Woolworths’ Woolly IP Agreements Don’t Hold Value

Case Digest: Butters and others v BBC Worldwide Ltd and others [2009] EWHC 1954 (Ch), 20 August 2009

A dispute between the Woolworths administrators and the BBC, born of the failure to agree an appropriate basis to value Woolworths' shares in a Joint Venture (JV), landed both parties in the High Court recently. The dispute itself regarded the validity of a provision contained in a Master Licence Agreement (MLA) and highlights potential problems that can arise when a JV shareholder licenses intellectual property rights to a JV.

Factual Background

This case involved a Joint Venture Agreement (JVA) setting up a company called 2 Entertain Limited (2e). 2e had a subsidiary, BBC Video Limited, which was the licensee under the MLA, which in turn was conditional upon the JVA. BBC Video Limited, which the MLA protected, was a subsidiary of the JV vehicle and the licence contributed substantially to its net worth.

The MLA terminated upon the happening of an ‘Insolvency Event’. If an Insolvency Event occurred within the Woolworths Group, BBC Worldwide could serve a notice in accordance with the JVA, requiring the Woolworths’ shareholder in 2e to sell its shares in 2e to BBC Worldwide; they did just this. The result was that the MLA had terminated and the valuation was to be determined on that basis. The effect of this provision was to allow the solvent JV partner to force the other partner to transfer its shares in the JV vehicle for a price that was discounted so as to reflect the loss of the licence.

Insolvency Deprivation Principle

This common law principle is the equivalent of s.107 of the Insolvency Act 1986 and r.4.181 of the Insolvency Rules 1986. Both sections ensure that the assets of an insolvent company are dispersed in line with the shareholders’ and creditor’s share of their interests in the company. It is against public policy to permit a company to contract out of this principle in order to favour one shareholder or creditor above all the others.

The High Court held that clauses in the MLA, which terminated the MLA upon the insolvency of a member of the licensee's group, were void as a matter of public policy because their effect was to deprive the creditors of the insolvent JV partner of the value of the licence upon the occurrence of an ‘Insolvency Event’. In doing so they expressly declined to follow the decision to the contrary in Perpetual Trustee Co Ltd v BNY Corporate Trustee Services and others. [2009] EWHC 1912 (Ch).

The key lesson for IT, IP and commercial lawyers is not that automatic termination of licences upon insolvency offends the principle, but that the termination cannot be linked to any mechanism that enables the licensor to benefit as a creditor/shareholder from the fall in value in the licensee as a result of the termination of the licence.

Watch this space...

Mr Justice Peter Smith has granted permission to the Administrators to appeal and to BBC to cross-appeal in relation to the deprivation principle. Further, judgment was handed down in Perpetual Trustee Co Ltd (see above) on 28 July 2009. This case also involved the deprivation principle and has also been given permission for appeal by the Chancellor. Expect this to be a live issue over the coming months.

The Sale of Databases as Assets in Insolvency

Databases

Many companies will be in possession of a list of clients and this client list will normally be in the form of a computerised database. This database is potentially an asset, which can be sold or licensed for the benefit of the insolvent company.

Because such databases contain personal information the seller usually will run into difficulties under the Data Protection Act 1998 (“DPA 1998”) if the individuals included in the database were not told in the first instance that their information could potentially be passed on to other organisations. However the DPA 1998 will not prevent the sale of such a database, provided that certain requirements are met. Some of these requirements are detailed below.

For what purpose was the information originally collected?

When personal information is collected from individuals (“data subjects”), the DPA 1998 requires it to be made clear to the data subjects what the data will be used for. When a database is sold, the Official Receiver should make sure that the buyer understands that it can only use the information for the purposes for which it was originally collected. Selling it to a business for a different use is likely to be incompatible with the original purpose and therefore go beyond the expectations of the data subjects. Although this means that your number of potential buyers for the information is reduced, it also means you have a unique selling angle as the information is by default ‘tailored’ for your prospective clients’ needs.

