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

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

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

1. What’s going on?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

1. What is software escrow and source code escrow?

1.1. What is source code?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

1.3. Software escrow / source code escrow

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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How to lawfully broadcast your soundtracks in bars, restaurants, hotels & other public spaces, from France | Music law firm Crefovi

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When a France-based sound system provider reproduces some phonograms on soundtracks, in order to propose such soundtracks for broadcasting in public spaces such as restaurants, bars, hotels, or shops, he/she needs to have a proper strategy in place, to lawfully implement his/her business plan. Especially when it comes to fostering useful and productive relationships with French, as well as foreign, collecting rights societies. How can this legal compliance effort be done in the most time and cost efficient manner, to assist the developing business of any France-based budding sound system provider? [hr]

1. Registering as a user-reproducer with both SPPF and SCPP

There are four neighbouring rights collecting societies, in France, as far as music neighbouring rights are concerned, as follows:

    • SPPF, which is a neighbouring rights collecting society for phonogram producers that are independent labels only;
    • ADAMI, which is a neighbouring rights collecting society for artists and performers and
    • SPEDIDAM, which is a neighbouring rights collecting society for session musicians and vocalists.

Any new sound system provider based in France needs to be aware of such neighbouring rights collecting societies, since some may come knock at his/her door, in order to collect royalties.

Indeed, which neighbouring rights collecting societies may have a legal, and financial, claim against a France-based sound system provider?

A distinction needs to be drawn, between:

    • neighbouring rights’ royalties collected on the basis of broadcasting phonograms, and
    • neighbouring rights’ royalties collected on the basis of reproducing phonograms.

As far as neighbouring rights’ royalties collected on the basis of broadcasting phonograms are concerned, the French intellectual property code (“IPC“) provides that 50% of the royalties paid by users (i.e. sites which broadcast phonograms, such as public spaces, TV channels, radio channels, etc.) are directed to the right owner of the phonogram, while the remaining 50% goes to artists-performers, session musicians and vocalists. Article L. 214-1 of the IPC provides for the payment of neighbouring rights’ royalties relating to the right to broadcast, on the basis of scales which are, themselves, provided for in article L. 214-4 of the IPC. These royalties paid in relation to the right to broadcast are entitled “fair remuneration” (“rémunération équitable“) and are distributed to phonogram producers via SCPP and SPPF, to artists-performers via ADAMI, as well as to session musicians and vocalists via SPEDIDAM.

However, as far as neighbouring rights’ royalties collected on the basis of reproducing phonograms are concerned, these are paid by users (i.e. sound system providers who provide sound via physical media, automated broadcasting systems, or satellite/ADSL) to phonogram producers only. Article L. 213-1 of the IPC provides for the payment of such neighbouring rights’ royalties relating to the reproduction right. These royalties are distributed to phonogram producers solely, via SCPP and SPPF.

Therefore, a France-based sound system provider, who reproduces phonograms on soundtracks which will then be broadcasted in the sites of his/her clients (i.e. bars, hotels, restaurants, retail stores, lifts, etc., collectively referred to as “Clients’ Sites“), located either in France and/or, for example, in the United Kingdom, will have a statutory obligation to negotiate, finalise and sign a common interest general agreement (“contrat général d’intérêt commun“) between a user sound system provider, and each one of the neighbouring rights’ collecting societies for phonogram producers solely, i.e. SCPP and SPPF. Following the execution of such agreements, the sound system provider will pay SCPP and SPPF some royalties due under the right of reproduction of phonograms.

Clients’ Sites, i.e. public places in which the soundtracks will be broadcasted via physical media, automated broadcasting systems, or satellite/ADSL, will pay neighbouring rights’ royalties pursuant to the right to broadcast phonograms, to SCPP, SPPF, ADAMI and SPEDIDAM.

2. On the agreements to be entered into, between users-sound system providers, and SCPP and SPPF respectively

The templates of common interest general agreements, between users-sound system providers, and each neighbouring rights’ collecting societies for phonogram producers, i.e. SCPP and SPPF respectively, are freely available on their websites (together, the “Agreements“).

Key points to note, in relation to the Agreements, are that:

