Is Comparative Advertising Going to Become Easier in Europe?

Excerpt from EuroWatch
published by WorldTrade Executive, Inc.

By Sahira Khwaja (Lovells LLP)

In answer to a reference to the European Court of Justice (ECJ) from the English Court of Appeal, Advocate General Mengozzi has issued an opinion which may make it more difficult for brand owners to stop comparative advertising by competitors.

The questions arose in a dispute in the mobile phone market between O2 and Hutchison 3G. In 2004 Hutchison ran a TV advertising campaign comparing its new pay-as-you-go service with that of O2 and other operators, implying it was cheaper.

If the ECJ agrees with the Advocate General’s reasoning that use of a competitor’s trademark in a comparative advertisement should be controlled under the Advertising Directive and not the TradeMark Directive, this will affect brand owners’ ability to enforce their rights, in some countries at least. A brand owner will not be able to sue for trademark infringement but will have to take whatever action it can under the national law implementing the Advertising Directive.

In the UK, for example, this would have a major impact as enforcement of those implementing regulations is by public bodies (the Office of Fair Trading and local authority Trading Standard Services). These have limited resources and objections of this type would be low priority (unless there was likely to be serious damage to consumers). There is no private right of action under the regulations, and complaints must be made to the public bodies. These usually only act if the complainant has first followed the complaints procedure run by the Advertising Standards Authority (the voluntary industry body), which may take two or three months.

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Mexico Enacts Important Commercial Litigation Reform

Excerpt from Latin American Law & Business Report
published by WorldTrade Executive, Inc.

By Oliver J. Armas, Luis Enrique Graham and Salvador Fonseca
(Chadbourne & Parke LLP)

A new system of "preventive" appeals, contained in the recently enacted reforms to the Mexican Code of Commerce, is designed to substantially reduce the complexities that currently tend to complicate commercial proceedings in Mexico.

The current system of appeals in commercial proceedings in Mexico is rather complicated. There are, for instance, intermediate and final appeals; the type of appeal depends on whether the challenge is directed against a resolution issued by the judge during the proceedings (intermediate appeal) or against the final resolution on the merits of the case (final appeal).

Currently, when filing an intermediate appeal, parties have to put forward all of their arguments and allegations before the court of appeals, even though there is the possibility that the issues discussed in the intermediate appeal will become moot once a resolution on the merits is rendered by the court of first instance. The reforms intend to remedy that.

The reforms, which will become effective July 16, 2008, primarily concern the appeals process. A new system of “preventive” appeals aims at substantially reducing the complexities that currently tend to complicate commercial proceedings in Mexico. The reforms also include new rules regarding documentary evidence and testimony from fact and expert witnesses; grant more time (15 instead of 9 business days) to file an answer, and harmonize default rules.

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Foreign Investment in the U.S.: Proposed Regulations

Excerpt from North American Free Trade & Investment Report
published by WorldTrade Executive, Inc.

By David J. Laing and Mark D. Menefee (Baker & McKenzie)

On April 21, 2008, the U.S. Department of Treasury issued proposed regulations which would implement the Foreign Investment and National Security Act of 2007 (“FINSA”). FINSA was enacted in July 2007 in response to what some members of Congress perceived as a failure of CFIUS to investigate thoroughly some investments into the United States. These are proposed regulations to implement FINSA, and these proposed regulations are subject to public comment before final implementation.

The focal point for the government’s review of foreign acquisitions will continue to be the inter-agency Committee on Foreign Investment in the U.S. (“CFIUS”), which is chaired by the Department of Treasury and which has been expanded to include additional agencies. CFIUS is authorized to investigate any foreign investments resulting in “control” of a U.S. entity by a foreign entity.

The proposed regulations would not fundamentally change the general U.S. policy of openness to foreign investments. The proposed regulations clarify what transactions would be subject to review and investigation by CFIUS, and set forth new procedures for notifying CFIUS of proposed transactions. However, FINSA and the proposed regulations confirm that future investments in U.S. entities by foreign entities will receive significantly increased scrutiny by CFIUS.

The regulations also would create important new requirements for the parties who submit voluntary notifications to the government concerning proposed transactions, or who enter into “mitigation agreements” with the U.S. government to reduce specific risks to the national security identified by CFIUS.