The buyer of a database will often seek to use it to send marketing material. Whether it will be able to do so will depend on the basis on which the personal information concerned was originally gathered. The general rule is that unsolicited marketing can be sent to data subjects where they have agreed to this or where this is nevertheless likely to be within their reasonable expectations.

The buyer should also establish whether data subjects would only expect to receive marketing via a particular medium, for example via the postal system. Particular care should be taken when there is an indication the data will be used for telephone or email marketing and the special rules governing electronic marketing should be complied with. Unsolicited marketing emails should only be sent to individuals who have consented and buyers should not assume consent if an individual does not respond.

When they have established that they can use the personal information for marketing, the buyer should only market products and services which are similar to those that the information has been used to market previously. Before selling databases to potential buyers the Official Receiver should point out any restrictions imposed by the DPA on the use of marketing material.

The Official Receiver has a responsibility to ensure that the personal information being sold on is used properly. As a result any potential buyer should be notified they can only use the personal information contained within the database for the purposes it was originally collected. In doing so, the Official Receiver will need to inform any buyer what these purposes were. If the buyer then expresses a wish to use the personal information for a new purpose, the Official Receiver should advise the buyer that it must gain consent from all the individuals concerned before it can use it in any other way.

This is not the only circumstance in which the new owner of the information will have to contact the individuals contained within the database. If the database is sold it is then the responsibility of the buyer to ensure all individuals contained within it are informed of the details of the new owners and should receive confirmations that the information will only be used in the same way as before. This is not as daunting a task as it first seems, as it is highly likely all the contact details needed to meet this task will be within the database itself. Before selling the database, the Official Receiver should ensure that the buyer undertakes to inform all individuals that it now holds the information.

Can information be held on databases indefinitely?

Any personal information held should be adequate, relevant and not excessive, and it should not be kept for longer than necessary. The Official Receiver should inform the potential buyer that it is required to decide how much of the information supplied it needs to keep and any unnecessary personal information should be deleted. It is important that personal information is not held in the hope that it one day might be useful.

What happens if the database cannot be sold?

If no potential buyers can be found for a database or if the Official Receiver so orders, the information held should be deleted and/or destroyed immediately.

Insolvency, Registered and Unregistered Design Rights

There are two types of design rights (“DRs”): registered design rights (“RDRs”), which are principally governed in the UK by the Registered Design Act 1949 (“RDA 1949”) and unregistered design rights (“UDRs”) introduced by the Copyright, Designs and Patents Act 1988 (“CDPA 1988”). There are rules on qualification for protection by both citizenship of the designer and place of design. Qualifying countries in addition to the UK include the European Economic Area and British overseas territories. Since RDRs afford greater protection for designs than UDRs, the value of the right is likely to be affected accordingly, making it essential to establish what kind of DRs the insolvent company may have.

UDRs
UDRs are saleable assets but do not subsist in designs made before the commencement of the CDPA 1988. UDRs are similar to copyright in that they exist automatically when a new design is created. However, unlike copyright, the length of protection is much more limited. The right lasts for 10 years after the date that an item made to the design is first marketed, or up to a limit of 15 years from the creation of the design and is only exclusive for the first five years. A licence of right to make and sell articles copying the design is available during the last five years of the UDR's life (s. 237 CDPA 1988).

UDRs differ from RDRs in that they do not give a total right of design ownership; instead giving a simpler form of protection against copying. This makes the subject of maintaining licences very important for an insolvent company who has an interest in UDRs. Further information regarding copyright and insolvency can be found at my earlier post accessed from this link.

RDRs
Once a design is registered the RDA 1949 makes clear that RDRs shall vest by operation of law in the same way as any other personal property. Therefore RDRs owned by a company subject to a winding up order will belong to the company in liquidation. By registering a design the owner of the right will have exclusive use of a design in the territory in which it is registered. In the UK and EU this period is 25 years and design registrations are renewable every 5 years. Any disposition of RDR’s must be made in writing and signed by all parties to the transaction. The UK IPO has a database of RDRs which can be accessed here.

