Korea and Syria).

    From a mere mail-based rental business 20 years’ ago, Netflix successfully transitioned to streaming services from 2007 to 2012, then to its development of original programming, from 2013 to 2017, then to its expansion into international productions, from 2017 to 2020, and now to its emergence into the gaming space (since 2021).

    Basically, Netflix rules, when it comes to streaming distribution (although Amazon Prime is a close second). And Netflix does not take any prisoners, when it comes to its distribution deals. Its distribution agreements, more properly characterised as ‟digital licenses”, are differentiated primarily by the fact that there is no division of revenues involved. Netflix does not share the subscription fees it receives. Thus, even when Netflix acquires all worldwide rights in perpetuity to a motion picture prior to production, and bills it as a ‟Netflix Original”, they agree to make a fixed ‟buyout” payment, with no additional net profits, royalties or other accountings.

    Bye-bye, contingent compensation for actors, when their film projects are produced by, or distributed by, the likes of Netflix and Amazon! Only fixed compensation is up for grabs.

    In fact, Netflix does not even disclose box offices results, even when their films have a theatrical run before, or simultaneously to, making the film available for streaming on Netflix’s online platform. Amazon followed suit on this policy. Both companies refuse to report their box office grosses to either internal industry compilers (including Comscore, which is built into ticket sites for the vast majority of North American theatres) or to the press. Since their distribution deals are free of any contingent compensation, why would they?

    As this practice of releasing films in both theatres and streaming platforms has become the norm, in the United States, some talent have filed lawsuits against movie studios for breach of contract. For example, Scarlett Johansson sued Disney over what she claimed was a breach of contract, after Disney chose to release the Marvel superhero movie ‟Black Widow”, in which Johansson starred, simultaneously in cinemas and on its Disney+ streaming platform. In her July 2021 summons, Johansson claimed that her fees were based on the box-office performance of the film and that Disney’s change of release strategy, whilst refusing to renegotiate her actor agreement, deprived her of her fair share of income on this title. Disney retaliated by publicly disclosing Johansson’s upfront fee of USD20 million. The parties eventually settled, for a reported fixed sum of around USD40 million paid by Disney to Johansson.

    Not only can actors seat on their box office bonuses, deferments and gross or net participations, when they get involved in a film project with Netflix or Amazon, or other competing streaming services, they are now held by film studios and streamers for anywhere from nine months to more than a year in some cases, per standard series agreement deals. Indeed, prestige film series are at the core of the film streaming universe and business model, with original shows like ‟Euphoria” (produced by HBO and distributed on its streaming platform HBO Max), ‟Squid Game” and ‟The Queen’s Gambit” (both produced by Netflix and distributed on its streaming platform) being massive draws for existing and new streaming subscribers. Actors who are involved in these streaming series are prevented from booking other jobs in that time, without a complicated process of approvals, hindering this talent’s ability to chase other job opportunities. Actors’ agents are complaining that their clients are losing work due to this exclusivity requirement under their actor agreements, exacerbated by multiple factors such as the year-round development cycle and short-order seasons of 13 episodes or less. Actors get paid less because they work on fewer episodes, but they still face long contract holds.

    Another cause of concern, for agents and their actor clients, is the use of non-disclosure agreements (‟NDAs”) in casting, with many major producers, allegedly, overly sensitive about the secrecy of their projects. In an era of online file-sharing and sensitivity around plot spoilers, the increased use of NDAs in this context is unavoidable. However, actors and agents are concerned that NDAs are being overused when it comes to casting auditions, with sweeping and unreasonable terms. US streamers are blamed for starting the trend. Actors and agents say the use of NDAs si breaking the traditional relationship between them, with actors unable to discuss the upcoming audition, script and prospective role with their representatives, which is increasingly cutting out agents from the audition process altogether.

    Finally, while the advent of streaming platforms means more opportunity for actors, in particular actors from minority backgrounds, the likes of Netflix, Amazon and HBO rely on mostly young, new or not yet discovered talent, to minimise actors’ labour costs incurred in the production of their prestige streaming series. There is no place for prima donna stars, dictating their terms and conditions, in the film streaming era. And with Netflix now pushing its limits beyond film and into gaming, actors could easily become replaced by animes, artificial intelligence and virtual actors, in the near future, further decreasing the costs of talent for streaming platforms.



    https://www.youtube.com/watch?v=uiljiYQxLF8
    Crefovi’s live webinar: How to negotiate actor agreements, in the film streaming industry? – 18 March 2022

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      Reforming UK music law: making the music streaming market economically viable for all stakeholders

      Crefovi : 07/02/2022 10:51 am : Antitrust & competition, Articles, Copyright litigation, Entertainment & media, Fashion lawyers, Information technology - hardware, software & services, Intellectual property & IP litigation, Internet & digital media, Litigation & dispute resolution, Music law, Webcasts & Podcasts

      1. Why are UK MPs investigating the music streaming market?

      Further to the digital revolution forced upon the global music industry by independent peer-to-peer file sharing service Napster, in the early noughties, music streaming has come out on top, as the most agile, flexible, user-friendly and wide-ranging music distribution channel.

      Indeed, based on research conducted by the International Federation of the Phonographic Industry (‟IFPI”) across 21 of the world’s leading music markets, its 2021 ‟Engaging with music” report sets out that subscription audio streaming (e.g. Spotify, Apple Music, Deezer) represents 23 per cent of the ‟music engagement mix”, while ad-supported audio streaming (e.g. free tier of Spotify or Deezer) and video streaming (e.g. YouTube, DailyMotion) represents 9 per cent and 22 per cent, respectively. So, according to IFPI, total music streaming is 54 per cent, in the ‟music engagement mix”, while music on the radio (e.g. radio stations, broadcast live, catch-up) is 16 per cent and purchased music (e.g. CDs, vinyls, DVDs, downloads) 9 per cent. Live music (including livestreaming) is at a paltry 2 per cent.

      The International Confederation of Societies of Authors and Composers (‟CISAC”), is prompt to underline, in its 2021 global collections report, that while music ‟streaming is fast heading towards being the most important source of creators’ earnings in the future”, ‟streaming revenues – however fast they grow – are currently simply not providing a fair reward when shared across millions of individual recipients”. Asking collecting societies to adapt to digital and re-invent themselves, CISAC’s main message conveyed through its 2021 report is better digital remunerations are needed for creators, via a fairer ‟digital split”.

      The Standing Committee on Copyright and Related Rights of the World Intellectual Property Office (‟WIPO”) conveys a similar, if more subtle and rigorously facts-checked, message in its 2021 report entitled ‟Inside the global digital music market”: ‟there is an ongoing legal debate within the music industry (…) over the interpretation of certain legal rights as they are, or believe that they should be, applied to digital music services”. ‟The debate appears to boil down to who should control administering rights, pricing and certain revenue collections for recordings with digital music services, whether record companies (producers), which invest in featured artists and recordings and which typically secure exclusive rights in the recordings, or Collective Management Organisations (‟CMOs”), which are tasked to collectively manage certain rights of performers, which vary from region to region. (…) The argument by the groups for the CMOs’ position aligns with the beliefs that featured performers’ royalties should be greater than what they are receiving from the digital market, and background (and) session musicians should be entitled to ongoing royalties or other form of additional remuneration generated by recordings in the digital marketplace, regardless of the contractual provisions and transfer of exclusive rights to producers. (…) (Already some) statutory provisions granting remuneration to musicians are in place in many countries’ legislation for broadcasting and communication to the public uses. The record companies observe that streaming services are substituting physical sales as the main method of delivering recorded music to consumers, and revenue from these services has become the main revenue source for the industry. According to record companies, licensing of streaming services should be organised along similar lines to the distribution of physical products”.

