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Are there any restrictions on the establishment of a business entity by a foreign licensor or a joint venture involving a foreign licensor and are there any restrictions against a foreign licensor entering into a licence agreement without establishing a subsidiary or branch office? Whether or not any such restrictions exist, is there any filing or regulatory review process required before a foreign licensor can establish a business entity or joint venture in your jurisdiction?
The United Kingdom does not have restrictions on foreign persons or entities being shareholders in UK corporate entities, or participating in joint ventures, subject to any international sanctions that may be in place.
Foreign entities will often license into, or take part in a joint venture in, the United Kingdom without establishing a branch office or subsidiary in the United Kingdom. This may be subject to some limitations depending upon the industry and other places of business of that foreign entity; for example, EU pharmaceutical regulations require that a company has a qualified person responsible for pharmacovigilance based in the European Union.
Foreign licensors may establish their own subsidiary entities governed by UK legislation, such as private limited companies, using the standard UK processes. Alternatively, a foreign entity may establish business operations in the United Kingdom in its own right, provided that it registers as an overseas company with Companies House (the UK body responsible for administering companies) within one month of opening for business. This registration is done by completing a form titled OS IN01, and paying a small fee. Certain businesses may also require operating licences, depending upon their field of industry.
Kinds of licences
Forms of licence arrangement
Identify the different forms of licence arrangements that exist in your jurisdiction.
The United Kingdom does not have a specific piece of licensing legislation; however, various intellectual property (IP) statutes (Patents Act 1977 (PA), Copyright, Designs and Patents Act 1988 (CDPA) and Trade Marks Act 1994 (TMA)) contain rules governing at least part of the licensing of those rights. The scope and complexity of licensing under English law often exceeds the simpler bounds contemplated by this legislation, and there is a substantial body of English common law clarifying these rights. Common licence types include the following.
- Technology transfer licensing and its sub-types: patent and know-how licensing. Such licences are highly fact-specific and can perform multiple functions, such as governing intra-group know-how transfers in a tax-efficient manner, governing the input and outcomes of joint R&D projects or direct licensing of IP for manufacturing or sales purposes within a jurisdiction. Depending upon the parties and IP involved, UK and EU competition law may be a consideration.
- Software licences. These are increasingly prevalent given the growth of the UK information technology (IT) services economy. Again, the scope and purpose vary considerably on the matter at hand. Licences to a generic software tool are often granted by developers in perpetuity for a fixed fee, though these licences will often not govern future software upgrades by the developer or warrant as to coverage. Licences for bespoke software tools or software development will often be considerably more complex and contain carefully delineated IP right (IPR) transfers or exchanges.
- Trademarks. These are often licensed as between various parties in a supply chain, for example, from a manufacturing licensor to a distributing licensee, or a holding licensor to a licensee that may manufacture and distribute. Trademark and brand licensing are also a significant intra-group tool for value transfers. Where the licensor and licensee are not part of a group, royalty and quality control provisions will typically be exacting.
The United Kingdom also has limited compulsory licensing and licences of right, for example, in order to prevent the abuse of monopolies of functional designs, section 237(1) of CDPA 1988 provides for any person to obtain a licence to do any act that would infringe an unregistered design right in the last five years of that design right’s term. If the parties cannot agree to the terms of such a licence then the terms will be settled by the Comptroller of Patents, Designs and Trade Marks, although the CDPA contains no guidance for the Comptroller. EU regulation also requires compulsory licensing of patents relating to the manufacture of pharmaceutical products to countries with public health problems.
The above paragraphs are not exhaustive and there is a wide variety of possible licensing arrangements under English law, these include, for example, licences for domain names, plant varieties, registered and unregistered designs and other IPR.
Law affecting international licensing
Creation of international licensing relationship
Does legislation directly govern the creation, or otherwise regulate the terms, of an international licensing relationship? Describe any such requirements.
Depending upon the parties and rights involved in the licence, the legislation most likely to impact an international licensing relationship will be United Kingdom and EU competition laws, particularly article 101 of the Treaty on the Functioning of the European Union (TFEU), and the Technology Transfer Block Exemption Regulation (TTBER) and its accompanying Guidelines. The TTBER restricts the use of certain licensing terms, notably passive sales restrictions (other than in jurisdictions with exclusive licensees) and automatic assignments or exclusive licences of improvements developed by a licensee to the licensor. The TFEU is concerned with anticompetitive behaviour more generally, and seeks to regulate the relationship between competitors, suppliers and customers. These laws can be used to prevent dominant parties forcing others into perpetual licences, or manipulating markets by contracting with anticompetitive royalty rates or minimum supply requirements from a given supplier. See question 28.
The United Kingdom has no legislation requiring that products must be purchased locally, or any equivalent provisions.
What pre-contractual disclosure must a licensor make to prospective licensees? Are there any requirements to register a grant of international licensing rights with authorities in your jurisdiction?
There are no formal requirements for pre-contractual disclosure in the United Kingdom. Subject to the transaction and resources at hand, parties may wish to agree upon a due diligence process similar to that for a corporate acquisition; however, for many small-scale licences (such as generic software licences) this is neither feasible nor necessary.
