Understand Your Rights. Solve Your Legal Problems
When computers started to be used seriously in business, I was asked whether actuaries would become redundant, as computers can calculate numbers a lot more cheaply. But it was true then, and now, that actuaries earn their keep by ensuring that the right numbers are being calculated. This fact underlies my work as an expert, focusing on two aspects of numbers: first, that they are appropriate to the situation, and second - a hobbyhorse of mine - ensuring that advice about financial risk has an array of numbers attached so that the recipient can appreciate the risk (and can focus their attention on the material issues).
I was asked by the Financial Conduct Authority to provide expert evidence to the Financial Services and Markets Tribunal on the subject of risk in a disciplinary matter concerning alleged large scale mis-selling of endowment assurance policies designed to repay a mortgage. This is a problem still affecting millions of homeowners who will not have enough money to repay their mortgages; many thought they would have a surplus to enjoy, but most now have a deficit.
Whether there is a surplus or a deficit is usually said to be a question of how good the investment return has been over the term of the policy - typically twenty-five years. But there is another fundamentally important element: how much money the homeowner pays each month into the policy. It seems obvious that the larger the monthly payment, the lower the risk of a deficit, and vice versa. So, I did research into who decided what the level of monthly payment should be and their method. The result was quite a shock; this particular life assurance company was telling their policyholders to pay sufficient in order to receive a 50% chance of a surplus alongside a 50% chance of a deficit. I told the tribunal that this was the case (the expert on the other side, an actuary from KPMG, told the tribunal that he agreed with me on this).
My career as an expert witness started in 1982, at which time I was the statutory actuary in a life assurance company (i.e. responsible for signing off the annual statutory financial condition report). My core day-to-day duties were setting rates and reporting on solvency of the life assurance funds. I also managed the underwriting, including employing medical officers to advise us, and claims. The claims side was particularly interesting because we had a large book of disability policies, and because we were also international, I even had responsibility for claims in a country that was experiencing a prolonged civil war in which some of our policyholders were killed or injured.
In the course of my work I frequently had to deal with the company’s solicitors and one day they asked me whether I could help them by giving expert evidence on the capital value of loss suffered by a man who was permanently disabled as a result of someone’s alleged negligence driving a car. The loss was both inability to earn a living and medical expenses. Other somewhat similar cases which followed included a bus driver who lost an eye, and hence his employment, as a result of an assault, and an Imam who was suing for loss of income after being dismissed from his position for blasphemy. I wrote over 100 expert witness reports over the next few years and gave evidence in court a number of times.
The man who assaulted the bus driver was not legally represented and when I was called to give my evidence – which was in a long report quoting issues such as mortality tables, discount rates and taxation – the judge said it was only fair that I explain my whole report, including actuarial concepts, to the defendant in layman’s language.
Another encounter I remember from those days was on the question of whether a penalty for late payment of life assurance premiums should be treated as interest and therefore taxable in the hands of the life assurance company. I was on the witness stand all afternoon, under attack the whole time. I must admit that I have never been willing to collaborate in being led down a path by cross-examining Counsel to say something I don’t actually believe, or that I think will be relied upon in an inappropriate way. In my experience counsel may even complain that I am being argumentative. Over the years I have a tally of five cases where the Judge has told Counsel to apologise to me and I have not yet been criticised by a Judge (or tribunal chairman) for my report or my performance on the witness stand. In a recent case there were three experts and the other two were both criticised in his judgment by the judge for engaging in advocacy – but I escaped that accusation.
In 1989 I joined a large London firm of consulting actuaries, Bacon & Woodrow. I was fortunate that John Prevett was one of the partners. He was well known for playing a crucial role, as an expert witness, in winning compensation for the victims of thalidomide. He suggested I should join the Academy of Experts and he endorsed me. Bacon & Woodrow split up later – the pensions consulting is now part of Aon and the insurance consulting is part of Deloitte.
At Bacon & Woodrow I was asked to become involved in the new area - following Big Bang - of financial services regulation. B&W had good contacts with the Financial Conduct Authority (it has changed its name a few times, although it has only ever been one continuous company, it was then called the Securities and Investments Board). At that time large numbers of people were being advised to leave occupational pensions, or not to join, and to take out personal pensions instead. FCA wanted an idea of the numbers involved, but personal pension providers were not required to record whether the individual could have been in an occupation pension instead. I devised a survey, based on sampling and telephoning personal pension holders with a detailed script, and we produced an estimate of numbers that was used to launch a major pensions mis-selling review. The eventual number was only 5% different from our estimate.
At that time, I decided I had sufficient experience of investment mis-selling - and of expert witness work - to leave and set up my own consultancy, and I have worked in these areas for nearly twenty-five years. In recent times I have broadened my approach towards investment mis-selling to regard it as one aspect of consultancy in the area of risk management concerning financial products. I now have a partner who also has an actuarial background but has worked in banking, so we can cover a wide range including investment portfolios, life assurance, pensions, mortgages, equity release, derivatives, banking operations etc.
Over the years I have been involved in regulator-led remedial programmes for mis-selling of pension transfers, pension opt-outs, mortgage endowments, interest rate hedging products and, currently, the review of banking relationships with the Global Restructuring Group of Royal Bank of Scotland. During the course of this work, I have built calculation programmes to calculate compensation (or check the amount of compensation offered) for pensions, endowments, and interest rate hedging products.
My approach to expert witness work has always revolved around the facts that in the large and complex area of financial products many problems come to the surface; and whereas there are many people needing advice, only a very small proportion of the problems end in litigation. In fact, the FCA requirement for financial institutions to operate complaints schemes, as well as a number of extensive regulator-led remedial schemes, and the financial and other ombudsman services, means a lot of work is done to avoid litigation – but this means advisory experts are needed and the experience I can bring to expert witness work is founded on a wide range of exposure obtained through consultancy.
The majority of cases I see are due to a financial product not being suitable. I claim a bit of credit for this term, because it was while I was engaged by a financial services regulator and assisting them with a disciplinary investigation into selling by a life assurance company (the regulator was LAUTRO - those with long memories may remember it, and its successor the Personal Investment Authority) it was decided that this term was the best to describe the test we were applying to selling practices.
Over many years I was involved in at least a dozen such investigations, for both regulators and those under investigation. These investigations don’t just look at individual cases, but look at multiple cases searching for patterns of conduct - this necessarily involves investigating an array of procedures and ensuring that they are carried out accurately and efficiently. There are similar considerations when an investigation leads to a remedial programme and I have been involved as an adviser in these situations too, including providing ‘skilled person’ services (section 166 of the Financial Services and Markets Act 2000).
Other categories of case I see are product operation issues and what I will call esoteric risk issues. I am going to return to the subject of suitability but will first give some examples of the other two categories. Product operation might be thought to mean only issues with charges – there are certainly such cases but there are others. An example which I worked on was a life assurance company that used an Excel workbook to calculate retirement benefits and found that errors had occurred and been carried forward – overpayments had been made totalling some hundreds of millions of pounds. This was a professional indemnity insurance claim but there had been a change of insurer – I was engaged to advise on when the problems arose and therefore which PI insurer would be asked to meet the bill.
There are many life assurance policies where premiums are invested but each month a charge is taken out to pay for that month’s life cover (and sometimes critical illness cover). Where the investment value of the policy builds up and overtakes the amount of cover provided such charges should cease. But if the investment value doesn’t build up, the cost of cover can escalate with the increasing age of the life assured. In my experience, the way in which the charges are calculated may be opaque – in fact I have seen cases where the life assurance company had not indicated in any way whatsoever how it would calculate these charges and there do seem to be some abuses.