      This debate and tensions between pro-creators and pro-music labels have picked during the governments’ management of the COVID 19 pandemic, since multiple national lockdowns and statutory restrictions towards non-vaccinated citizens have grinded to a halt most live music events and concerts, all over the world. Music performers and songwriters therefore had even less revenues to sustain them, in the last two years, with many of them having to find additional side jobs in order to make rent.

      The negative effects of the pandemic have been strongly compounded, in the United Kingdom (‟UK”), by Brexit, since not only does the EU-UK withdrawal agreement not provide for any specific music visa provision system, which would have allowed UK touring musicians to easily continue performing and touring in the 27 member-states of the European Union (‟EU”), but certain cross-border copyright mechanisms – especially those relating to CMOs and other rights management societies, as well as those relating to the EU digital single market (‟DSM”) – stopped applying in the UK on 1 January 2021.

      In this context, it is no wonder that UK musicians – songwriters and performers alike – are getting increasingly concerned about getting a slice of the pie which would allow them to keep on creating, and performing, in the music industry. Their urgency and various acts of lobbying have not fallen on deaf ears, and many compassionate UK members of parliament (‟MPs”) have decided to take this matter in their own hands, so that UK music creators could benefit from a level playing field, in particular with respect to their EU peers, post Brexit.

      2. What process is followed by UK MPs, to implement change in the music streaming market?

      MPs on the House of Commons Digital, Culture, Media and Sport Committee (the ‟Committee”) launched an investigation in October 2020, during which they heard from music creators, industry experts and streaming services, held roundtables with musicians to hear their views and wrote to major UK record labels and tech companies for their explanations.

      Several publications were issued as a result, among which:

      The main takeaways from the inquiry and Committee’s report are that:

      • the Committee recommends to classify music streaming as an income source subject to equitable remuneration. To implement this, the Committee’s report recommends that the UK government legislate so that performers enjoy the right to equitable remuneration for streaming, by amending the Copyright, Designs and Patents Act 1988 (‟CDPA”)so that the making available right does not preclude the right to equitable remuneration, using the precedent set by the co-existence of the rental right and right to equitable remuneration in UK law”. The Committee’s report asks for the remuneration to be paid by the rightsholders (i.e. record labels) – rather than the streaming services – to the performers, through their CMOs.
      • since the music industry market, and in particular the UK music market, is dominated by a small number of large buyers of music rights (i.e. the major record labels Warner, Sony and Universal), the UK government should expand creator rights by setting out, in the CDPA, a right to recapture works, and a right to contract adjustment, where an artist’s royalties are disproportionately low compared to the success of their music. Such right to recapture should occur after a period of 20 years, so short enough to occur within an artist’s career.
      • concerns about the above-mentioned oligopoly currently in place in the music industry – in terms of overall market share in recording and publishing, but also through vertical integration, acquiring shares in streaming services and a cross-ownership system – should be escalated to the CMA, to undertake a full market study into the economic impact of the music majors’ dominance and assess whether any infringement of competition law may be taking place.
      • a renewed safe harbour protection should be put in place by the UK government, so that music rightsholders may be protected on a par, compared to EU rights owners who benefit from the provisions of the EU directive on copyright in the DSM 2019/790 (the ‟DSM directive”), when their music content is uploaded on user-generated content platforms such as YouTube (‟UGCs”). The Committee recommends that the UK government introduces robust and legally enforceable obligations to normalise licensing arrangements for UGCs, ensuring that these obligations are proportionate so as to apply to dominant players such as YouTube and Facebook, without discouraging new entrants to the UGCs’ market.
      • the Advertising Standards Authority (‟ASA”) should regulate music playlist curators, who have an important role in the discovery and consumption of digital music, and are therefore influential in how creators are remunerated. However, since the extent of their paid-for activity is currently undisclosed, and since the selection methods of platform editorial playlists are non transparent, music playlist curators should comply with a code of practice drafted by ASA, similar to the one focusing on social media influencers, to ensure that the curation decisions they make are transparent and ethical.

      The Responses, from the UK government and the CMA, were, circonspect and measured, yet pragmatic and ‟enthusiastic”.

      In particular, the UK government set out three main pillars, in its Responses:

      • Establishing a music industry contact group with senior representatives from across the music industry to drive action and examine stakeholders’ view on the key issues, including equitable remuneration, contract transparency and platform liability rules introduced by the EU;
      • Launching a research programme, alongside stakeholders’ engagement;
      • Establishing two technical stakeholders’ working groups, the first focused on creating standards for contract transparency and establishing a code of practice for the music sector, and the second addressing data issues and developing minimum data standards for the music industry.

      With respect to equitable remuneration, the Responses set out that the UK government will launch work to better understand issues of fairness in songwriters’ and performers’ remuneration. As part of this work, the UK government will assess different models, including equitable remuneration, to explore how likely they are to affect different parts of the music industry and how that might be achieved, including through potential legislation. It will also explore these issues through the above-mentioned music industry contact group.

      As far as safe harbour is concerned, the UK government agreed that righsholders should be properly remunerated when their works are shared on UGCs, and that the UK had a unique opportunity to learn lessons from EU member-states that have implemented the DSM directive, as well as from approaches taken by other countries. Therefore, the UK government will analyse how EU member-states are implementing the DSM directive, to understand its impact on different parts of the music industry, other creative sectors, and UGCs alike.

      In relation to the recommendation of expanding creators’ rights by restricting contract freedom, the UK government will commission research on these issues, particularly by looking into countries that have implemented similar measures.

      With respect to launching a CMA investigation into the economic impact of the music majors’ dominance, the UK government pointed out that the CMA is an independent regulator, which should therefore decide autonomously how best to allocate its resources to protect fair competition. However, the Responses also include the CMA’s initial response, which stated that a new digital markets framework was being finalised, before its implementation, by the UK government and the CMA’s own ‟Digital Markets Unit”. Upon implementation of this new digital markets framework, the CMA’s ‟Digital Markets Unit” will assess the pertinence of launching an investigation into the majors’ oligopoly in the UK music industry.

      Finally, the UK government agreed with the Committee’s recommendation to subject music playlist curators to a code of practice developed by ASA. It is also in contact with Ofcom, the UK’s communication regulator for TV, radio and video on demand sectors, with respect to this issue.

      3. When are reforms to UK music law likely to take place?

      While the ‟enthusiastic” above-mentioned plans, set out in the Responses by the UK government, may be currently implemented, a member of the Committee, Kevin Brennan MP, erred on the side of caution, with respect to the follow-through abilities of the UK government, by introducing a bill to make provision about the rights and remuneration of musicians, on 24 November 2021 (the ‟Bill”).

      The timeline of the Bill, currently on its 2nd reading in the House of Commons, is now firmly on hand by the UK parliament.

      This will put adequate pressure on the UK government, as well as the CMA and Ofcom, to deliver on all the exciting measures and goals that they had set out in the Responses.

      The Bill proposes to introduce legislation giving effect to some of the recommendations made by the Committee, in the Committee’s report, in particular with respect to equitable remuneration for streaming, contract adjustment, right of revocation and transparency.