Licensors should be aware of the impact of inducing a licensee to enter into an agreement by misrepresentation, which can lead to rescission of the contract, or a payment in damages to the licensee. Silence may constitute misrepresentation in some circumstances, and accordingly a licensor may wish to make some limited disclosure, or include some level of warranty in any licence.
There are no requirements to register licences to confirm their validity; however, it is advisable to register exclusive patent licences and any trademark licence with the UK Intellectual Property Office (UK IPO), European Patent Office (EPO) (only European patent applications may be registered; licences to granted European patents can registered in the national patent offices) or Trade Marks Registry as applicable. Licensees are only granted certain rights in the event of prompt registration; for example, an exclusive patent licensee must register the grant of the licence within six months if it wishes to claim costs of an infringement action that are attributable to infringements pre-dating the registration. For patent and trademark licences, registration is important to give notice to third parties. Without registration, the licence will be ineffective against a party acquiring a subsequent interest in the patent or trademark without actual knowledge of the licence.
Are there any statutorily- or court-imposed implicit obligations in your jurisdiction that may affect an international licensing relationship, such as good faith or fair dealing obligations, the obligation to act reasonably in the exercise of rights or requiring good cause for termination or non-renewal?
Commercial entities contracting in the United Kingdom are able to agree to such terms as they wish, provided that the agreement is freely entered into by all the parties. While the position is not entirely settled, English courts have typically been reluctant to imply general ‘good faith’ obligations into contracts.
The courts have a limited discretion to imply terms into agreements, where such a term is required to give business efficacy to an agreement, or is obvious to both parties to have been a term at the time of formation; however, the courts will not intervene to resolve a bad bargain where both parties have freely entered into the agreement, to the ultimate detriment of one or both.
Termination is similarly subject to the agreement reached between the parties and may be unilateral and without cause if the parties will agree it. However, where an agreement is silent on both its term and termination the courts will imply a term that an agreement is terminable on reasonable notice, though reasonableness will be judged on the facts at hand, rather than a statutory standard. There is also no obligation that a party must have good cause for non-renewal.
Intellectual property issues
Is your jurisdiction party to the Paris Convention for the Protection of Industrial Property? The Patent Cooperation Treaty (PCT)? The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs)?
The United Kingdom is party to the Paris Convention 1883 (in force since 1884), the Patent Cooperation Treaty 1970 (in force since 1978) and the Agreement on Trade-Related Aspects of Intellectual Property Rights 1994 (in force since 1995).
On a pan-European point, the European Union’s long-delayed ‘unitary patent package’ legislation, which will ultimately create a unitary patent right and a Unified Patent Court (UPC) for Europe, currently features the United Kingdom as a signatory. The UK government has also ratified the UPC Agreement, and existing European patents will be subject to the jurisdiction of the UPC. However, the ultimate scope of the United Kingdom’s long-term involvement in the UPC remains uncertain in light of the Brexit vote. The British government has expressed an intention to seek to remain as part of the UPC even in the event that no deal is reached with the European Union following Brexit negotiations, but it remains to be seen whether that will be possible.
Can the licensee be contractually prohibited from contesting the validity of a foreign licensor’s intellectual property rights or registrations in your jurisdiction?
There is no outright prohibition on non-challenge clauses; however, licensors should be wary of being seen to restrict competition or restrain trade under article 101 of the TFEU. The TTBER, and its Guidelines, provide a competition framework for patent, know-how and copyright agreements by way of a block exemption to article 101.
Under article 5(1)(b) of the TTBER, non-challenge clauses relating to EU IPR in non-exclusive licence agreements will not benefit from the block exemption, and will be subject to article 101. However, non-challenge clauses in exclusive licence agreements are protected under the block exemption. Paragraph 134 of the Guidelines explains the proviso as follows:
The reason for excluding non-challenge clauses from the scope of the block exemption is the fact that licensees are normally in the best position to determine whether or not an intellectual property right is invalid. In the interest of undistorted competition and in accordance with the principles underlying the protection of intellectual property, invalid intellectual property rights should be eliminated. Invalid intellectual property stifles innovation rather than promoting it.
The European Commission views non-challenge clauses as typically acceptable in the context of settlement agreements, although with the proviso that the no-challenge should only be induced by a licence to the right in question.
Invalidity or expiry
What is the effect of the invalidity or expiry of registration of an intellectual property right on a related licence agreement in your jurisdiction? If the licence remains in effect, can royalties continue to be levied? If the licence does not remain in effect, can the licensee freely compete?
Typically, it will be a term of an IP licence that it will terminate in line with the expiry or invalidity of the right in question. However, there are some nuances depending upon the right in question.
Patent licensors should be aware of the impact of EU competition law, because agreements that restrict the right of a licensee to compete against the licensor after the expiry of the patent will be in breach of this legislation. Similarly, licences requiring indefinite payment of royalties or fees are likely to be in breach of competition law, although an ongoing obligation for payment exceeding the term of the patent may be permissible where it pertains to either fair reward for the patent holder (eg, in research patents, which may not ultimately bear fruit during their term, although their exploitation may be instrumental to any eventual commercial outcome), or is in relation to know-how associated with the patent.
