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CMA encourages banks to embrace tech innovation

In August 2016, the Competition and Markets Authority (“CMA”) published its report proposing banking reforms focused on encouraging technological innovation.[1] These reforms included introducing an open API standard for banking to be adopted by early 2018. Such a standard is intended to enable intermediaries to readily access information about bank services, prices, service quality and customer usage, that is currently accessible in most cases only by the relevant individual financial institution and is not generally shared in a portable format. 

This report marks the completion of the CMA’s retail banking market investigation, and follows on from the approach recommended by the Open Banking Working Group, published in February 2016.[2]

Purpose – level playing field

The CMA envisages that applications will be developed using the open APIs and the data that flows through them that will:

  • allow customers to manage their accounts held with several banks or building societies;
  • allow customers to authorise transfers of funds between their various accounts;
  • provide comparison services on price and quality, tailored to their own usage patterns;
  • monitor a current account and forecast cash flow, helping to avoid overdraft charges; and
  • use a business’s transaction history to allow a potential third party lender to reliably assess that business’s creditworthiness (and thereby help the business get a better deal).

The CMA hopes that introducing open APIs will help to bridge the knowledge gap between incumbent banks which have known their customers for years and challenger banks and the FinTech sector which, without the customer history, do not have the same ability to assess financial risk in lending to a particular customer or to develop new products.

In order to ensure a level playing field between new market entrants and incumbent banks (which may develop their own aggregator solutions), there has been speculation that a new regulator or rulebook may also be required, drawing parallels with the Payment Systems Regulator that was established in 2015 to oversee the opening up of payment systems by the incumbent banks.[3]

Data security

However, allowing third parties access to sensitive customer data raises concerns about data security and the extent to which customers would be willing to share data between different organisations. Additionally, by bringing data together from a number of different accounts it may make the application a more attractive target for fraudsters. Any third party aggregator will therefore need to ensure that it has rigorous data security measures in order to gain trust and build its market share.

Liability issues

At the moment, the contractual structure between a bank, its customers and the various technology services is relatively straightforward: typically, the bank acts as the technology provider and is therefore responsible to the customer for errors or security issues with the technology. Where the third party is also able to initiate payment instructions to the bank, as envisaged by the CMA, there is a risk that the customer is left without recourse for any erroneous or fraudulent transactions executed through the third party aggregator. For example, this situation could arise where third party aggregators adopt a business model based on low fees and a very conservative liability position or where the third party aggregator does not have sufficient capital to continue in the event of a security breach that leads to a high number of customer claims.

However, it is worth noting that the Revised Directive on Payment Services (PSD2) seeks to address exactly this type of issue with the new category of “payment initiation services”. This is likely to include a number of third party aggregators that use open APIs, who would therefore be subject to certain regulatory requirements set out in PSD2, including in relation to their liability to customers and holding a certain amount of capital within their business – measures which should go a considerable way towards protecting the customer’s position.

More to come

These are just some of the issues – both legal and commercial – that such a broad change in the data landscape is likely to bring with it. The short timelines for introducing open APIs proposed by the CMA and the Open Banking Working Group coupled with the level of complexity mean that this is likely to be a hotly debated topic for the foreseeable future.

How blockchain can reshape financial services

The World Economic Forum (WEF) recently published a report on the future of financial infrastructure looking at how blockchain could reshape financial services.

Noting that 80% of banks are predicted to initiate blockchain / distributed ledger technology (DLT) projects by 2017, the report identifies DLT as one of a number of emerging technologies which include biometrics, cloud computing, cognitive computing, predictive analytics and robotics that will shape the future of financial services infrastructure.

According to the report the impact of blockchain will vary according to the particular use case, for example:

  • Global payments: enabling near real-time point to point transfers of funds between financial institutions, reducing settlement times.
  • Trade finance: enabling real-time multi-party tracking and management of letters of credit for faster automated settlement.
  • Compliance: automating compliance processes which draw on immutable data sources where transaction records cannot be altered for faster and more accurate reporting.
  • Digital identity: a fully digital system for storing and transferring identity attributes which could be directly integrated into financial infrastructure, for much faster and more accurate customer identification and counterparty matching.
  • Digital fiat currencies: providing settlement to liquid, cash-equivalent tokens issued by central banks, eliminating the need for an inefficient linkage between cash and new financial infrastructure.

