The Regulations apply to a “relevant transfer”, which covers two types of event:

•         a transfer of a business, undertaking or part of a business or undertaking where there is a transfer of an economic entity that retains its identity (essentially the sale and purchase of an identifiable part of a business).

•         a customer engaging a contractor to do work on its behalf, reassigning such a contract or bringing the work “in-house”. There must be an organised grouping of employees whose principal purpose is carrying on the relevant activities on behalf of the customer and the activities must not consist wholly or mainly of the supply of goods for the customer’s use.

It is the second type of event which is, in effect, an outsourcing. However, it is to be noted that the Regulations will not apply to the second type of event if the activities concerned “consist wholly or mainly of the supply of goods” for the customer’s use. Such a state of affairs arose in the recent case of Pannu and others v Geo W King (in liquidation) before the Employment Appeals Tribunal.

The claimants were all employed by Geo W King Ltd (In Liquidation) (GWK) on an assembly line producing van parts for IBC Vehicles Ltd (IBC). GWK went into liquidation and the claimants were dismissed. IBC then entered into a contract with another company, Premier, to produce the relevant parts. Premier employed one of GWK’s workers, a supervisor, but none of the others.

The Employment Tribunal held that the employment contracts of the claimants did not transfer to either Premier or IBC as the activities involved consisted wholly or mainly of the supply of goods. On appeal the claimants argued that the facts pointed clearly to the conclusion that the activities were in truth the supply of services, rather than goods. The Employment Appeals Tribunal disagreed, holding that whilst the employees were providing a service to their employer, its activities did indeed amount to the supply of goods – specifically the supply of finished goods to IBC.

In addition, any change in the arrangements when Premier took over was irrelevant: either the nature of the activities changed, in which case the requirements of the Regulations were not met, or they remained the same, in which case a finding that GWK was providing goods meant that the Regulations did not apply.

It is clear that there are some advantages to characterising an outsourcing as principally a supply of goods if this is possible in the circumstances. Often this will not be the case, but it might be unwise on some occasions to wrap in unnecessary services to an outsourcing where the principal undertaking is to provide goods, since doing so might bring in the complexities of TUPE when, with some forethought, they might properly be avoided.

© Taveners 2012

In a recent case before the Patents County Court (Hollister Inc and another v Medik Ostomy Supplies Ltd) Medik admitted importing a large number of HOLLISTER and DANSAC products into the UK and there was no dispute that Medik did not give sufficient notice of this activity to the claimants in order to satisfy the notice condition. Accordingly, Medik admitted infringement and the claimants sought an account of profits.

The claimants argued that the sums due on the account were Medik’s gross profits, amounting to over half a million pounds. Medik rejected this on two grounds:

•         The sum payable should be zero or at most only a token; the acts of infringement were due solely to the failure to give adequate notice, and the claimants had not suffered any damage.

•         Alternatively, if the sum due were to be assessed by looking at Medik’s profit, the relevant profit was the net profit made by Medik, taking into account properly attributable costs. This gave a profit figure of about £110,000.

An account of profits under English law is generally assessed on principles including the following:

•         The defendant is treated as if he conducted his business and made profits on behalf of the claimant.

•         The court should determine what profits have been caused by the defendant’s wrongful acts. In particular, a distinction must be made between profits caused by infringement and those made on the occasion of such infringement.

•         Profits attributable to the non-infringing parts of the defendant’s business were not caused by the use of the relevant intellectual property even if the use of that intellectual property was the occasion for the generation of those profits.

•         A claimant must take a defendant as he finds him and cannot say that the defendant could and should have generated higher profits.

Applying these principles, the judge accepted Medik’s argument that a proper proportion of fixed, centrally incurred overhead costs should be deducted. A proper share of Medik’s premises costs, repackaging costs, general staff and overheads should be allowed, to be apportioned by units sold. Notional charges for directors and the staff costs of a sister company were disallowed.

The judge accepted that had the sales of the repackaged products not taken place, the claimants would have earned a substantial profit. He also accepted that the claimants had not suffered any damage relating to the purposes for which the notice provision was provided. There was no evidence of any issue of counterfeiting in this case which had been affected by the failure to give notice.

The judge rejected the suggestion that he should award only a small sum; this would not produce a financial remedy that was effective and a sufficient deterrent to ensure that traders did give the proprietor notice. However, it was not right to award the total sum derived from the account for the following reasons:

•         This was not a case in which the purposes for which the notice provision was created had been engaged. There was no evidence that any anti-counterfeiting strategy of the claimants was hindered by the lack of notice from Medik.

•         In this case the claimants knew Medik was repackaging or relabelling their goods; there had, in effect, been only a minor breach of the notice provisions.

•         The right approach was to award a fraction of the profits arrived at on the account that was a fair and proper fraction in all the circumstances, bearing in mind the extent of damage to the trademark owner and proportionality. The above factors pointed towards a lower fraction, but this needed to be balanced with the need for the remedy to be effective and a sufficient deterrent.

On this basis the court awarded the claimants half of Medik’s profits which were to be recalculated by the accountants for the parties on the principles set out above.

Despite the details of the principles set out by the judge in this case and their apparently careful application, the final decision appears to be a fairly arbitrary 50% “fine” calculated by reference to the defendant’s profits. As was contended by the defendant in this case, it is difficult to see how the claimants truly suffered loss – they were given insufficient notice of the intended importation and repackaging, but nothing was wrong with the products themselves and the underlying rights of the claimants in their brands were not in peril.

© Taveners 2012

The facts

In this case S owned 68.8% of the shares and was chairman of CH Ltd. The second director was B, who was described as “Group Managing director” in his employment contract, and B held the remaining 31.2% of the shares. The third director, H, the Group Financial Director, held no shares. The articles of CH Ltd incorporated the 1985 Table A Regulations (as is the case for most companies formed before 2009). In addition, special articles required that the quorum at meetings of shareholders was two, one of which had to be S, and further S was entitled to be a director so long as he held any shares in the company.

