IP

Question 1

• Types of intellectual property?

Answer 1

· Trade marks;
· Design rights;
· Data base rights;
· Goodwill;
· Copyright;
· Patents; and
· Know how and trade secrets.

Question 2

• Benefits of registered IP rights include

Answer 2

 Once registered, rights are valid unless proved otherwise.
 Acts as a deterrent for third parties

Question 3

Drawbacks of registered IP rights?

Answer 3

 Cost and effort for registration; and
 Requirements to renew at regular intervals.

Question 4

• Benefits of unregistered IP rights include:

Answer 4

 Rights arise automatically; and
 No requirement to renew.

Question 5

Drawbacks of unregistered IP rights?

Answer 5

 Requirement to prove existence and ownership of right in order to enforce.

Question 6

Different between registered and unregistered design rights?

Answer 6

• Registered design right under the Registered Designs Act 1949 - this requires registration with the IPO – it gives up to 25 years of protection to the ‘novel’ appearance of the whole or part of a product – it is generally intended to protect the appearance of a consumer product
• Unregistered design right under the Copyright Designs and Patents Act 1988 - this arises automatically – it gives up to 15 years of protection to the ‘shape or configuration’ of an original tangible object – but if there is copyright in a work, it will not also be protected by an unregistered design right

Question 7

• What is a trade mark?

Answer 7

• A trade mark is a distinctive badge of origin for a particular trader.
• It can be registered or unregistered. A registered trade mark provides a monopoly right to use the badge of origin. An unregistered trade mark is only protected by an action in ‘passing off’

Question 8

• What could be registered as a registered trade mark?

Answer 8

• S. 1(1) TMA defines a trade mark as a ‘sign’ - this includes anything that can be apprehended by the senses (i.e. can be seen, heard etc – so could include a sound or a smell);
• WHICH IS
• Capable of being represented in a clear and precise manner - this is necessary so that third parties can consult the register and understand the exact scope of the trade mark owner’s rights;
• AND IS
• Capable of distinguishing goods and services of one undertaking from those of another - this effectively requires the sign to have some distinctive character (see discussion below).

Question 9

• Elements of a trade mark registration?

Answer 9

• A representation of the trade mark itself; and A specification of the goods and services in relation to which the owner has exclusive rights to use the mark,
• AND
• The combination of these two elements defines the scope of the owner’s monopoly.
• SO
• This means that two different traders could potentially register and use the same trade mark for different goods and services without conflict (subject to some exceptions discussed below).
• NOTE: if you register a trade mark for goods/services you don’t sell, the trade mark could be cancelled
• There is an international classification system for goods and services with associated ‘class numbers’.

Question 10

• Application to register a trade mark: overview?

Answer 10

• Stage 1
   Section 1 TMA - if a mark does not fulfil the definition (see above) then it cannot be registered as a trade mark.
• Stage 2
   Section 3 TMA – are there any other absolute grounds on which the IPO could refuse to register the trade mark? These are problems inherent to the mark itself.
• Stage 3
   Section 5 TMA – are there any relative grounds which may entitle an existing trade mark owner to object to the registration of the mark applied for? This requires a comparison of the trade mark applied for to existing marks on the register: in essence, did somebody else get there first?

Question 11

• The absolute grounds for refusal set out in s. 3(1) TMA are:

Answer 11

 If the mark is devoid of any distinctive character (s. 3(1)(b)).
 Examples of this (from IPO guidance):
* ‘100’ - round numbers are often used as product or model numbers.
* Any mark consisting of an expression of praise (e.g. ‘The ones you want to do business with’) because this could apply to anyone in the field.
 If it consists exclusively of a sign indicating the types of goods and services covered or their characteristics(s. 3(1)(c)).
 Examples of this:
* FROOT LOOPS comprises two words which describe characteristics of the cereal to which it applies.
* A simple picture of a lemon when applied to a lemon.
 If it is customary in the language or practices of the trade (s. 3(1)(d)).
 Examples of this:
* Green wrapping for mint-flavoured sweets.
* Stars for hotel services.
- S. 3(1) also provides that a mark that has acquired a distinctive character over time as a result of its use as a trade mark may still be registered even if it would otherwise fall foul of these three grounds.
 Note: There are some other absolute grounds for refusal – e.g. deceptiveness about the product

Question 12

• ‘Relative grounds’ not to register a trade mark?

Answer 12

• Owners of existing registered trademarks (or with an earlier application)* may oppose the registration of a new mark on the following grounds set out in s. 5 TMA.
• S 5(1) -Double identity - which means that the mark is Identical to one already registered AND also the goods/services it is to be registered against are also identical to those for the mark already registered. Note: This is the easiest ground to prove – confusion between the marks is assumed.
• S 5(2)(a)/(b) - Likelihood of confusion - where the mark is identical to one already registered AND the goods/services it is to be registered against are also similar to those for the mark already registered OR the mark is similar to one already registered AND the goods/services are either identical or similar. Note: The overriding question is whether confusion in the mind of the public would be likely to arise - that is, would the average consumer be likely to believe that the applicant’s goods or services are made or supplied by the owner of the earlier mark.
• S 5(3) - The earlier mark is identical or similar to the new mark AND it has a ‘reputation’ which could be damaged - in this case, it could be in a completely different market. Note: This ground is only available to marks known by a significant part of the relevant public market: for example, famous marks such as the ‘Virgin’ brand – see below for additional requirements.
• S 5(4) * - This ground of opposition is based on ‘earlier rights’ that are not registered. This could apply where the person opposing the new trade mark has used an unregistered mark and has thereby established rights in ‘passing off’ (see below) - it is a harder ground to rely on.

Question 13

• If an earlier brand has been found to have a ‘reputation’, s. 5(3) TMA applies where one or more of three specified consequences may follow from the identity/similarity of the two marks:

Answer 13

 The new mark could cause detriment to the distinctive character of the earlier famous mark – e.g. if it could cause confusion as to whether any goods or services are associated with the owner of the famous mark AND/OR
 The new mark could cause detriment to the reputation of the earlier famous mark – by tarnishing it by association with something ‘unseemly’ AND/OR
 The new mark could allow its owner to take unfair advantage of the famous mark – essentially, the new owner would get ‘something for nothing’ as a result of an association with the earlier famous mark.
- If one of these grounds is established AND the owner of the famous brand has shown that there is a ‘link’ between the brands (in the minds of the average consumer) THEN the applicant must show that its use of the new brand has ‘due cause’ if it is to have a chance of maintaining its registration. ‘Due cause’ has a narrow meaning – but prior use of the new mark in a different but related market could be sufficient to show that it exists.

Question 14

Trademark searches?

Answer 14

• The client might involve a trademark agent to carry out searches of existing registered trademarks (and to identify relevant unregistered brands) - and to help decide on the scope of the mark and the goods/services to which it should apply.
   Do searches to:
• Make sure you can register it
• Do not need to do a product recall – for infringing on another’s trademark
• When the application is made, the examiner at the IPO will review the trade mark against s.3 TMA and will give notice of the application to any identified owners of relevant existing trade marks in case they want to oppose it under s.5 TMA.
• The trade mark will then be published in the Trade Marks Journal – the deadline for filing an opposition is two months from the date of publication (extendible by one month).
• If the application is not opposed, or if opposition is made but is unsuccessful, the trade mark will be registered – the owner may bring proceedings against infringements dating back to the application date.
• A registered trade mark can be assigned (transferred) or licensed to a third party – a transfer should be registered with the IPO.