The report looks at a number of use cases and highlights the significant changes that could be made to current processes through the application of blockchain and the resulting benefits. Taking global payments as an example, trust between the sender of a payment and the bank or money transfer provider could be established via a digital identity profile. The obligation to transfer funds between sender and beneficiary could be captured in a ‘smart contract’, a computerised transaction protocol that forms the terms of a contract by reference to business rules codified on the blockchain. Through smart contracts, foreign exchange could be sourced from participants willing to facilitate the conversion of fiat currencies. Funds would be transferred in real time with minimal fees without the need for a correspondent bank. The beneficiary’s identity could be verified using a digital identity profile. A regulator could monitor transactions in real time and receive specific AML alerts and at any time review transaction histories stored on the ledger.

As an early stage, real-world example, Circle recently launched in the UK a free app allowing cross-currency transactions between US dollars and pounds sterling, using Bitcoin as an underlying currency. When a sender wishes to send a payment, the service charges the sender’s bank card, buys Bitcoins, sends them to the recipient’s account and makes the reverse exchange. There are no fees for the service. Customers hold their money in national currencies, using Bitcoins for such a short period of time that there is a low risk of being exposed to volatility in the cryptocurrency’s price. Circle has announced that it plans to extend this service to Euro-zone customers.

There have been regular press reports of major financial institutions taking an interest in blockchain. Recent announcements have included: UBS partnering with Deutsche Bank, Santander, BNY Mellon and the broker ICAP to develop a new form of digital cash which they hope will become an industry standard to clear and settle financial trades over blockchain, aiming for a commercial launch by early 2018; and Visa collaborating with digital payments start-up BTL Group to adapt its technology for processing interbank payments across multiple currencies with the aim of reducing costs, speeding up settlement times and reducing credit risk.

The WEF report highlights the potential for blockchain to achieve significant benefits over current processes. In the case of global payments for example, it could result in reduced costs and settlement times and more efficient KYC, AML and compliance processes. However, for these benefits to be realised, there are a number of major issues to be resolved such as:

  • consensus on the type of DLT platform across a significant number of financial institutions to facilitate economies of scale;
  • adopting common KYC processes used by banks and money transfer operators across different regulatory frameworks;
  • clarification of an uncertain regulatory environment;
  • creating a legal framework so that the rights and obligations recorded in the blockchain can be accepted as binding without the need for legacy solutions to be maintained in parallel; and
  • managing the volatility of cryptocurrencies.

By some estimates, it will be three to five years before blockchain is adopted at scale. Significant issues still to be resolved before blockchain can be applied more widely include:

  • security issues such as ensuring that distributed ledgers are secure and safeguarded against errors, building rules to prevent malicious behaviour, performing thorough end-to-end testing, verifying all code and having in place stringent IT controls to detect potential gaps in security;
  • implementing new regulatory frameworks (US regulators recently cited concerns about distributed ledger systems, including possible operational vulnerabilities not becoming apparent until the systems were deployed at scale and possible vulnerability to fraud executed through collusion among a significant fraction of participants); and
  • putting in place new liability frameworks (where liability and jurisdictional issues are not expressly dealt with by traditional legal agreements or smart contracts, it remains unclear which party will have to take responsibility when things go wrong). 

A copy of the WEF’s report can be found here.

 

Court holds regularly licensing software is 'sale of goods'

Until recently, there has been uncertainty as to whether agents who market and promote software on behalf of their principals are covered by the Commercial Agents (Council Directive) Regulations 1993 (Regulations).  The prevailing view, based on limited case law in this area, has been that software would not be considered goods (and therefore the Regulations would not apply) unless it is supplied bundled within hardware.

On the 1 July 2016, the High Court in The Software Incubator Limited v Computer Associates UK Limited [2016] EWHC 1587 (QB) handed down a significant judgment which provides some clarity on this question. The Court held that the licensing of software on a perpetual basis was a ‘sale of goods’ for the purposes of the Regulations, despite the software being supplied in intangible form.

Background

The Regulations apply only to agents who are involved in the sale or purchase of goods on behalf of their principal and do not apply in relation to services. Goods are not defined under the Regulations. When the Regulations came into force, and in the absence of any European guidance, the UK Government considered the meaning of goods under the Sale of Goods Act 1979 and issued guidance that this would be a reasonable guide as to interpretation under the Regulations, without being definitive. This, together with the limited case law we have had in this area, has resulted in a widely held view that software is not goods under the Regulations unless it is sold on tangible media or bundled within hardware.