      Using similar wording as the equitable remuneration already provided for under section 93B of the CDPA, the Bill proposes to amend the CDPA and introduce a right to equitable remuneration for performers, where they have transferred their making available right, in relation to a sound recording, to the producer of the sound recording (usually, their record label). This new right to equitable remuneration cannot be assigned, except to be administered by a CMO, or via testamentary disposition. Equitable remuneration is payable by the person to whom the right was transferred, or any successor in title of that person. Therefore, where performers have transferred their making available right to their record company, the record company pays the equitable remuneration. How much is paid can be negotiated by the performer and producer, or the Copyright Tribunal where no agreement is met.

      The Bill also provides for contract adjustment: it sets out a right for performers and composers of musical works to receive additional and fair remuneration for their works, where their arrangement provides them with a disproportionately low level of remuneration, compared to the overall revenue generated from their work. The remuneration is paid by the person exploiting the work.

      The Bill sets out a right for performers and composers, who have transferred their rights, to revoke the transfer of their rights after 20 years. The right is not automatic, notice must be provided within two years.

      The Bill finally provides for a right for performers and authors of musical works (or literary works accompanying a musical work) to receive ‟up to date, comprehensible, relevant and complete information on the exploitation of such work or works”. This will enable music creators to determine whether the remuneration they are receiving is accurate and fair, or whether they may seek to renegotiate via the Bill’s contract adjustment rights.

      While the Bill is following its course in the UK parliament, the UKIPO is commissioning further research on equitable remuneration, contract adjustment and right of revocation.

      4. How do the UK music streaming suggested changes compare to EU policies and, in particular, the Digital Single Market directive?

      The Bill’s provisions are in line with existing EU rules on transparency, safe harbour protection, a right to appropriate and proportionate remuneration for music streaming income, as well as a right to revocation and contract adjustment.

      In the EU, two directives include transparency provisions:

      • article 19 of the DSM directive which provides that authors and performers receive on a regular basis, at least once a year, up to date, relevant and comprehensive information on the exploitation of their works and performances from the parties to whom they have licensed or transferred their rights, or their successors in title, in particular in relation to modes of exploitation, all revenues generated and remuneration due.
      • for CMOs in the EU, the 2014/26 directive on collective management of copyright requires CMOs to provide to rightsholders reports of revenue (royalty statements) that include the revenue attributed to the rightholder, the amount paid by the CMO to the rightholder per category of rights managed and per type of use, the period during which the use took place and deductions made for the CMO’s fees for managing the rights.

      In addition, chapter 3 of the DSM directive establishes:

        • a so-called appropriate and proportionate remuneration principle (article 18). EU member-states can choose to implement the fair remuneration principles set out in the DSM directive by relying on different or already existing mechanisms such as collective bargaining;
        • a contract adjustment mechanism (also referred to as a ‟best-seller”clause) (article 20). Armed with information obtained through the transparency obligations, authors and performers can seek ‟additional, appropriate and fair remuneration” where the original remuneration is ‟disproportionately low compared to the relevant revenues derived from the subsequent exploitation”. If a re-negotiation is unsuccessful, creators have the option to bring a claim with a voluntary alternative dispute resolution body to be set up in each EU member-state for this purpose;
        • an alternative dispute resolution (‟ADR”) mechanism (article 21). EU member-states are required to establish a voluntary ADR body to deal with disputes arising from the transparency obligations and the contract adjustment mechanism (without prejudice to the right to take court proceedings);
        • a revocation right. It can be used when a copyright work licensed exclusively is not being exploited by the licensee. The parameters of this right are to be set out in domestic legislation (article 22);
        • a specific ban on contractual overrides such that certain of these provisions (articles 19, 20 and 21) are considered to be of a mandatory nature (article 23).

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      Loan-out companies and loan-out agreements: how to use them in the new IR35 landscape, in the UK?

      Crefovi : 29/11/2021 10:13 am : Articles, Copyright litigation, Emerging companies, Employment, compensation & benefits, Entertainment & media, Fashion law, Fashion lawyers, Gaming, Information technology - hardware, software & services, Intellectual property & IP litigation, Internet & digital media, Law of luxury goods, Music law, News, Trademark litigation, Webcasts & Podcasts

      Perhaps surprisingly in a Conservative government, the IR35 rules have been tightened, in order to ensure that the taxman gets its fair share of revenues, when creators and their clients enter into entertainment, film, media and professional sports contractual arrangements. What is at stake for the creative industries in the UK? How to make the most of loan-out companies and loan-out agreements, while ensuring compliance with the revised IR35 rules?

      Loan-out companies1. What are loan-out companies?

      In the entertainment industry, accountants often advise their clients, who work as key talent and crew in the film, TV, sports and media sectors, to set up a personal service company (‟PSC”) with Companies House, the United Kingdom (‟UK”) registrar of limited companies.

      Such personal service companies are also called ‟loan-out” corporations because this is the jargon term they are referred by, which comes from the USA. Indeed, the US, as a global leader in the entertainment industry, was the first country where creators used this form of US business entities to loan-out their services, via the corporate body, to their end-clients.

      The creator is usually the sole shareholder and director of the loan-out company.

      The loan-out entity is engaged by external third parties (i.e. the end-clients) to fulfil entertainment, media or professional sports services, which are going to be performed and executed solely by the creator. Consequently, it is the talent’s loan-out company that is referred to, and liable, in contracts to perform the services required.

      Since the creator’s services are typically performed on individual contract bases, in exchange of large, irregular sums of income throughout the year, the loan-out business model is especially prominent in the entertainment, media and professional sports industries.

      Article 17 of the OECD Model Income Tax treaty of 1930 appears to be the foundation by which loan-out corporation structures may be used, as it provides that athletes, celebrities, artists who operate across several countries, and who therefore earn income under several national taxation systems, may only be taxed in their home jurisdiction’s source of income (even without an established corporate body).

      By the 1970s-1980s, loan-out companies, or PSCs as they are more commonly referred to by the UK taxman, HMRC, and UK lawmakers, were widely used by entertainers, top talent and crew, as well as professional sportspeople, in the UK.

      2. How to use PSCs and loan-out agreements?

      Loan-out companies are used as a means to reduce the personal liability of the talent, as well as protect their personal assets.

      Indeed, since the SPC is the sole party to any services agreement entered into with the end-customer, then, such end-client cannot go after the personal assets and liability of the creator, in case things go south during the execution phase of such services. The end-client – who is the counterparty to that loan-out agreement – will only be able to sue the SPC and trigger the limited liability of such loan-out company.

      Moreover, in the UK, private companies limited by shares (which represent over 95 per cent of all companies in existence in that country), limit the liability of their shareholders to creditors of the company, to the capital originally invested, i.e. the nominal value of the shares and any premium paid in return for the issue of the shares by the company. Therefore, a shareholder’s personal assets are protected in the event of the company’s insolvency or increased liability to a third party.

      Also, in the UK, the corporate veil is thick and not often, or easily, pierced: UK company directors incur no personal liability because all their acts are undertaken as agents of the SCP. While there are certain circumstances where personal liability may be imposed by the UK courts, particularly in respect of wrongful or fraudulent trading, it is rare that the corporate veil is pierced, and that the owners are held accountable, on their own assets, to pay off the limited company’s debts.