Question 15

• Life span of a registered trade mark?

Answer 15

• A registered trade mark potentially has an unlimited life span.
• An initial grant is for 10 years – the mark must be renewed every 10 years from the date of filing the application OR the registration will lapse
• A registered trade mark may be revoked if no use of it has been made in any continuous five year period – e.g. because the owner does not trade in the relevant goods or services.
• A registered trade mark can also be revoked if the owner has allowed it to become ‘generic’ - e.g. CELLOPHANE used to be a brand name but now denotes a type of product.

Question 16

• Action against infringement of registered trade mark?

Answer 16

• It is an infringement to ‘use’ a registered trade mark ‘in the course of trade’ in the UK ‘without the consent’ of the trade mark owner (s. 9(1) TMA).
• There is a non-exhaustive list of acts which would amount to ‘use’ of a mark – e.g. fixing the mark to packaging of goods or offering goods for sale under the mark (s. 10(4) TMA).
• It does not matter if the defendant has copied the registered mark or even knows that it exists – and there is no need to show damage or loss.
• The infringement action will only be successful if there is double identity (i.e. the marks and the goods/services involved are identical) or if confusion is likely, or if the trade mark being infringed has a reputation which could be damaged – see ss. 10(1) to (3) TMA, which mirror the s. 5 grounds for opposition set out above.
• Statutory defences in s.11 TMA are very limited (e.g. defendant is using their own name).

Question 17

• Remedies for infringement of a registered trade mark?

Answer 17

• Civil remedies – ss. 14-19 TMA
   Injunction to prevent the defendant from continuing to use the mark (to preserve the distinctiveness of the mark);
   Order for delivery up of infringing goods, materials or articles;
   Order for erasure of offending sign from infringing goods, materials or articles;
   Order for disposal of infringing goods, materials or articles;
   Damages or an account of profits. In practice, a financial remedy is often a low priority (the cost of bringing a claim, even if successful, can easily exceed any financial remedy); and
   Interim remedies may be available, such as injunctions and search orders.

Question 18

• What is an unregistered trade mark?

Answer 18

• An unregistered trade mark is a distinctive badge of origin for a particular trader that symbolises the trader’s ‘goodwill’ in its business.
• ‘Goodwill’ in this sense is the reputation attached to the goods or services supplied by the trader.
• Goodwill is protected by a common law tortious cause of action called ‘passing-off’.

Question 19

• Three elements to the tort of ‘passing-off’

Answer 19

 In order to establish a case for ‘passing-off’, the Jif Lemon case found that a party must establish that:
* The claimant has an unregistered trade mark to which goodwill attaches in the UK; AND
* There is a misrepresentation to the public that is likely to lead the public to think that the defendant’s goods and services are those of the claimant; AND
* The claimant suffers or is likely to suffer damage by reason of the confusion caused by the misrepresentation.

Question 20

• What is copyright?

Answer 20

• Copyright protects a form of expression NOT the ideas within that form of expression: the way that something is written, not the substance.
• Copyright is an unregistered right, so:
   It arises automatically with no formalities; but
   The owner has the burden of proving the existence and ownership of the copyright.

Question 21

• What works are protected by copyright?

Answer 21

· Original literary works (including novels and play scripts);
· Original musical works;
· Films, sound recordings, broadcasts;
· Typographical arrangements of published editions;
· Original artistic works (including photos, sculpture, architectural works etc.); and
· Original dramatic works (including dance and mime).

Question 22

‘Literary works’ include

Answer 22

(1) computer software; and (2) some data bases (s. 3(1) CDPA).

Question 23

• Additional requirements for copyright?

Answer 23

• No copyright is given to a work unless it is recorded ‘in writing or otherwise’ (s.3(2) CDPA) - e.g. it could be filmed or it could be recorded in computer code.
• For those categories that are required to be ‘original’, the work must have originated from its author and NOT have been copied from elsewhere (s.1(1)(a) CDPA); AND
• Data bases have a higher threshold for originality – the way that the content of the data base has been selected or the arrangement of its fields of data must be the author’s own intellectual creation to be a protected literary work (s.3A(2) CDPA).
   BUT there is no requirement for any artistic merit or novelty of content

Question 24

• What rights does copyright give to the owner?

Answer 24

• Key Point: Copyright does not give monopoly rights – accidental similarity is not an infringement (so two very similar – or even identical – works could both have their own copyright protection).
• It is only if a third party has had access in some way to a work that they can be prevented from misusing it – see acts below.
• S. 16(1) CDPA sets out a list of acts that could breach copyright in this circumstance (noting that the ‘public’ is defined very widely – it could be a relatively small group of people).

Question 25

• Acts that could breach copyright?

Answer 25

· Issuing copies to the public;
· Communicating a work to the public;
· Adapting a work;
· Copying a work;
· Performing, showing or playing the work in public; and
· Renting/lending a work to the public.

Question 26

• Who owns copyright in a work?

Answer 26

• The first owner is generally the author = the person who has created the work (s. 11(1) CDPA)
• BUT where a work is made by an employee in the course of their employment THEN it will belong to the employer of the author (unless agreed otherwise) (s. 11(2) CDPA).
• Where the author was commissioned by someone else to produce the work, ownership will depend on the contract.
• The first owner or any subsequent owner can then pass ownership on by assignment or licence.
• The owner can assign or licence different aspects separately – e.g. licence one person to publish a novel and another to adapt it

Question 27

• How long does copyright exist for?

Answer 27

• Copyright exists automatically for a particular term, with no requirement for any renewal payment or fees.
• In the case of primary works, including literary works (such as computer programmes), the term is the end of the calendar year in which the author dies plus 70 years (s.12(2) CDPA)
• AND
• In the case of films, sound recordings and broadcasts, there are particular rules that apply (ss. 13A, 13B and 14 CDPA)
• AND
• In the case of a typographical layout of a published edition, the term is the end of the calendar year in which the edition was first published plus 25 years (s.15 CDPA).

Question 28

How can copyright be enforced?**

Answer 28

• Stage 1
   Subsistence and ownership
• Identify the work, establish that copyright subsists and prove the claimant owns it.
• This means that it is very important to have evidence of how and when a work was created.
  o NB: There are commercial companies that offer to ‘register’ and keep a copy of the work as proof of its creation.
• Stage 2
   Infringing act
• Identify the restricted act by the defendant.
• Note that the act must have been done without consent from the owner of the copyright.
• Stage 3
   Comparison
• Compare the works – in two parts:
  o Can you infer a causal connection between the works?
  o Has a substantial part of the claimant’s work been used?
• A prima facie causal connection is established when the claimant can prove that:
  o the defendant’s work was made at a time when the defendant had access to the claimant’s work; and
  o the defendant’s work is objectively similar to the claimant’s work.
  o It is then for the defendant to prove that their work is original and that any similarity is coincidence.
  o The claimant must then show that the defendant’s act was done in relation to a ‘substantial part’ of the claimant’s work – either in quantity (e.g. copying a large portion) or quality (e.g. copying a key part of the work).

