This panel discussion, held on June 24, 2014, is the third and last of three seminars that Weil held this spring and summer at its New York headquarters on science, technology, intellectual property and the media. This seminar focuses on the non-IP aspects of law that frequently arise when counseling clients on IP matters.
Jeffrey D. Osterman, a partner in the Technology and IP Transactions practice located in Weil, Gotshal & Manges LLP’s New York City office, concentrates on matters with deep commercial or technical complexity. He has had extensive experience with patent licensing, technology transfer, outsourcing, technology integration, content licensing and merchandizing. Jeffrey L. White, a partner in the Antitrust/Competition practice group and based in the Washington, DC office, provides counsel for all aspects of antitrust law as well as government investigations, private litigation, and general counseling. Carrie Mahan Anderson is a partner in the Firm’s Washington, DC office, where she focuses on antitrust and consumer protection counseling and litigation. She advises clients on consumer protection issues in government investigations and private litigation as well as mergers, acquisitions and joint ventures. Barry Fishley is a partner in the Technology and IP Transactions practice in the Firm’s London office. He has wide-ranging experience in technology, intellectual property, e-commerce, telecoms and general commercial matters.
Osterman: My subject is what lawyers need to know about bankruptcy law. During this segment, I will discuss the goals of bankruptcy law and how they differ from those of contract law and how these rules apply in the context of an intellectual property transaction. This should provide some context that will help you better understand the reason for some outcomes that otherwise might not seem to make sense.
Contract law is aimed at allowing parties to bind themselves to promises in the future so that one party is comfortable making investments in future performance knowing that its contract counterparty will be required to perform when the time comes. It allows the parties to plan for the future. Bankruptcy law, in contrast, is aimed at providing an orderly process for an entity in financial distress to restructure its affairs or liquidate its assets in a manner that is fair to various groups of stakeholders.
A debtor may choose to file for bankruptcy to avoid collection efforts from creditors that can be destructive to value. The filing automatically “stays” creditors’ collection efforts and provides breathing room to develop a strategy to prioritize the various classes of claims against the company and address those claims in a fair and orderly fashion.
Filing for bankruptcy typically grants administrative powers to the debtor or an administrator, and one of those administrative powers is the ability to convert “executory” contracts that are viewed as detracting from value to liability claims (for which the counterparty will be considered a creditor). Those liability claims in turn can be grouped with other claims of similar priority and treated equally in a plan of reorganization or liquidation.
“Executory” contracts are generally viewed as those that have ongoing obligations by each party. This can raise questions, however, in the case of a fully paid, or even a royalty-bearing license agreement where the licensor has few affirmative obligations beyond refraining from suing the licensee for infringement. Is this an executory contract? Five years ago most practitioners would have viewed a license agreement as an executory contract. Today, the courts have softened their stance and are increasingly willing to find that a license agreement is not an executory contract where the only substantial obligation of the licensor is to refrain from suing the licensee.
If a license agreement is found to be an executory contract, U.S. bankruptcy law gives the debtor-licensor a choice: it can choose either to assume the contract, in which case the debtor-licensor has to completely cure any defaults, and provide assurances it will continue to perform; or the debtor-licensor can seek to reject the contract (the debtor-licensor can also refrain from making a choice, which can leave the licensee in a state of limbo, in which case the licensee may ask the bankruptcy court to force the debtor to make a choice). In the U.S., if a license agreement is an executory contract and the debtor-licensor rejects it, the licensee is faced with a choice of its own: it can elect to retain its rights under the license agreement, or it may choose to treat the rejection as a breach of the agreement and have a claim for damages (which will frequently be treated as unsecured liabilities of the debtor, which frequently have a low priority in bankruptcy). If the licensee elects to retain its rights, the debtor-licensor must allow the licensee to continue using the intellectual property and honor any rights of exclusivity contained in the license, but the affirmative obligations of the debtor-licensor (such as maintenance and support) fall away. If a licensee elects to retain its rights, it must continue making any royalty payments. This is a reason to separately define a royalty payment and a maintenance and support payment (instead of having them rolled into a single consolidated fee) because that provides a basis for determining what royalty continues to be owed.
The Bankruptcy Code has a particular definition of “intellectual property,” which includes patents, trade secrets and copyrights, but does not include trademarks and possibly not foreign intellectual property. If you have trademarks or foreign intellectual property, how do you protect yourself as licensee? Some advocate transferring the intellectual property into a bankruptcy-remote special-purpose entity, and others advocate selling the intellectual property to the “licensee” and licensing it back to the original owner, but both of those approaches have significant complications. One alternative with a lower degree of complication is to have the licensee take a security interest in the subject intellectual property. This better secures the damages claim that the licensee would have if the licensor rejects the agreement, reducing the incentive for a debtor or administrator to seek rejection.