      In a loan-out agreement, the party which is the loan-out company is typically responsible for dealing with the tax and/or any applicable national insurance contributions (‟NICs”) on any payments made under this agreement, by the counterparty.

      This loan-out structure is therefore beneficial to, and flexible for, the end-client, who is unencumbered by HMRC’s rules on income tax and employer NICs payable on employees’ salaries, as well as protective employment law regulations applying to employees and self-employed people/freelancers relating, in particular, to a right to holiday, the national minimum wage, workplace pension and the maximum amount of 48 work hours per week.

      There are also some tax advantages to this loan-out arrangement for the creator: first, the range of expenses which the PSC may set against its taxable profits will be much wider than that allowed to an employee to set against their taxable income. Second, there will be a cash-flow benefit in avoiding income tax being deducted at source each month. Third, the individual, as shareholder, may be in a position to be paid dividends by their loan-out company, which is a more tax-efficient alternative to only being paid earnings as the PSC’s employee, since this dividend form of income is not subject to NICs.

      Therefore, loan-out agreements often lead to win-win situations, for the talent and their end-clients, provided that such services agreements are drafted correctly. In particular, the producing entity needs to ensure that all intellectual property created by the talent is assigned to the production.

      Such loan-out agreements are typically called ‟producer agreement” or certificate of engagement (‟COE”). Indeed, a COE transfers to a studio or production company all rights in the results and proceeds of the services of an independent contractor (talent like an actor, producer, model, director or professional sportsperson) on an entertainment production, such as a television movie, theatrical motion picture film, TV or online series, social media content, or commercial. The COE includes work made for hire and assignment provisions. The parties negotiate and execute the COE promptly after agreeing to all deal terms before entering into a long-form agreement, such as a producer agreement, at a later stage.

      As there can be some risks with the loan-out approach, in case the COE and/or long-form agreement are drafted incorrectly, it is best practice to seek expert legal advice when drafting, and reviewing as well as negotiating, a loan-out agreement.

      3. What is the future of loan-out companies and agreements within the new IR35 landscape?

      While I highlighted that loan-out agreements may be a win-win arrangement for the creator and their end-clients, there is one entity which has a lot to lose out of them: the taxman.

      By the late 1990s, there were concerns that PSCs were being widely used, in the UK, to disguise the fact that, in many situations, individuals were working effectively as their client’s employee, while garnering the loan-out structure’s tax benefits.

      To counter this type of tax avoidance in the March 1999 Budget, the Labour government announced it would introduce provisions to allow the tax authorities to look through a contractual relationship, where services were provided through an intermediary such as a PSC, but the underlying relationship between the worker and the client had the characteristics of employment. In those circumstances, the Labour proposals went, the engagement would be treated as employment for tax purposes.

      Provision to this effect was included in the Finance act 2000, with effect from the 2000/01 tax year. The legislation is commonly called ‟IR35”, after the number of the Budget press notice which first announced this measure.

      For the last 20 years, IR35 remained controversial, but were retained, even by the Conservative governments which succeeded the Labour one.

      However, concerns escalated when it was discovered that the use of PSCs was common by senior staff in the public sector and by contractors working for the state-owned broadcaster BBC.

      Since 2014, the various Tory governments went about cleaning the slate, by reforming the way the IR35 rules worked in the public sector. Following these reforms to the application of IR35 in the public sector, the government introduced legislation to make similar changes for the private sector to take effect from April 2021.

      How do these changes affect creators in the entertainment, media and professional sports industries, since April 2021?

      From 6 April 2021, IR35 rules applying to PSCs shift the responsibility from the PSC to the organisation receiving the talent’s services.

      Before 6 April 2021, it was the loan-out company that was responsible for assessing and making payment of income tax and/or NICs for the services being provided by the creator/talent.

      The government’s reforms for private sector companies are intended to improve compliance with the IR35 rules by moving the responsibility for tax assessment and payment from the contractor to the end-client. What this means, in the film, media and sports context, is that a producer engaging the services of a talent is now responsible for assessing whether that individual should be legally treated as an employee if they were being engaged directly by the producer, rather than through the loan-out company, and, if so, for accurately deducing income tax and NICs from the individual’s pay.

      However, this change only affects large and medium size businesses, meaning that producers which fall into the category of a ‟small business” are not affected by the new IR35 provisions. It is not yet known how a ‟small business” will be defined by HMRC, and what criteria will be applied by HMRC to any assessment as to business size.

      For example, our law firm Crefovi recently advised a client, whose producer services were retained by a production company working on behalf of the BBC, the commissioning broadcaster of an upcoming TV series, via his loan-out company. When I asked this client how much the budget of these TV series was, since such information was not disclosed in the draft producer agreement he had asked us to review and analyse on his behalf, he replied ‟GBP10 million”. I would argue that this budget size definitely places the BBC- commissioned production company into the category of ‟medium to large business”. Yet, the production company’s solicitor had drafted the loan-out agreement in such a way that the onus of paying any income tax and NICs liabilities, on the producer’s payments, layed solely with our client’s loan-out company, not with the production company.

      Even if HMRC has confirmed, in its guidance on the new IR35 rules, that ‟customers will not have to pay penalties for inaccuracies in the first 12 months relating to the off-payroll working rules, regardless of when the inaccuracies are identified, unless there’s evidence of deliberate non-compliance”, and that HRMC ‟will not use information acquired as a result of the changes to the off-payroll working rules to open a new compliance enquiry into returns for tax years before 2021 to 2022, unless there is reason to suspect fraud or criminal behaviour”, it seems that UK production companies and their accountants and lawyers still turn a blind eye on their new responsibilities, post April 2021. This will trigger quite a few compliance enquiries with HMRC and, no doubt, tax litigation in the coming years.

      Watch that space and, if you are a responsible creator, or production company owner, do reach out to us, at Crefovi, so that we may advise you on how to still reap the benefits of loan-out companies and structures, while minimising heightened legal and tax risks caused by this more stringent IR35 framework.

      Crefovi’s live webinar: How to use loan-out companies & agreements in in the new IR35 landscape, in the UK? – 3 December 2021

       Crefovi regularly updates its social media channels, such as LinkedinTwitterInstagramYouTube and Facebook. Check our latest news there!

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        How to sell your US fashion products in Europe, at high margins?

        Crefovi : 28/08/2021 2:41 pm : Antitrust & competition, Articles, Consumer goods & retail, Emerging companies, Fashion law, Information technology - hardware, software & services, Internet & digital media, Law of luxury goods, Outsourcing, Product liability, Technology transactions

        In the globalisation age, fashion and luxury brands aspire to doing business everywhere, servicing their retail clients on each continent.

        Yet, trade and geographical barriers are still in place, and even increased during the inward-looking Trump era, in the US, and Brexit transition, in the UK, making smooth and seamless fashion and luxury purchase transactions a challenge.

        So, what is the best approach, in the post-COVID, post-Trump, and post-Brexit world, to sell your fashion and luxury wares around the world, while making high margins?

        how to sell your US fashion products in Europe1. Selling fashion products between the US and Europe, via your own e-commerce sites, at a profit: ‟how to” guide

        In an age stricken by lockdowns and compulsory sanitary passes induced by COVID, online sales are a life saver. They took off during the pandemic and retail customers have now gotten used to shopping online.

