Enforceability of IP Agreements and Enforcement Strategies MIP Asia-Pacific Forum 2011 Kherk Ying Chew, Kuala Lumpur Celeste Ang, Singapore Adolf Panggabean, Jakarta 29 September 2011 / Hong Kong Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a partner means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an office means an office of any such law firm. Introduction IP Licence Agreements and Enforcement of IP Rights 1
Case Study The Parties: Licensor Sofia Organics, Inc. UK company, which manufactures & sells organic luxury cosmeceuticals (cosmetic products with biologically active ingredients that have medical or drug-like benefits) Mark: SOFIA ORGANICS Third party distributors handle the distribution and sale of products in Europe 2
The Parties: Licensee Hanami Corporation Malaysian company, which manufactures & sells cosmetics in the Asia-Pacific Mark: HANAMI Has a successful line of products developed for hypersensitive Asian skin Sells HANAMI products across the Asia- Pacific including, among others, Indonesia, Malaysia and Singapore The Transaction Sofia Organics wants to enter the Asia-Pacific market Hanami is interested in expanding its cosmetics business in Southeast Asia Manufacturing and Distribution Licence Agreement in relation to SOFIA ORGANICS mark & products, to cover Singapore, Malaysia & Indonesia 3
The Transaction: some concerns What are the key considerations for Sofia Organics when it enters into a Manufacturing and Distribution Licence Agreement in Singapore, Indonesia and Malaysia? What if there are improvements to the licensed IP in the course of the licence? How can Sofia Organics protect its confidential information/trade secrets (esp. in production of goods)? Are there any formalities to note? The Transaction: some concerns Are there any special tax considerations in IP licensing agreements? What are the consequences in the event of one parties breach of obligations? In the event of a dispute, how should it be resolved? How quickly can it be resolved? What are the consequences in the event of breach of obligations? 4
Enforcement Problem Counterfeit SOFIA ORGANICS products found being sold in Indonesia, Malaysia and Singapore. Hanami informs Sofia Organics about its counterfeiting problem. *What can Sofia Organics do to stop the sale of counterfeits in these markets? The Client Citta Prasidha Regional Counsel, South East Asia Sofia Organics, Inc. 5
External counsel Chew Kherk Ying Baker & McKenzie Malaysia Adolf Panggabean Baker & McKenzie Indonesia Celeste Ang Baker & McKenzie Singapore Key Enforceability Issues 6
Client s key concerns 1. Impact of competition laws 2. Impact of data protection laws 3. Improvements to licensed IP 4. Protection of confidential information 5. Tax implications 6. Arbitration as a dispute resolution mechanism 1. Competition laws Do competition laws restrict noncompete provisions? Do competition laws restrict grant back to licensor of rights to improvements? Do competition laws restrict licensee s right to engage in independent R&D? Whilst the Competition Act 2010 ( CA ) will come into force on 1 January 2012, the CA does not itself provide specifically for restrictions in IP licensing agreements guidelines by the Malaysian Competition Commission ( MCC ) will need to be issued, as with other jurisdictions such as the UK and Singapore. Generally, the Singapore Competition The Indonesian Competition Law Act ( SCA ) seeks to prohibit anticompetitive activities that unduly prevent, restricts non-compete provisions, (the ICL ) does not specifically restrict or distort competition. It also but it provides that a business prohibits conduct which would amount to actor is prohibited from an abuse of a dominant position in the preventing other business actors market. to do business in the same field. The Guidelines issued by the However, since the ICL excludes Competition Commission of Singapore all IP related agreements ( CCS ) on Treatment of IPR (the (including license and franchise Guidelines ) seek to explain how the agreements), non-compete CCS expects the SCA to operate in provisions will be subject to relation to agreements and conduct contractual agreements between which concern IP rights. parties. The Guidelines provide that grantbacks will generally be considered procompetitive, but may have an adverse impact on competition where they substantially reduce incentives for the licensee to engage in R&D and thereby reduce innovation. Licensing agreements which restrict the ability or incentive of any of the parties to carry out independent R&D may have anti-competitive effects. Since the ICL excludes all IP related agreements, this may be subject to contractual agreement between parties. Since the ICL excludes all IP related agreements, this may be subject to agreement between parties. 7