Between 2002 and 2005 S was allegedly involved in a cheque fraud involving two subsidiaries of the company, as a result of which substantial amounts of cash were allegedly diverted to S. The cheque fraud came to light in 2009, when it was investigated by the company. B took no steps against S at that time. However, by 2011 S was expressing reservations about the way that the company was being run by B and H and declared his intention to appoint another person as CEO. In May 2011 B on behalf of the company instructed solicitors to investigate possible fraud by S. S attended the offices of the company on 1 July 2011 to attend a board meeting, but was handed a letter setting out his immediate suspension. Following his departure B and H signed a resolution of the board authorising the suspension. After this B and H ran the company without reference to S.

On 18 July 2011 S requested that the company hold an EGM to consider the removal of B and H as directors of the company. B made clear that he would not attend such a meeting so that there would not be a quorum. Next day S instituted proceedings against B and the company, seeking a declaration that the decision to suspend him was invalid and that the court should grant an order that in the circumstances a general meeting could take place with a quorum of one.

The Law

Articles will usually provide that the business of a company is to be managed by the directors, who are empowered to exercise all the powers of the company. Those powers must usually be exercised by the board collectively at a properly convened board meeting. The board may not delegate any of their powers unless expressly authorised by the articles or a resolution of shareholders. Articles will therefore often include a provision providing for delegation to a managing director. For example, Regulation 72 of Table A provides:

“The directors may delegate any of their powers …. to any managing director or any director holding any other executive office such of their powers as they consider desirable to be exercised by him. Any such delegation may be made subject to any conditions the directors may impose, and either collaterally with or to the exclusion of their own powers and may be revoked or altered. …”

As a result the actual power of a managing director will depend on the articles which confer the power on the board to appoint him and upon the terms of the delegation, which will usually be in his employment contract. The office of managing director does not, without more, imbue an officer with powers over and above those enjoyed by any other director.

In this light the court held that there was nothing in B’s service contract whereby any of the powers of the board were delegated to B. The suspension of the Chairman was not a commercial decision, nor was it something occurring within the day to day running of the company’s business.

Further, any powers the Managing Director had depended on the Articles as a whole. The Special Articles were designed to protect S’s position as majority shareholder. They enabled him to ensure that the board could not pass a resolution dismissing him as Chairman. It could not have been intended that that could be sidestepped by an implied delegated authority of the Managing Director. The decision to suspend S was unlawful.

The court noted that B was not powerless as a result of the alleged dishonest conduct by S. He could bring a minority shareholder petition under section 994 of the Companies Act 2006 or he could attempt to bring a derivative action under section 206. What he could not do was to use his position as Managing Director to confer on himself powers which should properly have been exercised by the board.

The court also considered whether it should grant S an order permitting him to hold a shareholders’ meeting on his own (a quorum of one). This was a case where the majority shareholder should be entitled to exercise his ordinary voting rights to appoint and remove directors. The court felt that it was of considerable significance that B chose to take no action in respect of the alleged cheque fraud between December 2009 and May 2011 and only chose to raise it in May 2011 when S was threatening to use his power as majority shareholder to appoint a CEO to the board. It seemed plain that the decision to instruct solicitors to investigate the fraud was part of his attempt to protect his position as Managing Director. The court granted the order in favour of S.

Finally, there was the matter of B instructing solicitors on behalf of the company. In the absence of express delegation, the Managing Director had no authority to authorise the active defence of proceedings against the company by the majority shareholder without a board resolution. As noted above, the Articles were designed to protect S’s position. In those circumstances there was no implied delegated authority to bring proceedings against S. Equally, there was no implied authority to mount an active defence to S’s proceedings. The question of whether there should be an EGM with a reduced quorum was a dispute between shareholders over who should control the company. It followed that company funds should not have been used for the prosecution of an active defence in the application.

The case shows that even where a majority shareholder is alleged to be involved in wrongdoing his power as largest shareholder and, here, his position enshrined by the special articles could not be undermined by a “managing director”. The managing director had authority over day to day commercial matters of the company, but this position did not give him any special rights to act independently in relation to ownership and control issues.

© Taveners 2011

The delightfully named Hedgehog Golf Company Limited (HGC) had developed and patented a device known as a “hedgehog” which attached to the wheels of a golf trolley to enable golfers to play in wet conditions. HGC is currently involved in a patent infringement case against Masters Golf Company (Masters) in respect of the “hedgehog” patent. A Mr Hauser (H) was a 50 per cent shareholder in, and a director of, HGC. In March 2009 the other shareholder and director of HGC, a Mr Lantsbury (L) presented an “unfair prejudice” petition against H under the Companies Act 2006 claiming that H had been responsible for a series of actions which were unfairly prejudicial to the interests of L as a shareholder. In March 2010 the High Court gave judgement in L’s favour, and the judge concluded that among the appropriate remedies was “to allow [L] to purchase [H's] share at a value to be agreed or, if necessary, to be established by the court after due enquiry”.

The judgement was, as is usual, circulated to the parties in the case (H, L and their respective lawyers) a few days before the judgement was formally announced in court. Shortly after seeing it, H telephoned a Mr Baum, a consultant to HGC, and put forward a proposal which he asked Mr Baum to pass on to L. H said that, if his proposal were not accepted, he would not only decline to provide any further assistance in connection with HGC’s patent infringement claim against Masters, but would offer his services to the patent attorneys acting for Masters to assist them in their defence of HGC’s proceedings. H also warned that he would make it publicly known that there were shortcomings in HGC’s patent and that he would contact golf trolley manufacturers to offer his services in helping them to manufacture products that competed with the hedgehog and effectively circumvented the patent protection.

When the judgement was formally given in court, H agreed to give an undertaking that, in essence, he would do nothing to harm HGC in relation to the period “whilst [he was] a director of [HGC]“, but he declined to give any undertaking as to what he would do when he was no longer a director.

A few days after the judgement H notified Companies House of his resignation as a director of HGC without informing L or any other representative of HGC that he was resigning. H then telephoned Mr Baum and told him that L needed to come back to him with a financial offer “to stop [L] from offering [his] services to the other side”. H subsequently sent L an e-mail to similar effect.

At this stage HGC obtained from the court an interlocutory injunction restraining H until 15 April 2010 from disclosing “any confidential information as to the practice, business dealings or affairs of [HGC] or any of [HGC's] customers or clients”. The order provided for the “confidential information” to include, among other things, confidential information relating to the hedgehog patent. That injunction was subsequently extended.