    • there is some leeway while negotiating with SCPP and SPFF the terms of the Agreements, before they are finalised;
    • SCPP owns 77% of the social repertoire of phonograms in France, while SPPF owns 23% of the social repertoire of phonograms registered in France, and these prorata numeris are set out in the calculation formula used to determine the amount of the royalty owed under the right of reproduction, as explained below;
    • both SCPP and SPPF have entered into reciprocal agreements with the UK neighbouring rights’ collecting society PPL, which implies that, a priori, it is not needed that a France-based sound system provider enters into a similar contract than the Agreements, with PPL, even if his/her soundtracks are broadcasted on Clients’ Sites located in the United Kingdom;
    • both SCPP and SPPF warrant and represent that the phonogram producers, members of their respective social repertoires, have obtained prior authorisation from artists-performers, session musicians and vocalists, to the reproduction of each of the phonograms registered in their social repertoires, in compliance with article L. 212-3 of the IPC;
    • the annual turnover, exclusive of tax, generated by the sound system provider, will be the sole amount taken into account by SCPP and SPPF, when computing the royalty due under the right of reproduction;
    • the formula to calculate the royalty is equal to ((annual turnover excl. tax * 15%) * 23%) for SPPF, where 23% represents the prorata numeris applicable to SPPF, as explained above;
    • the formula to calculate the royalty is equal to ((annual turnover excl. tax * 15%) * 77%) for SCPP, where 77% represents the prorata numeris applicable to SCPP, as explained above;
    • both SCPP and SPPF have put in place some guaranteed minimums, for royalties, depending on the number of phonograms reproduced on a Client’s Site per year; which amounts must be set out in the Agreements;
    • SCPP requests the sound system provider to pay a royalties’ deposit, while SPPF does not request any deposit;
    • sound system providers have strenuous reporting obligations, as they need to send to SCPP and SPPF, on a regular basis, a filled-out excel spreadsheet, which sets out all the data to be reported, in relation to each one of the phonograms reproduced on their soundtracks, which belong to the respective social repertoires of SCPP and SPPF;
    • soundtracks, as well as automated broadcasting systems, must allow for phonogram protection tools, such as digital rights management tools, which protect phonograms from unauthorised copy and
    • data about phonograms can be traced and found in the databases of SCPP and SPPF, in particular their IRSC numbers.

SCPP and SPPF legal teams are useful to better understand the Agreements, as well as to negotiate, possibly customise, and then finalise such Agreements.

To conclude on this note, neighbouring rights’ royalties that any France-based sound system provider must pay represent 15% of his/her annual turnover, exclusive of tax.

What about any eventual royalties on copyright?

3. Relationships between users – sound system providers and SACEM-SDRM

Sound system providers do not have any statutory obligation to register with SACEM, i.e. the French music copyright collecting society, or to the “Société pour l’administration du droit de reproduction mécanique des auteurs” (« SDRM »).

Indeed, Clients’ Sites will pay royalties to SACEM and SDRM, relating to public performance rights and mechanical reproduction rights, provided for in article L. 122-4 of the IPC, through a representation agreement entered into by the authors, their beneficial owners as well as SACEM and SDRM, pursuant to article L. 132-18 of the IPC.

For example, a restaurant located in Paris will pay an annual fixed price exclusive of tax of 1,783.69 euros, pursuant to the royalties due under the public performance rights and the mechanical reproduction rights of the musical compositions of authors-composers registered with SACEM and SDRM.

Therefore, there is no obligation for a sound system provider to register with SACEM, in order to pay any royalties due under the right to reproduction, since his/her Clients’ Sites located in France will pay such royalties, which are included in the annual fixed price exclusive of tax, that they will directly pay to SACEM and SDRM.

However, SACEM and SDRM recommend that professional sound system providers share their digital declarative forms (i.e. the reporting data on each phonogram which needs to be set out on an excel spreadsheet provided by SCPP and SPPF) with them. This way, SACEM and SDRM can make a realistic and exact sharing of the rights due under the mechanical reproduction, because they have the accurate information relating to each phonogram and musical composition reproduced on a soundtrack, which is then broadcasted in each Client’s Site located in France. So SACEM is currently putting together a charter, for the attention of professional sound system providers, in order to educate them on the need to report about the musical compositions which have been reproduced, to SACEM.

As far as Clients’ Sites located in the United Kingdom are concerned, SACEM has entered into a reciprocity agreement with the UK music copyright collecting society, PRS, in order to ensure that royalties collected by PRS in the name and on behalf of SACEM, be then sent to SACEM as soon as possible, for distribution to the appropriate authors and their beneficial owners, all members of SACEM.

 

To conclude, setting up a profitable sound system provider business in France comes with a few hoops and hurdles, from a regulatory standpoint. However, if these intricacies are rightly tackled, through appropriate software solutions (especially to deal with the strenuous reporting obligations on each phonogram reproduced on each soundtrack) as well as tactical and effective legal advice, nothing should come in the way of any savvy and business-minded sound system provider because he/she will have set up constructive and mutually beneficial relationships with French collecting rights societies. 

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

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

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

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

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

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

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

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

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

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

 

1. How to lawfully terminate your French lease

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

How do you lawfully terminate such French leases?

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

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

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

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

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

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

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

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

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

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

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

2. How to lawfully terminate your French staff

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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

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

 

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

2.2. Removal of free movement of services and VAT changes

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

3. Legal implications of Brexit in the UK

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

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

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

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

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

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

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

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

 

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

 

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