Product operation issues also include some difficult issues of taxation and limits for pensions – and sometimes for life assurance. There are traps for the unwary financial adviser and sometimes they get it wrong and the consequences can be very expensive; they then need an expert to determine what amount of loss is attributable to the financial adviser’s negligence and what is not causally linked.
I have mentioned esoteric risk issues. This category covers a range of cases where the risk issues are not all that clear. For example, financial arrangements in the United Kingdom between the parties in a divorce may involve income-producing assets in another country, but exchange control prevents the assets being moved even though income can be transferred. The principle of a ‘clean break settlement’ can mean it is necessary for one party effectively to buy, in UK currency, a foreign income stream. Valuation involves not just the usual discounting process, but consideration of future currency exchange movements and how to adjust the cost for the risk borne by the “buyer”.
Another esoteric risk is ground rents extending more than a hundred years. Obviously discounting techniques can be used, but what allowance should be made for uncertainty over such a long period? To take another example, derivatives are complex financial products (understood by very few people) but they are in wide use by the banks and others and the total exposure is staggeringly large. Usually these products are traded between parties who both know exactly what they are doing and there is little or no reason for any dispute arising. But businesses buy these products from the banks and several things can go wrong. My experience is that it often needs an expert to see whether something has in fact gone wrong; most businesses have no frame of reference to do anything other than accept what they are told by their bank.
It is important to seek qualified advice from an independent expert when dealing with bank products and services. Where the products are complex e.g. derivatives, it is important that the customer’s first-call advisers, e.g. lawyers and/or accountants, recognise the limits of their expertise and introduce qualified experts at an early stage.
Banks are usually well resourced and can rely on a depth and breadth of expertise which cannot be rivalled by most other non-bank financial institutions. That means that it is important to seek the appropriate expertise to ensure that a bank’s representations are assessed on an equal footing. Given their resources, the complaints process of most banks is well structured in terms of provision of information and timeliness of response. That does not mean however that they always make the right decision. I have seen a number of cases that have been overturned by the Financial Ombudsman Service as a result of Congruent’s advice and representation.
When it comes to litigation the banks usually “throw everything but the kitchen sink” into the dispute. In a dispute there is a conflict between looking after the bank’s interests and treating customers fairly - we find that the bank usually looks after its interests ahead of the customer’s interests.
Problems frequently encountered are that the tenor and shape of a product do not match the need well enough and how the product will work is inadequately understood. The impact on the business’ balance sheet may not be understood, or the impact of changing interest rates may not have been thought through. In the event of a dispute arising there may be a question of whether an alternative product would have been more suitable. In addition, businesses need to be able to alter their finances from time to time but often there is an existing derivative which may need breaking – there is then an issue whether the profit margin taken by the bank is fair; I have been asked to advise where future profit margins seem to have been added to the break costs, but also included in an alternative product ie double charging.
I said earlier that suitability is a major cause of referrals that I receive. What this means is that the product does not meet the needs of the customer. Unfortunately, it is not usually a simple matter of saying the customer wanted £X and is getting £Y. Problems arise when the customer has future financial needs, which involve risk, and they want a product that matches those needs and the attendant risks, but there is no exact solution so they must compromise. The financial adviser is supposed to explore all this before recommending a product, but it is possible that too little attention, or too little weight, is given to one aspect or another.
People only come to an actuary when the issues are complex to unravel, or where the basis on which compensation needs to be calculated is difficult to decide. The issues can be around whether the consequences of the various levels of possible future investment performance were properly understood and what is the impact on what was being sought or hoped for. The modern term for this is a risk assessment and the questions are whether it was carried out at all, whether it was carried out competently, and whether it was communicated adequately. I have seen issues arise, for example, with gearing and its impact not being adequately understood. I have seen a case where gearing - in other currencies - was so important that the investment demanded constant monitoring and timely corrective action, but nobody actually did that until it was too late.
What about the future – will there continue to be problems or have we all learnt enough for problems not to arise? I am sorry to say, but I think there will always be problems - the volumes of money that need to be invested is enormous and financial risks will always be with us combined with continuing lack of adequate understanding and clarity of thinking (using pensions as a fine example) Product providers have strengthened their standards (mainly under regulatory pressure) but even if they continue to do so I think, for the reasons I have said, they cannot prevent a flow of problems.
The question then arises how firms like Congruent can help. I mentioned earlier that few cases go as far as litigation. So, I would say that there needs to be a thriving industry of people with the necessary expertise providing financial remedial advice alongside solicitors. I think that most solicitors would agree that the most cost-effective way of initially dealing with a financial product problem is for an expert to look into it without legal costs being incurred at that stage.
Parliament is presently considering the Financial Guidance and Claims Bill to bring together various free-to-client financial guidance services and transfer regulation of claims management services to the FCA. Those initiatives may be necessary but what I have been writing about above is not the day-to-day conduct of providing financial products to the population, but a layer of concern where problems - usually complex - have occurred. Obviously improved guidance for the population can help reduce the future flow of cases which bring up problems but I do not think the flow will stop.
Finally, after writing a lot about handling problems before litigation is started, I will say a few words about expert witness services supporting litigation. The problem, as we all know, is that the process is very expensive but my opinion is that involving an expert at an early stage can save money. In appropriate cases, an expert can sometimes identify the key financial issues more quickly than a lawyer can. An expert may be able to help by interviewing the complainant at an early stage.
Unfortunately, I have many times been brought into a case too late. In one case I told a solicitor, after studying the papers, that I could not support the case he had put together and he told me that because I had agreed to be appointed I was under an obligation to support the case – which I did not agree to do. In another case recently – a distressing case of a widow in her nineties, whose husband borrowed a modest amount on the security of their home on terms that interest would roll up, being told she now has to repay the loan which has grown to be more than the value of the house; but the solicitor had built his case on the interest rate being higher than the Bank of England base rate and I had to tell him that this was permissible (and any lender would need to charge a margin).
Obviously, I have met other expert witnesses working in the same area. Many of them do seem to lean towards their client – which they are obviously not meant to do. I tend to the other extreme; if asked, about a past case, which side I was on, I can sometimes truthfully say I can’t remember. My feeling is that the number of competent expert witnesses needs to grow to cope with the flow of problems, but as I have said earlier, advisory work should be the bulk of what they do rather than litigation support.
ROGER GRENVILLE- JONES
DIRECTOR
Email: rgj@mycongruent.com
Tel: +44 (0)20 3143 3150
www.mycongruent.com
Roger Grenville- Jones held a senior position as a ‘Head of Actuarial Function’ within a global insurance company and since then has been a consulting actuary for over twenty-five years. He has a wealth of experience in dealing with specialist financial products and is particularly experienced as an expert witness for financial complaints. Roger was appointed by the Financial Conduct Authority (“FCA”) to provide expert evidentiary analysis on the risk of certain financial products in disciplinary proceedings against a regulated firm.
He holds an MA in Mathematics from Cambridge University and is a Fellow of the Institute and Faculty of Actuaries. He has also been a university lecturer in actuarial science.
Congruent was established in 2013 in response to a growing demand from corporate clients seeking independent, professional advice on banking and financial product risk management & hedging arrangements.
As an established financial risk advisory firm, we provide businesses and their professional advisors with specialist advisory and transaction services. We also provide expert witness services.
With your comprehensive knowledge of the electrical industry, which aspect poses the biggest legal challenges?