Trademark licensors may wish to be careful about accepting termination on the invalidation of a trademark, as the trademark may retain value as an unregistered trademark with its attendant goodwill. Should a licence not provide for expiry on the invalidation of the trademark, a licensee would need to demonstrate that the invalidity of the trademark was a repudiatory breach of the licence, or that the maintenance of that trademark was a condition of the agreement, in order to terminate.
Various unregistered rights, such as copyright and design rights, will expire over time, and agreements pertaining to such rights should take this into account in much the same way as they would otherwise pertain to expiry of registration.
Requirements specific to foreigners
Is an original registration or evidence of use in the jurisdiction of origin, or any other requirements unique to foreigners, necessary prior to the registration of intellectual property in your jurisdiction?
The United Kingdom has no special requirements for the registration of IPR owned by foreigners, or for the registration of IPR originating in another jurisdiction. The registration of IPR originating outside or held by entities based outside the United Kingdom should follow the United Kingdom’s standard registration processes.
Can unregistered trademarks, or other intellectual property rights that are not registered, be licensed in your jurisdiction?
An unregistered right may be licensed, or assigned, to the extent that it can be defined in such a way as to grant sufficient certainty as to the scope of that property right. Unregistered trademarks are not uncommon in the United Kingdom and are often licensed, because they are easily delineated and can be protected under the common law tort of passing off, thereby giving a licensee comfort as to the value of its licence. Similarly, licences of registered trademarks will typically incorporate reference to the attendant unregistered rights associated with that trademark, such as any goodwill accrued to it. Future or potential rights can be licensed prospectively.
Are there particular requirements in your jurisdiction to take a security interest in intellectual property?
IPR are property rights, and are therefore capable of being subject to the usual security interests under English law. There are no requirements unique to the securitisation of IP, which may be mortgaged or subject to fixed or floating charges in the usual manner.
Proceedings against third parties
Can a foreign owner or licensor of intellectual property institute proceedings against a third party for infringement in your jurisdiction without joining the licensee from your jurisdiction as a party to the proceedings? Can an intellectual property licensee in your jurisdiction institute proceedings against an infringer of the licensed intellectual property without the consent of the owner or licensor? Can the licensee be contractually prohibited from doing so?
Subject to the provisions of any licensing agreement, there is nothing in UK legislation to restrict a foreign owner or licensor from commencing proceedings without joining the UK licensee. There is also nothing to prevent a licensee from initiating proceedings without the consent of the owner or licensor, subject to the licensee having standing to issue the proceedings.
The position in respect of patents is prescribed by legislation. Under section 67 of PA 1977, a licensee may only bring proceedings in respect of a patent to which it is the exclusive licensee, and in the event that it does so the patentee must either be joined as a claimant, or if it is unwilling to do so, as a defendant (provided that, if the patentee does not enter an appearance as defendant, it shall have no liability in costs). An exclusive licensee under section 67 of PA 1977 may be awarded damages or other relief. Recent case law has clarified that an exclusive licence that is subject to the right of a third party to request a non-exclusive licence remains an exclusive licence for the purposes of section 67 of PA 1977 until the third party exercises its right. Section 46 of PA 1977 provides that a licensee under a ‘licence of right’ may require a patentee to issue proceedings to prevent infringement, and if the patentee does not do so within two months, may commence proceedings itself, joining the patentee as a defendant (though without cost liabilities unless entering an appearance). A licensee may be prohibited from exercising the above rights by agreement with the licensor.
The TMA sets out similar provisions in respect of trademarks. Section 31 of TMA 1994 provides that where an exclusive trademark licence states that the licensee has the same rights as if the licence had been an assignment, the licensee shall be able to bring proceedings in its own name. Where the exclusive licensee and proprietor of the trademark have a concurrent right to bring infringement proceedings, they can both sue, but must both be made parties to protect a defendant from being sued twice for the same infringement. Where the proprietor is joined as a defendant to proceedings, they will not be liable for costs unless they take part in the proceedings. The obligation to join the proprietor or exclusive licensee and the proprietor’s ability to avoid liability for costs can be contracted out of by the proprietor and the exclusive licensee.
For non-exclusive trademark licensees and exclusive licensees where the licence does not grant a right to bring an action in the licensee’s name, section 30 of TMA 1994 entitles the licensee to call on the proprietor to take infringement proceedings in respect of any matter which affects the licensee’s interests, unless the licence excludes this right. If the proprietor refuses to bring proceedings or fails to do so within two months of being requested, the licensee may bring proceedings in its own name. Once again, the proprietor must be joined as a party to the proceedings, and if added as a defendant, is not liable for costs unless they take part in the proceedings.
Can a trademark or service mark licensee in your jurisdiction sub-license use of the mark to a third party? If so, does the right to sub-license exist statutorily or must it be granted contractually? If it exists statutorily, can the licensee validly waive its right to sub-license?
There is no statutory right to sub-license in UK legislation, and both section 30(4) of PA 1977 and section 28(4) of TMA 1994 refer to sub-licences being grantable only so far as is provided for in the relevant head licence. The CDPA is silent on rules for sub-licensing copyright, but in light of the above it is likely that no such right will be implied unless specifically contemplated within the head licence. Licences should in any event deal expressly with sub-licensing rights to avoid later dispute or inference, for instance, where a licence is to ‘all the rights under the patent’.
