29th October 2020How to manage intellectual property ahead of Brexit

So far, the protection of EU intellectual property rights has continued to apply as normal in the UK, but this will not be the case after the expiry of the transition period. The UK is the second largest EEA country by GDP (around 15% of the EEA’s total GDP) and from the 1^st January 2021, there will be a direct impact on many long-term multi-year agreements.

We have summarised the background and important areas to be mindful of ahead of the UK’s exit from the EU at the end of 2020.

How are intellectual property agreements defined?

Many international agreements, particularly licensing agreements concerning intellectual property, are defined by a territorial area. This may be a list of countries or a geographical region, such as the EU or the EEA (European Economic Area).

When any country in the EU/EEA is listed as authorised under a licence agreement, by extension, unsolicited sales to the remainder of the EEA countries are permitted, due to the principle of free trade. This means, if your territory includes any EEA country, the licensee is legally allowed to sell to all EEA countries.

• The detail is slightly more complex, as there is also consideration of what counts as ‘active solicitation’. In practice, this means that a licensee permitted only to sell to Germany, for example, may not under their agreement actively promote outside of Germany. Yet the Licensor can place no restriction on the Licensee accepting unsolicited orders from a non-German customer within the EEA.
• A Licensor can also set minimum sales or royalty targets for individual countries (or groups of countries).

Licensors have tried to use soft measures to encourage licensees to operate within their intended territory– such as discouraging the licensees from accepting the orders, placing language restrictions on the products, or even requiring licensor notification of such unsolicited orders. The European Commission heavily cracked down on these processes, and notably fined Nike, Sanrio and Universal Studios a total of over €30M.

The impact of Brexit

Losing a major territory, like the UK, from the EU has an impact on the whole region.   means businesses in the UK and businesses working with UK entities will be impacted. For businesses who hold licenses for an individual country (or group of countries) within the EU will no longer be able to accept orders from the UK, and those UK companies with licenses only for the UK will lose access to the major EU markets.

Interestingly, the vast majority of UK licenses are for the UK and Ireland. Given that Ireland remains a member of the EU, it’s possible that UK and Irish licensees will get an advantage over their European counterparts, by retaining access to both the UK and EU market. However, it remains to be seen whether licensors will continue to carve up the geographical regions to combine the UK and Ireland, as these markets have historically been combined.

A factor will be whether an agreement made several years ago, permitting sales for within ‘the EU’ will continue to allow sales to the UK. This is a legal point concerning the specific wording of the agreement, but it will still be worthwhile for licensors and licensees to clarify their arrangements by way of an amendment to ensure that there are no disagreements in the future. There is unlikely to be  one-size fits all answer, so it is important to get advice once an agreement is made.

Otherwise the legal determination may well be centred around how the , and whether a legal argument could be constructed that the licence was determined based on what constituted the EU at the date of agreement, as opposed to what it has become. If, on the other hand, the UK is listed as a member of the EU within the agreement, then it seems likely that the continued sale within the UK would be permitted, as the intention to include the UK is clear. Our guidance would be to ensure you have reviewed the agreement in place to see if any ambiguity exists in the territories listed – if so, it will be vital to clarify matters between licsensee and licensor to ensure that going forward the agreement reflects the intent of the parities.

Withholding tax implications

A final licensing point will be whether withholding tax implications will apply post-leaving the EU. If the EU Parent Subsidiary directive no longer applies, companies will need to look to the bilateral Double Tax Treaties.  Although most countries share Double Tax Treaties with the UK to ensure that WHT can be reduced (sometimes to 0%) and/or be recovered by way of a tax credit, it still remains an administrative burden when applied – for both the Licensee and the Licensor. 

What can my business do to ? Our checklist:

• Review existing agreements – anything that refers to the EU as a territory, or is registered to EU rights needs to be checked to ensure that UK rights will be covered from 1st January 2021
• Identify and record details of UK comparable trade marks – make sure you have a clear list of the trademarks that have been automatically created to replicate existing EU rights. It will also be important to ensure the renewal deadlines of new UK comparable rights are not missed.
• Consider the impact on your administrative support functions – there is still time to prepare, but failure to prepare could leave a significant administrative burden on support teams. Whether you are paying or receiving royalties, consider that there may be new withholding tax implications from 1 January 2021.
• Review any ongoing EU disputes that have a UK connection – it is important to have a plan in place, especially for disputes which are expected to continue beyond 1^st January 2021

Finally, it is vital that businesses are clear on the impact of these changes – if you’d like to discuss specific cases, please get in touch and we would be happy to help explain.