The biggest legal challenges are created by uncertainty and the time required to mitigate, or at least manage, the risks arising from that uncertainty. Industry participants and stakeholders are now faced with changing legal and regulatory frameworks, changes in government and policy, shifting public opinion around climate change and renewable energy, increasing stakeholder engagement and activism, and fluctuating market prices for power and underlying resources. In this environment, it can seem impossible to get projects developed on time and on budget (or at all). In the time it takes to navigate through this complex maze, the market window may have closed, or the business case may have changed. And in some cases, our legal and regulatory frameworks have not yet changed enough to keep up with our pace of technological innovation. Going forward we will need these to accommodate advances in storage, electric vehicles, distributed generation and community energy systems, among others. The way we produce and consume power is changing. As lawyers in this sector, we help our clients identify and bridge these gaps by providing practical and timely advice, so they can understand the current landscape, how it is evolving, and take advantage of opportunities when they arise.
As energy demands rise, and investment within the energy industry increases, what obstacles lie ahead for your clients?
Increased demands and investment means new projects and infrastructure. Any new project these days, and for the foreseeable future, faces obstacles, but perhaps none greater than securing social license. Simply put, social license refers to the level of support for the project from local communities, Indigenous Peoples and stakeholders. Without sufficient support, any project faces an uphill battle for permits, or at best significant delays because of lengthy and contested permitting proceedings. Even if a proponent is initially successful, there are often appeals or other legal challenges that follow, that can cause further delay. All of this contributes to increased project risk and a general reticence on the part of industry to undertake new projects, particularly in jurisdictions where social license is more difficult to secure. A well-structured and comprehensive engagement strategy is critical for project execution, and the support of experienced professional advisors can significantly contribute to the success of the endeavour.
How is this affected by the growing concern for the environment and its resources?
The energy mix is shifting towards lower carbon sources, driven by technology and growing environmental concerns. In certain jurisdictions, energy generation is a major source of carbon emissions, so switching to renewable energy sources like solar and wind will mean less greenhouse gas emissions. However, the integration of intermittent energy sources on the grid poses some challenges, such as reliability of the transmission network, lack of capacity storage technology and balance between electricity supply and demand. Moreover, the energy efficiency of our infrastructure for the coming years is determined by the construction and building efficiency regulations in place today. Investments in new cost-effective energy efficiency technologies for buildings should be supported by well-developed policy and regulatory frameworks.
Having practised in the carbon markets for over 15 years, how have you seen this trade change for your clients?
Fifteen years ago, carbon markets were very much in their infancy in North America. Market-based compliance mechanisms had the support of many economists, of course, and, looking back on it, from a surprising number of businesses and individual politicians (at both ends of the political spectrum). But policymakers, especially at the federal level in the US and Canada, were just not yet ready to provide the kind of institutional certainty that would have allowed carbon markets to fully emerge then. Notwithstanding the uncertainty, or perhaps because of it, the past 15 years has seen a tremendous amount of learning and innovation in the carbon market space: energy-intensive businesses, offset project developers and state and provincial policymakers have all been exploring different models, finding out what works and what doesn’t, getting comfortable with the mechanics and the risks associated with carbon markets. A lot of our early work in the area was helping businesses and industry groups engage in small, voluntary transactions for carbon offsets. At the time, a lot of these deals were criticised as cosmetic. But that missed the point. These tentative first steps laid the foundation for what followed, helping industry to learn what was involved in carbon transactions and to familiarise themselves with a fundamentally new type of market. And we, as lawyers, were learning right alongside our clients - adapting or inventing new contractual tools to allocate novel types of risk, discovering what kinds of issues typically arise in carbon market transactions and how best to address these issues in advance. Over the past fifteen years, compliance markets have spread in North America at the level of states and provinces, and in Canada, the federal government is now also making moves that will encourage provinces to harmonise their carbon pricing policies. But even without a final consensus emerging, it has been interesting to see how even a modest narrowing of the range of likely policy outcomes has been enough to dramatically change the environment for carbon market participants. Carbon markets are growing, and have shifted almost entirely from voluntary to compliance transactions. The linkage of California’s cap-and-trade system with cap-and-trade systems in Canada’s largest provinces, Quebec and Ontario, was an especially important milestone for us. We are seeing more carbon market transactions, for more clients, at higher overall valuations. Carbon offsets are increasingly backed by sophisticated and well-financed developers. We are seeing more complex, cross-border business structures, which in turn raise new and challenging issues for lawyers. It has really ratcheted up the stakes for lawyers on each transaction, and has put a premium on experienced lawyers who understand both the regulatory and the commercial aspects of carbon deals. It is an exciting time.
How complex is risk management within the energy sector and what are the main considerations you convey to your clients?
Risk management is a critical and complex factor in every aspect of the energy sector, whether it be in relation to the health and safety of people or the environment or in relation to managing legal and business risk in commercial transactions, developing projects or business operations. Energy is consumed at all levels of society in every country of the world. As such, participants in the energy sector function across both local and global markets and are subject to risks ranging from economic and geo-political volatility to stringent local and national compliance and regulatory regimes. Working with our clients, our principal focus is to identify and mitigate the risks inherent in their business, often by identifying a comprehensive inventory of the risks associated with the particular mandate and developing a comprehensive strategy to manage or eliminate the risks identified. Many elements of a risk mitigation strategy are best managed by our clients own internal risk management functions, such as managing financial risk and insurance. As legal counsel, we tend to focus on the legal and business risks associated with the mandate, paying particular attention to legal and regulatory compliance, contractual terms and dispute resolution. Our extensive experience advising a broad range of clients across all aspects of the energy sector allows us to help our clients successfully anticipate, identify and manage the risks inherent in their business.
What regulatory changes do you feel would be beneficial to your clients?
The key industry and regulatory change over the next 20+ years will be driven by the continuing emergence of renewable energy sources. This power shift to wind, solar, geothermal, biomass, hydroelectric and other sources will have a game changing impact on our clients, consumers and society as a whole. New technologies, such as hybrid and electric vehicles and others not yet invented, will place dramatic new demands on the power system. It will require a massive investment in new infrastructure since the current system was never designed for such loads or technologies. Everything is changing, and the regulatory system is not prepared for it. The new generation sources require new transmission lines as the sources of power are dramatically reconfigured based on “good wind” and similar locational characteristics that have not mattered before. Everything will be in the wrong location for the new sources and the grid will need to be reconfigured. Grid technologies need to be invented to cope with intermittent power sources, and the intermittency requires diverse types of standby or base load power to exist, to offset when the renewable sources cannot generate. This all comes with a cost, requiring new regulatory models to set rates and pricing for these new interdependent renewables dominated grids. The regulators of the power sector must become more nimble and capable of adapting and integrating changing power sources and technology. This is a cultural and generational change for the regulators and industry and there is little time left to prepare for it.
The other key regulatory issue is the slow pace and uncertainty for regulatory and environmental assessment and approvals. In relation to project approvals, Canada trails other countries, especially related to the time spent coming to a decision (even if the decision is to reject the project). Canadian courts have been described as affected by a “culture of delay”. Some of the same issues affect the regulatory system. It is becoming increasingly litigious (before and after the approval) and uncertain. Canada has had a number of projects that required years of public process to approve (or not), more years of judicial process to judicially review and hear appeals, and when it is finally done, the market has moved on. The regulatory system must change if society is to be successful at making the power shift to renewables and a greener grid. Some say this will all change when the approvals are considering beneficial renewables projects, but that has not been the record. Wind farms, solar and hydro projects are as likely, or arguably more likely, to run into a wall of opposition, often based on build-it-anywhere-but-here sentiments. The regulatory and environmental assessment systems must be modernised to cope with these new demands. The processes need to be rigorous and fairly applied to all. There must be timelines that are respected, and new methods to bring Indigenous concerns and local opposition into the process earlier, and dedication to new means to resolve issues. The current hearing oriented system struggles with this, and reinforces those “dug in” to their position, rewarding unwillingness to compromise. It is time to look for better ways.