Another matter to be aware of is the risk of fraudulent transfer, which says, among other things, that an entity in distress or in bankruptcy that transfers out assets at less than reasonably equivalent value may be able to avoid or unwind that transaction within a certain period of time after the transfer occurs. Fraudulent transfer law applies to intellectual property licenses just as to all other contractual obligations.
Finally, be aware that it is generally true that under the Bankruptcy Code “ipso facto” clauses (e.g., those that are triggered on the counterparty’s bankruptcy) are not enforceable. But this is not generally true for a class of agreements that likely includes most non-exclusive copyright licenses, non-exclusive patent licenses and non-exclusive trademark licenses, nor contracts that are non-assignable under non-bankruptcy law.
Anderson: My partner Jeff White and I are here today to discuss what IP lawyers need to know about the antitrust laws. In connecting intellectual property with antitrust issues, you should be aware that antitrust issues can arise in connection with many aspects of intellectual property law, including anytime you are licensing or acquiring intellectual property or in settling litigation. I will quickly run through the antitrust regime in the U.S., touching briefly on what is happening abroad, and generally explain some fundamental antitrust principles.
The current antitrust regulatory landscape could be characterized as being one of heightened enforcement. The Antitrust Division of the U.S. Department of Justice, the U.S. Federal Trade Commission, and state attorneys general all enforce the antitrust laws with great vigor. Enforcement of antitrust laws outside the U.S. also increases every day. One area of risk that is predominantly prevalent only in the U.S. is the private class action plaintiffs’ bar, which frequently will file lawsuits upon news that a company has received a subpoena or inquiry from a federal agency or a press release indicates a suit is pending. Treble damages and attorneys fees for the prevailing party, as well as the allure of large settlements, are attractive inducements to bring antitrust cases.
Violations of antitrust laws can result in penalties of $1 million for individuals and $100 million or more for corporations, as well as jail time. Antitrust litigation and investigations are extremely complicated and, as a result of some of the most expansive discovery allowed in the courts and the frequent need for data-intensive economic analysis, can be the most expensive litigation you will deal with. As a result, it is vital to guard against even the appearance of impropriety in the antitrust space.
The fundamental point of the antitrust laws is to promote and enforce competition, which benefits consumers. Of the primary federal statutes – the Sherman Act, the Clayton Act and the FTC Act – the more significant one for my purposes is the Sherman Act. Section 1 prohibits agreements that unreasonably restrain trade – including both horizontal and vertical agreements. Section 2 of the Sherman Act prohibits a firm acting alone or with another firm from attempting to or actually monopolizing a market for a particular product or service. Alleged Sherman Act violations are examined by the courts under two standards – per se or rule of reason. One example of a per se violation is an agreement amongst competitors to fix prices. Note that “prices” includes not just the actual price, but the myriad aspects of competition related to the price, including costs and fees. Agreements to allocate customers or territories also are per se illegal. Under a per se standard, there is no justification allowed for the illegal agreement – it doesn’t matter why you did it, it is a violation of the Sherman Act. Rule of reason is the standard used to evaluate other types of restraint where perhaps the result of the alleged agreement isn’t always as clear. What the courts are looking to do here is balance the anticompetitive effects of a restraint against any pro-competitive benefits.
Another significant federal antitrust statute is the Clayton Act. Section 7 of the Clayton Act prohibits mergers and acquisitions where the effect may be substantially lessening competition, which may include many IP transactions. Transactions that meet certain requirements must be reported to both the DOJ and the FTC, which has a certain amount of time to review the potential competitive impact of the transaction before it can be consummated. Be aware that the acquisition of certain types of intellectual property (exclusive licenses, for instance) can be reportable under the Act.
Finally, Section 5 of the FTC Act is a very broad, somewhat amorphous statute prohibiting unfair or deceptive acts or practices. It is only enforceable by the FTC. Many of the states have similar or broader “baby FTC acts,” which can vary markedly from state to state. States often also have analogues to the Sherman Act, but these can vary considerably from (and often contradict) federal law, as in the case of lawsuits by indirect purchasers.
White: Courts have recognized that the bodies of antitrust and IP law are actually complementary since both are aimed at encouraging innovation, industry and competition. The DOJ and the FTC have laid down three essential principles regarding the treatment of IP under the antitrust laws: (1) IP is regarded in antitrust terms as any other form of property; (2) IP is not presumed to create market power in the antitrust sense; and (3) IP licensing is often pro-competitive. Again, analyzing IP issues under the antitrust laws generally involves balancing the anticompetitive effects of an arrangement involving IP with the pro-competitive benefits of the arrangement. Where an IP holder can be said to have market power in a particular area, there are greater risks that IP licensing arrangements or other IP use could run afoul of the antitrust laws.