Question 29

Defences to copyright infringement?

Answer 29

• Some specified ‘fair dealing’ circumstances; e.g. allowing for criticism and parody;
• And Some practical exemptions; e.g. enabling domestic recording of television programmes.
• The available civil remedies for infringement are set out below – if the infringement amounts to piracy, it could also be a criminal offence.

Question 30

Remedies for copyright infringement?

Answer 30

• Injunction to prevent the defendant from continuing its act in relation to the copyright;
• Order for erasure of offending sign from infringing goods, materials or articles;
• Damages or an account of profits. Discretionary additional damages may be ordered for flagrant copying or where the defendant has received substantial benefit; and Interim remedies may be available, such as injunctions and search orders.

Question 31

• What are moral rights in a work?

Answer 31

• Moral rights arise in relation to literary, dramatic, musical or artistic works and are separate from copyright – they are personal to the author and cannot be assigned (but may pass into the author’s estate after death).
• An author will have a moral right to be identified as the author or director – s.77 CDPA.
• An author has a moral right to object to ‘derogatory treatment’ of the work - i.e. to prevent others from altering their work if this would mutilate the work or harm their reputation as an artist – s.80 CDPA.
• An author has a moral right to object to false attribution of their work – s.84 CDPA.

Question 32

• What is a data base right?

Answer 32

• A data base right protects a substantial investment (human, financial or technical) in obtaining, verifying and/or presenting the content of a data base – ‘substantial’ can be judged quantitively or qualitatively.
   it is separate from any copyright that may arise in a data base as a literary work (though it also arises under the CDPA).
• A data base is an unregistered right that arises automatically:
• The first owner is the person who takes the initiative, and the risk of investing, in the creation of the data base – the right can then be assigned or licenced;The right lasts for 15 years from the end of the year in which the data base is completed; and
• The owner of the data base right can prevent unauthorised acts of extraction or reutilisation of the content.

Question 33

• What is a patent?

Answer 33

• A patent is a monopoly right to use and exploit an invention that has an industrial application.
• A patent is a registered right – registered with the IPO in the UK.
• Any third party who uses the invention would be infringing the patent right unless they have permission or a defence.

Question 34

• There are two types of patent that could be applied for:

Answer 34

 Product patent - a new product or an improvement to a product. Example: a microwave oven; and
 Process patent - a new process or a new way of carrying out a process. Example: the method for putting chocolate into a Vienetta ice cream.

Question 35

• To be capable of being patented, an invention must be examined by the IPO and found to satisfy the following criteria:

Answer 35

 Novelty (s. 2 PA): The invention must be totally ‘new’ - it must not already form part of the ‘state of the art’ known to the public as at the date of the filing (the ‘priority date’) AND there must not have been any prior ‘enabling disclosure’ that would allow a skilled person to work the same invention. Note: even a prior public disclosure by the inventor themself could defeat a patent, so it is vital to keep new inventions totally secret up to the priority date of filing.
 Inventive Step (s. 3 PA): The invention must also involve an inventive step which is ‘not obvious to a person skilled in the art’ - which is assessed by considering the differences between the invention and the current state of the art at the priority date: combining two known concepts could still be an inventive step.
 Capable of Industrial Application (s. 4 PA): The invention must be capable of being ‘made or used in any kind of industry, including agriculture’ - this is widely construed, but will exclude an invention that cannot work (e.g. a perpetual motion machine).

Question 36

• What else is needed for registration?

Answer 36

• The invention must not fall within a list of excluded things that do not amount to an invention (s.1(2) PA): this includes scientific theories, artistic works and the presentation of information.
• Note: This means that a computer programme as such cannot be patented – although it is possible to patent a computer programme if it produces a ‘technical effect’ - e.g. a computer controlling an X-ray.

Question 37

What is needed to register a patent?

Answer 37

• The invention must not fall within a list of excluded things that do not amount to an invention (s.1(2) PA): this includes scientific theories, artistic works and the presentation of information.
• Note: This means that a computer programme as such cannot be patented – although it is possible to patent a computer programme if it produces a ‘technical effect’ - e.g. a computer controlling an X-ray.

Question 38

• Process for registration for patents?

Answer 38

• The process is lengthy and will generally require specialist support.
• The application must itself include an ‘enabling disclosure’ of the invention that would allow the invention to be exploited by others once the patent has expired (otherwise it can be rejected for ‘insufficiency’).The patent specification in the application is made up of a description of the background and of the invention, drawings if relevant and claims that define the specific matter for which protection is sought - this all requires specialist work and judgement.Once the application has been made, there will be a preliminary and then a substantive investigation by the IPO.The application process could therefore take 3 to 5 years to complete – but action can be taken against infringement after the priority date once the patent is issued.

Question 39

• How long does a patent last?

Answer 39

• A patent will last for a maximum period of 20 years from the date of filing BUT the initial grant is for four years, after which annual fees must be paid within three months of each anniversary of the date of grant.

Question 40

• Who owns a patented invention?

Answer 40

• The first owner is generally the inventor or joint inventors (s.7(2)(a) PA).
• BUT where an invention is developed by an employee in the course of their normal duties or duties that have been assigned to them THEN it will belong to the employer of the inventor (unless agreed otherwise) (s. 39 PA).
• If the employee develops the invention outside the scope of these duties, then it will generally belong to the employee UNLESS they were (for example) a director or someone else with a special obligation to the employer (ss. 39(2) and 24(2) PA).
• The first owner or any subsequent owner of the patent can then pass ownership on by assignment or licence. An assignment must be in writing and signed by or on behalf of both parties – it should then be registered at the IPO (s. 30 PA).

Question 41

• Action against infringement of a patent?

Answer 41

• There is no right to pursue an infringement claim until the patent takes effect – which is the date that the grant of the patent is published by the IPO (s. 25(1) PA).
• There is a list of acts that amount to direct infringement of a patent in s. 60(1) PA (see below) – a UK patent will be infringed if any of these activities are carried out in the UK without consent from the owner.

Question 42

Infringing acts?

Answer 42

• Infringing acts for a product invention:
   Making, disposing of, offering to dispose of, using, keeping or importing the product.
• Infringing for a process invention:
   Using the process or offering it for use when the infringer knows, or it is obvious to a reasonable person, that use would be an infringement;
   OR Disposing of, offering to dispose of, using, importing or keeping a product obtained directly by means of the process.
• The act will only be an infringement if it falls within the scope of the patent’s claims – this is a matter for the courts to assess.

Question 43

• Remedies for infringement of a patent

Answer 43

• Civil remedies – s 61 PA
   Injunction to prevent the defendant from continuing the act;
   Order for delivery up/destruction of infringing products;
   Damages or an account of profits;
   Declaration that the patent is valid and has been infringed; and
   Interim remedies may be available, such as injunctions.
• Note: Once a product made using a patented invention has been placed on the market in the UK by the owner of the patent, the patent right will at that point be ‘exhausted’ – so it will not be a breach if the purchaser then re-sells the product to someone else.

Question 44

• Is confidentiality/trade secrets an alternative approach to protecting an invention?