1. Competition laws (cont d) Do competition laws restrict non-compete provisions? Whilst the Competition Act 2010 Consequence The MCC can impose a The CCS can impose financial ( CA ) will come into force on 1 January 2012, the CA does not itself provide specifically for restrictions in IP licensing agreements guidelines by the Malaysian Competition Commission of noncompliance ( MCC ) will need to be financial issued, as with other penalty jurisdictions of such up as to the UK and penalties Singapore. based on a percentage Generally, the Singapore Competition Act ( SCA ) seeks to prohibit anticompetitive activities that 10% unduly of prevent, the restrict worldwide distort competition. It also of prohibits the conduct turnover of an enterprise for which would amount to an abuse of a dominant position in the market. The Indonesian Competition turnover Law (the ICL ) of does an not specifically enterprise restricts non-compete each provisions, year of infringement, up to a but it provides that a business actor is prohibited from preventing other business actors to do business in the same field. However, since the ICL excludes all IP related agreements (including license and franchise agreements), during non-compete period of provisions will be subject to maximum contractual of 3 years. There are agreements between parties. Do competition laws restrict infringement. grant back to licensor There of are rights to improvements? also rights of private action under also rights of private action the SCA. The Guidelines issued by the Competition Commission of Singapore ( CCS ) provide that grantbacks will under generally be the considered CA. pro-competitive, but may have an adverse impact on competition where they substantially reduce incentives for the licensee to engage in R&D and thereby reduce innovation. Licensing agreements which restrict the ability or incentive of any of the parties to carry out independent R&D may have anti-competitive effects. Since the ICL excludes all IP related agreements, this may be subject to contractual agreement between parties. Do competition laws restrict licensee s right to engage in independent R&D? Since the ICL excludes all IP related agreements, this may be subject to agreement between parties. Consequence of non-compliance The MCC can impose a financial penalty of up to 10% of the worldwide turnover of an enterprise during period of infringement. There are also rights of private action under the CA. The Competition Commission of Singapore ( CCS ) can impose financial penalties based on a percentage of the turnover of an enterprise for each year of infringement, up to a maximum of 3 years. There are also rights of private action under the SCA. N/A, as the ICL excludes IP related agreements from the scope of the Law. However in general the ICL provides administrative sanction (order to cease the activities, cancellation of merger or acquisition of shares of the company proven to conduct such activities), criminal sanctions (fine and imprisonment). N/A, as the ICL excludes IP related agreements from the scope of the Law. However in general the ICL provides administrative sanction (order to cease the activities, cancellation of merger or acquisition of shares of the company proven to conduct such activities), criminal sanctions (fine and imprisonment). 2. Data protection laws Are there personal data protection laws in force? Key considerations in IP licensing agreements Yes, the Malaysian Personal Data Protection Act 2010 ( PDPA ) date of coming into force has yet to be announced but is expected in early 2012. If licensee will be processing personal data on behalf of licensor, licensee to undertake to comply with the PDPA and indemnify licensor for non-compliance. PDPA requires that licensor as data user ensures that licensee as data processor (i) provides sufficient guarantees in respect of the technical and organizational security measures governing the processing to be carried out; and (ii) takes reasonable steps to ensure compliance with those measures. Singapore is presently looking into a data protection regime. The Ministry of Information, Communication and the Arts has recently released a public consultation document on the proposed regime. At the moment, there are several sectoral-specific laws regulating the protection of personal data. Pending the implementation of the new data protection regime, parties should contractually agree to parties respective obligations on the use of private data and/or confidential information that may be transferred and/or imparted in the course of the licensing arrangement. Indonesia does not have any specific personal data protection law. The most prudent course is to secure consents from the parties concerned on the use of their respective personal data. We suggest inserting a general clause on provision of warranty that the parties will use personal data in accordance with the prevailing laws and regulations in Indonesia. 8