Jointly owned intellectual property
If intellectual property in your jurisdiction is jointly owned, is each co-owner free to deal with that intellectual property as it wishes without the consent of the other co-owners? Are co-owners of intellectual property rights able to change this position in a contract?
In contrast to many other jurisdictions, such as the United States, in the United Kingdom, co-owners of IP are significantly restricted in the way they can deal with and exploit co-owned IP without the consent of the other co-owner or owners.
Pursuant to section 16(2) and 173(2) of CDPA 1988, in the United Kingdom, a joint owner of copyright cannot license or exploit a copyright work without the consent of the other joint owner. Where a jointly owned right has been licensed by one owner, the other ‘non-licensing’ owner would be free to sue for infringement. The CDPA does not expressly deal with assignment of jointly owned copyright, although it has been asserted academically that this is possible, with the assignee stepping into the shoes of the assignor and taking the copyright ownership as tenant in common. This uncertainty regarding assignment can be dealt with expressly between the parties by contract.
In respect of patents, the PA provides that patents may be jointly owned, and each patent owner will be free to work the patent for him or herself. However, section 36(3) of PA 1977 provides that a joint owner of a patent may not without the consent of all other joint owners:
- grant a licence under the patent;
- assign his or her share of the patent;
- mortgage his or her share in the patent; or
- amend the patent specification or apply for an amendment.
The ability for a co-owner to exploit the patent is therefore significantly limited. Again, this may be varied by contractual agreement between the parties.
A similar position exists in respect of trademarks under the TMA. Co-owners of trademarks may exploit the mark themselves without the consent of the other co-owners but may not license, assign or charge the mark without consent.
Broadly speaking, the above statutory positions can be varied by express agreement between the parties in a contract; however, practical and drafting difficulties may often arise in trying to foresee and provide for, any possible permutation of future exploitation by each of the parties.
First to file
Is your jurisdiction a ‘first to file’ or ‘first to invent’ jurisdiction? Can a foreign licensor license the use of an invention subject to a patent application but in respect of which the patent has not been issued in your jurisdiction?
The United Kingdom is a ‘first to file’ jurisdiction. Patent applications are considered personal property under section 30 PA, and accordingly grants of rights may be made out of them.
Scope of patent protection
Can the following be protected by patents in your jurisdiction: software; business processes or methods; living organisms?
While software is an excluded and non-patentable category under section 1(2)(c) of PA 1977, UK case law is pulling away from the certainty of this, because the courts have considered whether the software creates a meaningful technical effect. The IPO has issued guidance based primarily upon the judgments in Aerotel Limited v Telco Holdings Ltd and ors , Symbian Limited v The Controller of Patents  and HTC Europe Co Ltd v Apple Inc , indicating that where software meets certain signposted criteria around technical effect, it will be patentable, subject to the other usual requirements.
Additionally, computer code as well as the images, text, video and sound present in any user interface of the software may be protected by copyright, and databases within software may be protected by database rights.
Business methods are similarly excluded from patent protection under section 1(2)(c) of PA 1977. However, they are subject to the same IPO guidance as software, and in the wake of Aerotel, business methods have been found to be patentable where they have a demonstrable technical effect above and beyond their methodology.
The Biotechnology Directive (Directive 98/44/EC) as implemented in Schedule A2 of PA 1977 states that a biological product or a process relating to biological material may be patented, subject to several exceptions within the field. These include any inventions pertaining to the human body, cloning, and any industrial or commercial use of human embryos.
Trade secrets and know-how
Is there specific legislation in your jurisdiction that governs trade secrets or know-how? If so, is there a legal definition of trade secrets or know-how? In either case, how are trade secrets and know-how treated by the courts?
On 9 June 2018, the United Kingdom implemented the Trade Secrets Directive (2016/244/EU) that harmonises trade secret protection throughout the European Union. Information is a trade secret if it:
- is secret;
- has commercial value because it is secret; and
- has been subject to reasonable steps to keep it secret.
Trade secrets and know-how can also be effectively protected under the United Kingdom’s ‘law of confidence’, a common-law doctrine. Trade secrets can be protected if it can be established that the information has the necessary quality of confidence, and that anyone with access to the information owes its owner a duty of confidence. It is not a requirement that a given recipient enters into a non-disclosure agreement, although it is indicative of a relationship of confidence. If a recipient then discloses that information in breach of that confidence, legal action can be taken by the owner. Trade secret owners may bring claims under the common law for breach of confidence or misuse of confidential information in addition to or as an alternative to a claim under the implementation of the Trade Secrets Directive.
Parties will often enter into agreements when transferring trade secrets or know-how between each other for any purpose expressly protecting the use and handling of the information, and setting out the indemnities in respect of their loss or misuse. It is also common in such agreements to include an express reference granting the right to seek an injunction as first recourse in the event that the information is lost or misused. The courts have been willing to grant injunctions in recognition of the importance of trade secrets.
Under English law, trade secrets, know-how and confidential information are not classed as ‘property’ as such. Accordingly, rights in the same are enforced under the laws of tort rather than property.