        It is therefore time to make your ecommerce site, as well as social media accounts, as attractive, and user-friendly, as possible. This way, you may capitalise on this online shopping spree, provided that you offer free worldwide shipping and returns, 24/7 customer service and a faultless and enjoyable electronic buying experience.

        a. Consumer protection on distance-selling transactions

        One thing to bear in mind, though. While there is no singular or specific law governing e-commerce by retailers or any other seller of goods or services via the internet, in the US, it is a distribution channel which is tightly regulated in the European Union (‟EU”) and the UK.

        In particular, national laws transposing the EU directive 2011/83 on consumer rights, which aims at achieving a real business-to-consumer internal market, striking the right balance between a high level of consumer protection and the competitiveness of businesses, apply in the 27 EU member-states and in the UK, as ‟retained EU law” (i.e. a new type of UK law filling the gap where EU law used to be, pursuant to the EU withdrawal act 2018).

        Thanks to these EU and UK national laws, the withdrawal period during which a consumer may withdraw from the sale, has been extended from 7 to 14 days. They introduced the use of a standard form, that can be used by consumers to exercise their withdrawal rights. Such form must be made available to consumers online or sent to them before the contract is entered into. If a consumer exercises this withdrawal right, the business must refund the consumer for all amounts paid, including delivery costs, within a period of 14 calendar days.

        If your US fashion or luxury brand wants to sell, online, to European consumers, it must comply with those above-mentioned EU and UK national laws protecting consumers.

        So, your best bet is to adopt a best practice approach, offering the same level of consumer protection rights to all your clients, all over the world, which will be in compliance with the high standards imposed by the EU and UK national laws transposing the EU directive 2011/83 on consumer rights.

        b. General data protection regulation and privacy

        Also, Europeans are quite touchy with regards to their personal data and how businesses manage it.

        The General data protection regulation (‟GDPR”), adopted in April 2016, reflects these concerns and how they are addressed in the EU and the UK.

        As a result, e-commerce stores, which target the EU and UK markets, must have a data privacy policy, as well as a cookies policy, as well as some general terms and conditions of use of their e-commerce website, as well as some general terms and conditions of sale on their e-commerce website, which all comply with the GDPR and national data protection laws such as the French ‟loi informatique et libertés” and the UK data protection act 2018.

        In addition, companies offering products and services to EU and UK consumers must appoint a data protection officer, ensuring that they:

        • comply with such data protection legal framework,

        • have a systemic and quick process in place, should they suffer from a data breach or some hacking issues of their e-commerce website, and

        • have a designated point of contact, who will liaise with the EU or UK data protection authority, such as the ‟Commission informatiques et Libertés” (‟CNIL”) in France, or the Information Commissioner’s Office (‟ICO”) in the UK.

        Again, perhaps the best approach, for any fashion and luxury business with global ambitions, is to set up a data protection policy worldwide, which will apply to all its customers globally, and which will meet the high standards imposed by the GDPR.

        While it may be a steep learning curving, to bring your ecommerce website and business up to these standards, your fashion brand will only gain in reputation, coming across as a deeply respectful company, in tune with consumers’ needs and concerns with respect to data protection and privacy.

        c. Value added tax

        Online sales are taxed in the same way than sales in brick-and-mortar retail stores, in the EU and the UK: they are all subjected to a 20 percent value added tax (‟VAT”) rate. It is the standard VAT rate in France and the UK and is applicable on all fashion and luxury products.

        Indeed, since July 2021, all e-commerce purchases, even those made by retailers based outside the EU or the UK, are subjected to VAT. While there used to be an exemption of VAT, for goods imported in the EU, and sold for less than 22 Euros, they are no longer exonerated of VAT.

        So, what does this mean, practically, for a US fashion business that sells its wares via e-commerce in Europe? It must register with the Import one-stop shop (‟IOSS”), to comply with its VAT e-commerce obligations on distance sales of imported goods. And it must charge VAT on all fashion goods imported to the EU.

        d. Import duties

        If the VAT and import duties (or trade tariffs) are not planned for, and paid promptly, when the imported fashion products enter the EU or UK, this will cause customs delays, slow your delivery time and negatively impact your customer’s experience.

        It is therefore essential to clarify from the outset, with your EU or UK customer, who is in charge of bearing those costs, and how. These additional costs, and the responsibility for paying these, must be clearly communicated on your e-commerce website and/or social channels, as well as at the checkout.

        Generally, the customs clearance process is more or less the same in all EU countries. As far as shipping documents go, a commercial invoice and air waybill are required for all international shipments.

        Personal shipments of low-value, unregulated goods can usually clear customs without any additional documentation.

        However, fashion brands in non-EU countries will need an Economic operators registration and identification number (‟EORI number”), if they will be making customs declarations for shipments to EU countries. Shippers based outside the EU can request the EORI number from the customs authority in the EU country where they first lodge a customs declaration.

        Customs duties will be charged for shipments valued over 150 Euros.

        As a US fashion or luxury brand keen to do business in the EU and the UK, you need to adapt your e-commerce website, by adding some information and checkout options relating to VAT and custom duties, and by adding appropriate terms and conditions’ webpages, compliant with the GDPR and EU laws on consumer protection during distance-selling transactions. This will be a winning recipe for your European conquest.

        2. Selling fashion products from the US to Europe, via third-party e-commerce sites: the holy grail

        When you sell your fashion wares via third party ecommerce websites, as a US business, you somehow delegate the above-mentioned EU and UK compliance issues to someone else.

        Indeed, it will be down to the mytheresa, net-a-porter, theoutnet and matchesfashion of this world to have all their ducks in a row, in order to comply with EU regulations.

        However, you still have to focus on two main points, when selling your products via third party ecommerce sites.

        Firstly, a working capital consideration: are you ready to accept consignment, or do you only do wholesale? In other words, will you get paid only if and when your product is sold by the e-commerce platform, or will you get paid for the product, by this third-party retailer, whether or not it sells on the online retail store?

        Secondly, are your products compliant with EU regulations relating to product safety rules and standards? This is especially true if you are selling high risk products such as jewellery (in direct contact with the skin) or children’s apparel and jewellery. For example, the EU REACH regulation limits the concentration of lead in jewellery and other articles, while US jewellery companies have no such limitations on their internal market. It is therefore essential for your US fashion and luxury brand to double-check, before exporting to the EU or the UK, that your products comply with these EU and UK product safety rules and standards, especially now that class action lawsuits are allowed in Europe.

        3. Selling US fashion products via European brick & mortar retailers and stockists: the traditional route

        During the European seasonal fashion trade shows, such as Pitti and White, in Italy, and Tranoi, Man/Woman and Premiere Classe in Paris, France, your US brand may meet some European stockists interested in selling your wares in their EU or UK brick-and-mortar retail stores.

        This is a great opportunity to showcase your US brand to European consumers and should be embraced with ‟cautious celebration”. Indeed, while the two above-mentioned considerations of consignment vs wholesale, and of compliance with EU product safety rules and standards, should be taken into account, a proper discussion about the retail channels of the EU or UK brick & mortar stores also needs to take place.

        Does the EU or UK stockist intend to sell solely in their physical store, or also online, on their e-commerce boutique? Under article 101 of the treaty on the Functioning of the European Union (‟TFEU”), luxury and fashion brands cannot ban their distributors from selling their products online, through ecommerce, as this would be a competition law breach, deemed to be an ‟anticompetitive restriction”. However, luxury and fashion brands may impose some criteria and conditions to their stockists, to be able to sell their products online, in order to preserve the luxury aura and prestige of their products sold online, via the terms of their distribution agreements.

