Worldwide: Google Adwords, Perpetual Licences and Customs Seizure in Intellectual Property, Reform of Controlled Foreign Company Rules and Impact on IP Rights, Substantial Reproduction of IP - Kookaburra case
Communications, Media and Technology Updater

European Court of Justice delivers Google Adwords decision

On 23 March 2010, the European Court of Justice (ECJ) delivered its judgment in the three Google adwords cases (between Google and Louis Vuitton Malletier SA; Viaticum SA and Luteciel SARL; and Centre national de recherche en relations humaines (CNRRH) SARL and Tiger SARL).

The ECJ has not followed the Advocate General's opinion in a number of key respects.

It finds the advertiser potentially liable for trade mark infringement by use of the adwords, but not Google for the act of selling/hosting the adwords system, unless it has knowledge of infringing use to be made by the advertiser. Google can be made liable if it is alerted to an infringement and does not take steps to address the infringement, i.e. the ECJ has removed the 'hosting' defence from Google where it knows of the infringement.

Our intellectual property team will be producing a full briefing on the implications of the ECJ ruling.

When a perpetual licence is not forever

The recent English case of BMS Business Solutions Limited v AB Agri Limited¹ serves as a reminder that simply stating that a licence is "perpetual" does not necessarily mean that it cannot be terminated.

The particular facts in the case were that a software licence was originally granted on terms such that the licence terminated upon termination of a related support agreement. The parties varied the terms of the licence to make the licence perpetual, but failed to make the corresponding amendment to dis-apply the termination provisions. The High Court considered that the term "perpetual" can carry different meanings, which can vary from "never ending" to "operating without limit of time" and found that in this case that the meaning was the latter, and that there had been a grant of a licence which was of indefinite duration but which was subject to the contractual provisions governing termination of the licence.

If an English law licence is intended to be granted on a "never ending" basis, then this should be made expressly clear in the drafting. The term "perpetual and irrevocable" is commonly used to achieve this (but even with this, beware conflicting termination provisions).

1. [2010] EWHC 464 (Ch)

UK brings in new simplified procedure for customs seizure of goods infringing intellectual property rights

Owners of intellectual property rights have welcomed the new procedure that provides for expeditious suspension and destruction of infringing goods entering the UK, where they are "abandoned" by the importers or owners.

Until recently, two distinct regimes applied to goods infringing intellectual property rights seized on the UK border, depending on the type of the intellectual property right being infringed.

Goods suspected of violating the rights of a patent holder would not be detained by HM Revenue and Customs (Customs) unless court proceedings were initiated by the right holder within ten days of the goods entering. A simplified procedure existed for pirated and counterfeit goods (i.e. goods infringing rights of the owners of trade marks or copyright). This procedure allowed for the goods to be suspended and destroyed on the basis of a witness statement, provided that there were no objections from the owners of the goods (i.e. they were "abandoned") (the Simplified Procedure).

Following the decision in HMRC v Penbrook in December 2008, Customs announced withdrawal of the Simplified Procedure as it did not comply with the requirements of Council Regulation (EC) No 1383/2003 of 22 July 2003 concerning customs action against goods suspected of infringing certain intellectual property rights and the measures to be taken against goods found to have infringed such rights. It was suggested that a unified regime be introduced to deal with all goods violating intellectual property rights regardless of the applicable right infringed. This meant that no goods would be seized and/or destroyed unless court proceedings were initiated by the affected right holder.

The announcement of the above procedure provoked a protest amongst owners of trade marks and copyrights, because the Simplified Procedure, which offered a straightforward and cheap means of preventing counterfeit goods entering the UK, was to be substituted by a more complex and costly method involving the need to start court proceedings within a specified time frame.

However, the Goods Infringing Intellectual Property Rights Customs (Amendment) Regulations 2010 (the 2010 Regulations), which came into effect on 10 March 2010, set out a new simplified procedure, whereby the regime for all infringing goods reverts to a procedure similar to the Simplified Procedure, with certain amendments (the New Simplified Procedure). In accordance with the New Simplified Procedure, the goods are considered to be abandoned for destruction, if:

• the right holder has informed Customs in writing within ten days that it believes that those goods violate its intellectual rights; and
• either there is a written agreement of the holder or owner of the goods that the goods may be destroyed, or the holder or owner of the goods has not opposed destruction of the goods within ten days.

The New Simplified Procedure applies to all goods infringing intellectual property rights, including those relevant to the rights of patent holders.

It is important to note that if the two conditions of the New Simplified Procedure are not satisfied, then court proceedings become necessary for the goods to be detained and/or destroyed.