Answer 44

• An invention that is patented will, as part of the process, be made public.
• BUT
• An alternative approach is simply to ensure that it is kept as a trade secret.
• This only works if the invention cannot be ‘reverse engineered’ from the product once it is marketed.
• If it does work, it may be a cheaper way of ensuring a protection that could also be permanent (e.g. the Coca-Cola formula).
• Confidentiality agreements must be drafted to avoid ‘restraint of trade’: they should protect only legitimate business interests, so should not prevent a counter party from using its own information or information in the public domain.

Question 45

• Key action points in relation to registered IP rights:

Answer 45

• Seek confirmation that all registrations and applications for registration are in the right name and that key brands and patents are registered in the relevant markets by carrying out searches of intellectual property registers in the important jurisdictions.
• Seek confirmation that any and all renewal fees have been paid.
• Check when IP rights will expire.
• Seek confirmation that the validity of the IP rights has not been challenged by third parties and that the seller is not aware that any such rights have been infringed by third parties.
• Check whether there are any claims or disputes with third parties concerning any of the IP rights.

Question 46

• Key action points in relation to unregistered IP rights:

Answer 46

 If an unregistered trade mark is considered especially important, the buyer may ask the seller to apply for registration of the trade mark prior to the acquisition.Try to identify all important copyright works owned and used by the target.Review the employment contracts of any technical staff and any consultancy agreements to establish who owns the copyright in any works created by the target’s employees and consultants. Copyright in any work created by an employee in the course of their employment is owned by the employer unless the contract of employment states otherwise. On the other hand, copyright in any work created by a consultant will usually belong to the consultant unless otherwise agreed in the relevant consultancy agreement. Enquire about the target’s documentation and record-keeping procedures; such information is vital to establishing not only the existence and ownership of any unregistered rights but it will also indicate the likely ease of asserting or defending such rights.

Question 47

• Key action points in relation to IP licences granted by third parties:

Answer 47

 Obtain copies and check when the licences expire. (a) If the transaction is an asset sale: Are there any restrictions on assignment? Would the sale trigger termination of the licence?
 (b) If the transaction is a share sale: Does the licence contains a change of control clause and, if so, what will the consequences be?
 Check the terms of the licences for any unusual or particularly onerous terms.

Question 48

• Key action points in relation to IP licences granted to third parties:

Answer 48

• If any licences have been granted to third parties to use IP rights:
   Seek confirmation that the target actually owns these rights. What are the terms of these licences? Will the terms prevent the target from using the IP rights?
   If the target has been indiscriminate in allowing third parties to use its IP rights, this may affect the value or even the validity of those rights.

Question 49

IP due diligence software?

Answer 49

 Confirm who owns the copyright in any important software. Ownership can be determined by reviewing the relevant contracts. Have the relevant contracts been disclosed by the seller? Identify what open source software is used by the target, where it originates from and the terms of the open source software licences.Confirm how much of the software is licensed from third parties. If any software is licensed, find out the fees payable by the licensees, review the termination provisions of the licences and establish whether such licences can be assigned or novated (for an asset sale) or whether they may be affected by a change of control (for a share sale). Seek confirmation, also, that the target’s use of any licensed software is compliant with the terms of the licence. If software is licensed, confirm the target’s access rights to the source code in order to update the software and any rights it has if the licensor enters into an insolvency procedure or does not comply with its obligations under the licence. Under what circumstances and on what notice may the licence be terminated?

Question 50

Due diligence for Website design and domain names

Answer 50

• Key action points in relation to website design and development:
   Seek confirmation regarding ownership in the copyright in the design and development of the website. Websites are often designed and built by consultants or outside developers. it is therefore important to check what the website development agreement says in terms of ownership.
• Key action points in relation to domain names:
• Seek confirmation that the target owns the key domain names that correspond with the important brand names of the business. All registrations should be confirmed and/or checked to ensure they are up to date and that they are not subject to any dispute.
• Enquiries should be made of relevant registries. For example: ‘Nominet’ is the registry for all .co.uk domain names.
• Appropriate and relevant warranty protection should be included in the acquisition agreement.

Question 51

• IT due diligence: IT due diligence: Disaster recovery and maintenance

Answer 51

• Key action points in relation to disaster recovery, maintenance and data protection:
   Enquire as to whether the target has any disaster recovery systems in place. Most businesses will have some kind of back up plan to provide for business continuity in the event of the unexpected failure of any of its systems (from software solutions through to full service back up centres).
   Enquire as to whether any third party provides maintenance for the systems and, if so, seek confirmation of the fees and that all fees are paid up to date.
   Confirm that the target is complying with data protection legislation. Practically all businesses process personal data and so are affected by data protection laws. This issue is of special importance for consumer businesses, where much value may depend on the ability to process customers’ personal data in particular ways – for example in the ability to market new products to existing customer lists without breaching data protection (or in this case direct marketing) laws.

Question 52

Your client (‘Company A’) is proposing to enter into a 50/50 joint venture company (the ‘JV Co’) with one other party (‘Company B’). Company B will be transferring its specialist garden design business (the ‘Business’) to the JV Co. The Business uses a decorative logo consisting of three numbers (the ‘Logo’). The Logo is starting to be well known among the high net worth customers targeted by the Business, although it is not very well known to the general public. A brand using the same numbers (the ‘Registered Mark’) is already registered as a trade mark against a different class of goods and services. Company A wants to be sure that the JV Co will have the benefit of an enforceable intellectual property right once the rights in the Logo are assigned to it as part of the Business.

What is the best advice to give to your client in relation to the intellectual property rights in the Logo?

As the Logo consists only of numbers, it may be devoid of any distinctive character: but the JV Co will still be able to register it as a trade mark if the Business has built up goodwill in the Logo.

The JV Co could register the Logo as a registered design right, and this would give a longer overall period of protection than registering it as a registered trade mark.

If the Logo and the Registered Mark use identical numbers, the JV Co will be unable to register the Logo as a registered trade mark.

Once the JV Co owns rights in the Logo, it might be able to bring an action in ‘passing off’ against a party using a brand that misrepresents that party’s goods and services as being those of the JV Co, but this would require an action in tort.

Answer 52

Once the JV Co owns rights in the Logo, it might be able to bring an action in ‘passing off’ against a party using a brand that misrepresents that party’s goods and services as being those of the JV Co, but this would require an action in tort.

Correct
Correct. This answer correctly identifies that an owner of an unregistered trade mark could potentially bring a passing off action in tort. One of the other answers is incorrect because the JV Co may still be able to register the Logo as the Registered Mark is registered against a different class of goods and services, another answer is incorrect because a trade mark would potentially give an unlimited lifespan, subject to payment of renewal fees, and the final answer is incorrect because the Logo would have to have built up a distinctive character (not goodwill) over time to overcome this. See Introduction to Trade Marks.

Question 53

Your client has entered into a 50/50 owned joint venture company (the ‘JV Co’) with one other party. The JV Co will run a homeware business (the ‘Business’) with a mermaid themed brand. Chloe McGregor is a self-employed sculptor who created a sculpture of a mermaid (the ‘Sculpture’) 18 months ago and displayed it for sale in a commercial art gallery (the ‘Gallery’). The JV Co has bought the Sculpture and proposes to sell a limited edition of 100 copies of the Sculpture through the Business. Chloe has not applied to register any aspect of the Sculpture’s design: however, she has “assigned” all rights in it to the Gallery, other than the right to copy the Sculpture for sale.