Facts

The Software Incubator Limited (TSI) was appointed by Computer Associates UK Limited (CA) as a non-exclusive agent to market, promote and sell CA’s release automation software (RAS) product in the UK.  TSI was required under the agency agreement to dedicate a substantial amount of time and effort in providing its services on behalf of CA and the agreement between the parties also contained a non-compete provision.  TSI had a proven track record in making sales of the product, but became dissatisfied with the relationship with CA, and decided to start acting as agent for a third party, Intigua.  CA terminated the agency with immediate effect on learning of the arrangement with Intigua. TSI claimed against CA under the Regulations for compensation in addition to claiming for commission on post-termination sales and damages.

Part of CA’s defence was that there was no valid claim under the Regulations because the licensing of software was not the ‘sale of goods’ for the purpose of the definition of “commercial agent” under the Regulations.

Decision

Wakeman, J held that the supply of the software in this case was a ‘sale of goods’.  In doing so, he departed from earlier court decisions by concluding that, in the absence of a definition of goods under the Regulations, it was “permissible and indeed desirable to have an autonomous definition of sale of goods for the purposes of the Regulations” and that “there is no logic in making the status of software as goods (or not) turn on the medium by which they were delivered or installed…[T]he essential characteristics of a piece of software like [CA’s RAS software] cannot depend on its mode of delivery (i.e. whether or not it is delivered on or with hardware) any more than the nature of tangible goods depends on whether they are transported by rail, sea or air”.

Key factors in Wakeman, J reaching this conclusion were:

  • how the software product was treated by the parties under the agreement: the agreement described TSI as having been engaged to “sell” the software, and purported to release CA from any claims under the Regulations.  Where software is treated in the same way as goods, Wakemn, J’s view was that it is logical that it should be interpreted in the same way for the purposes of the Regulations
  • the software was sophisticated and non-bespoke, and should, therefore, be considered a “product”, rather than a “service”
  • there was a “sale” of the software because the vast majority of customers received a perpetual licence (subject only to particular conditions in relation to breach); the intention, therefore, was that the purchaser had the ability to use it forever, as with the sale of any product
  • there is nothing under EU or domestic legislation, or existing case law which prohibits the interpretation this way, and
  • the fact that software is ‘intellectual’ property rather than real or personal property does not prevent software being treated as goods.

Comment

Companies using agents to market and promote their software products should review their arrangements to ensure their exposure under the Regulations is minimised, in particular by considering which of the two termination payment calculation methodologies (compensation or indemnity) will apply.  

Companies should also take care as to how the software, and the agent’s activities are described in the agreement: As noted above, the fact that the agreement between TSI and CA referred to sales was relevant to the court’s decision in this case.

It should also be noted that this decision does not mean that software will always be treated as goods for the purposes of the Regulations. In particular, and as noted above:

  • a factor in Wakeman J concluding that the software was a product and not a service was that it was non-bespoke; it is possible, therefore, that where software is heavily customised, it would be treated as the supply of a service rather than the sale of goods, and
  • the software in this case was licensed on a perpetual basis and, as such, was akin the sale of any other product; it is by no means certain, therefore, that the licensing of software on a subscription basis (which is the case with many software products) would be treated as the sale of goods under the Regulations.  

All is fair in love and war... and network neutrality

Network neutrality is the principle that our data should be treated equally over the internet regardless of its source, who receives it or content and without favouring or blocking particular products or websites.

The Body of European Regulators for electronic communications (BEREC) delivered its final guidance on implementation of the net neutrality rules by EU regulators on the 30th August (as required by Article 5(3) of the Regulation (EU) 2015/2120 of the European Parliament and of the Council of 25 November 2015). After the compromise text of the regulation concluded that all data should be treated equally but some data is more equal than others, otherwise known as carve outs to the principle of network neutrality, BEREC was always going to have a tough job trying to come up with a set of guidelines that will be implemented consistently across all Member States.  BEREC received over 400,000 responses to the consultation.  The finer details of what constitutes ‘acceptable traffic management practice’ are not ’byte sized’. It will also be interesting to see how the ‘specialised services’ which are aimed at allowing more managed ‘internet of things’ type services to emerge that do allow internet access to be provided contrary to the network neutrality principle are actually offered by the telecom operators in practice particularly as they will be required to justify that such an approach is necessary, that network capacity is sufficient and that the broader internet access service is not degraded, if requested to do so by the regulator. 