3. Improvements to licensed IP Does the law imply who would own rights to improvements of the licensed IP? Can parties contract out of this? Generally, IP vests in author/inventor except where created by employee in the course of employment or commissioned party is deemed to transfer to employer or party who commissioned the IP licensing unlikely to fall under employment or commissioning. Hence, the law would imply that licensee as the author/inventor owns the IP but parties can contractually agree to licensee assigning all IP in improvements to licensor (subject to any restrictions under the Competition Act 2010). The position in Singapore is similar to that in Malaysia. Generally, IP vests in author/inventor except where created by employee in the course of employment or commissioned party is deemed to transfer to employer or party who commissioned the IP. The law would likely imply that the licensee, as the author/inventor, owns the IP. However, parties can contractually agree to licensee assigning all IP in improvements to licensor, provided such arrangement does not have the effect of restricting competition in the relevant market. The IP related laws do not specifically stipulate this. Improvements to the licensed IP may fall under new invention or creation and thus licensee is the author/inventor of the improvements of the licensed IP. As the laws do not specifically cover this matter, parties should provide a clause stating that the licensee will assign all the improvements of the licensed IP to the licensor. 3. Improvements to licensed IP (cont d) Special considerations where parties contractually agree for licensee to assign all IP in improvements to licensor Except for future copyright, IP can only be assigned upon creation. Obligation of licensee to assign all IP in improvements to licensor is more akin to an undertaking to assign as and when such IP is created. The IP licensing agreement is not in and of itself the document effectively assigning the IP licensee will need to execute separate assignment agreements for all IP (except copyright) in the improvements. If licensee refuses, licensor's recourse would be to enforce the agreement and demand for specific performance. The special considerations in relation to IP licence agreements, from the perspective of Malaysia law, similarly apply for Singapore. Parties may include a clause in the agreement that the improvements to the licensed IP must be subject to the licensor s approval considering that the licensee will develop the licensed IP from the licensor s IP assets. 9
4. Confidential information Are contractual confidentiality obligations enforceable? Any limitations or special considerations? Yes, contractual confidentiality obligations are enforceable. Generally, no limitations or special considerations. Yes, contractual confidentiality obligations are enforceable. Generally, no limitations or special considerations. Yes, contractual confidentiality obligations are enforceable. No general limitations or special considerations. How can contractual confidentiality obligations be enforced? Civil claim for breach of confidence. Civil claim for breach of confidence. Civil claim for breach of contract or non-performance. 5. Tax Special tax considerations in IP licensing agreements? Withholding tax payable on royalties. Withholding tax payable on royalties. Not specifically regulated yet, but may subject to income tax Stamp duty payable for IP licensing agreements? What are the consequences for failing to stamp the agreement? Yes. Under Item 22, First Schedule of the Stamp Act, stamp duty is imposed at the rate of 1% on the periodical payment for an agreement for an indefinite period and 0.5% on the total sum payable for an agreement which is for a definite term. The failure to stamp a document does not generally invalidate a document or transaction. However, the document cannot be adduced as evidence in a Malaysian court and there is technically a breach of the Stamp Act. There is also potential liability for directors. With effect from 28 February 1998, stamp duty has been abolished in Singapore on all instruments except for those that relate to stocks and shares and immovable property. There is no legal requirement to affix a stamp duty to an agreement. The Indonesian Civil Code provides that a contract is valid if it has fulfilled four basic statutory requirements (consent, capacity, certainty and permissible cause), but the Indonesian Stamp Duty Law provides that all agreements or letters prepared for evidence of actions, facts or situation of a civil nature must be affixed with a stamp duty. 10