The sale of IP also can raise antitrust issues in the U.S., as well as abroad, where antitrust regulators are increasingly interested in IP issues. It is wise to involve antitrust counsel early in the process to avoid any surprises that may arise down the road. In the U.S., the standard for the sale of IP rights is the same as any ordinary merger or acquisition: whether the deal substantially lessens competition or tends to create a monopoly.
Transactions that are valued in excess of $75.9 million (a number that is annually adjusted), may be reportable under the Hart-Scott-Rodino Antitrust Improvements (“HSR”) Act if certain other criteria are met and no exemptions otherwise apply. Transactions that are subject to the HSR Act must observe a statutory waiting period – typically lasting 30 days – before they can be consummated. It is not unusual, however, for the merger review period to be extended beyond the initial waiting period if the reviewing agency determines that the transaction may lead to competitive harm.
Notably, there are also penalties for structuring a deal around the HSR Act, and even if a deal gets cleared, the parties are not necessarily free from scrutiny in the future. In addition, the U.S. agencies also can and do challenge consummated deals that are non-reportable because they fell under the HSR Act reporting thresholds.
One example of a transaction involving the sale or transfer of IP was the highly publicized bidding war for Nortel’s patents between Rockstar (a consortium that included Apple, Microsoft, RIM and Sony Ericsson) and Google. The Nortel patents included patents that were declared essential to certain standards relating to wireless networking technologies, and the entire portfolio commanded a selling price of $4.5 billion. Several months after Rockstar’s acquisition, Google announced its acquisition of Motorola Mobility for $12.5 billion, which included a rich portfolio of patents. After lengthy investigations into both of these deals, the DOJ ultimately focused on the declared-essential patents (a declared-essential patent is a patent that claims an
invention must be used to comply with a technical standard). Essentially, the DOJ was concerned with whether each of these acquisitions of patents would enhance the buyer’s incentives or ability to hold up their rivals in a way that would substantially lessen competition. Ultimately, both of the deals were closed without a consent decree. In a statement issued by the DOJ announcing the closing of its investigation, it reported that the parties had reaffirmed certain commitments that the sellers had previously made to standards-setting organizations regarding the licensing of certain patents on F/RAND terms. The acquisition and subsequent use of patents, including declared-essential patents, remain a hot issue today.
In addition, other hot issues involving antitrust and IP currently include: (1) the circumstances in which a declared-essential IP holder may seek injunctive relief; (2) how parties or courts determine a F/RAND rate in licensing arrangements; (3) the extent to which the antitrust laws should be used to regulate the conduct of patent assertion entities, known as trolls; and (4) mostly relevant to the pharmaceutical industry, the circumstances under which “product hopping” and reverse-payment patent settlements may violate the antitrust laws.
Fishley: I am a partner in Weil’s London office overseeing IP and tech transactions. In Europe, and more specifically in the UK, we use the term “data protection” to cover all aspects of privacy and note that Americans use the term “privacy.” I attribute the increase over the last year or so of client inquiries about data protection to three principal reasons: first, more companies are thinking about ways of monetizing personal data relating to users/subscribers/customers; second, European regulators are becoming more aggressive; and third, there is greater public awareness generally.
Data protection issues are key if a company is looking at outsourcing cloud services. If a multinational company wants to house all of its data in data centers in the U.S., including European data relating to European customers or employees, European data protection issues are involved. Similarly, if the company wants to provide benefits, services, etc. to European-based employees from the U.S., or if a company is looking to buy a business with assets and personnel in Europe, the data protection laws come into play.
Data protection laws relate to data concerning living individuals, including opinions, appraisals, HR files, etc. Data protection laws cover electronic records but also cover certain manual filing systems. However, random pieces of paper, like Post-it notes, would not be covered. The prime responsibility for data protection is on the data controller, i.e., the organization that holds the data or decides what to do with it, as opposed to a service provider like a hosting company that hosts the data on another company’s behalf.
There are national differences in how data protection laws apply because different countries had pre-existing laws when the European-wide Directive was passed in 1995, and because there are differences in the ways that each country implemented the Directive. In addition, different regulators in different countries have taken different views on data protection issues. For example, the German regulator is prepared to fine heavily for violations and to intervene in company conduct, although technically it may not have a right to do so. You have Germany at the high end of the scale with Italy, Spain and then France, particularly in relation to employee data, then the UK at the lower end. By comparison, the UK regime is more laissez-faire, more business friendly. As a result, it’s almost impossible to say that any one company is 100 percent compliant. This affects M&A deals where it’s not unusual for the seller to refrain from giving a 100 percent compliance warranty unless it is subject to a materiality exception.