The general consensus is that BEREC has not looked to water down the principle of network neutrality through the carve outs in its Guidelines and therefore network neutrality has been protected.   There were criticisms that in fact it has been too prescriptive in its approach.  Of course these Guidelines are now going to be interpreted by the national regulatory authorities.  The role of the NRAs will be to monitor, enforce and report back to BEREC on how network operators are complying the fundamental principle of network neutrality or whether the ‘carve outs’ become the exception rather than the rule. Ultimately as EU governments seek to auction 5G spectrum off and ask the EU telcos to put their hands in their pockets once again to invest in networks whilst adopting a not entirely consistent approach to mergers, it will remain to be seen how forcefully traffic management is scrutinised to assess its reasonableness and non-discriminatory basis for implementation.  One thing is clear however, uncertainty and investment rarely go hand in hand and the final Guidance does not totally remove the former when the networks in Europe need the latter.

Third Time Unlucky for Hot Joker EU Trade Mark Application

In Novomatic AG v EUIPO (1), the EU General Court upheld a decision of EUIPO’s Second Board of Appeal that there was a likelihood of confusion between a “hot joker” figurative sign and an earlier “joker” figurative mark in the gambling and gaming sector. The decision, which concerned an opposition brought by leading soft drinks company Granini France, will be of particular interest to gambling and gaming businesses for its analysis of the similarity between “hardware and software” in Class 9 and “games” in Class 28 and comment on the effects of changes to recent editions of the Nice Classification. As electronic-based gambling games are effectively a regulated subset of video games with a cash wager at stake, computer and video games businesses more generally should also take note of the decision.

Background

Granini France has sold fruit juice drinks in France for a number of decades. Its products include the well-known “Joker” range. While Granini’s trade mark portfolio generally relates to fruit juice drinks in Class 32, it also has a word mark for JOKER from 1984 and a figurative “Joker” mark from1989, each registered in France for a broad range of goods and services across many classes. In 1999, the French national lottery operator, Française des Jeux (FDJ), updated its national lottery add-on game called Joker to a new version named Joker+. FDJ discovered from its clearance searches that Granini’s1984 and 1989 “Joker” registrations already covered “entertainment” and “lotteries”, among other things. FDJ contacted Granini who agreed to file a “Joker+ ”figurative mark and license it to FDJ. In 2006, FDJ rebranded Joker+ and Granini registered the figurative mark shown below (the Joker+ Mark) in France for “games and toys” in Class 28 and “Entertainment; entertainment by means of radio or television; services of organisation of lotteries or gambling; organising of competitions for entertainment” in Class 41: Novomatic AG is an international gambling and gaming company headquartered in Austria with an extensive trade mark portfolio in the gambling and gaming sector. On 14 December 2010, Novomatic filed an application at EUIPO for a figurative device mark (the Hot Joker Sign) in the following classes:

Class 9:

Hardware and software, in particular for casino and amusement arcade games, for gaming machines, slot machines or video lottery gaming machines, with or without prize pay-outs, or games of chance via telecommunications networks and/or the Internet, with or without prize pay-outs.

Class 28:

Casino fittings, namely roulette tables, roulette wheels; casino games with or without prize pay-outs, gaming machines and games machines, in particular for commercial use in casinos and amusement arcades, or games of chance, with or without prize pay-outs, via the Internet and via telecommunications networks, games of chance, with or without prize pay-outs, for use in telecommunications apparatus; Slot machines and/or electronic money-based gaming apparatus with or without prizes; housings for slot machines and gaming machines; electronic or electrotechnical gaming apparatus, gaming machines and automatic gaming machines

It appears that Novomatic intended to use the Hot Joker Sign primarily for either physical slot machines or their virtual counterparts, often known as “video slots”. Novomatic appears to offer other video slot games with the “Joker” theme and imagery, including “Mega Joker”, “Joker Fruits” and “Power Joker”, which feature similar versions of the jester’s face from the Hot Joker Sign as the slot machine symbol that awards the most prize money.