        Indeed, these above-mentioned discussions and conditions could be the premises of setting up a selective distribution network for your US brand in Europe. Selective distribution is the most-used distribution technique for perfumes, cosmetics, leather accessories and ready-to-wear in Europe. It escapes the qualification of anti-competitive agreement, under article 101(3) of the TFEU, via a vertical agreement block exemption.

        If you decide to appoint an agent, or a distributor, for the EU and UK territories, so that they find more stockists for your products in their geographical territories, your fashion brand must have a clear distribution plan in place, which needs to be set out in their agency agreement or distribution agreement. This way, your agent or distributor will be able to implement this distribution strategy, according to your guidelines and its contractual undertakings, in the designated EU or UK territory.

        4. What’s in the works, with a global tax for digital platforms? How is that going to affect fashion and luxury brands worldwide?

        Earlier this year, after the election of Joe Biden, we have heard a lot about an agreement on the corporate taxation of multinationals, paving the way to create new rules for the imposition of levies on the world’s multinational enterprises (‟MNEs”).

        This is because European governments, and businesses, are fed up with US MNEs, such as Amazon, Google, Facebook, Starbucks and Apple, not paying corporate tax on their soil, but solely in the US and/or in European tax havens such as Ireland (which corporate tax rate is among the lowest in Europe at 12.5 percent).

        Also, transfer pricing (that is, what affiliated companies charge each other for finished goods, services, financing or use of intellectual property) has been a source of tax planning opportunity, and the largest single source of tax controversy for MNEs, in a wide variety of industries, including retail and consumer products companies.

        The French government went as far as setting up its own unilateral digital services tax, at a 3 percent rate, which applies to social networks, search engines, intermediaries such as online selling platforms, digital services, online retailers, since December 2020.

        In July 2021, 130 countries and jurisdictions, representing more than 90 percent of global GDP, had joined a new plan to reform international taxation rules and ensure that MNEs pay a fair share of tax, wherever they operate, according to the OECD. If these reforms take place, taxing rights on more than USD100 billion of profit are expected to be reallocated to market jurisdictions each year, while the global minimum corporate tax will be at a rate of at least 15 percent and will generate around USD150 billion in additional global tax revenues annually.

        While these global tax reforms may not affect the P&L of most fashion and luxury brands directly, it will definitely impact the tax burden of their digital distributors, marketplaces and channels, around the world.

        These tax reforms will level the playing field, ensuring that wealth is redistributed more fairly, while globalisation and fashion distribution continue their ineluctable growth and expansion.

         

        Crefovi regularly updates its social media channels, such as LinkedinTwitterInstagramYouTube and Facebook. Check our latest news there!

         

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          How to enforce civil and commercial judgments after Brexit?

          Crefovi : 14/06/2021 10:45 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, Intellectual property & IP litigation, Internet & digital media, Law of luxury goods, Life sciences, Litigation & dispute resolution, Mergers & acquisitions, Private equity & private equity finance, Product liability, Tax, Technology transactions, Trademark litigation, Unsolicited bids

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

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

          a. The EU legal framework

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

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

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

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

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

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

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

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

          b. Enforceability of remedies ordered by a EU court

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

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

          c. Competent courts

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

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

          d. Separation of recognition and enforcement

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

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

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

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

          • a copy of the judgment which satisfies the conditions necessary to establish its authenticity;

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

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

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

          e. Defences

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

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

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

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

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

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

          So what happens now?

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

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

          a. The UK accessing the 2007 Lugano convention

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

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

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

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

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

          b. The UK accessing the Hague convention

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

          I. At common law rules

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

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

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

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

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

          II. The Hague convention

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

           

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

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

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

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

           

           

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            Why the UK TuneIn judgments are a return to the dark ages

            Crefovi : 14/04/2021 2:56 pm : Antitrust & competition, Articles, Consumer goods & retail, Copyright litigation, Entertainment & media, Information technology - hardware, software & services, Intellectual property & IP litigation, Internet & digital media, Litigation & dispute resolution, Music law

            TuneInAs a daily jogger, I am an early adopter, and fervent user, of radio apps, such as Radio Garden and TuneIn, in order to listen to, in particular, Los Angeles’ radio stations such as KCRW Eclectic 24 and KPFK, while I am practising my daily and morning sport exercises. While at home, I listen to French radio stations such as FIP or Nova, or to LA channels, via Tunein which is accessible on my Sonos home sound systems, software (installed on my two iphones) and speakers.

            However, over the last year or so, I could not help but notice that European radio stations, such as FIP or France Inter, were no longer accessible from either TuneIn station or Sonos Radio station, while I am in the United Kingdom (‟UK”).

            Well, now I know why. Indeed, I read today the 3 latest issues from Music Confidential published by Susan Butler on the ‟TuneIn appellate decision” (sic).

            Intrigued, I decided to delve deeper into this case and gulped (there is no other word) the 47 pages of the Warner Music UK Ltd and Sony Music Entertainment UK Ltd versus TuneIn Inc decision handed down by the High court of justice of England & Wales on 1 November 2019, as well as the 56 pages of the TuneIn Inc versus Warner Music UK Limited and Sony Music Entertainment UK Limited judgment handed down by the Court of appeal on 26 March 2021.

            Whilst I admire the intellectual virtuosity of the first degree judge, Justice Birss, displayed in the above-mentioned first degree decision, as well as the ‟strong hand in a velvet glove” approach favoured by the appeal judge, Justice Arnold, in the appellate judgment, I can only conclude that this exercise in intellectual masturbation by the judiciary has led, yet again, to another castration of a technological product full of creativity, advancement, connectivity to the world and fantastic ubiquity.

            Am I therefore pissed off?

            Yes. Here is why.

            Are you actually saying that TuneIn should ditch internet radio stations which are unlicensed in the UK?

            The ‟modus operandi” of TuneIn is to operate an online platform, website and apps, which provide a service enabling users to access radio stations around the world. The service is called TuneIn Radio.

            It is now available on over 200 platform connected devices, including smart phones, tablets, televisions, car audio systems, smart speakers such as Sonos, and wearable technologies.

            TuneIn Radio has links to over 100,000 radio stations, broadcast by third parties from many different geographic locations around the world. It is monetised through advertising and subscriptions, although the subscription is free for many users of hardware products such as Sonos and Bose sound systems.

            TuneIn Radio is awesome because, like Radio Garden, it allows users to save some radio channels as favourites, offers some curation services as well as some search functions, which a new user may use when he or she does not know what radio stations he or she may like. In addition, TuneIn Radio provides perks such as personalisation of content, collation of station information presented on individual station pages, and artist information set out on dedicated artist pages.

            Even better, until a few years ago, TuneIn Radio offered a recording device, through its Pro app, which also included a curated repertoire of a large number of music internet radio stations.

            As a user, you are therefore blissfully entertained, and your every musical needs catered for, when using the full gamut of TuneIn Radio’s perks and services.

            Well, such users’ bliss was short-lived, however, since the High court decision, confirmed by the 2021 appellate judgment, found that by including internet radio stations which are either unlicensed, such as Capital FM Bangladesh and Urban 96.5 Nigeria, or not compliant with the local neighbouring rights regime, such as Kazakhstan station Gakku FM and Montenegro’s City Radio, TuneIn Radio was infringing under section 20 of the 1988 Copyright, designs and patents act (the ‟Act”) which provides:

            20. Infringement by communication to the public
            (1) The communication to the public of the work is an act restricted by the copyright in—
            (a) a literary, dramatic, musical or artistic work,
            (b) a sound recording or film, or
            (c) a broadcast.