On 21 January 2011 H made a witness statement in support of patent proceedings issued by HUA Services LLP. The witness statement referred extensively to the application pursuant to which HGC’s hedgehog patent had been granted. As a result HGC went back to court.

The judge found it easy to conclude that HGC was well-justified in its concern that H, if not restrained by injunction, would disclose confidential information without HGC’s consent. He had in the past shown a “blatant disregard” for L’s rights; he had revealed an intention to destroy or damage HGC; he had made a number of threats, including to assist a party with which HGC was engaged in litigation; he had shown a willingness to reveal information about HGC, to its prejudice, even at the risk of breaching a previous court order. The judge therefore granted a perpetual injunction to restrain H from improperly disclosing confidential information.

Passions can run high when people who’ve previously worked very closely together fall out amongst themselves, but it can be an expensive mistake to allow the heart to rule the head. Even if one of the founding fathers of a business was primarily responsible for its success, that success, together with related confidential information and intellectual property, belong to the business and not to any one individual. The present case confirms that the courts are ready to step in on very short notice in appropriate cases and use their full powers to prevent the abuse of such rights.

©Taveners 2011

This note will take a look at the key offences under the new Act (which carry penalties of up to 10 years imprisonment and unlimited fines), how the defence to section 7 is likely to work in the light of the new guidance, and the circumstances in which prosecutions are likely to be brought against both individuals and organisations under this new regime.

Section 1

Bribing another person: a person (“P”) is guilty of an offence if either of the following cases applies.

Case 1 is where P offers, promises or gives a financial or other advantage to another person, and P intends the advantage either to induce a person to perform improperly a relevant function or activity, or to reward a person for the improper performance of such a function or activity. Note that it does not matter whether the person to whom the advantage is offered, promised or given is the same person as the person who is to perform the function or activity concerned.

Case 2 is where P offers, promises or gives a financial or other advantage to another person, and P knows or believes that the acceptance of the advantage would itself constitute the improper performance of a relevant function or activity.

In cases 1 and 2 it does not matter whether the advantage is offered, promised or given by P directly or through a third party.

The guidance indicates that “improper performance” of a function is performance which amounts to a breach of an expectation that the person will act in good faith, impartially, or in accordance with a position of trust. Functions in both the public and private sectors are included. The test is what a reasonable person in the UK would expect, and where the function is not subject to UK law then local custom or practice will nonetheless be disregarded unless the activity which otherwise amounts to “improper performance” is permitted or required by local written law contained in a written constitution, legislation or judicial decision. Hence, if local law in a foreign jurisdiction neither expressly permits or requires what, in essence, is bribery, then the fact that that local law does not expressly outlaw it will mean that the activity is caught under the new UK Act.

Offers of hospitality and similar benefits could be caught under section 1, but only if P intends it to induce an improper performance of a function or if P knows or believes that the acceptance of the hospitality would itself constitute improper performance (for example where P knows that the person to whom he is giving the hospitality is specifically prevented from accepting it by the rules attaching to his job).

Section 2

Accepting a bribe: a person (“R”) is guilty of an offence if any of the following cases applies.

Case 3 is where R requests, agrees to receive or accepts a financial or other advantage intending that, in consequence, a relevant function or activity should be performed improperly (whether by R or another person).

Case 4 is where R requests, agrees to receive or accepts a financial or other advantage, and the request, agreement or acceptance itself constitutes the improper performance by R of a relevant function or activity.

Case 5 is where R requests, agrees to receive or accepts a financial or other advantage as a reward for the improper performance (whether by R or another person) of a relevant function or activity.

Case 6 is where, in anticipation of or in consequence of R requesting, agreeing to receive or accepting a financial or other advantage, a relevant function or activity is performed improperly, either by R, or by another person at R’s request or with R’s assent or acquiescence.

In cases 3 to 6 it does not matter whether R requests, agrees to receive or accepts the advantage directly or through a third party, or whether the advantage is for the benefit of R or another person. In cases 4 to 6 it does not matter whether R knows or believes that the performance of the function or activity is improper. Finally, in case 6, where a person other than R is performing the function or activity, it also does not matter whether that person knows or believes that the performance of the function or activity is improper.

Section 6

Bribery of foreign public officials: a person (“P”) who bribes a foreign public official (“F”) is guilty of an offence if P’s intention is to influence F in F’s capacity as a foreign public official. P must also intend to obtain or retain business or an advantage in the conduct of business. P bribes F if, and only if, P offers promises or gives, directly or through a third party, any financial or other advantage to F or to another person at F’s request or with F’s assent or acquiescence, and F is neither permitted nor required by the written law applicable to F to be influenced in F’s capacity as a foreign public official by the offer, promise or gift.

“Influencing F in F’s capacity as a foreign public official” means influencing F in the performance of F’s functions as an official, and includes any omission to exercise those functions, and any use of F’s position as an official, even if not within F’s authority. The guidance indicates that where, for example, local planning law permits or requires a company doing business in a jurisdiction to put some additional investment into the local economy this is unlikely to trigger a section 6 offence unless the additional investment would advantage the official himself and the local law is silent on the matter, in which case the UK prosecution authorities might consider prosecuting in the public interest.

Section 7

Failure of commercial organisations to prevent bribery: a relevant commercial organisation (“C”) is guilty of an offence under this section if a person (“A”) associated with C bribes another person intending either to obtain or retain business for C, or to obtain or retain an advantage in the conduct of business for C. For the purposes of this section, A bribes another person if A is, or would be, guilty of an offence under section 1 or 6 (whether or not A has been prosecuted for such an offence).

A “relevant commercial organisation” is a body or partnership incorporated or formed in the UK (regardless of where it carries on business) or an incorporated body or partnership (regardless of where it is incorporated or formed) which carries on business or part of a business in the UK. Whether or not an organisation carries on business in the UK in any particular case would be a matter to be determined by the court, but the new guidance suggests that merely being listed on the London Stock Exchange would not automatically mean that the company “carried on business in the UK”. In addition, the fact that an organisation has a UK subsidiary would again not automatically mean that it carried on business in the UK for the purposes of section 7 since a subsidiary may act independently from its parent. Much will turn on the facts of each case.