In May 2011, Granini filed opposition proceedings against the Hot Joker Sign based on a likelihood of confusion with its earlier marks on the part of the French public, as a relative ground of opposition under the EUTM Regulationart.8(1)(b).(2) For reasons of “procedural economy”, EUIPO’s Opposition Division only considered the Joker+ Mark out of the marks that Granini cited because it had been registered for less than five years and was thus not subject to proof of genuine use by Granini or FDJ.

EUIPO’s Opposition Division upheld Granini’s opposition. That decision was approved by EUIPO’s Second Board of Appeal, although the Board found that the relevant public was limited to “professionals in casinos, amusement arcades, bingo halls and the like in France”, who have a higher level of attention than the general public. Novomatic appealed again to the General Court.

Decision of the General Court

Novomatic canvassed various grounds of appeal for its case based on breaches of the Regulation by the Board of Appeal, but its position was essentially that the Board had wrongly concluded that there was a likelihood of confusion among the relevant public after the Board had incorrectly carried out the comparison of the overlapping goods and the respective signs.

Comparison of the goods

The Board of Appeal had held that the overlapping goods were “games and gaming devices”. It had decided that Granini’s “games” in Class 28 were similar to Novomatic’s “hardware and software” in Class 9 to the extent that they “include computer games programs and amusement apparatus adapted for use with an external, display screen or monitor”. The Board further held that Granini’s “games” in Class 28 were identical to the majority of Novomatic’s goods in Class 28 and similar to the remainder. Novomatic’s first argument was that Granini’s registration for “jeux et jouets” or “games and toys” in Class 28 had to be read in combination as a narrower scope of registration than “games” alone would be. Novomatic argued that its goods in Class 9 and 28 could not be “played with”, whereas “games and toys” were aimed only at children, who were prohibited by French legislation from gambling activities, and were a different relevant public from Novomatic’s gambling professionals. The General Court rejected Novomatic’s arguments and agreed with the Board’s definition of “games” based on the New Shorter English Dictionary, which states that “games” is “so general that it can cover everything from ‘amusements’, ‘sports’ and ‘pastimes’ to ‘games of chance for money’”. The court also agreed with the Board that this assessment was supported by the explanatory note to Class 28 in the Eighth Edition of the Nice Classification, which was the relevant edition for the Joker+ Mark as it was filed in 2006. While the note specifically excluded “amusement apparatus adapted for use with television receivers only” from Class 28, it did not specifically exclude games played on a monitor or “games of chance, hand held devises [sic] or on-line games”. The court decided that, because these types of game were not expressly excluded from Class 28, such games should be included in Class 28 and hence be considered within the definition of “games” for the Joker+ Mark. The General Court concluded that “games” was a broad definition that included “electronic or on-line games of chance, such as bingo or various other card games” and was not narrowed by the addition of “and toys”. Novomatic’s second argument was that the Board of Appeal wrongly carried out its assessment of the similarity of the respective goods, claiming that:

  • the Board had solely relied upon the explanatory note to the Ninth Edition of the Nice Classification, which supported the similarity between Novomatic’s “hardware and software” in Class 9 and Granini’s “games” in Class 28 because the note specifically included “amusement and game apparatus adapted for use with an external display screen or monitor” in
  • Class 9 and thus contradicted Novomatic’s argument that “hardware and software ”could not be “played with” and were thus dissimilar to “games”;• the Board wrongly interpreted the use of the words “in particular” in the specification applied for in Class 9 to restrict “hardware and software” to gaming devices, when these words were only illustrative; and
  • Its goods in Class 28 were not similar or identical to “games” owing to the “reality of the markets”, for example, “housings for slot machines” could not be obtained in toy shops. Again, the General Court disagreed, holding that:
  • the Board had been correct to state that the Hot Joker Sign’s specification was subject to the Ninth Edition rather than the Tenth Edition of the Nice Classification as the Hot Joker Sign was filed in 2010; the Tenth Edition provides that “amusement and game apparatus adapted for use with an external display screen or monitor” are specifically included in Class 28 and excluded from Class 9—the opposite position from the Ninth Edition. Moreover, it was clear to the court from the Board’s decision that it had taken into account all relevant factors and had not solely relied upon the Nice Classification in reaching its decision on Novomatic’s Class 9 goods;
  • the Board of Appeal had not read the phrase “in particular” as restrictive rather than illustrative, although the court did not support this finding with detailed reasoning; and
  • only the description of the goods applied for could be taken into account, not the “reality of the markets”. On that basis, the General Court entirely agreed with the Board’s conclusions on Novomatic’s goods in Class 9, noting that “hardware and software” are similar to computer games, including electronic or online games of chance, because they are “essential to their functioning” and thus “complementary”. The General Court also agreed with the Board’s conclusions regarding Class 28, save that it held “casino fittings, namely roulette tables, roulette wheels” were similar rather than identical goods to Granini’s “games”.