Does the law allow a licensor to restrict disclosure or use of trade secrets and know-how by the licensee or third parties in your jurisdiction, both during and after the term of the licence agreement? Is there any distinction to be made with respect to improvements to which the licensee may have contributed?
Parties are free to contract so as to restrict the disclosure of trade secrets to third parties, and will ordinarily do so. Confidentiality provisions will typically be drafted to survive the agreement and be severable, as disclosing parties will wish to protect their trade secrets indefinitely, rather than just for the term of a given licence; any loss of confidentiality in the future will limit the capacity of the disclosing party to monetise that information going forward.
Parties are similarly free to contract with respect to the confidentiality (and other rights) associated with any follow-on work or improvements that a licensee might make, but should be aware of competition law restrictions on exclusive grant-backs of IPR (see question 27).
What constitutes copyright in your jurisdiction and how can it be protected?
UK copyright law is set out in CDPA 1988, although works published before that date will be subject to the law in place at the time of their creation (the Copyright Act 1956 and the Copyright Act 1911). Although there is some nuance in the application, generally a work that is original and permanent (ie, has been recorded in some way) will be automatically protected by copyright provided that it falls within one of the following categories:
- literary, dramatic, musical or artistic works;
- sound recordings, films, broadcasts or cable programmes;
- typographical arrangements of published editions; and
Copyright protection lasts for 70 years from the end of the year in which the last creator of the work dies, though for some of the above categories the period is shorter. Although there are no publication or registration requirements for UK copyright, it is advisable to maintain a record of a work’s creation, should ownership disputes arise.
Perpetual software licences
Does the law in your jurisdiction recognise the validity of ‘perpetual’ software licences? If not, or if it is not advisable for other reasons, are there other means of addressing concerns relating to ‘perpetual’ licences?
Parties to agreements in the United Kingdom are free to contract for any term that they wish, subject to competition rules. There is therefore no bar to a perpetual licence, but to ensure the functioning of the licence in practice, parties should contract clearly that the licence is in perpetuity, and also directly address termination. In BMS Computer Solutions v AB Agri Ltd  the courts held a perpetual licence to be terminable on its true construction (including by reference to its construction in relation to other related agreements between the parties).
Practically speaking, software has a limited lifespan relative to the copyright protection it is entitled to, and accordingly parties are unlikely to come upon issues of enforceability owing to duration and competition requirements.
Are there any legal requirements to be complied with prior to granting software licences, including import or export restrictions?
As software can be protected by copyright, an exclusive licence to a piece of software should be in writing and signed by or on behalf of the copyright owner. This is typically the licensing entity, but copyright ownership should be checked in advance of entering into any licence. Beyond this there are no bespoke requirements pertaining to software licensing.
The United Kingdom has some export restrictions, primarily in relation to military goods; the list of restricted goods (which can include software) is published as the UK Strategic Export Control List. Software is unlikely to be restricted at import; however, importers should be aware that imported goods infringing IPR in the United Kingdom may be detained.
Restrictions on users
Are there any legal restrictions in your jurisdiction with respect to the restrictions a licensor can put on users of its software in a licence agreement?
It is permitted, and indeed market practice in this jurisdiction, for a software licensor to restrict the licensee from copying, adapting, reverse engineering, decompiling, disassembling or modifying the licensed software; however, this restriction is often caveated with the wording ‘to the extent permitted by law’ or words to that effect. This is because the CDPA provides that there are some rights available to a licensee that a licensor is not permitted to restrict, including:
- the right to decompile (or effectively reverse engineer) software if necessary in order for it to interoperate with another program;
- the right to make a backup copy of the software if necessary for its lawful use; and
- the right to observe, study and test the functioning of the software in order to determine the principles and ideas that underlie it.
Royalties and other payments, currency conversion and taxes
Is there any legislation that governs the nature, amount or manner or frequency of payments of royalties or other fees or costs (including interest on late payments) in an international licensing relationship, or require regulatory approval of the royalty rate or other fees or costs (including interest on late payments) payable by a licensee in your jurisdiction?
The United Kingdom does not place restrictions on, or require approvals for, payments in international licensing relationships.
Unless the contract stipulates the interest rate and details how debts will be recovered, the Late Payment of Commercial Debts (Interest) Act 1998 provides that in business to business contracts, a creditor can claim interest at a rate of 8 per cent a year above the Bank of England base rate on the price of goods or services, plus a fixed sum and reasonable costs of recovering the debt. Whether or not the act applies to international agreements depends on the choice of law and whether there is a significant connection to the United Kingdom.
Are there any restrictions on transfer and remittance of currency in your jurisdiction? Are there are any associated regulatory reporting requirements?
There are no legal restrictions on capital flows to and from the United Kingdom, although persons carrying more than €10,000 (or equivalent) in cash, cheque or bankers draft into or out of the European Union must complete a cash declaration form, with fines of up to £5,000 and seizure of the cash for a false or non-declaration.
Additionally, the Proceeds of Crime Act 2002 places reporting obligations on those who suspect money laundering and imposes liability on those involved in the handling of assets obtained from criminal conduct.
Taxation of foreign licensor
In what circumstances may a foreign licensor be taxed on its income in your jurisdiction?
In general, non-resident licensors are only subject to tax in the United Kingdom on income that is attributable to a permanent establishment in the United Kingdom of that licensor; or to the extent that tax is required to be withheld by the licensee.