A person (“A” above) is “associated” with a commercial organisation if he, she or it performs services for on behalf of the organisation. This can cover employees, agents, subsidiaries, contractors, suppliers and subcontractors. The guidance acknowledges that an organisation is likely only to have control over its relationship with persons with whom it has a contract and that it may not even know the identity of its subcontractors or that they are performing services ultimately on its behalf. However, all the guidance suggests is that the organisation concerned imposes anti-bribery procedures on its contractor (presumably by way of the contract) and requires the contractor to adopt a similar approach with the next party in the supply chain. As a result “anti-bribery clauses” are likely to become far more common in English law commercial contracts.

It is a defence to the section 7 offence for C to prove that C had in place “adequate procedures” designed to prevent persons associated with C from undertaking such conduct. The newly published guidance sets out six principles which should inform those procedures:

Principle 1: Proportionate procedures.

A commercial organisation’s procedures to prevent bribery by persons associated with it are proportionate to the bribery risks it faces and to the nature, scale and complexity of the commercial organisation’s activities. They are also clear, practical, accessible, effectively implemented and enforced.

The nature of the risks faced by an organisation will be ascertained by a risk assessment exercise and will depend on factors such as its size, the nature and complexity of its business and the type and nature of persons associated with it.

Principle 2: Top-level commitment.

The top-level management of a commercial organisation (be it a board of directors, the owners or any other equivalent body or person) are committed to preventing bribery by persons associated with it. They foster a culture within the organisation in which bribery is never acceptable.

The guidance makes clear that top management must be involved with developing anti-bribery procedures and communicating to the rest of the organisation its anti-bribery stance.

Principle 3: Risk assessment.

The commercial organisation assesses the nature and extent of its exposure to potential external and internal risks of bribery on its behalf by persons associated with it. The assessment is periodic, informed and documented.

The guidance makes it clear that the risk assessment exercise needs to consider elements such as country risks, sectoral risks, transaction risk, business opportunity risk and business partnership risk.

Principle 4: Due diligence.

The commercial organisation applies due diligence procedures, taking a proportionate and risk based approach, in respect of persons who perform or will perform services for or on behalf of the organisation, in order to mitigate identified bribery risks.

The guidance suggests that an organisation’s monitoring of associated persons should continue throughout the business relationship. Organisations should also carry out due diligence in relation to their own employees who are in a position of vulnerability in relation to the potential for bribery.

Principle 5: Communication (including training)

The commercial organisation seeks to ensure that its bribery prevention policies and procedures are embedded and understood throughout the organisation through internal and external communication, including training, that is proportionate to the risks it faces.

The guidance indicates that internal communication will include a statement of policies, and external communication may include codes of conduct including information on the organisation’s procedures, controls and sanctions. Employees must be trained, along with associated persons where this is proportionate, and such training should be continuous, regularly monitored and evaluated.

Principal 6: Monitoring and review.

The commercial organisation monitors and reviews procedures designed to prevent bribery by persons associated with it and makes improvements where necessary.

The guidance acknowledges that bribery risks will change over time and so policies and procedures should be kept under constant review. Emphasis is placed on financial control mechanisms. The results of reviews should be supplied to top management and an organisation should also consider external appraisal of its policies and procedures.

Prosecution

In England and Wales the main prosecution authority with responsibility for enforcing the Bribery Act is the Serious Fraud Office (SFO). The new offences under the Act are wide and, although there is the prescribed defence to the section 7 offence, generally prosecutors seem to have a particularly wide discretion which they must administer if injustices are to be avoided. As a result the SFO and the Director of Public Prosecutions issued guidance 30 March 2011 on bribery prosecutions under the new Act.

The general rules relating to most criminal prosecutions will still apply; there must be sufficient evidence of the offence and it must be in the public interest to bring the proceedings. Current guidance indicates that it is unlikely the prosecution will be in the public interest if the court is likely to impose only a nominal penalty, the suspect has already been subject to appropriate regulatory proceedings or a relevant civil penalty, or the offence was committed as a result of a genuine mistake or misunderstanding. But in addition the new bribery prosecution guidance suggests that prosecutions will not generally be brought where the harm caused is minor and resulted from a single incident, or the organisation involved adopts a genuinely proactive approach involving self reporting and remedial action. Interestingly the new guidance also suggests that if an organisation has sound anticorruption procedures, not only may this be a defence against a charge under section 7 but it may also lead the prosecutor to conclude the prosecution would not, in any event, be in the public interest. Such a stance reinforces the importance of commercial organisations adopting new and appropriate compliance procedures. However, the new prosecution guidance makes the point that under section 7 the defendant organisation has to prove on a balance of probabilities that its anti-bribery procedures were “adequate”; if the matter goes to court then there is an onus on the organisation to satisfy the jury that its procedures were sufficiently robust.

Conclusions

By and large sections 1, 2 and 6 restate the existing criminal law in respect to bribery and corruption. Section 7, by contrast, exposes a commercial organisation to unlimited fines for matters which may take place overseas without its knowledge. The defence is to persuade the authorities and, ultimately if necessary, a jury, that the organisation has procedures designed to prevent bribery on its behalf and those procedures are “adequate”.

A key element in all of the offences is intention; in essence, along with the giving or taking of money or other advantage there must be an intention that someone somewhere will behave “improperly”. But again section 7 departs from the usual approach here; it is not the intention of the commercial organisation (“C”) to induce improper behaviour that is required, but merely the intention of the person offering the bribe (“A”). Once that intention on A’s part is proved, the fact that C had no idea what was going on is irrelevant; C is liable for a very serious criminal offence unless it can prove it had adequate procedures designed to prevent such activities.

Given the extraterritorial reach of the new UK Act, companies who deal internationally will need to carefully assess their risks based, largely, on where they do business in the world and the types of people they do business with and through. Contracts will need to be more carefully drawn than in the past, and documented procedures will need to be put in place. Lawyers and compliance officers will have plenty to do, but how this affects the competitiveness of UK plc against those countries with less robust anti-bribery laws is perhaps another question entirely.

The new guidance from the Ministry of Justice is at http://www.justice.gov.uk/guidance/docs/bribery-act-2010-guidance.pdf.