Comparison of the signs

The Board had found that the Hot Joker Sign and the Joker+ Mark had:

  • a low degree of visual similarity because of the different figurative and graphical elements;
  • an average degree of phonetic similarity because of the verbal “joker” element likely to be recalled by the relevant public; and
  • an average degree of conceptual similarity because of the common idea of a “joker” with connotations of card games and the Batman films. Novomatic did not dispute this analysis before the General Court, but it repeated its arguments that the “Joker” verbal element must not be taken into account because:
  • “Joker” was not distinctive for games of chance; and
  • the remaining elements of the two signs were clearly not similar. In support, Novomatic cited the co-existence of many “Joker” signs in the sectors of entertainment, lotteries and games of chance in the European Union. By contrast, Novomatic’s own additional “hot” verbal element gave the Hot Joker Sign the distinctiveness required because it had no meaning in the French language, it was placed at the beginning of the Hot Joker Sign, and it was illustrated by flames.

Once more, the General Court did not agree, holding that Novomatic had failed to discharge its burden of proof to show that the word element “Joker” was descriptive for games. Further, even if the General Court had decided that “Joker” were descriptive, the court could not have completely excluded it from the comparison because only elements that are entirely negligible can be so excluded. The court also held that completely excluding “Joker” would have effectively deprived the Joker+ Mark of any scope of protection, as the remaining elements were merely decorative or laudatory, but EU case law has established that such invalidation of an earlier national mark could only take place through cancellation proceedings in a Member State and not before the EU courts. In respect of Novomatic’s “hot” element, the General Court simply stated that it was “obvious” that this did not create the “unique impression of the mark applied for” by itself.

Likelihood of confusion

Based on the similarity of the goods and the signs, the General Court concluded that the Board was correct to find a likelihood of confusion between the two signs, despite “the high level of attention of the professionals in the casinos and amusement arcades sector”.

Comment

Novomatic does appear to have been somewhat unfortunate in the timing of its application. Had Novomatic waited another nine months before applying for the Hot Joker Sign, the Joker+ Mark’s registration for the very broadly defined “games” would have been subject to proof of genuine use and limited to the type of “games” for which Granini could prove that its licensor, the FDJ, actually used the Joker+ Mark. While the Joker+ lottery add-on may still have been considered to be a form of a “game of chance”, it might have also been regarded as sufficiently dissimilar to Novomatic’s application for “hardware”, “software” and various gaming devices to eliminate the likelihood of confusion and permit the registration for some or all of those goods. The timing of the changes to the Nice Classification also worked against Novomatic. On the one hand, the court found that Granini’s “games” in Class 28 could include electronic games on an external display screen because the explanatory note to the Eighth Edition only specifically excluded game apparatus that used a “television receiver” and not other external display screens. While evolving gaming technology meant that this note was changed in the Ninth Edition to cover any “external display screen or monitor”, the court did not take this change into account and only looked at the Eighth Edition in isolation for these purposes. On the other hand, the court relied on the Ninth Edition to determine the similarity between Novomatic’s “hardware and software” and Granini’s “games” because Class 9 specifically included “amusement and game apparatus adapted for use with an external display screen or monitor”, even though this position was reversed in the Tenth Edition. As a result, Novomatic was effectively caught both coming and going by the changes to the Nice Classification. Gambling and gaming companies, but also video gaming companies, should be aware of these alterations in recent years to the Nice Classification and consider them when carrying out clearance searches, filing trade mark applications or contesting oppositions. Gaming companies should also be aware of the limitations and potential confusion around the meaning of the inclusion or exclusion of “amusement and game apparatus adapted for use with an external display screen or monitor”. As the Japan Patent Office pointed out in 2008 at the 27th Session of WIPO’s Preparatory Working Group before the changes to the Tenth Edition, this creates an artificial difference between modern gaming consoles or handheld gaming machines depending on whether or not they have an integrated or external display screen, but its sensible recommendations were not fully adopted. The General Court’s judgment is also another demonstration of the power of national trade mark rights since the decision in P Formula One Licensing v OHIM (3) which removed the risk to opponents in an EUIPO opposition of losing their national trade mark rights through a challenge to their validity based on lack of distinctive character. More generally, this case is a reminder to businesses in the electronic gaming sector of the similarity of goods in Class 9 and Class 28, as the General Court held that “hardware and software” can be considered complementary to “games” on the basis that they are essential for their functioning. Given the overlap, video gaming and gambling businesses should generally seek to obtain registrations in Class 9, Class 28 and Class 41 for their goods and services as a starting point.