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Amy Carruthers is a corporate/commercial Partner in the Vancouver office with a solid background as a transaction lawyer and extensive experience in the energy industry.
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Pierre-Oliver Charlebois is a leading lawyer in the areas of environmental, mining, energy, climate change and corporate social responsibility law.
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Fasken is a full-service law firm with offices in Canada, the UK, South Africa and China. We work with clients around the globe, offering expertise in legal issues affecting all types of industry, government and individual objectives.
We now hear from the D&O Liability team at Levitan Sharon & Co, who speak on the changes in Israel which impact their clients and if the Business Judgement Rule applies in their jurisdiction.
What is the most significant change in D&O Litigation in Israel in the last few years?
The increase in the number of motions filed with the Court requesting to certify the filing of Derivative Actions against D&Os.
Whereas between the years 2000 to 2010 approximately 100 motions to certify the filing of Derivative Actions were filed with Israeli Courts, in the past few years approximately 30 motions were filed each year.
We have also witnessed an increase in the number of motions certified as Derivative Actions; in the past, the Israeli Courts scarcely certified motions for the Derivative Actions, but in the past few years over 70% of these motions were certified as Derivative Actions.
Does the Business Judgement Rule (BJR) apply in Israel?
The BJR was formally adopted by the Israeli Supreme Court in a Judgement handed down in December 2016 (C.A. 7735/14 Verdenikov v. Alovitch). According to the said ruling, a director will enjoy the BJR protection if his or her decision fulfills the following terms: first, the decision was made without conflict of interests; second, the decision was made in good faith; and third, the decision was made in an informed manner. A decision which fulfills these three terms is presumed to be proper, and the court will not interfere in its content.
Nevertheless, the Courts are very careful before releasing the directors from liability based on this protection.
One of the main obstacles of directors who wish to enjoy the BJR protection, is proving that their decision was made in an informed manner. According to Court rulings, this can be proved if the minutes of the Board of Directors' meeting reflect a real discussion made before reaching the decision.
If the Court reaches the conclusion that a decision was made in an uninformed manner it will not be protected by the BJR. The Supreme Court ruled that in such cases, the court will examine the content of the directors' decision, while the burden of proof that the decision was reasonable will shift to the directors.
What is the impact of the Economic Court that was established in 2011 on claims against Directors in Israel?
The Economic Court is comprised of three judges, specialising only in financial claims.
As a result, complex financial disputes are now discussed and reviewed in a thorough manner. The judges are keen to create new precedents.
We have witnessed innovative judgements and precedents in various issues including in respect of Derivative Actions, Squeeze Outs, assessment of loss in Securities Claims, etc.
Litigation of securities claims whereby the companies have dual registration in Israel and the US.
The Israeli Securities Law, 1968 permits listing in Israel securities that are traded on specific foreign exchanges. The Law exempted such companies from reporting requirements pursuant to the Israeli Securities Law, and permitted them to continue reporting exclusively according to the foreign law that applies to them, while relying on the supervision of the foreign regulator (the SEC and the FSA).
In several District Court rulings handed down recently, the Courts determined that the liability of such dual listed companies towards their Israeli public shareholder will be examined according to the foreign law applicable to the said companies' reports. Accordingly, a securities class action must be based on the foreign law, which must be proved by an expert to the relevant law.
The impact of existing D&O policy on the Litigation.
The Israeli Insurance Contract Law grants a Third Party direct privity against the liability Insurer. As a result the liquidators of companies which hold D&O insurance cover will usually file a liability claim against the D&Os and their Insurers while drafting their claim in a way that will fall under the D&Os insurance policy.
Even if the D&O Insurer is not a party to the litigation the Court in many cases will explore the existence of a D&O policy and the relevant limit of liability.
For example, in the case of Trade Bank, the Court approved a settlement with the D&Os of the Bank while it considered the limit of liability under the policy, emphasising that the settlement would not have been approved if the limits were higher.
Levitan, Sharon & Co. is a leading law firm specializing in Israeli insurance law as well as reinsurance law in Israel. The firm has been involved in major insurance cases tried in Israel and its leading partners have precedents in their name.
We reconnect with Ilya Kazi, IP Partner at Mathys & Squire, who spoke on being commercially pragmatic with patents in our April edition. Months on from his previous interview with Lawyer Monthly, a lot has changed; from artificial intelligence to Brexit, Ilya speaks on how these changes are impacting the patent world.
Are there any particular industries which are cropping up more, in relation to IP disputes?
Telecoms especially, and we can use Unwired Planet Vs Huawei as an example, and other IT related disputes.
Why do you think this is and what could be done to reduce such disputes?
In part, this is due to well-known mobile phone companies selling off patents to patent monetisation entities and a large secondary market in patents having become established. In IT, as opposed to pharmaceuticals, there are large numbers of patents potentially relevant to any successful product. Moreover, the recent Actavis Supreme Court decision may embolden those wishing to enforce patents where infringement is questionable. Companies may have to become more pro-active about clearing the way.
You previously mentioned how Brexit may impact the legal world; with Brexit now underway, what do you think the future of the UPC will be?
I was at a conference at the EPO recently and spoke to the EPO team leading the project. They are very keen to have the UK part of the UPC and believe it is legally possible. The informal view from those who have seen the German Constitutional challenge is that although lengthy and well-written, it is unlikely to be conclusive. I am more positive than I was (which was not very!), that in 2019 we will have some movement.
AI has been a huge topic of discussion this year; do you think the rapid development of robotics has, or will, affect the legal world? If so, how and why?
Yes. Firstly, firms may use it to take some cost out of certain things. Secondly there will be new issues like liability associated with autonomous systems, self-driving vehicles being a topical issue. Thirdly, AI design will raise issues of authorship and possibly ‘inventorship’.
Is there anything else you would like to add?
Both AI and Brexit have caused larger corporations to seriously question established issues of who and what does things in the value chain. The coincidence of both being on the agenda is likely to accelerate change, most likely not in the way supporters of Brexit might have hoped. The legal world will have to deal with this change in commercial realities.
The energy sector is beginning to change a substantial amount, with concerns of increased levels of CO2. We speak with Majid Kübler, who reveals what is changing and how to prepare for arbitration hearings.
With environmental concerns changing the energy sector, how have you seen legal cases changing over the years?
The trend to cleaner energy and energy efficiency and the reduction of CO2 emissions are global ambitions.
On the one hand, we see a complete new cluster of cases, where investments in and revenues from renewable energy sources are at dispute, e.g. delay of commissioning or cut in regulated revenues.
We have also seen indirect changes ever since renewable energies and increased energy efficiencies have impacted market forces and prices in more traditional energy markets too. The rise of renewable energy affects the profitability of third parties being active in the traditional energy sector. Overall, there is hardly any energy business not affected by the development of a cleaner and more efficient use of energy.
Do you think arbitration is the better method of resolving such cases? Do you ever see this changing?