What is the best advice to give to your client in relation to the issues that might arise for the JV Co in relation to the Sculpture?

As more than one year has passed since the Sculpture was first made available to the public, the Sculpture is not new: so the JV Co does not need Chloe’s consent to copy it.

Mermaids are not within the closed list of works protected by copyright, so there is no copyright in the Sculpture.

The JV Co must obtain Chloe’s permission if it wants to copy the Sculpture.

As the JV Co owns the Sculpture, it may copy the Sculpture without first obtaining Chloe’s consent.

Answer 53

The JV Co must obtain Chloe’s permission if it wants to copy the Sculpture.

Correct
Correct. A sculpture is an original artistic work, so will be protected by copyright (which is why one of the other answers is incorrect): sale of the physical Sculpture would not automatically include a permission to copy the Sculpture (which is why another answer is incorrect). Copyright does not need to be ‘novel’ in order to attract protection, which is why the final answer is incorrect. See Introduction to Copyright.

Question 54

Your client (‘Company A’) is entering into a 50/50 owned joint venture company (the ‘JV Co’) with one other party (‘Company B’). On commencement of the JV Co, Company B will be transferring to the JV Co a wholly owned subsidiary (the ‘Subsidiary’), which manufactures accessories for mobile telephones. The Subsidiary owns a UK patent granted on 18 September 2017 (the ‘Patent’) for the technology (the ‘Technology’) behind a wireless mobile telephone charger (the ‘Charger’). The Subsidiary filed the application for the Patent on 23 March 2016. The Technology was primarily developed by an employee of the Subsidiary, Sofia Gomez. Her usual job was for a different division of Company B’s business but she had been assigned to work for the Charger business. In February 2016, the Subsidiary published a paper (the ‘Paper’) in an academic journal giving an explanation of the Technology.

What is the best advice to give to your client in relation to due diligence carried out on the Patent?

Company A should check that the Subsidiary is up to date with its payment of annual fees, otherwise it is possible that the Patent may have lapsed.

The publication of the Paper will not invalidate the Patent on the grounds of a lack of novelty because the disclosure was by the Subsidiary, the subsequent applicant for registration of the Patent.

The Subsidiary may take action against customers who purchase Chargers and then sell them on to third parties on the internet, as this will always be an infringement of the Patent.

The first owner of the patented Technology would have been Sofia Gomez, rather than the Subsidiary, because she was not working in the course of her normal duties.

Answer 54

Company A should check that the Subsidiary is up to date with its payment of annual fees, otherwise it is possible that the Patent may have lapsed.

Correct
Correct. The Patent might lapse if annual fees are not paid by the Subsidiary. The first answer is incorrect because an early public disclosure of technology by the applicant can invalidate a subsequent application for a patent, the second answer is incorrect because an invention developed in the course of Sofia’s employment while assigned to the Charger business would belong to the Subsidiary, and the third answer is incorrect because the sale of a Charger in the UK should ‘exhaust’ the patent rights so a further sale would not be a breach. See Introduction to Patents See Introduction to Patents.

Question 55

• How can you deal in intellectual property?

Answer 55

· Intellectual property is personal property, so can be ‘assigned’ to a third party.
* A license

Question 56

What IP rights cannot be assigned?

Answer 56

· Note: Rights in ‘passing off’ (see unregistered trademarks) and confidential information are not property that can be assigned BUT a purchaser of a business that includes goodwill will then be able to enforce its own rights in passing off AND can also require the seller of the business to give confidentiality undertakings.

Question 57

· Because an IP right can be viewed as a ‘bundle’ of rights, it is generally possible to:

Answer 57

 Assign part only of the rights - Example: A trademark is registered to be used on soft drinks and also ready meals – the owner assigns the right to use it on soft drinks;
 Assign different rights to different people - Example: An author of a novel who owns copyright assigns the rights to translate the novel into German to one person and assigns the right to adapt the novel into a film to another person; and
 Assign rights for a limited period only - Example: The assignment of the rights to adapt the novel into a film is for five years only – if the film has not been made by then, they revert back to the author.

Question 58

• Formalities required for an assignment

Answer 58

· An assignment of intellectual property must generally be in writing and signed by the assignor – see s. 24(3) TMA, s. 90(3) CDPA and s. 30(6) PA.
· Where the right is of registered intellectual property, the assignment should be registered in order to perfect the title of the assignee – see s. 25 TMA, s. 19 RDA and s. 33 PA.
 If not registered cannot bring an action
· It is possible to assign pending applications for registration OR unregistered rights before they are created.

Question 59

• How do you license intellectual property?

Answer 59

· A licence of intellectual property does not give the recipient a property right, but instead gives a personal right against the owner not to be sued for use of the licensed intellectual property.
· Basic licence: a consent by the owner of the IP (the ‘licensor’) to the doing of an act by a third party (the ‘licensee’) that would otherwise amount to infringement.
· Commercial licence: a commercial licence is a contract which formalises this consent and makes it:
 enforceable; andirrevocable other than on the terms of the contract.

Question 60

Who are the parties in a license agreement?

Answer 60

· Licensor - Retains ownership of intellectual property:
· Licensee - May use the intellectual property in agreed ways without risk of an infringement claim
· Consideration from Licensee - promise to abide by terms of licence:
· Consideration from Licensor - promise not to sue for infringement.

Question 61

• Formalities required for a licence

Answer 61

· A licence is not legally required to be in writing – but a commercial licence will be a written contract.
· Where the right is of registered intellectual property, the licence should be registered – see also s. 25 TMA, s. 19 RDA and s. 33 PA because a registered licence will bind an assignee of the underlying right so that it cannot sue for infringement BUT an unregistered licence will not bind an assignee, so the new owner could sue the licensee for infringement of its property.
 e.g. a licence is binding when a brand is sold

Question 62

• Application of Chapter 1 Prohibition?

Answer 62

· Reminder: Section 2(1) Competition Act 1998 (‘CA’) sets out the Chapter I Prohibition: agreements that fall foul of the prohibition are void and unenforceable. For the prohibition to bite, each of the three criteria must be met:
 an agreement between undertakings, a decision by associations of undertakings or a concerted practice between undertakings; which
 may affect trade within the UK; and
 has as its object or effect the prevention, restriction or distortion of competition within the UK.
· Application: An intellectual property licence between two companies fulfils the first of these criteria; and, depending on the provisions within the licence (e.g. that restrict how the licensee uses the IP right), it could both affect trade within the UK and potentially prevent, restrict or distort competition.

Question 63

• How do you check that the licence does not fall foul of the Chapter 1 Prohibition? - Step 1

Answer 63

· In cases where the parties’ shares of the relevant markets affected by the agreement fall below certain thresholds, there is no infringement of the general prohibition – these shares are included in EU and CMA guidance. Vertical Agreements (not between competitors) - the market share of each party taken separately must not exceed 15%Horizontal Agreements (between competitors) – the market share of the parties together must not exceed 10%If the parties meet these thresholds (and the agreement has no ‘hardcore’ provisions – see below), the agreement does not have an appreciable effect on competition and so its parties do not infringe the Chapter I prohibition.