Withholding tax is imposed on payments of royalties for a number of different types of IP including patent royalties, copyrights, trademarks and design rights. There are certain reliefs from the duty to deduct tax, the most common being where a double taxation treaty (DTT) concluded between the United Kingdom and the jurisdiction in which the licensor is resident provides that the rate of withholding is to be reduced (sometimes to as low as zero).
Where no reduction in the rate of withholding tax is possible, the rate of deduction is 20 per cent of the royalty. If a licensor has suffered a withholding, it may be able to claim credit for the UK tax withheld in its home jurisdiction, either under local law or under the provisions of any applicable DTT.
From April 2019, withholding tax on royalties will also apply where a non-UK entity without a permanent establishment in the United Kingdom makes sales in the United Kingdom and pays a royalty to a connected non-UK party. The change in legislation is aimed to capture UK sales made by large multinational technology companies who do not fall within the scope of the separate diverted profits tax.
Competition law issues
Restrictions on trade
Are practices that potentially restrict trade prohibited or otherwise regulated in your jurisdiction?
Practices that have as their object or effect the prevention, restriction or distortion of competition within the European Union and may affect trade between member states are prohibited by article 101 of the TFEU. A similar prohibition applies to practices having an effect on trade within the United Kingdom under Chapter I of the Competition Act 1998 (CA). Agreements or practices relating to price fixing, output limitation, market sharing, resale price maintenance or absolute territorial protection are particularly likely to be caught by this prohibition. However, commercial agreements may contain other terms that affect competition, such as exclusivity provisions or customer restrictions. These need to be considered in their market context.
Article 102 of the TFEU and Chapter II of CA 1998 similarly prohibit practices affecting trade that constitute an abuse of a dominant position. This can include acts by a dominant company such as predatory pricing, refusal to supply and tied selling.
Serious infringements of these prohibitions carry heavy penalties. Agreements that infringe article 101 and the Chapter I prohibition may be partly or wholly unenforceable. Such agreements can be investigated by the competition authorities (in the United Kingdom, the Competition and Markets Authority (CMA) or the European Commission), and may also be the subject of private litigation.
Are there any legal restrictions in respect of the following provisions in licence agreements: duration, exclusivity, internet sales prohibitions, non-competition restrictions and grant-back provisions?
The prohibitions outlined in question 26 can apply to licence agreements. Licences that comply with the terms of the TTBER are deemed compliant with competition law. Licence agreements outside of the block exemption require fuller consideration, with the assistance of the Technology Transfer Guidelines.
The duration of a licence rarely leads to competition concerns in itself, although it can be problematic where restrictions continue to apply to a licensee after a licensed right has expired.
Exclusivity may be permitted, depending on the market context; a licensor can also generally prevent licensees from actively soliciting customers from other countries. However, if a licence confers absolute territorial protection, it is likely to be found anticompetitive. Prohibitions in internet selling are treated as restrictions on passive sales, and are usually prohibited, although bans on third-party platforms may be permitted in selective distribution systems (Case C-230/16, Coty).
Direct or indirect non-compete obligations that last longer than five years are specifically excluded from the Vertical Agreements Block Exemption (applicable to brand licences contained in distribution agreements). Licensors are not permitted to prevent licensees from exploiting their own technology, but other non-compete obligations are permitted under the TTBER.
Exclusive grant-back provisions, where the licensee is required to assign or license improvements back to the licensor on an exclusive basis, are likely to breach competition law. Non-exclusive grant-backs are permitted under the TTBER.
IP-related court rulings
Have courts in your jurisdiction held that certain uses (or abuses) of intellectual property rights have been anticompetitive?
The United Kingdom’s competition regulator, the CMA, has held in Paroxetine (Case CE-9531/11), that patent settlement agreements that delay entry of a generic drug in return for value transfers (a ‘pay for delay’ deal) breached the prohibition against anticompetitive agreements and amounted to an abuse of the patentee’s dominant position. GSK appealed the decision to the Competition Appeals Tribunal, which referred a number of questions to the Court of Justice of the European Union (CJEU) in March 2018. Judgment is pending. Similar decisions have been reached by the European Commission and the General Court of the European Union; these are currently binding on UK courts. In Case C-179/16, Hoffmann-La Roche Ltd, Roche, the CJEU warned that entering into a licence agreement that complies with competition law does not justify later anticompetitive conduct connected to that licence.
Certain patent life-cycle management strategies in the pharmaceutical sector have also been held to be anticompetitive. ‘Product hopping’, which encourages a switch from a product for which a patent is about to expire to a newly patented product with no generic alternatives, has been held anticompetitive where the company recommending the switch intends to limit generic competition (see Reckitt Benckiser, Case CA98/02/2011).
In Case C-170/13, Huawei v ZTE, the CJEU has held that in certain circumstances it may be anticompetitive for holders of standard essential patents that have committed to license those patents on fair, reasonable, and non-discriminatory (FRAND) terms to seek injunctions against potential licensees. In Unwired Planet v Huawei ( EWHC 711 (Pat)) the English High Court was willing to set a global FRAND rate and licence terms, and impose an injunction for failure to accept those terms. Conversely, a licensor who failed to grant a licence on terms established by the Court to be FRAND would be refused an injunction. The English Court of Appeal upheld this decision in October 2018 ( EWCA Civ 2344).