Given these proposed regulations, as well as CFIUS’s recent shift toward undertaking much more detailed reviews of transactions, we believe the key to a successful foreign investment in or acquisition of a U.S. company will be to use enhanced due diligence measures to (1) determine promptly if the transaction is covered by the regulations and if it involves critical technologies or infrastructure; (2) voluntarily notify and consult with CFIUS to identify any possible concerns by the government; and (3) if CFIUS expresses particular concerns, be prepared to modify the transaction and/or implement specific compliance procedures.

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China: The M&A Due Diligence Process

Excerpt from Practical China Tax & Finance Strategies
published by WorldTrade Executive

By Lefan Gong (Zhong Lun Law Firm, Shanghai)

China has been going through an extraordinary period of mergers and acquisition activities. However, making successful investments and striking good deals in this turbulent market requires more than a gold-rush mentality. Investors doing M&A transactions in China are often faced with a number of unique risk and pitfalls, such as restrictions and limitations on deal structures, unfamiliar customs and practices, difficulty in discovering hidden liabilities and other problems, a “sellers’ market” created by a significant influx of investment capital, and a legal and regulatory system that is still in a state of flux.

An initial matter that a foreign investor needs to assess in setting its expectation is how the Chinese regulatory restrictions and the personal views of the applicable approval authorities may affect the structure and process of the deal. One of the first things that a buyer may want to look into is whether the target company, after being acquired by a foreign investor, can continue to conduct its business and operations in the same manner without becoming subject to additional regulatory restrictions.

There are still a number of business sectors in China that are not fully open for foreign investors, and in which such investors cannot establish wholly foreign-owned enterprises (“WFOEs”) or even joint ventures. A foreign investor should determine as early as possible whether there are percentage limitations on its potential ownership in an enterprise in a given industrial sector, as this will directly affect the deal structure. For example, if the target company is a conglomerate, some assets may need to be carved out to make sure the post-closing target company will steer clear of the sectors that are “prohibited” or “restricted” for foreign investment.

“Trust, But Verify” – the Assets You Acquire
In China, the verification of the ownership of assets can present substantial challenges. Publicly available information and government records, if they exist, may be inadequate or unreliable. For private companies, the internal documentation is usually not well kept and organized, and it may be insufficient to show what assets belong to whom. For the state-owned enterprises, the situation may not be significantly better, and requests for information often meet with reluctance and the “state-owned” attitude of secrecy.

It is important to realize that a target company’s assets may have been used in related-party transactions. For example, one company’s assets might have been pledged for another’s bank borrowings, and the same assets might have been used multiple times for making (registered) capital contributions in different companies. The buyer also needs to be extremely careful if substantial assets of a target company were bought from a bankruptcy auction of a state-owned enterprise. If the process was not properly supervised by the court and the case was not effectively closed, the sale could risk being overturned for reason of a flawed auction process.

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Europe Breach Notification Law Coming?

By Thomas Smedinghoff (Wildman, Harrold LLP)
Excerpt from Global Intellectual Property
Asset Management Report
published by WorldTrade Executive, Inc.

The European Union, along with
several other countries, appears to be moving toward
a security breach notification requirement.

The European Commission recently published a
proposal to amend the Privacy and Electronic
Communications Directive to require providers
of “publicly available electronic communications
services” that suffer a data breach to notify subscribers
whose personal information has been
compromised.

Proposals for breach notification
laws have also recently been made in Canada,
the UK, Australia, and New Zealand. See Proposed
Directive at http://ec.europa.eu/
information_society/policy/ecomm/doc/library/
proposals/dir_citizens_rights_en.pdf.

More Information on International Information & IP Law

Intellectual Property Holding Companies: Tax Panacea or IP Mistake

Excerpt from International Finance & Treasury
published by WorldTrade Executive

by Paul Dau, Paul Devinsky and Justin Hill
(McDermott Will & Emery LLP)

The potential tax advantages of IP holding company structures are significant and well known. The objective, from a tax planning perspective, is to transfer the enterprise’s proprietary intangibles to an owner in a tax-advantaged jurisdiction, and to minimize exposure to tax in other jurisdiction by carefully controlling how the new owner exploits the intangibles.