            (2) References in this Part to communication to the public are to communication to the public by electronic transmission, and in relation to a work include—
            (a) the broadcasting of the work;
            (b) the making available to the public of the work by electronic transmission in such a way that members of the public may access it from a place and at a time individually chosen by them.

            So not only those unlicensed and non-compliant internet radio stations are in breach of the right to communicate to the public, but TuneIn Radio is too, since it provides links to those streams.

            Had TuneIn Radio not obtained a warranty from those internet radio stations that they operated lawfully in their home state? God forbid, TuneIn Radio could not rely on such warranty, of course, and the onus was on TuneIn Radio to double-check that such internet radio stations were either licensed or compliant with their local neighbouring rights regime.

            So what is the direct consequence of such stance, taken by the UK High court and Court of appeal? Well, all those internet radio stations become unavailable to the public, in the UK but also probably in other European countries such as the 27 member-states of the European Union (‟EU”), via the TuneIn Radio platforms, websites and apps.

            Indeed, all the reasoning made by Justice Birss, in the first degree case, as well as Justice Arnold, in the appellate case, revolved around article 3 of the EU Information Society Directive (the ‟Directive”), which was transposed into the above-mentioned section 20 of the Act, and the abondant, eye-wateringly complex and excruciatingly intricate related case-law of the Court of Justice of the European Union (‟CJEU”) on the right of communication to the public.

            So, yeah, you bet, this TuneIn case is valid both for the UK (which has now exited the EU via its unwitty Brexit), and the 27 remaining member-states of the EU.

            Therefore, users and customers lose because they cannot listen to all worldwide internet radio streams via TuneIn anymore, as a direct consequence of the UK decisions.

            And it does not stop there! Perish the thought.

            What about those music radio stations which are licensed for a local territory other than the UK, such as VRT Studio Brussel in Belgium, Mix Megapol in Sweden and MavRadio in the USA?

            For these radio stations outside the USA, the countries operate various kinds of remuneration rights regimes and these stations are paying remuneration under these local schemes. The USA operates a statutory licence scheme conditional on paying royalties and the sample radio MavRadio pays those royalties. However, in all of these cases, the relevant body has not granted geographical rights for the UK.

            Ahhh, the UK first degree judgement, confirmed in appeal says, that’s not my problem, my dear sir: TuneIn’s act of communication in relation to those sample radio streams which pay royalties to a body that does not grant geographical rights for the UK, is unlawful, unless licensed by the UK rights holder. Since it is currently not, TuneIn’s actions amount to infringement under above-mentioned section 20 of the Act.

            Therefore, TuneIn has to now remove all this pool of internet radio stations from its platforms, apps and websites too, until it has figured out how to strike a deal with the UK rights holders.

            Probably, TuneIn’s best call is to reach out to the UK neighbouring rights collecting society, PPL, and start the licensing negotiations from there, immediately. Also, TuneIn better cooperate directly with labels Warner and Sony, to strike those licences, now that the UK first degree decision has been confirmed in appeal and since these two claimants ‟account for more than half the market for digital sales of recorded music in the UK and about 43 percent globally” (sic).

            While I can understand that the UK courts would slam TuneIn for not proactively getting a UK neighbouring rights’ licence for its own premium radio stations, made available exclusively to TuneIn’s subscribers, I found it profoundly castrating to make TuneIn’s liable for primary infringement of the right of communication to the public for merely providing streams to unlicensed and non-compliant third party internet radio stations and to third party internet radio stations which do not pay royalties in the UK.

            What about the right of UK and EU users to have access to as much culture, musical experience and knowhow, as possible, even in a geopolitical context where most countries in the world do not care about, and probably don’t even know what are, neighbouring rights?

            This is directly discriminating UK and, probably, all EU listeners and users, because TuneIn will now have to geoblock all its links to non-compliant and unruly streams, which probably constitute at least 50 percent of the 100,000 internet radio stations available on its apps, platforms and websites.

            So Justice Birss and Justice Arnold can now breathe a sigh of relief, at the thought of having saved European neighbouring rights in the face of barbarian non-British cultural invasion, but I am sure that most UK users of TuneIn only have a ‟fuck you” to respond in return, for their ill-advised, technologically-stiffling and Brexitist stance on the matter.

            Now, by using TuneIn Radio, a UK user will only have access to music radio stations which are licensed in the UK by PPL, such as BBC Radio 2, Heart London, Classic FM and Jazz FM. Thank you very much, but we can already access those radio channels on our terrestrial radio sets or on their respective online platforms, from the UK, so what is the added value of TuneIn Radio in the UK now, pray tell?

            So I can’t use the recording service on TuneIn anymore?

            Of course, Justice Birss, and then Justice Arnold, went for the jugular with respect to the recording option by users of TuneIn’s Pro app.

            Indeed, in terms of a user’s use of the recording function, the claimants contended that the Pro app was not just a recording device. It also included a curated repertoire of a large number of music internet radio stations. The purchaser of the Pro app would, reasonably, understand that TuneIne had sold them the Pro app (with its built in recording function) in order to allow them to record audio content offered by the TuneIn Radio service. There was also a point on the degree of control exercised by TuneIn. Only internet radio stations provided by TuneIn could be recorded and TuneIn could disable the record function at a station-by-station level.

            While this TuneIn recording function was a very original, and unique, offered feature, in the competitive world of radio aggregators, the High court decision, confirmed in appeal, swiftly killed it, by finding that ‟TuneIn had authorised the infringements carried out by its users by recording using the Pro app” and therefore ‟TuneIn’s service via the Pro app when the recording function was enabled infringed the claimants’ copyrights under Section 20 of the Act”.

            Even if Justice Arnold allowed the appeal, in his appellant judgment, against the conclusion drawn by the first degree judge, that TuneIn was liable for infringement by communication to the public in relation to the ‟category 1” stations (i.e. the internet radio stations which already are licensed in the UK via PPL) by virtue of providing the Pro app to UK users with the record function enabled, the outcome is the same: off with its head, with respect to the great recording function offered by TuneIn’s Pro app.

            As Susan Butler wisely wrote, in her Music Confidential’s last three issues, ‟in my view, however, that does not mean that (intellectual property) must be disruptive to digital innovation across national borders”. ‟(…) the bad kind of disruption – the costly and destructive kind – seems to occur most often when anyone tries to drag old business models or entities built around old business models into new multi-national digital marketplace. (…) Everyone must become more pliable to truly reshape the market to support true innovation”.

            Well, Susan, with the old farts who handed down the 2019 and then 2021 decisions (check them out on the audio-video recorded hearings here!), count on it.

            Another example of UK splendid and backward looking isolation, my friends: where is my visa to move to Los Angeles asap, please?

             

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              Crefovi’s take on EFM online 2021: finally, the digital revolution has come to the film industry!

              Crefovi : 18/03/2021 11:28 am : Articles, Copyright litigation, Entertainment & media, Events, Information technology - hardware, software & services, Intellectual property & IP litigation, Internet & digital media, Technology transactions

              Crefovi’s founding and managing partner, Annabelle Gauberti, attended, by way of her MacBookPro, the EFM online 2021 session from 1 to 5 March 2021. What are Crefovi’s key takeaways from the first European film festival and market of the year? Was this online session a success, managing to link buyers and sellers, as well as their respective service providers, together?