Question 64

• How do you check that the licence does not fall foul of the Chapter 1 Prohibition? - Step 2

Answer 64

· If the market share of the parties is too high, the next thing to consider is whether they can rely on a block exemption.
· A block exemption provides an exemption that is applicable to all agreements of a particular category (i.e. a block of agreements). Broadly speaking, it is the commercial purpose of an agreement which determines in which block (if any) it belongs.
· Any agreement belonging to the block to which a block exemption refers is, as a matter of law, exempt from the general prohibition – always provided that its terms comply with the detailed provisions of the respective block exemption. There are certain ‘hardcore’ provisions that cannot be included within an agreement that seeks protection under a block exemption: these are formulated differently depending on the type of agreement in question.
 These provisions are wholly void
· Block exemptions can either be introduced by the CMA or may be retained from EU law following Brexit. One of the ‘retained exemptions’ that still applies in the UK is the Technology Transfer Block Exemption, which applies to certain licences of patents, know how, design rights and/or software copyright – there is also a Research and Development Block Exemption which may apply in other circumstances.

Question 65

• How do you check that the licence does not fall foul of the Chapter 1 Prohibition? - Step 3

Answer 65

· If there is no applicable block exemption, you should consider Section 9 CA.
· The principle underlying s. 9 CA is to render exempt from the Chapter I Prohibition agreements which are fundamentally desirable from a commercial or policy point of view, albeit they may have minor anti-competitive side-effects.

Question 66

• To this end, s9 CA sets out four stringent conditions all of which must satisfied. The agreement must:

Answer 66

· have a positive effect, i.e. contribute to improvement of production or distribution, or promote technical or economic progress; andallow consumers to receive a fair share of the benefit;
· and not impose restrictions on the undertakings concerned that are beyond those strictly necessary to help to achieve the previous two objectives; andnot act as a tool to effectively eliminate competition in relation to a substantial part of the affected products.
· If a licence is not protected by the de minimis market thresholds or by a block exemption, it may be possible to apply s. 9 – however, it is hard to show that all the conditions are satisfied.

Question 67

• Subject matter and scope in a lisence agreement?

Answer 67

· Subject matter: A licence should specify clearly what intellectual property (belonging to the licensor) the licensee is permitted to use.
· Scope of the licence: The scope of what the licensee is allowed to do with the subject matter is usually subject to specified limitations.

Question 68

Different types of license?

Answer 68

· Exclusive licence
 This gives the licensee permission to use the relevant IP to the exclusion of all other persons, including the licensor itself.
· Sole licence
 The licensor agrees not to grant the same permission to any third party, but the licensor retains the right to do the acts permitted to the licensee.
· Non-exclusive licence
 The licensor is allowed to do all the acts permitted to the licensee and also to grant the same licence to third parties.

Question 69

• Restrictions on use by licensee

Answer 69

· Manner of use: The licensor is likely to require some control over how the licensee exercises the rights granted, to avoid damage to any retained rights – the terms may vary widely according to the circumstances and the parties’ commercial interests: e.g. in a patent manufacturing licence, the licensor would set out detailed specifications and have rights of inspection/approval of products

Question 70

Integrity and preservation of IP rights?

Answer 70

· The licensee will want to be sure that the licensor has and continues to have the IP rights that it has licensed on (that they have title and are valid) – and also that there is no other third party that might have a claim to the IP that could be enforced against the licensee.
· Title warranty: The licensee will seek a warranty from the licensor that the subject matter of the licence belongs outright to the licensor.
· Third party rights warranty: The licensee will seek a warranty that use of the IP rights will not infringe any third party rights – the licensor may resist this.
· Obligation to preserve: The licensee will seek an obligation on the licensor to preserve the IP - in particular, to pay any renewal fees - OR to offer an assignment to the licensee if the licensor decides not to renew.
· Liability cap: Where a licensor is giving warranties as to the licensed rights, it may seek to cap its liability for warranties that go beyond a confirmation as to title: particularly if the potential damages could be much greater than the licence fee it receives.

Question 71

• Infringements by third parties - license agreements?

Answer 71

· Both parties have an interest in preventing infringements of the underlying IP by third parties – such infringements could damage the commercial value of the rights to both the licensor and the licensee AND IP rights can even be lost entirely if they are not properly policed (e.g. a trade mark becoming a generic term).
· BUT while the general rule is that the licensor (as owner) must bring proceedings against infringement, in some circumstances a licensee (particularly an exclusive licensee) may bring proceedings (depending on the particular IP right and the terms of the licence) - this course does not go into this in detail.
· SO the terms of the licence should set out what each of the parties is going to do in the event of a suspected infringement – including as to conduct of claims.

Question 72

• What rights to sub-licence are required?

Answer 72

· If the licensee wishes to allow third parties to use the licensor’s licensed IP, it will need a right to grant sub-licences.
· Note: In some cases, this will be essential – e.g. in a patent licence where the licensee intends to sub-licence a manufacturer to produce the patented goods.
· The licensor is likely to require the licensee to impose ‘manner of use’ restrictions on the sub-licensee that are at least as strict as those in the head licence – and to have a right to oblige the licensee to take action against the sublicensee for breach.
· The licensor may also want an independent right of action directly against the sub-license.

Question 73

• Direct right against sub-licensee

Answer 73

· A direct right can be ensured by obliging the licensee to procure that the sub-licensee must enter into a separate agreement directly with the licensor.
· Note: A similar effect could be achieved by relying on the Contracts (Rights of Third Parties) Act 1999 and giving the Licensor third party rights in the sub-licence: however, licensors generally prefer a direct contractual right as giving more certainty.

Question 74

• What rights to assign are required?

Answer 74

· The licensee might also want the right to ‘assign’ the licence – in the sense of an assignment of a contract. This might be important in a long term licence with an upfront payment, where the licensee might want to realise some of its investment in the future, by selling on the licensed rights.
· The licensor may want to restrict rights to assign – either to ensure that it has a right to an additional payment on an assignment, or to ensure that they are able to approve (or veto) a new licensee to ensure quality control.

Question 75

· Where a licence is granted in the normal course of business, the licensor’s main commercial motivation is likely to be that the licence will generate income. The payments to be made to the licensor by the licensee are most likely to be:

Answer 75

 Royalties: amounts calculated as a percentage of the value of sales made using the licensed intellectual property (or a percentage of some other measurement of worth) - these allow the licensor to share in the licensee’s commercial success; and/or
 Flat fee: either a one-off sum or flat rate payments made at agreed intervals – these will guarantee the licensor a return even if the licensee is not successful – the licensee may resist such payments for that reason.
 Additional provisions: The licence should address practical issues such as how any royalties should be calculated and the intervals at which payments become due. The licensor will also require some provision to check that the correct amounts are paid (e.g. by having a right to inspect the licensee’s records).

Question 76

• Term and termination in a license agreement?

Answer 76

· An IP licence could be granted for a fixed term or it could be granted for an indefinite period.
· In each case, either or both parties could have a right to give notice to the other to terminate ‘at will’ during the fixed or indefinite term.
· There are also likely to be express termination provisions for material breach by the other party or in other adverse circumstances – as the common law rights to terminate for repudiation are unlikely to give enough certainty to the parties.
· In some circumstances, it may be agreed that the grant to the licensee should be ‘irrevocable’ in all circumstances – in which case the licence should state that the only remedies for breach are damages and equitable relief.