© Taveners 2011

At the beginning of 2007 Formula One team Spyker MF 1 Racing (the Team) found major sponsors in the shape of Etihad, Abu Dhabi’s national airline, and Aldar, a major Abu Dhabi property development company (the Sponsors). Immediately before the opening of the 2007 F1 season a binding Heads of Terms Agreement dated 13 March 2007 was entered into, and a full contract followed on 12 April 2007.

Under the contract the Team undertook that it would adopt the name “Etihad Aldar Spyker F1 Team” during the years 2007, 2008 and 2009. However, under clause 5 of the contract the Team had the right to source an alternative Team sponsor for the years 2008 and/or 2009 with full naming and livery rights, enabling an alternative sponsor to become the main Team sponsor, but only if the Team obtained an irrevocable and enforceable written commitment from the alternative sponsor to pay more money than was due under the existing contract from the Sponsors. In the event that such a commitment was received the Sponsors had the right then to (i) match the new money and keep their naming and livery rights, (ii) effectively share sponsoring rights with the new sponsor at a reduced price, or (iii) terminate the agreement.

Clause 21 contained a reasonably standard termination provision, which read: “The Sponsors may terminate this Agreement with immediate effect on the giving of written notice to SPYKER at any time [if]… SPYKER has committed any material breach of this Agreement which, if capable of remedy, has not been remedied within ten (10) Business days of receipt of written notice giving particulars of the breach and requiring its remedy.” The clause did not refer to what would happen in the case of an irremediable breach.

On 1 September 2007 Dr Vijay Mallya, a prominent Indian entrepreneur and billionaire, announced that he had made a successful bid for the Team. He proceeded in short order to rename the Team “Force India Formula One Team” (Force India), it would seem on the basis that he felt that Etihad and Aldar, whom he had inherited as the main sponsors of the Team, were paying too little for the privilege. As part of the general rebranding, Mallya also arranged for a new livery for the Team’s car sharing the Sponsors’ logos on the car with the prominent use of the Kingfisher logo. Kingfisher was not only another airline, which detracted from the branding of Etihad, but also the major beer brand in India, which did not go well with the antipathy to alcohol in Muslim Abu Dhabi.

Discussions ensued between the Team and the Sponsors, but eventually, on 27 January 2008, Etihad and Aldar served a letter terminating the contract. The Team claimed that they did so out of the blue and in bad faith, and, because of the provisions of clause 21, they were not entitled to do so. If there had been any breaches, then these had been remediable, and the Sponsors should have given the Team 10 days notice. If the breaches were irremediable then the Sponsors had delayed too long and had effectively waived their rights to terminate. By serving notice of immediate termination as they had done on 27 January 2008 it was, in fact, the Sponsors who had repudiated the contract, and Force India was entitled to damages.

In English law there are 2 types of breach of contract that can give rise to termination rights, firstly a breach that falls within the terms of any termination clause which may exist in the contract itself and secondly what is known as a “repudiatory breach”. A repudiatory breach of contract is a breach which is sufficiently serious that it gives the innocent party the right to bring the contract to an end. In such circumstances the innocent party has 2 options; it can “accept” the repudiation and the fact that the contract is at an end, with the right then to sue for damages for breach of contract, or it can “affirm” the contract and insist that the other party continues to perform the contract. If it affirms the contract then it effectively loses its right to treat the contract as terminated. The right in English common law to effectively terminate a contract for a repudiatory breach exists whether or not there is a termination clause in the contract itself.

The High Court found that, if there had been any breach by Force India, that breach had effectively been waived by the Sponsors as a result of the discussions between the parties between September 2007 and January 2008, and so when the Sponsors came to terminate the contract for alleged breach they had acted too late and that termination was unlawful. Somewhat surprisingly therefore, Force India was entitled to substantial damages from the Sponsors.

The Court of Appeal took a substantially different view. There was evidence of considerable communications between the parties during the latter part of 2007, and in the view of the court this showed that there had been a cumulative process of breaches of contract as Force India had sought to distance itself from the naming and livery obligations it owed to the Sponsors in order to rebrand itself as an Indian team. The key questions were what kind of breach of contract did this process amount to, what, if any, termination rights arose, and did the Sponsors do anything which meant that they lost those rights.

Clause 21 did not apply to irremediable breach, only to a material but remediable breach. As a result, no prior written notice of termination was required in the case of an irremediable repudiatory breach. In the view of the court, when Force India changed its team name and abandoned the contractual Team Name by omitting the names of its main sponsors Etihad and Aldar, this was a clear, grave and continuing breach of the contract. There had been no approval by the Sponsors of the use of the Kingfisher logo, and the deliberate change of the car livery without consultation with, and the approval of, the Sponsors was a further serious breach of the contract.

The judge in the High Court had concluded that any such breaches were remediable, in the sense that Force India “could have put matters right”, either by changing the Team Name back to Etihad Aldar Spyker F1 Team and/or by reverting to the previous livery and removing the Kingfisher logo. However, the Court of Appeal completely disagreed. An analogy was drawn between the publication of confidential information and the publishing of advertising matter not containing a party’s name: one releases information which should be kept confidential, the other broadcasts a product in an inappropriate way. In neither case was it possible to put the genie back into the bottle. The breach was irremediable.

A decision on the part of an innocent party to affirm the contract (and therefore let it continue in force) requires knowledge of the relevant facts and a communication of the decision, in words or conduct, in clear and unequivocal terms, to the other party. A party may be taken to have elected to affirm where it acts in a manner which is consistent only with a decision to affirm or where it allows too much time to pass by without indicating any decision. The delay in this case, which took place during the winter break between 2 Formula One racing seasons, did not mean that the Sponsors lost their right to accept the Team’s repudiation of contract. As a result, the Sponsors were entitled to bring the contract to an end, which they did on 27 January 2008, and were accordingly entitled to damages.

It is interesting to note that, in coming to its conclusions with regard to the precise terms of the contract (and therefore whether it had been breached), the Court of Appeal took into account not only the terms of the contract itself but also the preceding heads of agreement which had in principle been superseded by the contract. As a result, great care should be taken to ensure that pre-contractual heads of agreement are drafted accurately or, at the very least, any later contract expressly overrules any particular terms in the heads.