              EFM online 2021Distributors’ need for European content to meet the statutory ratios set out in the Audiovisual Media Services Directive (‟AVMSD”)

              As part of its push towards shaping Europe’s digital future, in the digital single market, the European Union (‟EU”) adopted the Audiovisual Media Services Directive (‟AVMSD”) in November 2018.

              This directive had to be transposed by September 2020 into national legislation in the 27 EU member-states. Yet, since only Denmark, Hungary, the Netherlands and Sweden notified transposition measures to the EU, the EU Commission sent formal notices to all the other 23 EU member-states, requesting them to provide further information, in November 2020.

              Be that as it may, the AVMSD is already impacting the buying strategy of distributors and other streaming companies (called ‟streamers” during the EFM online 2021 session).

              Indeed, the AVMSD governs EU-wide coordination of national legislation on all audiovisual media, both traditional TV broadcasts and on-demand services.

              Since one of the goals of this EU coordination, via the AVMSD, is to preserve cultural diversity, each EU member-state is currently figuring out how best to transpose into national law the new obligation, for video on-demand services (which include streamers), to ensure at least a 30 percent share of European content in their catalogues, and to give prominence to such European content. The provisions of the AVMSD also allow, under certain conditions, EU member-states to impose on media service providers that are established in other member-states, obligations to contribute financially to the production of European works. The new obligations do not apply to media service providers with a low turnover or a low audience, in order not to undermine market development and inhibit the entry of new market players.

              So, of course, the likes of Netflix, Amazon Prime, Disney+ are opening their large purses freely, in order to catch the best European titles, and therefore meet the 30 percent share of European works, which is a ‟sine qua non” condition for them to keep on, or start (in the case of Disney+, Hulu, HBO Max), offering their video on-demand services to EU consumers.

              This was a blessing for European film producers, directors and sales agents present at the EFM online 2021 session. Indeed, a lot of key deals were signed at the European Film Market, this year, for European titles such as French work ‟Petite Maman” from Céline Sciamma, Radu Jude’s Golden Bear winner ‟Bad Luck Banging Or Loony Porn” (from Romania), and many more.

              COVID 19’s negative impact on the production stage of film projects and how the UK and French film industry stakeholders rebounded

              There is another reason why current new film content has not met the high demand (for European titles and other international works) in the supply chain. Well, you guessed it, the COVID 19 pandemic is the cause, of course.

              Due to health and safety issues, the logistics of going into the film production stage have, for a while, seemed unsurmountable. Almost all film productions shut down, during the first European lockdown in February to June 2020. Then, everybody took a hold of themselves and went back to work, putting in place extremely stringent health and safety precautionary measures, pre, during and post production, such as:

              • administering PCR COVID test to all above-the-line and below-the-line production staff upon entry in the UK and France, and then on each day of production;
              • mandatory wear of personal protective equipment for all staff other than actors currently filming;
              • keeping the mandatory 2 meters’ apart distanciation rule, between all team members.

              Major talents and film producers would have none of the nonsense that COVID deniers would throw their way, with Tom Cruise going on record for his outburst towards UK film crew members who were flouting social distancing guidelines, on the Leavesden set of the 7th instalment of his ‟Mission: impossible” franchise, in December 2020.

              The panel for EFM online 2021 session, from the British film commission, provides vivid description of how UK film producers and their staff had to adapt, at very short notice, when the pandemic hit in 2020, and how they are regularly reviewing and improving their health and logistics protocols, in order to ensure that they are compliant with the latest health news and information about the virus.

              Also, the cost of insurance went through the roof, for most film productions around the world, making it impossible for many a project to move onto production stage. This disproportionately impacted independent filmmakers, to the point that governments stepped in, such as the UK government issuing a ‟Film & TV production restart scheme” for UK film and TV productions struggling to get insurance for Covid-related costs.

              Of course, at the end of the film supply chain, a major change occurred, thanks to the pandemic: the tyranny, imposed by major film studios and European governments, consisting in forbidding ‟day-and-date” release (i.e. a simultaneous release of a film on multiple platforms – most commonly theatrical and on-demand videos services), dissolved. Cinemas have been closed for a while, now, since March 2020, on-and-off, due to the pandemic-induced lockdown. Therefore, there is a change of paradigm, for film producers and directors, from asking themselves ‟Should we go for a day-and-date release?”, to ‟On which video on-demand service and/or streamer, my film will shine most?”.

              Indeed, die-hard fans of the theatrical window have started to yield, such as film major Universal pictures which released big films on streamers from March 2020 onwards.

              Other major studios have preferred to hold back releasing many big titles indefinitely, such as Wes Anderson’s ‟The French dispatch”, much to the chagrin of end-consumers and fans.

              EFM online 2021: filling the gap for more top-quality content with VFX hacks such as virtual production

              One of the major takeaways from the EFM online 2021 is that, due to this huge demand for content, film professionals need to produce more, faster, at an affordable cost, and in very high production value.

              This is where virtual production is coming, to deliver this faster, smoother and enhanced quality.

              From the moment where the initial upfront cost and investment of acquiring top virtual production tools and material have been incurred, it is a no-brainer: virtual production specialists laude the cost and time savings, as well as agility, induced by this new technology, predicting that every filmmaker will irresistibly move to virtual production in the near future.

              So what is virtual production? Virtual production is the use and incorporation of visual effects (‟VFX”) and technology throughout the production life cycle. While this process is not entirely new, the film industry is now paying much attention to virtual production, because it enhances production planning, increases shooting efficiency and reduces the number of expensive reshoots. Through visualisation, motion capture, hybrid camera, and LED live-action, the virtual production techniques that belong to the toolset of modern content creation are perfectly adapted to a COVID 19-era of film production.

              Potentially, virtual production would allow actors, and crew members, to shoot and work from multiple locations, in a safe environment where they have set up their respective COVID-19 health and safety protocols and bubble.

              The challenge now is for film professionals to jump on the bandwagon and swiftly obtain appropriate training on virtual production and other VFX tools and technologies, so that they can hit the ground running and offer their new much-needed skills to French and UK film productions.

               

              To conclude, while I would have liked all presentations and virtual events to be accessible to all participants, during the EFM online 2021 (festival organisers cannot pretend that the room has a limited number of seats, anymore, right?), I deeply enjoyed the virtual attendance of this film market and festival, getting a lot out of it, from catching up on the latest trends to catching up with our film clients and prospects via Cinando and the online EFM platform. We will be back!



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

                Crefovi : 27/11/2020 12:43 pm : Antitrust & competition, Articles, Consumer goods & retail, Copyright litigation, Emerging companies, 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, Technology transactions, Trademark litigation

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

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

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

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

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

                2. How are licenses used in the creative industries?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                 

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

                  Crefovi : 22/06/2020 4:01 pm : Antitrust & competition, Articles, Copyright litigation, Emerging companies, Gaming, Information technology - hardware, software & services, Insolvency & workouts, Intellectual property & IP litigation, Internet & digital media, Litigation & dispute resolution, Outsourcing, Product liability, Technology transactions

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

                  escrow agreement1. What is software escrow and source code escrow?

                  1.1. What is source code?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                  1.3. Software escrow / source code escrow

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                   

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