The full text of the 2010 Regulations and the Explanatory Memorandum are available from the website of the Office of Public Sector Information at http://www.opsi.gov.uk/si/si2010/uksi_20100324_en_1

UK tax update: reform of the Controlled Foreign Company (CFC) rules and their impact on IP rights

The current CFC regime

The CFC regime was introduced in 1984 and forms part of the UK's anti-avoidance legislation; its application is relevant to management of intellectual property (IP), due to the fact that IP is inherently mobile and can be easily moved from the UK.

The CFC regime applies broadly where profits have been artificially diverted from the UK into UK-controlled subsidiaries that are resident in a low tax jurisdiction. To the extent the rules are applicable, UK controlled groups may be subject to tax on profits arising from IP held outside the UK, even if such profits are not distributed to the UK.

The discussion document about reform of the CFC rules

On 26 January 2010, HM Treasury and HMRC published a discussion document outlining proposals for the reform of the UK's CFC regime.

The discussion document identifies offshore IP companies as an area of difficulty that warrants special attention. In particular there are two proposals that are worth highlighting:

(1) Active management of IP held offshore

The Government has suggested that the revised CFC regime should be drafted on an exemption basis, whereby all UK controlled foreign companies are within the scope of regime, unless they are specifically exempted.

One of the proposed exemptions is for offshore companies that undertake active management of IP in circumstances where there is no or minimal UK involvement. If the IP is held offshore and the UK is involved in any way in the activities performed or decisions made, this exemption would not apply and a CFC charge would be incurred on the basis that there had been an artificial diversion of profits from the UK. This leaves questions about how in practical terms groups need to demonstrate a disassociation from the UK for IP that is actively managed offshore, and what exactly is meant by "active management". These are areas that are likely to be considered in more detail during the consultation process.

(2) Exit charges on transfer of IP from the UK

The Government is looking into whether existing exit charges and transfer pricing rules provide sufficient protection against the erosion of the UK's tax base in instances where the IP is developed in the UK and is subsequently transferred abroad. The Government is considering applying a further charge to UK tax in instances where the value of the IP was uncertain at the time it left the UK and where that value has increased significantly following the transfer.

Comments on the CFC discussion document are to be provided by 20 April 2010. The intention is for the Government to issue a further document on CFC reform, together with draft legislation, later in 2010, with a view to legislating in Finance Act 2011.

Kookaburra has last laugh in Federal Court of Australia

On 4 February 2010 Justice Jacobson of the Federal Court of Australia ruled that the iconic Australian pop song "Down Under", performed and recorded by the group Men at Work, reproduces a substantial part of the children's song "Kookaburra sits in the old gumtree" (Kookaburra) and infringes the copyright owned by Larrikin Music Publishing Pty Ltd¹.

In reaching the conclusion that the flute riff in the "Down Under" composition was a substantial reproduction of "Kookaburra" (a short musical work consisting of four bars), Justice Jacobson considered the musical elements of melody, key, tempo, harmony and structure. With the assistance of expert evidence, he also compared the aural musical elements and the visual features of the notated music.

Despite differences in key, harmony and structure, the Court found that there was a sufficient degree of objective similarity between the "Down Under" flute riff and the bars of "Kookaburra" which are seen and heard in "Down Under" to amount to reproduction of a part of "Kookaburra". In this regard, the Court found that the melody from "Kookaburra" was still recognisable.

Secondly, the two bars of "Kookaburra" found to be reproduced in "Down Under" were held to be a substantial part of "Kookaburra" because of the significance of the part taken. Whilst the experts considered that the two bars taken were the "signature" of the song, the Court did not necessarily consider that this would, of itself, be sufficient to give rise to a finding that what was taken was a substantial part of the copyright work. However, it was persuasive to the Court that one of the lead singers of Men at Work, Mr Hay, sang the relevant bars of "Kookaburra" when performing "Down Under" live at a number of concerts in pubs and bars. His Honour therefore considered a substantial part of "Kookaburra" to have been taken.

The question of what percentage of income from "Down Under" should be paid to Larrikin following the finding of copyright infringement will be determined by the Court at a later hearing.

It was widely expected that the respondents would appeal the decision. An appeal has now been filed and will most likely be heard later this year. In the interim, the decision serves as a reminder that substantial reproduction is a qualitative, and not quantitative, assessment. In addition, an original work may nevertheless constitute an infringement of copyright if it can be objectively found to encapsulate a substantial part of another work.

The judgment has sparked significant debate about what is the nature of copyright and creative expression that can be protected and both the music industry and lawyers will await with interest the result of the appeal.

1. Larrikin Music Publishing Pty Ltd v EMI Songs Australia Pty Limited & Ors [2010] FCA 29

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