© Taveners 2011

A privileged position

Legal professional privilege (LPP) is the rule that entitles a client to refuse to disclose documents or answer questions, and to require his legal adviser and others to refuse to do so as well, subject to very limited exceptions. In 2002 one Law Lord said

“LPP is a fundamental human right long established in the common law. It is a necessary corollary of the right of any person to obtain skilled advice about the law. Such advice cannot be effectively obtained unless the client is able to put all the facts before the adviser without fear that they may afterwards be disclosed and used to his prejudice.”

Various private matters relating to the rights and risks relating to a proposed contract are likely to be discussed prior to and during any negotiation, and most businessmen would be horrified if they thought that the details of those discussions might be released at some future stage to, as one court put it, “the police, the executive, business competitors, inquisitive busybodies or anyone else”. Legal advice will often be at the heart of many of these private discussions, and as one court pointed out “legal advice is not confined to telling the client the law; it must include advice as to what should prudently and sensibly be done in the relevant legal context”.

But the benefit of LPP only applies to communications between a client and a member of the legal profession. In October 2010 the Court of Appeal confirmed the position by holding that legal advice in relation to tax law given to the Prudential Insurance Company by its accountants was not covered by LPP and had to be disclosed to HM Revenue & Customs. Had that legal advice being given by a solicitor with a current practising certificate the communications would have been privileged and the Revenue would have had no power to see them.

Accountants, contract managers, “legal consultants” and others may give legal advice relating to contracts from time to time, but if a dispute later arises then all relevant documents and other communications, whether written or oral, however confidential or damaging, are likely to become open to scrutiny.

Safety first

Solicitors firms are regulated by the Solicitors Regulation Authority which imposes stringent standards relating to honesty and integrity as well as the way a firm’s business is run generally.

One of the most onerous obligations on a firm is the requirement to carry special professional indemnity insurance meeting minimum criteria designed to protect the client to the utmost. A standard insurance policy will not pay out in favour of the client if the adviser has obtained the insurance cover by fraud or nondisclosure; the policy mandated by the SRA will pay out however dishonest or forgetful the solicitor has been with his insurer. Once claims have reached the level of cover under a standard insurance policy the policy will lapse; a solicitor must carry insurance that has a level of cover “per claim” with no limit on the number of claims in any year. Finally, even if the solicitors firm ceases business those behind it are obliged to continue to carry “run-off cover” for a further 6 years after it has stopped trading.

No other professional body imposes standards like these.

© Taveners 2010

The facts

The facts of the case are somewhat removed from the biotech/medtech world, but the applicable law has undoubted relevance to it. German company Grimme Landmaschinenfabrik GmbH makes agricultural machines and, in particular, holds a patent covering a machine for separating potatoes from weeds, earth and other matter during harvesting. Mr Derek Scott also manufactured a potato harvesting machine which Grimme claimed infringed its patent rights. Both machines contained rollers, and claim 1 of the patent referred to the fact that “the roller bodies comprise an elastically deformable shell part”. Mr Scott’s machine was sold in two variants, one with all rubber rollers and the other in which the first roller of a pair was elastically deformable but the second roller was made of steel. Both the High Court and the Court of Appeal found it relatively easy to determine that the first variant clearly infringed the patent, but what of the second? This latter variant clearly fell outside the terms of claim 1, but the machine was designed so that the rollers were interchangeable – the steel rollers could be changed by the ultimate user (or indeed a middleman) over to rubber rollers. Indeed, Mr Scott marketed his machine on that basis, saying that it was “a selling feature of our machine that you can have rubber and stainless and you can do all these different crops”.

Section 60(2) of the Patents Act 1977 states, in essence, that a person will infringe a patent for an invention if he supplies or offers to supply someone else with any of the means relating to an essential element of the invention for putting the invention into effect when he knows, or it is obvious to a reasonable person in the circumstances, that those means are suitable for putting, and are intended to put, the invention into effect. (There is a partial exemption from this provision in relation to “staple commercial products” – usually regarded as being products of a regular kind needed daily and generally available, which was not relevant to this case).

Mr Scott argued that the machine fitted with the steel roller did not itself infringe the patent when it was supplied, but in the Court’s judgement:

“The fact that a steel-rollered… machine, so long as it remains steel-rollered, does not infringe and is capable of lawful use as a complete machine in that state is irrelevant. [Section 60(2)] is clearly intended to apply to, among other things, products which are perfectly capable of being used in a manner which will not constitute a direct infringement”.

In the Court’s view the breath of this provision is tempered only by the requirement that the supplier knows or it is reasonably obvious that the product he supplies is intended be used to work the patented invention.

The court confirmed that the intention to work the patented invention was not an intention on the part of the supplier but on the part of either the ultimate user or, indeed, possibly a middleman. Further, it does not have to be proved that such an intention is actually held by any purchaser of the relevant product – the test is “what probably will be intended and what probably will be the use to which the means will be put”. Further still, such a “probable intention” need not be formed at the time of purchase – it could be formed sometime in the future.

In principle the Court of Appeal’s judgement in this case is a considerable extension of the concept of “indirect patent infringement”. U key element on the facts of the case was that Mr Scott sold his machine partially on the basis that it could optionally be fitted with a second rubber roller instead of the steel roller with which it was supplied, and so the evidence clearly showed that he was well aware of the potential future, and infringing, use to which his machine could be put. However, in a future case such evidence would not necessarily be required to find indirect infringement – the subsection refers to an infringer who “knows, or it is obvious to a reasonable person in the circumstances” that what he is supplying or offering to supply is suitable for putting and is intended to put the patented invention into effect, and it is therefore open to the court to conclude in relevant circumstances that the future infringing use was “obvious”.

How do you avoid committing indirect infringement of this nature?

1. Firstly, do not fall into the same trap as Mr Scott by suggesting a future use for your product that infringes someone else’s patent. This means in practice carrying out patent due diligence not only on your product in the form that it is supplied but also on reasonably obvious future uses that it may have.
2. If it is technologically feasible, produce your product in a way so that it is difficult for purchasers to modify it so that it becomes an infringing product.
3. If it is commercially feasible, insert a provision in your supply contract requiring the purchaser not to use your product in a manner that infringes third party rights and include an indemnity in your favour in case the purchaser does just that.