RDRs may also be subject to a secured loan by way of a mortgage and enquiries should be made to establish whether there are any licensees or mortgagees of the right in order that they can be informed of the making of the Insolvency Order and asked to note the Official Receiver’s interest. Instead of contacting the Land Registry the way you would to check if land was subject to a mortgage, the Official Receiver should contact the UK IPO. Information may also be found in the insolvent company’s accounting records and/or by searching at the UK IPO.

Exceptions to RDRs
There are many exceptions to protection offered by RDRs, which include, but are not limited to: parts of a design necessary to connect to another article (“must fit” designs), to methods and principles of construction or to those parts of a design which are dependent on the appearance of another article, or where that article and the article that the design right applies to is an integral part of the second article (“must match” designs) and to surface decoration. RDRs also don’t apply if a design is not original, and a design is essentially defined as not being original if the object so designed is already commonplace. If a right is not covered by RDRs, it may be still be subject to other forms of IP protection such as copyright and UDRs.

Ownership of DRs
S.215 CDPA 1988 stipulates that the first owner of a UDR is the designer, except in the circumstances that the design is created under a commission or in the course of employment, in which case the commissioner or employer is the first owner. In the case that the owner of a UDR is also the owner of a RDR, it is assumed that any assignment of the UDR also includes an assignment of the RDR, unless a contrary intention is shown.

The Official Receiver should establish ownership of any RDRs from the insolvent’s records and/or by carrying out a search of the information held at the UK IPO (whose database can be found here). Where RDRs vest in the company in liquidation they may be sold with the assignment being signed by the liquidator as assignor. In such a case the UK IPO should be informed of the change in ownership (s.19 RDA 1949).

Does more than one person own the RDRs?
Joint entitlement to ownership of RDRs will usually arise in two situations; either where there are co-designers or if a share of the design is sold. Where a design is registered to two or more persons they are entitled, unless there is agreement to the contrary, to equal undivided shares. The interest of each would survive his death as part of his estate. Importantly, joint owners may not sell their interest to a third party without the consent of the co-owners. Therefore if the Official Receiver is able to establish any RDRs, they should also be aware of other interested parties and ensure that they do not breach their rights by attempting to sell or license the design.

Royalties
In addition to the sale of the rights themselves, royalties may be paid by a third party to the owner of RDRs in exchange for exploiting that right. The royalties may be payable under the terms of a licence, with the owner retaining the RDRs. Where a winding up order is made against the owner of a registered design, the Official Receiver should contact the third party paying the royalties and ask it to pay any royalties due to the liquidator.

If the company in liquidation holds any licences, those licences are also saleable property and any assignment of such a licence should be in writing and signed by the parties. In such an instance the UK IPO should be informed of the transfer.

It may be the case that a liquidated company is in receipt of royalties as a condition of the sale of RDRs. In this case the royalties cannot be claimed as an asset as the right does not vest in the company in liquidation. Instead, the royalties should be treated as income and can be claimed under an income payments agreement or an income payments order.

How to Protect RDRs
If an insolvent company owns RDRs, the UK IPO should be informed of the winding up order and asked to note the Official Receiver’s interest in the design. The UK IPO should also be asked to provide details of the remaining “life” of the registration as this could materially affect the value and details of any renewal fees outstanding.

Enquiries should always be made to establish whether there are any licensees or mortgages of the right in order that they can be informed of the making of the insolvency order and asked to note the Official Receiver’s interest.

European Community RDRs
The rules governing the procedures, processes and requirements for European Community (EC) design registration are largely the same as those relating to the UK registration process. The guidance above can be followed in respect of an insolvent that owns any EC design registration, with the exception that the relevant authority will not be the UK IPO. It will instead be the Office for the Harmonisation of the Internal Market (OHIM), which maintains a searchable online register which can be accessed here.

Valuation of DRs
The valuation of intellectual property is a complicated and sometimes controversial area and the value will very much depend on the circumstances. It is unlikely that the Official Receiver will have experience in this field and should exercise discretion as to whether to employ specialist advice such as forensic accountants. A specialist in designs may be contacted through The Chartered Institute of Patent Attorneys.