Indemnification, disclaimers of liability, damages and limitation of damages
Are indemnification provisions commonly used in your jurisdiction and, if so, are they generally enforceable? Is insurance coverage for the protection of a foreign licensor available in support of an indemnification provision?
Indemnities are generally enforceable and are commonly found in licence agreements as a way of mitigating losses without resorting to other principles of contract and tort, which may be more difficult to prove, such as causation. Insurance coverage is available for those providing indemnities, and will be subject to the terms and conditions of the insurer.
Waivers and limitations
Can the parties contractually agree to waive or limit certain types of damages? Are disclaimers and limitations of liability generally enforceable? What are the exceptions, if any?
Parties will frequently waive or limit their liability, and such limitations will generally be enforceable provided that they are seen as fair and reasonable under the Unfair Contract Terms Act 1977 (UCTA). The test for fairness and reasonableness takes into account all the circumstances that were or that ought reasonably to have been known or in the contemplation of the parties when the contract was made. Schedule 2 of UCTA 1977 provides guidelines as to the application of the test, and lists such factors as bargaining position and trade customs. Liability for death or personal injury as a result of negligence and liability for fraud cannot be limited under any circumstances.
Right to terminate
Does the law impose conditions on, or otherwise limit, the right to terminate or not to renew an international licensing relationship; or require the payment of an indemnity or other form of compensation upon termination or non-renewal? More specifically, have courts in your jurisdiction extended to licensing relationships the application of commercial agency laws that contain such rights or remedies or provide such indemnities?
In England and Wales, the principle of freedom of contract also applies to the right to terminate without conditions or limitation, subject to the terms of the contract itself. Wrongful termination may result in damages for breach of contract. Licensing relationships are not treated any differently in this respect.
Compensation may be owing to a ‘commercial agent’ under the Commercial Agents (Council Directive) Regulations 1993 for termination of their continuing authority to negotiate a sale of purchase of goods on behalf of a principal. Consequently, most international licensing contracts will be structured so as to avoid the licensee coming under the definition of ‘commercial agent’. The English courts will only apply the laws of agency where there is an agreement that establishes an agent-principal relationship (ie, where the agent is empowered to bind the principal, as opposed to a mere licensing relationship (see VLM Holdings Limited v Ravensworth Digital Services Limited )).
Impact of termination
What is the impact of the termination or expiration of a licence agreement on any sub-licence granted by the licensee, in the absence of any contractual provision addressing this issue? Would a contractual provision addressing this issue be enforceable, in either case?
Without an agency relationship, a sub-licence will only be as good as the head-licence. However, as the case of VLM Holdings Limited v Ravensworth Digital Services Limited  has held, if the court finds an agency relationship exists then the sub-licence may not terminate on termination of the head-licence. The law in this area is subject to evolution. To protect the parties’ positions, IP owners should ensure that the effect of termination of a head-licence is clearly stated with respect to any sub-licences.
Impact of licensee bankruptcy
What is the impact of the bankruptcy of the licensee on the legal relationship with its licensor; and any sub-licence that the licensee may have granted? Can the licensor structure its international licence agreement to terminate it prior to the bankruptcy and remove the licensee’s rights?
Upon a licensee becoming insolvent, an administrator will be appointed to take control of the licensee’s assets. The administrator will then decide how those assets should be distributed to ascertain as much value as possible for the licensee’s creditors. This is likely to include valuable assets such as licensed IPR.
It is common for licensors to structure licences to provide for express termination of the licence on administration or liquidation of the licensee. In this way, the licensor can protect valuable IP assets.
Impact of licensor bankruptcy
What is the impact of the bankruptcy of the licensor on the legal relationship with its licensee; and any sub-licence the licensee has granted? Are there any steps a licensee can take to protect its interest if the licensor becomes bankrupt?
Where a licensor becomes insolvent, the Insolvency Act 1986 (IA) does not trigger an automatic termination of the licence. It is unlikely also that a licensee would have (or indeed want) a contractual right to terminate in these circumstances. The IA does provide the option for the licensee to apply for an order to rescind the licence, although in practice this is not likely to be desirable. The licensee can put in place contractual provisions in the licence to protect itself from this situation, including:
- inserting a contractual right to buy the licensed IP on arm’s-length terms upon a triggering event pre the licensor’s insolvency; or
- providing that the licence will become perpetual and royalty-free in the event of the licensor’s insolvency.
Both these options must be carefully considered so as to avoid the transaction being voided as a transaction at an undervalue under UK insolvency laws. It is also advisable for a licensee of registered IP to record its licence at the relevant registries, as this will protect its interest against a third party who may subsequently purchase the IP via a liquidator or other insolvency practitioner without knowledge of the licence (see question 4).
Governing law and dispute resolution
Restrictions on governing law
Are there any restrictions on an international licensing arrangement being governed by the laws of another jurisdiction chosen by the parties?
It is common in international licensing agreements for the parties to choose a governing law of a jurisdiction other than their own. There are no specific restrictions in this regard in relation to the United Kingdom. When drafting the governing law provisions, the parties should take into account conflict of laws principles and mandatory laws.