© Taveners 2010

The Monsanto decision

Glyphosate is the well known Monsanto herbicide “Roundup” and acts by inhibiting the enzyme 5-enol-pyruvylshikimate-3-phosphate synthase (‘EPSPS’), which plays an important role in the growth of a plant, with the result that the plant dies. In 1996 Monsanto obtained a European patent which covered (a) isolated DNA encoding a new class of EPSPS (CP4-EPSPS) which was resistant to glyphosate, (b) a method of producing a genetically modified plant which tolerated glyphosate by making a transgenic plant cell containing CP4-EPSPS, (c) glyphosate-tolerant plant cells and plants, and (d) a method of controlling weeds in a field containing a crop with CP4-EPSPS.

Armed with this technology Monsanto went on to produce a soy bean plant which was resistant to Roundup. The plant became widely cultivated in Argentina where Monsanto had been unable to obtain patent protection. Subsequently soy bean meal made from the soy bean plant in Argentina was imported into Europe and the meal was found to contain the DNA sequence protected by Monsanto’s European patent. The European Court of Justice was called upon to decide whether the importation of the meal infringed the European patent.

Patent protection of biotechnological inventions in Europe is governed by the Biotech Directive. Article 9 of the Biotech Directive states “The protection conferred by a patent on a product containing or consisting of genetic information shall extend to all material … in which the product is incorporated and in which the genetic information is contained and performs its function.”

In the court’s view, the function of the Monsanto invention was performed when the genetic information protected the biological material in which it was incorporated against the effect, or the foreseeable possibility of the effect, of a product which could cause that material to die. The function was not to protect soy meal from the use of a herbicide, and indeed a patented product intended to protect the life of biological material could not perform its function when the genetic material could only be found in a residual state in the soy meal, which was a dead material. As a result, the protection provided for in Article 9 of the Directive was not available when the genetic information had ceased to perform the function which it had performed in the initial material from which the soy meal had been derived.

The effect of the decision

It can be argued that this interpretation of Article 9 undermines the status of patents covering many biotechnology inventions since many genes are only expressed for a limited period of time. The status of patents claiming isolated DNA or RNA sequences used as reagents – including reagents used in diagnostic methods such as gene tests and DNA chips – could now be called into question. Overall, the enforceability of “product patents” (as opposed to “method patents”) in this area now looks seriously in doubt. This is in stark contrast to the status of products based on patented chemical entities outside the field of biotechnology.

Most biotechnology license agreements pin milestone and royalty payments to the development and sale of products which are actually covered by the licensed intellectual property rights – primarily and in most cases patent rights. The result of the court’s interpretation of Article 9 may well impact on the definition of “products” in such agreements and the payments which the licensor is entitled to receive. As a result, the court’s decision could in appropriate circumstances impact directly on the licensor’s bottom line.

Any attempt in future agreements to extend milestone and royalty payment obligations to products which now fall outside the reach of the relevant licensed patents could well fall foul of European competition law (specifically because of the definition of “contract products” within the Technology Transfer Block Exemption) unless the appropriate definition is carefully drafted. So-called “reach through” royalties are likely to be limited by the doctrine announced by the European Court in the Monsanto case.

However, where milestone and royalty bearing products depend not only on patent rights but also on secret know-how then, as long as the agreement has been put together correctly, the immediate impact of the court’s decision should be avoidable, since even without patent coverage for the product itself it will nonetheless be based on licensed know-how. However, royalties and other payments based solely on know-how will be in jeopardy if the know-how ceases to be secret for any reason other than the licensee’s breach of the agreement.

Going forward…

Some may argue that the outcome of the Monsanto case puts Europe in breach of its obligations under Article 27 of the TRIPS Agreement (dealing with the international recognition of intellectual property rights) which provides that “patent rights shall be available and patent rights enjoyable without discrimination to the field of technology” on the basis that isolated DNA patents (and therefore the field of biotechnology) are dealt with differently under European patent law. However, even if such an argument is correct, it will take many years for the international mechanisms available to the signatories of TRIPS to have any effect, and in the meantime biotechnology companies should consider the following:

Revise your patenting strategy: of course the Monsanto case itself revolved around plant technology, and it is open to plant biotechnology companies to obtain Plant Breeder’s Rights for important plant varieties to protect harvested material and products made from harvested material. But outside agribiotechnology the court’s opinion in the Monsanto case makes “method patents” of significant importance; the long-standing orthodoxy that “product patents” are better than “method patents” is no longer necessarily true in biotechnology.

Review your current licences and revise your approach to confidential know-how: it will clearly be in a licensor’s interests to ensure that any relevant secret know-how that is linked to a biotech patent which includes claims over isolated genetic material be included in the licence. In addition, current licences should be reviewed to ensure that all anticipated royalty streams are protected, with particular scrutiny being applied to the definitions of such things as “licensed products” and “valid claims”. In some cases confidential information may prove to be a more useful fruit of the licensor’s labours than a patent.

© Taveners 2010

Since the early days of the human genome project biotechnology has been pumping out vast amounts of data, and collating that data – and more importantly understanding them – has become a hugely resource intensive process requiring many life science companies to invest significant expenditure on IT infrastructure. However, in the last couple of years so called cloud computing has come to offer (or so the hype suggests) a cost-effective alternative, permitting the user an opportunity to rent high-performance computing capability on an on demand basis and port large scale or complex processing to the cloud. Are there any legal issues which might prevent the cloud from being the new future of areas such as bioinformatics?

The US National Institute of Standards and Technology defines cloud computing as “a model for enabling convenient, on-demand network access to a shared pool of configurable computing resources (e.g., networks, servers, storage, applications, and services) that can be rapidly provisioned and released with minimal management effort or service provider interaction.” Cloud computing tends to come in three main flavours:

• “Software as a service” (SaaS): users access applications, and related data are also stored on the provider’s servers. General use apps such as e-mail are obvious examples.
• “Platform as a service” (PaaS): an operating system on which users can install their own applications. Where the related data are stored is dependent on how the relevant application is configured. Such a service can be used for example in connection with in-house application development.
• “Infrastructure as a service” (IaaS): a “logical hardware” infrastructure onto which users install an operating system, their own applications and, if they so choose, their own data. This can be useful in connection with quickly adding or subtracting server capacity as required, and also can form part of a disaster recovery procedure.