Question 77

• What is software?

Answer 77

· Software is a term for the computer programs that are necessary in order to operate the hardware in a computer system, comprising:
 Operating system (and associated functions)- software that is vital to run the basic functions of the computer system; and
 Applications – software that operates key business functions, such as word processing or access to the internet.
· In terms of intellectual property rights, software is protected by copyright (so is an unregistered right that arises automatically on the development of a computer program).

Question 78

• What does software consist of?

Answer 78

· Software consists of instructions given to a computer system in order to produce the desired result – it comes in two versions:
 Source code = The computer program written in programming language that is intelligible to trained IT personnel; and
 Object code = The form into which the program is converted in order to be understood by the computer system (which is not intelligible to a human).
· Conversion from source code to object code is carried out by a program called a ‘compiler’ - which can also ‘decompile’ an object code into a source code.
· The software developer will usually protect its source code from access by licensees (unless it is being licenced on an ‘open source’ basis – see below).

Question 79

• Subject matter of an IT software licence

Answer 79

· Subject matter: An IT software licence will generally licence a particular version of a product to the licensee (often by reference to a detailed functional specification).
· The licensor should be under an obligation to provide free updates to fix issues with the program or improve functionality
· BUT
· The licence should clearly define when improvements to the program create a wholly new product that would require the licensee to purchase the new version under a new licence.

Question 80

· The scope of the permitted use of the software may be limited by reference to:

Answer 80

 The identity of the permitted users – e.g. subsidiaries within a group;
 The nature and volume of processing for which may be used;
 The geographical location in which it may be used; and/or
 The number of individual users and/or computers on which the software may be run.
· The licensee will generally also be prohibited from copying, modifying, adapting or decompiling the software: which will protect the source code.
· There will generally be some exceptions in the licence to allow for permitted maintenance, repairing and updating in certain circumstances: there are also some statutory rights in the CDPA that cannot be excluded by contract.

Question 81

• Enforcement of the licence restrictions

Answer 81

· Enforcement: It is hard to police restrictions on the use of a software licence, so the undertaking not to breach is important – and to assist with enforcement, the licence may also provide for:
· An undertaking to inform the licensor of any breach and/or any change in the use of the licenced software;
· A right for the licensor to audit the use of the licence (including by coming onto the premises of the user); and/or
· Consequences for breach including extra damages, injunctions and potentially even termination of the licence.

Question 82

• Integrity of IP rights in IT software

Answer 82

· The licensor will warrant that it has the right to grant the licence: it has title to the copyright. The licensor will generally also give an indemnity to the licensee against claims from third parties for any breach of their rights.The licensor will generally also undertake to repair or replace defective software if notified within a warranty period.
· Liability: IT software is so essential to a business that a claim against the licensor under these provisions could be very large – so it will be important to the licensor to have a cap on its liability– subject to statutory restrictions and the requirement for reasonableness in any such cap.
· Infringements: Other than on a licence of a bespoke software created for the customer, dealings with third parties who infringe the copyright in the software will be an issue for the licensor.

Question 83

• Escrow agreements for source code

Answer 83

· In some cases, a licensee may want extra protection for the source code to the licensed software – for example, if the software was customised for the licensee/is key to its business and there is some concern that the licensor might be at risk of insolvency.
· In this case, the licensor could deposit a copy of the source code with an escrow agent, with rights of access to the licensee in certain circumstances: however, this does cost money and will generally be resisted by a licensor.

Question 84

• IP audit and portfolio management?

Answer 84

· All businesses are well-advised periodically to conduct an IP audit so as to identify the IP rights which are of importance to their commercial activities and to assess the extent to which appropriate steps are being taken to protect them. Such an audit might address the matters set out below, which are similar to those addressed in due diligence.

Question 85

Policies and procedures – record keeping

Answer 85

· ‘Owned’ IP rights
 It is very important for a business to have systematic IP records in place to keep track of its rights. The business needs appropriate systems (e.g. databases) to do this.
 Ownership of registered rights can be proved by reference to the register, but in respect of unregistered rights, it is important to be able quickly to produce evidence of ownership, for example by recording, and storing evidence of:
* authorship and date of creation of copyright works;the extent to which unregistered marks have been used in the marketplace (so as to prove goodwill in such marks and/or prove acquired distinctiveness for registration purposes);
* assignments of rights to the business;
* And steps taken to protect the confidential information of the business
· ‘Licensed’ IP rights
 Where the business uses rights under licence (‘licences-in’), it may be necessary to check the licence terms from time to time. For example, if the business wishes to change the way in which it uses the rights it will need to confirm that any new use is within the scope of the current licence.
· Systematic record-keeping protects against missing important dates. For example:
 Registration renewal dates should be logged systematically, so that the rights are not allowed to lapse and so that the client can consider, at the appropriate time, whether or not it wishes to maintain the registration.
 When are important licences-in set to expire?
· If granting licences (‘licences-out’) forms an important and/or frequent part of how the business operates (e.g. a software developer), then keeping appropriate records will be a core function of the business, covering such matters as:
 licensees’ details and rights granted;
 expiry/renewal dates; and
 due dates for payment of fees/royalties.

Question 86

• Key action points in relation to monitoring for infringements:

Answer 86

· Is appropriate action being taken to police suspected infringements? Trade mark registrations in particular are vulnerable if not policed (s. 46(1)(c) TMA). Some businesses subscribe to monitoring services and/or instruct their lawyers to write routine letters to all third parties who use a similar mark, to put them on notice of the client’s rights.
· The client should also review its staff training policies to ensure that its employees understand the importance of these matters. Those involved in generating new IP in particular (e.g. designers, researchers) need to understand third party infringement risk so that they do not inadvertently create a liability for their employer.

Question 87

• Confidentiality provisions

Answer 87

· Obligation of confidence: during employment
 A well drafted contract of employment will contain an express obligation of confidence by employees, particularly by those who deal with technical or other sensitive information which is truly confidential. During the course of employment this duty is likely to be enforced by the courts.
 Even if there is no such clause in an employment contract, an obligation of confidence will be implied because of the duty of good faith owed by the employee to the employer. An employee may not disclose confidential information or compete with his employer during the course of their employment.
* Obligation of confidence: after employment
 A prudent employer should also include a post-employment confidentiality provision in the contract of employment. This will be subject to the general rules relating to restraint of trade – so should be drafted to protect the employer’s legitimate business interest and be reasonable in scope (e.g. should not prevent the employee from using their own information/discoveries). See also restraint of trade discussed in the context of restrictive covenants below.
 In the absence of an express post-termination covenant, there will nevertheless be an implied duty of confidentiality preventing an ex-employee from making unconscionable use of certain information acquired during employment.
* Employee or consultant?
· A visiting consultant is not an employee: an obligation of confidentiality may be implied, but an express obligation is clearly preferable in practice.