Contractual agreement to arbitration
Can the parties contractually agree to arbitration of their disputes instead of resorting to the courts of your jurisdiction? If so, must the arbitration proceedings be conducted in your jurisdiction or can they be held in another?
Parties are free to agree to submit their disputes to arbitration. Alternative dispute resolution mechanisms are encouraged by the Civil Procedure Rules (which govern civil litigation in England and Wales). The parties may also agree to have the hearing conducted in a jurisdiction of their choosing. When agreeing to arbitration of IP disputes, the parties should carefully consider the varying forms of dispute that may occur to ensure that such a clause does not fall foul of public policy restrictions on the arbitrability of disputes. In the United Kingdom, the validity of an IPR is arbitrable, although the award will only bind the parties to the arbitration. As the position on this varies from jurisdiction to jurisdiction, the parties should ensure that this is taken into account in their governing law and jurisdiction clauses.
The most popular arbitral body or rules selected in respect of licensing arrangements are typically the London Court of International Arbitration or the World Intellectual Property Organization Arbitration Rules with the most favoured seat being London.
There is no concept of collective arbitration in the United Kingdom and the statute governing arbitration (the Arbitration Act 1996) does not provide for a mechanism by which collective arbitration could proceed. For this reason, clauses excluding collective arbitration are not found in agreements governed by English law.
Would a court judgment or arbitral award from another jurisdiction be enforceable in your jurisdiction? Is your jurisdiction party to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards?
Foreign court judgments are generally enforceable in the United Kingdom, but are subject to different regimes, depending on the jurisdiction from which the foreign judgment originates. Enforcement is most straightforward for judgments from EU member states, Iceland, Norway and Switzerland because, by virtue of its EU membership, the United Kingdom is subject to the provisions of Council Regulation (EU) No. 1215/2012 (the Recast Brussels Regulation) and the Lugano Convention. These provisions will stop applying upon the United Kingdom’s exit from the European Union. In the event that a deal is not reached between the United Kingdom and the European Union that comprehensively addresses mutual enforcement of judgments, it will remain open to the United Kingdom to apply to join the Lugano Convention, which is in broadly the same terms as the Recast Brussels Regulation, or any other international treaty for mutual enforcement.
The United Kingdom is a party to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958. Accordingly, foreign arbitral awards are ordinarily enforceable.
Is injunctive relief available in your jurisdiction? May it be waived contractually? If so, what conditions must be met for a contractual waiver to be enforceable? May the parties waive their entitlement to claim specific categories of damages in an arbitration clause?
Injunctive relief (both interim and final) is available and is a frequent feature in IP and licensing disputes. An injunction is not available as a remedy of right and is only granted at the discretion of the court if it is ‘just and convenient’ to grant such a relief.
Provided that the ordinary conditions for a contract are met, a party may waive its entitlement to claim specific heads of damages such as loss of profits and indirect losses, or the availability of injunctive relief.
Updates & Trends
Updates & Trends
Updates and trends
In two recent cases, the English courts have clarified what constitutes an exclusive patent licence for a licensee’s right to bring patent infringement proceedings in its own name (Illumina, Inc & Ors v Premaitha Health Plc & Ors  EWHC 2930 (Pat) and Oxford Nanopore Technologies & Anor v Pacific Biosciences of California, Inc & Anor  EWHC 3190 (Pat)) (see question 12). An exclusive licence that is subject to the right of a third party to request a non-exclusive licence, as is commonly seen in licences where the patents are owned by academic institutions, remains an exclusive licence until the third party exercises its right. On the other hand, a licence granted to a party and its affiliates cannot constitute an exclusive licence and drafting should instead provide for the licensee to grant sub-licences to its affiliates in order to protect the statutory rights granted to exclusive licensees.
The 2017 first instance decision in Unwired Planet v Huawei (see question 28), which dealt with determining FRAND terms for SEP licences, was affirmed in 2018 by the Court of Appeal ( EWCA Civ 2344). The Court of Appeal’s confirmation that the English courts can set global FRAND rates and licensing terms and grant injunctions for any arising patent infringement should reinforce the reputation of the English courts as a favoured location for SEP litigation for global actors in the field of telecommunications.
In anticipation of the delayed introduction of the unitary patent and UPC (see question 6), parties to a licence agreement are advised to deal expressly with their respective rights and responsibilities during the transitional period as regards ‘opting out’ any classical European patents that are the subject of the licence from the UPC system (and subsequently opting them back in). These precautions remain prudent despite the uncertainties surrounding the United Kingdom’s involvement in the UPC brought about by the Brexit process.
IP licensing continues to be a popular business model in the United Kingdom, in particular in the life sciences sector. Increasingly, the parties are entering into R&D or collaboration arrangements as a precursor to, or alongside or as part of, a licence agreement in order to take what are becoming increasingly complex technologies from early stage through to industrial application. Licences between academic institutions and commercial companies, and between large pharmaceutical organisations and small biotech companies, are becoming very common, and there is also now a notable increase in the number of transactions between pharmaceutical companies and traditional IT and technology companies in the rapidly growing arena of digital health.