The question to whether arbitration or a commercial solution is the better method depends on the specific situation of the parties and the issue. Commercial solutions offer a higher degree of freedom to find possible resolutions and allow for more budget control. Arbitration demonstrates the severity of one’s position, and the external and neutral assessment of the issue can also be beneficial towards upper management and supervisory boards.
If we compare arbitration with ordinary jurisdiction, it also depends. Arbitration has clear advantages, like speed and confidentiality of the dispute. However, arbitration is not a feasible option for all cases. Disputes in regulated business or participation of states or state-owned companies might require ordinary jurisdiction.
What are three top things to be prepared for in case of arbitration proceedings?
iii) Do not close communication and negotiation lines to counterparty. Disputes often are played hardball. Don’t let the rough language of submissions disturb your partnership with the counterparty. Distinguish between the submissions and the long-term relationship the parties have had and which will hopefully still be honoured. Therefore, never close communication lines for commercial negotiations (unless temporarily for strategic reasons).
How do you advocate your clients? Any current activities?
We advocate our clients in different ways. When arbitration proceedings are initiated, we support them by advising strategically, and by providing expert reports and testifying as expert witnesses in court. In cases where we are involved earlier, we rather advise our clients in the background when the parties are still in commercial negotiations. Our current activities comprise both formal and commercial disputes. Current disputes are requests for price adjustments and compensation for damages, based on contractual revision clauses or other legal positions such as competition law have gained importance, too.
What disputes are present and how do they differ?
In the renewable energy sector, many disputes are about compensation for damages, e.g. from delays in construction or lost revenues. The quantification thereof is getting more complicated since revenues are more market driven: what is the damage from missed revenues after regulatory reforms? Disputes in the LNG sector have something in common with pipeline gas disputes: price level, delivery flexibility or oil indexation are typical issues. Yet, the LNG disputes become more complicated when LNG specifics like destination clauses are also dealt with.
Madjid Kübler
Managing Director
TEAM CONSULT G.P.E. GmbH
Robert-Koch-Platz 4
10115 Berlin
T. +49.30 - 400 556 11
E-Mail: mk@teamconsult.net
Web: www.teamconsult.net
Madjid Kübler is Managing Director of Team Consult. He heads Team Consult’s dispute resolution practice. Prior to Team Consult, he has worked in senior positions at Accenture and Arthur D. Little.
He is an experienced expert witness and commercial arbitrator in gas price and further energy disputes.
Since 1987, Team Consult offers independent strategic advisory services for global and local energy companies.
Team Consult is a leading adviser for questions regarding the North-West European energy markets. Development and trends in the international energy business are identified at an early stage. The range of products and services offered by Team Consult comprises: Evaluation of long-term gas supply contracts, support in negotiation and dispute resolution, support for de-/ investment decisions (e.g. power plant projects, transportation/logistics, storages, renewables) and development of market entry strategies, market design and regulatory framework.
Team Consult’s experts have been assigned in disputes relating to natural gas, power and renewables for more than a decade.
Franchising is complex and there are ways in which franchisors could easily find themselves in legal disputes by not being attentive enough. Dr Hubertus Thum speaks to Lawyer Monthly about how foreign investors are often unaware about good will indemnity and investment compensation, and common issues franchisors may fall into under Austrian regulations.
Franchising is a complex cross-sectional area. What are the common issues that foreign franchisors fall into, due to being uninformed about Austrian regulations?
Issues often arise in case of franchise agreements based on a different jurisdiction being just translated but not properly adapted to Austrian laws or the Austrian market situation. What works in one country does not necessarily works in another country too.
There is quite a high standard regarding pre-contractual information. Many disputes arise due to false or missing information the franchisee is (not) provided with before signing the franchise agreement. Besides checking the documents and information in regard to correctness and completeness, it is highly recommendable to include proper disclaimers.
In addition, foreign franchisors should be aware of possible franchisee’s post-contractual claims as described below.
Are there other topics that could lead to disputes, despite Austrian regulations?
As in the other EU member states, the respective cartel laws apply. Minimum or fixed sale prices are strongly forbidden, irrespective of the market shares.
Often the franchisor wants the franchisee to conduct his own marketing activities within his region. Depending on the type of business, the franchisor should consider that he might be held liable for the franchisee’s activities (e.g. if an advertisement states an infringement of competition law). Thus, it is highly recommendable to have guidelines on how to conduct any marketing activity and possible reimbursements between the franchisor and the franchisee.
What are the consequences of terminating franchise agreements in Austria? Does the franchisee have any claims that foreign investors are often unaware of?
In case of termination of the franchise agreement, franchisors may face several claims by the franchisee depending on the reasons for terminating the contract. Besides claims for outstanding fees or damages due to wrongful termination, there are especially two possible claims that foreign franchisors are often not aware of: a so called good will indemnity, and an investment compensation.
What are the good will indemnity and the investment compensation about?
The good will indemnity derives from an analogous application of rules regarding commercial agents: the commercial agent directive (86/653/EEC) introduced compulsory indemnity/compensation in favour of the commercial agent under certain circumstances if the contract is terminated. The agent shall be entitled to an indemnity if he has brought new costumers to the principal or significantly increased the volume of business with existing costumers and the principal continues to derive substantial benefits from the business with such customers. The payment of this indemnity has to be equitable in regard to all the circumstances.
The analogous application was first picked up by the German Federal Court (BGH) in regard to authorized car dealer agreements and later more or less copied by the Austrian Civil Supreme Court (OGH), which has also applied it to the termination of (subordination) franchise agreements. According to the OGH, the main criterion for justifying the analogy is an “integration in the franchisor’s distribution processes comparable to that of the commercial agent”.
The OGH developed a list of contract clauses which can indicate such an integration. The most decisive factor is still a general perspective. The good will indemnity can amount up to a franchisee’s annual margin.
On the other hand, franchisors may be faced with an (additional) investment compensation in case of termination of the contract. Distributors that are part of a ‘vertical distribution system’ (including franchising) are entitled to claim non- amortized or non-adequately utilisable investments they were obliged to make according to their distribution agreement with regard to a uniform distribution system. A possible (good will) indemnity remains unaffected.
Both claims do not exist if the franchisee has terminated the contract, unless the franchisor has given the reason for it. Nevertheless, the claims also exist in case of termination by mutual agreement and expiration.
What are the possibilities for a franchisor to avoid a franchisee’s claim for a good will indemnification? Can they be excluded by agreement or by choosing another governing law?
Under Austrian law the above mentioned good will indemnity and the investment compensation are obligatory and cannot be excluded by agreement. In case of a commercial agent operating within the EU, agreeing on a governing non-EU law does not help the principal. The commercial agent’s claims still remain.
Nevertheless, in regard to franchise agreements the situation can be different depending on the franchisor’s origin, the franchisee’s registered office and the actual place of activity.
In some specific constellations it might be possible to exclude the above-mentioned claims by choosing a jurisdiction and governing law that does not provide the franchisee with such claims. Additionally, it might be possible to exclude them by contract.
Considering the international circumstances an arbitration clause might be a good solution too.
Hubertus Thum
Dr. iur, LL.M.
Neustiftgasse 3/5, 1070 Vienna, Austria
tel: 0043 1 361 2222
e-mail: office@thum-law.at
web: www.thum-law.at
Starting and running a business is enough of a challenge in a competitive and short-lived world. Dr Hubertus Thum’s clients - including sole traders, freelancers, SMEs, clubs and individuals - benefit from his years of experience and his sense of the times.