Question 88

· Despite the restrictions on use of confidentiality, an employer will still want to prevent an ex-employee from going immediately to work for a competitor or from immediately seeking to poach customers or fellow employees. There are 3 common types of restrictive covenants intended to avoid these adverse outcomes:

Answer 88

 Non-competition. These prevent the ex-employee from:
* working for a competitor; or
* setting up a competing company.
 2. Non-dealing. These prevent any dealing between the ex-employee and customers (even if the customers approached them).
 3. Non-solicitation/poaching of customers or sometimes suppliers (preventing the ex-employee soliciting business from customers or suppliers, respectively); or of staff (preventing the ex-employee poaching members of the team to join a new business).

Question 89

· The courts generally look unfavourably on any provision which restrains an employee from earning a living in the future (a so-called ‘restraint of trade’). Therefore, the basic premise is that all restraints are prima facie void and unenforceable unless they:

Answer 89

 protect a legitimate interest of the business (for example, customer connections, a stable workforce, trade secrets);
 and
 go no further than is reasonably necessary to protect that legitimate interest.
· To ensure enforceability, the covenants must be tailored to suit the requirements of each individual employment situation and should be reviewed regularly.

Question 90

• The blue pencil test

Answer 90

· The court will not rewrite restrictive covenants to make them enforceable. The court may, however, strike out the unenforceable part of a restrictive covenant clause (for example, an offending word) but will only enforce the remainder of the clause if it makes independent sense.
· Any enforcement of restrictive covenants by the court will be at the minimum level needed to protect the employer’s legitimate interests.

Question 91

• The effect of wrongful dismissal on covenants?

Answer 91

· If (1) the employer dismissed an employee in breach of contract; or (2) the employee resigns as a result of a constructive dismissal (i.e. the employee is compelled to resign because of the conduct of the employer), then any restrictive covenants are likely to be unenforceable.
· As covered in an earlier part of the course, this is because the employer will have committed a repudiatory breach of the underlying employment contract – thereby entitling the employee to free themselves of their obligations under the contract.

Question 92

• Garden Leave clauses

Answer 92

· An employment contract may also include a Garden Leave clause – this can be an alternative means of ensuring that an employee does not pass immediately from the employer to a competitor.
· The purpose of this provision is to enable the employer to require the employee to stay at home for a period of time – for example, during their notice period or during investigations of alleged misconduct - so that they have less opportunity to disrupt the business and/or take valuable know how (such as customer lists) from the employer.
· While the employee is on garden leave, they remain employed by the employer – so the employee cannot get another job and the employer continues to pay them. This gives the employer an additional period to those covered by any restrictive covenants, during which the employee cannot work for a competitor.
· A court will only enforce a garden leave provision by way of an injunction if the employer can demonstrate that it is necessary to protect its interests – taking into account the status of the employee and the employee’s job (so a more senior employee could be subject to a longer garden leave provision).

Question 93

You are acting for a joint venture company (the ‘JV Co’) that has been licensed to use a patent (the ‘Patent’) to manufacture a product (the ‘Product’) for sale in England and Wales (the ‘Territory’). The licence was granted by the owner of the Patent (the ‘Owner’) on a sole basis to the JV Co. The Owner has also granted a licence to another company (the ‘Competitor’) to manufacture the Product for sale in Northern Ireland. Each licence contains an undertaking by the licensor to comply with its terms. However, the JV Co has just discovered that the Competitor has started to manufacture and sell the Product in the Territory.

Which of the following statements would be correct advice to give to your client in relation to the consequences that might result?

If the Competitor has breached the terms of its licence, the Owner could choose to sue for breach of contract as it may be more straightforward than an action for infringement of intellectual property.

The provisions of the Competition Act 1998 will not be applicable to the licences granted by the Owner.

As the licence was granted to the JV Co on a sole basis, the JV Co should check whether the Owner has granted the Competitor another licence to sell the Product in the Territory.

Even if the Competitor has breached the terms of its licence, the Owner will not be able to sue for infringement of its intellectual property in the Patent as it has licensed those rights in the Territory to the JV Co.

Answer 93

If the Competitor has breached the terms of its licence, the Owner could choose to sue for breach of contract as it may be more straightforward than an action for infringement of intellectual property.

Correct
Correct. The licence is a form of contract so the Owner could choose to sue for breach of contract. One of the other answers is incorrect because a licence granted on a sole basis would only allow the Owner to sell the Product in the Territory alongside the JV Co, Another answer is incorrect because the Owner would still be able to take action against the Competitor for unlicensed dealings in its Patent in the Territory, and the final answer is incorrect because the licenses are agreements between undertakings that could come within the Chapter 1 Prohibition in the Competition Act 1998. See Dealing in Intellectual Property.

Question 94

You are acting for a joint venture company (the ‘JV Co’) that has been granted a licence (the ‘Licence’) of some proprietary IT software (the ‘Software’) by the software developer (the ‘Licensor’). The Licence has been granted on the standard terms of the Licensor.

Which of the following statements best describes a contractual provision that you would expect to find in the Licence?

An undertaking on behalf of the Licensor to keep the registration relating to the Software up to date.

A provision requiring the JV Co to take action against any third party found to be infringing the intellectual property of the Licensor in the Software.

An undertaking to inform the licensor of any change in the use by the JV Co of the Software.

Full access to the source code of the Software and permission to amend and update the code.

Answer 94

An undertaking to inform the licensor of any change in the use by the JV Co of the Software.

Correct
Correct. The Licensor would want to know about change in use in order to ensure that the Licence is not being breached. One of the other answers is incorrect because software is protected by an unregistered IP right, The other two answers are incorrect because these are not terms that would generally be included in the standard terms of a licensor. See Key Terms of an IP Licence.

Question 95

You are acting for a joint venture company (the ‘JV Co’) that operates a business that involves the creation and use of a wide range of intellectual property rights (the ‘Business’). The JV Co has decided to carry out an audit of the Business in order to ensure that it is fully protecting its interests in this area. The JV Co is particularly concerned to ensure that it has the right provisions in place in its employment contracts with technical employees (the ‘Employees’) that are employed in the Business (each an ‘Employment Contract’).

Which of the following would be appropriate advice to give in relation to the Employment Contracts?

An Employment Contract should include restrictive covenants preventing the Employee from moving to work for a competitor as soon as they leave employment with the JV Co: these covenants should last for as long as the JV Co can commercially agree with the Employee.

Employees should be obliged to undergo staff training when required in order to ensure that they understand the risk of infringement of third party intellectual property rights.

The Employment Contracts should provide that all intellectual property created by the Employees belongs to the JV Co, otherwise copyright and patents that they create would initially be owned by the Employees.

An Employment Contract could include a garden leave provision requiring the Employee to stay at home for a period once notice has been given: if this period is longer than the notice period in the Employment Contract, it will restrict the Employee from working for anyone else during the remainder of the garden leave.

Answer 95

Employees should be obliged to undergo staff training when required in order to ensure that they understand the risk of infringement of third party intellectual property rights.

Correct
Correct. It would be sensible to give Employees staff training otherwise they might infringe third party IP rights. One of the other answers is incorrect because copyright and patents created by employees in the course of their employment will generally be owned by their employer, another answer is incorrect because if a restrictive covenant is too long, it may be unenforceable as a restraint on trade, and the final answer is incorrect because the garden leave provision would not be binding on the employee once they have left employment. See Restrictive Covenants and Confidential Information.