There is a general prohibition on anyone outside Europe having access to personal data in Europe unless certain exemptions apply. That is because all but a few countries (Canada, Israel, and Switzerland) are seen by the European Commission as not providing an adequate level of protection for the integrity and security of that data. As yet, we don’t have a class action culture in Europe – it is very much a regulator-litigation regime. The regulators get involved, investigate and may levy fines. In addition, when there is a breach of the data protection requirements, the respective financial service regulators may also have power to impose a fine for the same breach. The fines may range up to a half million pounds in the UK, and in Germany and Italy, the range may be in the low millions of Euros.
Let me set out some basic principles, particularly in the context of access to employees’ or customers’ personal data for due diligence purposes.
First, exercise a genuine level of fairness. You need to be very upfront and transparent in terms of what you are going to do with any data collected.
The most common condition allowing for lawful use of personal data is consent. A word of warning in terms of consent: if you are dealing with employee data, you should never rely on consent because the law says essentially it must be genuine consent. The common thinking is that you should use another lawful means to allow access to and use of that data. Perhaps the access and use are necessary for the purpose of running an employment contract with a particular individual involved.
A third way of lawfully using personal data, which is often used in the context of M&A, is that the use of the personal data is in the data controller’s (or a third party’s) legitimate interest and that there is no prejudice to the individual. For example, in the context of M&A, it is legitimate for a seller to allow a would-be buyer or bidder to have access to information concerning employees and customers, and there would be no prejudice to the individual employees of customers as the seller would impose confidentiality and other obligations on the potential buyer or bidder.
The fourth principle is that the data must be accurate. This is the principle that was the focus of the European court’s decision concerning Google in May requiring deletion of inaccurate and irrelevant information. Google now has in place a process to enable anyone to request that personal information be deleted, and the regulators are going to announce guidelines in September to help organizations in dealing with these requests for “the right to be forgotten.”
The fifth principle gives the opportunity for an individual to request that any organization that holds personal data confirm whether it is holding information concerning the individual and the right of that individual to see the information. This covers HR files, employee appraisals, and everything that relates to the individual, and the organization has to comply with the request within 40 days and can only charge a maximum of 10 pounds sterling or 10 Euros. This is a big issue for companies in Europe.
The sixth principle states that there is an obligation for every organization to have in place measures to safeguard the data from loss, damage or access. The obligation is not absolute; it is subject to the availability of technology, the determination of cost and the assessment of risk, having regard for the risk of there being a security breach. The organization that holds the data is obliged to ensure that its service providers comply with this principle, including the reliability of staff. Again, the hosting company would not be responsible to the regulator.
Under the seventh principle, the transfer of or access to data outside of Europe is generally prohibited unless an exemption can be found. A few multinationals do use binding corporate rules, which is an intergroup agreement whereby the different subsidiaries/affiliates agree to keep information confidential. Another exemption is the use of model clauses, which is a form of contract provided by the European Commission, pursuant to which individuals in Europe are allowed to sue the participating companies for breach as third-party beneficiaries. Model clause is the most common way of lawfully transferring or allowing access to data outside of Europe.
A further exception is the U.S. Safe Harbor Self-Certification process in the Department of Commerce, which is only a halfway measure since it only allows for transfer of data from Europe to the U.S. and doesn’t cover global transfers of data.
Finally, all of this is going to change possibly by the end of 2016 when there will be a new law that will extend its reach to non-European companies if they target their goods and services to European citizens or monitor their online behaviour. Sanctions will be much higher, and all individuals will have a true “right to be forgotten,” or right to have their data deleted. That has huge systems and other cost implications. Many organizations are putting together project plans and teams to work out what this means in terms of future procurement exercises for systems and what they can do now since it may take at least two years to reconfigure the systems. It also means there will be a “deeper dive” in terms of M&A due diligence in terms of privacy to determine how much the target companies are aware of the ramifications of this regulation.
The following is an example of European Agency Laws: if a company wishes to reconfigure its distributor reseller network across Europe, red flags go up! The European laws affect the termination of any agreement where there is a third-party intermediary who is involved in negotiating contracts of goods, requiring payment of compensation to that third-party agent. The compensation is based on the loss of revenue stream and how much a hypothetical purchaser would pay for that agent business. In the UK, the parties have an option to decide whether the compensation should be a compensation payment or an indemnity, which is capped at one year’s commission. The agent has one year after termination to make a claim, but no payments are due if there is a serious breach by the agent or the agent terminates itself.