Our next article in our Expert Insight section has been written by Stephen Cheeseman; with expert knowledge and vast experience in legal compliance and business leadership in the financial sector, he has provided us with interesting insights into how regulatory ‘Sandboxing’ will enhance the legal sector. With Sandboxing not being a newly coined word, Stephen also touches on how it will change the FinTech industry; as the legal sector tries its hardest to embrace technology, this is a must read article for those who are rooting for such change.
If you have not heard the term Regulatory Sandbox – get ready to hear it a lot more. No single concept will pose as much challenge towards the traditional training for legal and compliance professionals, whereby rules are meant to be followed and enforced when necessary. “Sandboxing” is a concept being promoted by countries who want to attract FinTech companies and seize opportunities to be more globally competitive in the financial services. In today’s digital planet, embracing technology is as key to delivering high quality financial services, as are the regulations that protect the national economy and its citizens. This becomes an even greater balancing act with the rapid globalisation of industry, retailing and financial markets. The greatest challenge will be harmonising regulations that support current financial services infrastructure (think legacy systems!), and yet embrace technology demands of the next generation. Two other “tech” concepts that need to be understood and will bump into the Regulatory Sandbox are “RegTech” - the use of technology for financial compliance and supervision, and “TechFins” entities, which are not financial services in nature, leveraging large amounts of data to provide financial services through technology. We will speak to these other two concepts in a different article. First, a few facts need to be on the table starting with when technology showed up in our modern financial ecosystem.
Post World War II saw a new agenda of legislation for the globalisation of banking including the Bretton Woods System (1944), resulting in the creation of the International Monetary Fund and the World Bank. This global connectivity also led to ideas about technology, including some that are still in use today: namely the first ATMs being brought into existence in London in 1967. This would be the first obvious sign of Fintech (even though it wasn’t called that) to the consumer for a few decades. Long before the internet, technology was already in play in the back offices, including: electronic stock trading in the 70s, the use of mainframe computers to track funds and support electronic record keeping systems. It wasn’t until the technologies that drove the back end of financial services became useable by the retail public, via the likes of digital investment platforms: (1982 – E-Trade), on-line retailing (1984 - TESCO) and digital banking (1998), that the customer and the regulators became truly aware of the benefits of technology in the delivery of financial services. The financial institutions had a strong sense of the servicing possibilities that technology could bring, but also understood both the cost of building out these platforms, as well as the challenges of a regulatory environment built around in-person service delivery and a paper based records interface with their customers. So how would regulators and financial services providers meet the consumer’s appetite for technology, while working within the confines of the existing regulatory framework?
Time for a Sandbox!
A Regulatory Sandbox is a platform where regulators allow FinTech solutions to be tested without having to fit exactly into an existing regulatory framework that can be prohibitive from a consumer intuitive delivery perspective and an implementation cost. A ‘Sandbox’ can reduce or remove select existing legal requirements for test purposes and even for the eventual formal adoption of the proposed technology solution. The test environments typically have limits on: the number of clients that are exposed to the test; maximum test time lines on testing; mitigating risks (minimum capital to protect customers), and testing under the regulators supervision. More importantly are the criteria that different jurisdictions use to determine who gets to “play in the sandbox” and the rules they need to abide by once they are approved. Applicant approval in most jurisdictions include criteria, such as: the benefit to consumers, risks to the overall financial system integrity, and the degree of innovation. Many jurisdictions - if it is a new entity to the financial services sector - will require registration or a licensing process so that the entity is as accountable as current registrants in that space. Registrants will generally berequired to meet minimum credit worthiness standards and approval of the company’s officers; these are credentials which have no connection to the technology proposed, but are starting points to protect potential customers. This opens the door to both start-ups, as well as established players. Prior to the project launch, and once approved as potential candidates, further parameters will include adherence to broader regulations around Customer Confidentiality and privacy, Know Your Customer, Anti Money Laundering, Countering Financing and Terrorism. These are minimum table stakes to maintain credibility on the global stage.
There are currently Sandboxes in most global regions financial hubs including Abu Dhabi, Australia, Canada, Hong Kong, Malaysia, Singapore, Switzerland and the UK. A note-worthy element is the growing number of countries that have proposed Sandbox type legislation to ensure they remain competitive with those already on board. These include Indonesia, Israel, Russia, Taiwan and the USA. (These lists are changing so fast there may well be more countries in either group that I have not mentioned by the time you finish reading this article!) The The Sandbox is in many ways aspirational – trying to find a Fintech embracing regulatory path to improve the delivery financial services. The harder part is determining the strategy and breadth of the Sandboxes which can vary significantly from country to country and depend in many ways on the countries’ regulatory infrastructure. As a primary financial services oversight regulator, the UK has the Financial Conduct Authority. This has served them well since their launch of the Sandbox in May 2016, with 55 applicants accepted to date. Jurisdictions with single or minimal regulatory ownership of the Sandboxes have shown greater accommodation to lessen regulation for the FinTech industry. For example,The Monetary Authority of Singapore (MAS) is clear in its flexibility with its website statement: “Depending on the experiment, MAS will provide the appropriate regulatory support by relaxing specific legal and regulatory requirements prescribed by MAS, which the sandbox entity will otherwise be subject to, for the duration of the sandbox”. Hong Kong has also found a way to launch and align Sandboxes managed by three different regulatory authorities across three sectors – banking, insurance and securities.
The US on the other hand, while home to Silicon Valley and a key global financial centre, has struggled to implement a Sandbox by the many layers of regulatory bodies that touch FinTech driven services. The range of federal regulators with specific, and at times, different voices on the role of Fintech include the Commodities Future Trading Commission, the Office of the Comptroller of the Currency, The US Securities and Exchange Commission, The Financial Industry Regulatory Authority and The Federal Deposit Insurance Corporation. Legislation H.R. 6118, The Financial Services Innovation Act of 2016 - well intended but currently stalled in Congress – was drafted on the theory that FinTech was a business necessity and foundational for financial services regulatory reform. The ability to put in place a Sandbox depends as much on the countries’ regulatory structure as its political appetite to accommodate FinTech opportunities.
Sandboxes have become table stakes for some jurisdictions. One obvious example is the European Commission issuing a recommendation in March 2017 for the launch of a Pan EU regulatory Sandbox. Given the leading role the UK plays in the current EU Fintech space and its pending departure, this recommendation appears to be a necessity for a smaller EU to keep up with the other global Fintech leading countries.
A final point: the country that is introducing the Sandbox needs to determine the breadth of areas it wants to open up to regulatory accommodation. Generally, these can be narrowed down to five categories: Payment Services, InsureTech, Credit Products, Investment Platforms, and Banking Tech. There are many other areas that technology can provide value to, however, these are the primary access points that FinTech has brought visible benefits to retail financial services customers. While the UK has opened its Sandbox to the full range of services, other countries like Canada have chosen to limit the Sandbox concept at this time to the purview of the Canadian Securities Administrators, the regulator of its capital markets.
The “Sandbox” idea is not new. In fact, its been around for decades as a software business concept that enables developers to test ideas before they get released to the public. The added dimension for regulators is that ‘technology advances at a speed much faster that any law could, or should be, enacted to accommodate the benefits of the technology’. The Sandbox concept is challenging not only the financial services industry, but also the legal profession in a long overdue way. We as lawyers and compliance professionals need to make it a point to understand technology beyond what serves us in our office. Instead of thinking outside the box we need to l think more creatively inside the Sandbox to help FinTech, Financial Services and the Legal profession to thrive in the digital world.