 What are the legal issues for life science companies?

There are a number of the legal issues connected with the use of cloud computing that can impact on life science companies in particularly significant ways.

Handing over vital assets into the control of third parties: since data is the lifeblood of any R&D or clinical developments, the life science customer must be certain with whom it is dealing in a cloud computing deal. It may be that the immediate service provider is not providing the whole service, but is relying on one or more subcontractors in the background to provide rack space, connectivity or other elements. The assets by their nature are extremely mobile and could in principle be stored anywhere in the world, well beyond the control of the customer or the immediate service provider if things go wrong. In addition, the financial stability of the provider and its subcontractors will be an issue.

Data security: although in principle the processing and storage by third-party providers of confidential data brings with it security issues, the fact is that most professional service providers probably adopt more effective security procedures than do most small and mid-sized biopharma companies. That said, most in the industry are proceeding cautiously with the adoption of cloud computing; when Pfizer adopted a cloud-based solution from Amazon it opted for a Virtual Private Cloud with Pfizer extending its firewall and other security aspects to this part of cloud. However, not all companies will be able to afford such a bespoke solution.

Data protection: rightly or wrongly, the European Union has a bee in its bonnet about personal data protection, and in particular has adopted stringent regulations regarding the transfer of personal data outside the EU to countries regarded as having less satisfactory personal data legislation. In addition, European data protection law identifies health information as “sensitive” personal data putting extra obligations on the data controller. Any data used by a biopharma company that relates to identifiable human beings and their state of health will fall into this category.

Local laws: a customer based in the UK may wish to insist on its cloud computing services contract being governed by English law, and the laws of many countries around the world (particularly in the Western world) will usually respect that choice. However even in Western countries there are certain local laws which will “trump” the chosen governing law of the contract in some circumstances, requiring a service provider to disclose the data it holds to government authorities. Examples include the Patriot Act and the Health Insurance Portability and Accountability Act in the US, which together with the requirements of Sarbanes-Oxley might make non-US-based customers think twice before having their confidential data stored or processed in the US. In the UK the Regulation of Investigatory Powers Act permits government authorities to access data in certain circumstances, something which again might make non-UK-based customers nervous.

International enforcement of contractual terms: a cloud computing services contract may be governed by, say, English law and jurisdiction may be given to the English courts, but that does not mean any judgement will be enforceable where the data actually is. If a customer’s data has found its way to a country such as Iran there is likely to be little the customer can do in enforcing its confidentiality and the return of its data.

Limitation of liability:  with cloud computing in its infancy, many of the major players providing these services are in a position to do so on their own terms, and often the customer gets very little opportunity to negotiate the contract effectively. As a result, the provider will often seek to limit its liability considerably, often using contract terms commonly found in software licenses and offering no more than the return of the service fee if things go wrong. If mission-critical data has been handed over and lost by a provider such provisions will do little to remedy the damage caused to the customer.

Transition arrangements: even if things go well with the service provider, the agreement will end at some time with the customer wishing either to port the data back in-house or to a new service provider. This will not be easy if the current provider has been using non-standard software or application programming interfaces.

How can the legal issues be dealt with effectively?

In the light of the number of legal issues which arise in this area, some (including a Council of Europe discussion paper on cloud computing and its implications earlier this year) have questioned whether the use of cloud computing services should be banned in some circumstances, including their use with health related matters. The argument goes that such information is so sensitive that it cannot be reconciled with the use of cloud computing and the risk of disclosure that goes with it.

Perhaps that goes a little too far – legal issues tend to have legal solutions, and many of them can be dealt with in a well drawn contract. European data protection law requires, in practice, the adoption by the relevant parties of reasonably standard legal provisions dealing with how personal data is to be processed and stored. The obligations must be identified and written into the contract, but as a process this is relatively straightforward. In addition, a practical approach is to ensure that no data leaves the European Union without being encrypted in a way that the service provider based outside the European Union cannot decrypt; if individuals cannot be identified by the service provider then data protection legislation will not apply.

Provisions relating to data security, in which jurisdictions data may, or may not, be held and possibly detailed transitional arrangements can all be written into the contract. Clear governing law and jurisdictional statements can also be included. However, not all of the solutions are contractual; business commonsense also needs to be adopted. Key assets should not be kept with just one provider; backups should be kept, either by the customer itself or ideally another third party. These arrangements are common in software escrow agreements.

Whilst Cloud computing is still something of a new kid on the block, efforts are starting to be made to establish what is “good practice” in the industry. In 2009 the Cloud Industry Forum was established in the UK in order to create a Code of Practice that provides transparency of cloud services so that consumers can have clarity and confidence in their choice of provider. The Code is due for public launch in October 2010, and having been involved in the consultation phase I have to say that much of the draft Code amounts to “motherhood and apple pie” without there being any significant penalties on cloud service providers who breach the Code. However, it is probably better to have a weak Code than none at all, and once in place it will be something that cloud service contracts can make reference to in the context of service levels.

Conclusions

The main issues are not new. Outsourcing in one form or another has been with us for many years and the principle is clear: outsource anything and your protection is only as good as the words in your contract and your ability to enforce them (requiring you having the money to pay the lawyers and ensuring you’re working in a jurisdiction where the courts will quickly and effectively uphold your rights). That means in practice that you must never put yourself in a position where the failure of an outsourced service will cripple the business so fundamentally that it will not survive long enough to successfully sue the provider! Great care needs to be taken with regard to what is outsourced as well as to whom.

As a result it is vital that would-be customers of cloud-based services have a detailed understanding of how their own IT systems operate now and how they will need to operate in the future. Whilst the input here of IT professionals is important, these are ultimately key business decisions which should be made at board level.

Cloud computing generally, and for the life sciences industries in particular, is still at an early stage but is projected to grow enormously over the next 3 to 5 years in line with the increasing complexity of DNA sequencing and other computationally intensive applications. The adoption of cloud-based solutions will be an important step for many bioscience companies to remain competitive, but it will be a step that needs to be taken with considerable care.

© Taveners

August 2010