However, in the international context, failure to assess properly competing economic and legal considerations can lead to failure to meet objectives and runaway costs. In many cases, the holding company is a subsidiary within an international corporate group. Sometimes, although less often, the holding company is the parent company of the overall corporate group. Adoption of a suitable structure depends to a large extent on the headquarter jurisdiction, the mechanism by which the various synergies are anticipated to operate, and on the circumstances of the particular scenario.

Issues to consider in detail include which group companies have standing to enforce the intellectual property and how damages are calculated in that event. For example, solutions which perhaps work best from the tax or insolvency point of view can compromise standing to sue and entitlement to claim certain categories of damages. Think about it; if your holding company does not make any sales, why should it have any claim to lost profits damages?

Other issues to consider include what happens in the future to the intellectual property of the operating companies. For example, most businesses want to continually develop their intellectual property portfolios. Selecting an IP holding jurisdiction purely on the basis of tax or corporate considerations can leave the holding company in a position where it does not have access to the international intellectual property treaties required to develop efficiently and manage an intellectual property portfolio. Depending on the scale of the portfolio, this can have huge cost and time ramifications.

Depending upon where the intellectual property is generated there may also be issues with technology exportation to get it into the holding company. For example, while South Africa generally does not require inventors to obtain a license when first filing an invention overseas, it does have relatively onerous exchange control legislation. This means export of capital by South African residents (including intellectual capital) is traditionally prevented in the absence of South African Reserve Bank Approval. Failure to properly observe such legislation, and to account for it in the documentation can lead to the relevant technology transfer transactions being considered void.

If a business wants the freedom to undertake structured financing or securitization processes, other considerations arise. What happens when a business unit is to be divested (this may be required as part of the investors exit strategy)? Does the structure afford the necessary freedoms and will the transfer give rise to stamp duty type considerations which still apply in a number of European jurisdictions?

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Japan: Pitfalls of Failing to "Reasonably" Compensate Employee Inventors

Excerpt from Global Intellectual Property Asset Management Report (published by WorldTrade Executive) by Calvin Griffith, Michiru Takahashi, and Nobutaka Komiyama (Jones Day)

Foreign corporations with R&D facilities in Japan need to be thoroughly familiar with Article 35 of the Japan Patent Law and with the internal procedures and rules that should be followed to minimize the risks of a lawsuit from a disgruntled employee inventor.

The United States is generally considered a more litigious country than Japan, where customs traditionally favor a less confrontational approach to dispute resolution. But there is one exception—employee invention lawsuits. A recent series of lawsuits filed by aggrieved employee inventors against their employer companies, demanding “reasonable remuneration” for the employees’ inventions, has brought attention to this unique area of Japanese patent law—and raised concern in the business community. Japanese companies were shocked to find themselves facing the possibility of paying seven-figure sums in compensation for employee inventions, having expected that the compensation provided in the ordinary employment contract or internal employment regulations would be accepted by courts as reasonable. This stunning development in Japanese courts is based on Japan’s unique employee invention system under Article 35 of the Japan Patent Law, and foreign companies doing business in Japan, especially those with R&D facilities there, should be familiar with the provisions of Article 35 and the case law applying it.

Origin of the Fuss—
Article 35 and the Olympus Case

Japan has a unique employee invention system under Article 35 of the Patent Law. That article provides a number of important rights for employee inventors.

First, if an employee makes an invention that, by the nature of the invention, falls within the scope of the business of his employer and was achieved by acts within the employee’s duties for the employer (an “employee invention”), the right to obtain a patent on the invention originally belongs to the employee (Article 35, Paragraph 1). This is different from the practice in countries such as the United Kingdom and France, where the right to obtain patents for employee inventions originally belongs to the employer.

An employer, however, may enter into a contract with an employee or establish internal employment regulations providing in advance that the right to obtain a patent for any employee invention shall be assigned to the employer, or that an exclusive license for any employee invention shall be granted to the employer (established construction deriving from Article 35, Paragraph 2).

If an employer acquires the right to obtain patents for employee inventions from an employee, the employer must pay a reasonable remuneration to the employee (Article 35, Paragraph 3).
Prior to the Olympus case, Japanese companies believed that if they unilaterally established internal employee invention rules that set an amount of remuneration in exchange for the assignment of inventions from employees, such amount would be duly respected by Japanese courts as valid and binding. The amount of remuneration provided in those employment regulations was usually not high, frequently around just a few hundred dollars. The Olympus case changed the landscape.

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