Stephen is Toronto based lawyer admitted to the Bars of Ontario, Colorado and Wales and England who has advised on transactions across the globe. With added credentials in Anti-Money Laundering, Privacy and Cyber Security, he is a frequent and passionate speaker on the intersection of technology and regulations. He has held legal and compliance roles in the delivery of financial services for international companies that include Foresters Financial, HSBC, Apptical and Canada Protection Plan and more recently is providing compliance expertise in the banking and life insurance space with a focus on digital initiatives.
We now hear from Dr Steven Hirsch, who reveals the complex, yet fascinating problems he faces in the world of psychiatry.
Are there developments in diagnosis and treatment, which has a bearing on legal practice?
Two issues of common concern for lawyers and doctors are medical symptoms for which there is no well understood physical cause, and injuries that inexplicably give rise to loss of function and disablement, or severe pain. There may be a number of psychiatric explanations – diagnoses which can often be effectively treated. These conditions have been subsumed under the rubric, Somatic Symptom Disorder; a diagnosis which has been widened in the American Diagnostic Manuel, DSM-5, to include conditions in which the medical practitioner considers that the severity of the symptoms is excessive and cannot be explained physiologically by the nature of the lesion or the original insult. For example, a man stepped on a nail that caused only a minor injury, but lead to such severe pain that he lost the function of his foot and could not walk. He subsequently developed changes in the appearance of his foot and ankle, which became cold, hairless, slightly swollen, and very weak. The diagnosis was Complex Regional Pain Syndrome (CPRS), something which pain specialists and rheumatologists often see; psychiatrists become involved because the pain is so out of proportion to the injury.
In another case, a man twisted his ankle, and only months later went for medical help, because pain and weakness seriously interfered with his ability to walk, but he did not have the tell-tale symptoms of CRPS.
How can we understand such apparently unexplainable complaints? Did either of these cases represent a Factitious disorder in which the symptoms are consciously fabricated in order to gain medical attention—e.g. so called Munchhausen’s syndrome? Or was it Hypochondriasis, in which the patient has become hyper-vigilant and over-reactive to the merest suggestion of illness? Or was it a Dissociative Disorder, also called Conversion disorder or Charcot’s Hysteria, in which there is a loss of memory or loss of a neurological or brain based function without a physical cause?
What about trauma, and threatening life experiences? Do they make up much of your practice?
Beside Pain and other Somatic Symptom disorders, Post Traumatic Symptom Disorder (PTSD) has become an important area of focus in psychiatric practice because it is very common, often latent, with a delayed and often misleading onset. I would suggest that lawyers, should ask clients who complain of psychiatric symptoms if they have ever experienced an emotional shock or trauma, because PTSD is an eminently treatable condition which can lie behind a range of symptoms and psychological dysfunction. The signs are hyper vigilance, such as jumping to a loud bang; flash-backs, or re-experiencing an event with nightmares or a recurrent disturbing thought or image; and characteristically, a change of behaviour involving avoidance of people and events which were enjoyed in the past. This was under-diagnosed in the past, but the symptoms are now too well known to the legal profession, if not the public in general.
How do these and other psychiatric issues come into play in employment cases, which is one of your areas of expertise?
Individuals may tend to perceive themselves as locked into their place of employment, and not find it easy to walk away when they feel threatened, are experiencing the exertion of power, or undermining of their self-esteem, be it from their superiors or their colleagues. The trauma can be compounded by the difficulty of escape, the sense of helplessness, and the implied threat to their future, and indirectly by its potential affect on their loved ones, and become too much to bear. Helplessness is one of the underlying dynamics leading to a Depressive Disorder, as well as Anxiety and Posttraumatic Stress Disorder. I have done follow-ups on some of my cases, and it is not at all uncommon to find that they never really recover, even when they have had a very ample financial settlement in their favour.
How do you think the workplace can be better organised to minimise the conditions which give rise to employment cases and prevent litigation?
Employers need to be sensitive to individuals showing signs of stress or depression in the workplace, and be aware of employees who develop a poor sickness record. They should be vigilant to rumours of abusive leadership within the workplace. HR needs to see itself as a sensitive listening post to pick up the signs of trouble, because in the long run that will better protect the employer than ignoring it or acting in a defensive manner. Creative and effective intervention requires sensitivity, open mindedness, and a desire to resolve conflict for the benefit of the common good, and should be part of the work policy. HR departments should have read and become familiar with the ACAS advise on dealing with mental health issues in the workplace.
What can be done to encourage this?
These principles should be written into a strong work policy, and HR departments should see their role in protecting the employee as being just as vital as their obligation to the employer, and not be reluctant to intervene when it is needed.
Steven Hirsch BA MD FRCP FRCPsych
Professor of Psychiatry Emeritus
Imperial College London
www.professorstevenhirsch.co.uk
I am Professor Steven Hirsch, Professor of Psychiatry Emeritus at Imperial College London, but since leaving the academic world, I have focused my interest on medico-legal issues; it is a second career. Psychiatric injury has become an important aspect of personal injury, employment, negligence, and testamentary capacity cases, with an increasing appreciation of the variety of psychiatric injurie, and the way psychiatric issues can affect the nature of the symptoms people present.
With previous experience as a tax inspector, JJ met many new clients needing help assessing their tax problems.
“As a former tax inspector, I can give them special insight into how their specific circumstances might be analysed by the tax authorities. They need to anticipate how the French Government will handle their situation.
“Being able to anticipate the tax authorities’ viewpoint gives them an edge and helps them feel more secure.”
He speaks more on reformations the French Government must make, in order to benefit the business world.
With this prior experience, what are important aspects you commonly see business people misjudging or being unaware about?
One particular aspect of business restructuring is the pivotal role played by a holding company. The French Holding Regime is very competitive in relation to those in place in other European countries and is very often the key player in a restructuring plan.
Another aspect of the French Regulation that foreign investors are not aware of, is the leeway that many articles of the tax code leave to the taxpayers. They often do not know they have a choice to find the most effective restructuring. They may also have different options when it comes to tax returns filing. I have published an article about this unawareness entitled: ‘France Can Be a Tax Heaven for Expats’. It is a bit provocative but relates to this lack of awareness that tax law is very flexible.
Are there any common business regulations international companies are unaware about? How does this lead them towards litigation or legal cases?
There is indeed a specific trap that I often see international companies entangled in. This could be known as “shadow permanent establishment” and is where a foreign company has some commercial interest in France and has set up an outlet or a warehouse; at the beginning, this structure is not very significant and does not equal a complete up and running legal entity. The problem is the grey zone where the company moves from a tiny outlet to a situation where the tax authorities will consider that they operate like a domestic company, given the size of their operation, the number of employees or the amount of their revenue etc. This can trigger a tax audit that results in heavy penalties.
To prevent this from happening, foreign companies should never let out-of-France advisers organise their French operations.
What are three tips you would offer to ensure your client invests in the economically best way possible?
Are there any regulations you are hoping to see change, that will help your role at the Paris Bar?
Wealth Tax: If not repealed, Wealth tax will be deeply amended by the new government. The business community has pushed hard for years to have this done because it is a deterrent for investors that makes things difficult to consider France as an investment-friendly country.
Labour law: This is another legal area that is under serious scrutiny in an effort to fluidify the employment market and to no longer put French companies at a disadvantage.
Protection of tenants: Investors constantly complain about the laws and regulations that prevent landlords from evicting non-paying tenants. In this respect, we consider investors are still better off when investing in the US or in other parts of Europe than in France. As a rule, it is preferable to buy a property in France when the investment is private.