6. Arbitration (cont d) Governing law Do local courts respect agreement to arbitrate? No specific legislation in Malaysia overriding parties choice of law so long as the choice is bona fide and not made for the purpose of avoiding some mandatory provision of Malaysian law. Yes, unless the courts find that the agreement is null and void, inoperative or incapable of being performed. No specific legislation in Malaysia overriding parties choice of law so long as the choice is bona fide and not made for the purpose of avoiding some mandatory provision of Singapore law. Not specifically stipulated, the parties can choose the governing law based on a contractual agreement. Yes, unless the courts Yes, the Indonesian find that the agreement is null Arbitration Law provides that and void, inoperative or the local courts is not incapable of being performed, authorised to try a dispute or that it would be contrary to between parties who are public policy to have the bound by an arbitration dispute determined by agreement, but we still see arbitration. cases in Indonesia where a court accept jurisdiction despite an arbitration clause. 6. Arbitration Enforceability of arbitral awards Yes, if it is an award made in respect of an arbitration where the seat of arbitration is in Malaysia or an award from a foreign State i.e. a State which is a party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards adopted by the United Nations Conference on International Commercial Arbitration in 1958. Yes, if it is an award made in respect of an arbitration where the seat of arbitration is in Singapore or an award from a foreign State i.e. a State which is a party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards adopted by the United Nations Conference on International Commercial Arbitration in 1958. Yes, the award will be enforceable not only in Indonesia but also in many other countries (so long that the country is also a party to the New York Convention). 11
Formalities Recordal of IP Licences Recordal from the perspective of IP enforcement Is recordal required in order for a licence to be valid, effective or enforceable against third parties? If not required, is recordal advisable or recommended, or merely optional? 12
Recordal of IP Licences Country Malaysia Is recordal advisable, recommended or merely optional? Not compulsory to record a licence in Malaysia. However, there are advantages in doing so e.g. the use of a registered trade mark by a registered user (licensee) shall be deemed to be use by the registered proprietor. Indonesia Singapore Mandatory, but no implementing regulation yet. In practice, it is possible to send a notification to the relevant IP Office informing the license arrangement. Deemed notice: Advisable for licensees to record their interest to ensure that third parties are aware of the existence of the licence. Recordal serves as prima facie evidence of the licence, and confers priority on claims. IP Enforcement Strategy 13
Stopping the sale of counterfeit goods Civil and criminal actions and remedies Remedies available to the licensee Standing to sue, personality Customs / border protection measures Is Customs recordation available? Will Customs act ex officio to stop counterfeits at the border? In this case: What can the licensor do to stop the sale of counterfeits? Enforcement Actions and Remedies - Overview Country Can licensee bring enforcement action? Civil & criminal actions/ remedies available Customs & border protection measures Malaysia Generally yes, subject to conditions imposed by the relevant statutes. CIVIL: infringement of trade mark, copyright, patent, industrial design. CRIMINAL: false trade description (counterfeit trade mark) and copyright offences. To invoke border enforcement measures, trade mark owner should file an appropriate application with the Registrar of Trade Marks. Indonesia In general, the licensee can initiate a civil action against an infringement. However, this can be waived depending on the contractual agreement between parties. Civil action (infringement) and Criminal action (counterfeit) IP rights owners can avail of Customs protection by: (i) filing a request with the Commercial Court, and (ii) reporting directly to Customs. Singapore Patent and Copyright: Exclusive licensee shall have the same right as the proprietor of the IP to bring proceedings in respect of infringement committed after the date of the licence. Trade Marks: An exclusive licence may provide that the licensee shall have the same rights and remedies in respect of matters occurring after the grant of the licence. CIVIL: infringement of trade mark, copyright, patent, industrial design. CRIMINAL: Offences under Trade Mark Act, Copyright Act, Registered Designs Act and Consumer Protection (Trade Descriptions and Safety Requirements Act) No customs recordal system but IP right owner may file a notice of suspected shipment with the Director-General of Customs. 14
Contact us Chew Kherk Ying Managing Partner Kuala Lumpur KherkYing.Chew@bakermckenzie.com +60 3 2298 7933 Celeste Ang Associate Principal Singapore Celeste.Ang@bakermckenzie.com +65 6434 2703 Adolf Panggabean Partner Jakarta Adolf.Panggabean@bakernet.com (62-21) 515 4887 Enforceability of IP Agreements and Enforcement Strategies MIP Asia-Pacific Forum 2011 Kherk Ying Chew, Kuala Lumpur Celeste Ang, Singapore Adolf Panggabean, Jakarta 29 September 2011 / Hong Kong Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a partner means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an office means an office of any such law firm. 15