Since I have set up my private practice, I assist, represent, and advice clients with a special emphasis on the strategy options either during transactions or during litigations.
Being registered with the Paris Bar as Attorney Agent in Real Estate Transactions, I provide a full range of services to clients willing making investments in France. Thanks to a new regulation issued by the Paris Bar, I now may assist clients willing to invest in real estate throughout France and even abroad. A French Tax Attorney may now assist a client the same way a Real Estate Agent would and at the same time, providing Legal and Tax advice to optimise their investment.
Jean-Jacques Michallon
J2M law firm
Email: jjmichallon@icloud.com
Instagram: @RealtyScope
Tel: +33 142 250 848
This insightful interview with Rhett Barney, Partner at Lee & Hayes, PLLC, is certainly not one to miss. Rhett touches on where companies often go wrong when trying to trademark, and aspects they often forget when trademarking internationally. Having an eye for fine details is a must, as Rhett below discusses how colours and signs can easily impact a company’s trademark and brand.
Can you suggest three things to consider when devising a unique ‘brand’?
Developing a unique brand starts with fundamentally understanding what a brand is and what it is not. Even though the term “brand” is often used by business and marketing people as a synonym for “trademark”, a brand is not just a trademark. A brand is also not the name of a business, a product or product concept, a copyrighted work created by a company, or an organisation’s advertising. Instead, a brand is a combination of an organisation’s products and services, unique source identifying words and symbols (trademarks), and advertising messages to the public. The interaction of each of those components creates a commercial impression that tells the public what they can and should expect from the company, at which point in time a “brand” is created.
With that in mind, my first recommendation is that businesses take the time to understand what their brand really is, and to make sure that each aspect of their brand is consistent with the overall brand approach.
My second recommendation is that businesses look at each aspect of their brand, instead of as the brand as a whole, as it is made up of protectable and protected elements. This might mean looking to get a registration to protect a trademark, ensuring that content that is created is original and does not “borrow” from others’ works, or revising a claim made in an advertisement to ensure that it is not false or misleading.
My third recommendation is that businesses seek to protect, within the limits of their budgets, the individual components of their brands. For example, most trademarks in today’s marketplace should have a federal registration. If you have a mark that you cannot get a registration for, either because the mark is not sufficiently distinctive, or because there are other conflicting marks that prevent it, that company should really think hard about why it is using that trademark. Similarly, if there is artwork or other copyrightable content (such as a video) that sets that company apart, the company should maximise its protection for that content by - at least as companies in the United States go - getting a copyright registration.
It is also very important for businesses to remember that not all trademarks are created equal. There is a spectrum of trademark strength, ranging from generic (non-protectable) to fanciful (most protectable). People deciding on trademarks should know about this, and they should be thoughtful about the trademarks that they chose.
In what ways can clients ensure that their trademarks are properly used for the benefit of developing their brand?
There are a lot of different things that companies can and should do with their trademarks to ensure proper use, which results in a stronger brand. The easy ones including using the trademarks properly; generally used as an adjective, set the mark apart in some way from the rest of the texts and imagery, generally avoid possessives and plurals, and correctly mark the trademark with a “TM” or “Circle R”, as appropriate. Consistency is also incredibly important, and this comes with having a strategy and a culture that informs people throughout organisations of proper and correct use of a company’s trademarks and other intellectual property assets.
What do businesses often forget in relation to protecting their design and brand, when trying to internationally expand?
Companies will oftentimes forget to re-examine their trademarks, business name, and product identifiers when going into a new country. Companies need to be sensitive and proactive about these issues when they roll into a new country. Sometimes the strategy can be to keep everything consistent across jurisdictions, but at least consider the following three items:
Meaning and translation
The company should talk with a local about how a word or phrase will translate, or if the word has alternative meanings, even if the languages of the two countries are the same. Further, if entering into a market that does not use Latin characters, such as China, businesses need to decide if they should select Hanzi (or Han) logograms to represent a word, or if they want to maintain the Latin format, which also affects filing strategy.
Imagery
Similar to words, certain images do not resonate well across cultures, so companies should look at them and decide if their current logos and other brand images are worth protecting in certain jurisdictions. If not, then the protective filing strategy should be altered accordingly.
Colour
Often overlooked in the branding context is colour. Colours have different meanings in different cultures. This is relevant for design trademarks, or logos, and filing strategy because companies need to decide if they want to file in colour or not, and what kind of protection they will receive by choosing to file in colour or black and white.
Another important aspect of brand growth that applies both domestically and internationally is to own as much relevant digital real estate as possible. This means owning all relevant domain names, Twitter accounts, Facebook profiled, LinkedIn profiles, etc. etc. This is particularly true in foreign countries where an English-only online presence will deter, rather than attract, consumers.
Can you share the general principles behind devising a strong global portfolio for branding decisions?
This is as much a business decision as it is a legal one. My advice to clients on expanding their portfolios abroad is to first consider what global marketplaces are strategically important to them. But before they can make that determination for most jurisdictions, they need to understand what kind of company they are in terms of the global marketplace. For example, consider if they are: international (importers and exporters with no real business investment outside the country); multination (some investment in other countries, but the products from the home country are typically adapted for the local market); global (invested and present in many countries with the same coordinated image across countries), or transnational (complex organisations that are much more decentralised with power given to each foreign market). Once they understand how they fit into the global marketplace, that should drive their foreign portfolio development, which will in turn support branding decisions. The “strategically important”, as I use it, means that there is either a financial tie to the country that justifies the investment, or there is a defensive reason for filing in that country, such as filing in countries where a business has no operations or market, but that may produce counterfeit goods or create a ‘copycat’ business.
From a purely legal perspective, there are a few basic guidelines that every company should take into consideration. The first and most obvious consideration is whether there is already someone in a target jurisdiction with a conflicting mark. If so, who has priority, or first use in that country? If the country has a first-to-file system, as many countries around the world do, is there any ability to claim priority to a home country application to pre-date the filing of the other country?
Is there anything else you would like to add?
The co-founder of HP, David Packard, once said that “marketing is too important to be left to the marketing department”. I agree with this wholeheartedly. Not because I don’t trust the marketing department, but because I am a proponent of getting marketing, legal, and C-suite together to make important branding decisions. While legal and marketing oftentimes butt-heads, it is my experience that they are both trying to accomplish similar objectives; they just aren’t good at communicating with each other. The more regularly these three groups get together, the better they will communicate, and the more protectable and valuable the resulting branding will be.
Rhett Barney | Lee & Hayes
Partner
rhettb@leehayes.com
P 509.944.4642 | F 509.323.8979
www.leehayes.com
Rhett Barney is a Partner at Lee & Hayes, PLLC and leads the firm’s Trademark and Copyright Practice Group. He provides worldwide trademark and copyright protection and enforcement strategies with a particular interest in branding and brand protection. Rhett represents clients ranging from small start-ups to leading global organisations. He is a featured speaker at universities, industry events and has been a featured legal analyst for MSNBC.
Lee & Hayes, PLLC is a dynamic law firm providing industry leading intellectual property counsel, as well as complementary legal services in corporate/securities and litigation. With intellectual property at its core, the firm focuses on providing strategic services to assist clients in the development, understanding, and protection of intellectual property assets.
The firm has offices in Atlanta, Georgia; Austin, Texas; Portland, Oregon-metro; Rochester, New York; Seattle and Spokane, Washington; and Washington D.C.-metro