1 Novomatic AG v EUIPO (T-326/14) EU:T:2016:221.

2 Regulation 207/2009 on the Community trade mark [2009] OJ L78/1.

3 P Formula One Licensing v OHIM (C-196/11) EU:C:2012:314.

Report into TalkTalk breach highlights security concerns

Nicola Fulford, Partner and Head of Data Protection and Privacy and Commercial Technology Partner Emma Wright, delve into the The UK’s Culture, Media and Sport Committee's Cyber Security report following the TalkTalk data breach. To read the full article which was originally published in E-Commerce Law and Policy please click here.

GDPR: how to prepare for mandatory PIAs

Nicola Fulford, Partner and Head of Data Protection and Privacy,and Krysia Oastler, Data Protection and Privacy Associate provide practical advice on how to prepare for when PIAs become mandatory, once the General Data Protection Regulation comes into force. The original PDP Journals article can be read in full here.

Amending Articles of Association by Conduct: The Sherlock Holmes International Society Ltd v Aidiniantz

In The Sherlock Holmes International Society Ltd v Aidiniantz [2016] EWHC 1076 (Ch) the court was asked, amongst other things, to determine whether the company’s articles had been amended by an informal agreement inferred from the conduct of the members.  

The question arose in relation to whether the sole director of the company was in fact qualified to be a director as he was not a member of the company as was required by article 33 of the company’s articles of association, which stated that “only persons who are members of the Company shall in any circumstances be eligible to hold office as a Director”.

The only members of the company were, and had always been, Mr Aidiniantz and his mother, Grace. The directors on the date of incorporation of the company were Grace and Mr Aidiniantz’s half-sister, Ms Riley. Since incorporation, the directors had changed as follows:

  • 24 March 2005: Grace resigned her directorship and was replaced by Ms Decoteau.
  • 1 August 2008: Grace was re-appointed as a director and both Ms Decoteau and Ms Riley resigned.
  • 1 April 2011: Mr Riley was appointed and Grace resigned.
  • 22 August 2011: Mr Riley resigned and Grace was re-appointed.
  • 28 October 2012: Ms Decoteau was re-appointed.
  • 17 October 2013: Grace resigned.
  • May 2014: Mr Riley was re-appointed with Ms Decoteau resigning shortly thereafter.

At the time of the court hearing, Mr Riley was the sole director of the Company, but was not a member.

Relevant Law

Section 21 of the Companies Act 2006 states that a company’s articles of association can be amended by a special resolution of the shareholders.

But, where all shareholders who have the right to attend and vote at a general meeting of the company agree to a matter, such agreement shall have the same effect as if such matter had been decided at a general meeting of the company (Duomatic); this includes where the matter agreed to is an amendment to the company’s articles of association (Cane v Jones).

To give effect to the principal above, the agreement of the shareholders must be given in full knowledge of the matter, but such agreement can be express or implied and acquiescence can be equal to consent.  

Court’s Decision

The court considered whether any intentions on the part of Mr Aidiniantz and Grace could be objectively inferred in relation to the director appointments and, if so, what those intentions were.

The court dismissed the notion that Mr Aidiniantz intended to admit as members those appointed directors who were not already members as it had always been acknowledged by all parties to the proceedings that the only members of the company were Mr Aidiniantz and Grace.     

According to the court, the most credible explanation for Mr Aidiniantz and Grace’s conduct around the director appointments was that they intended to do whatever was required to allow the directors to be validly appointed. As it was necessary to amend the articles in order to appoint the directors, Mr Aidiniantz and Grace’s conduct demonstrates their intention, with appropriate or full knowledge of the matter, to amend the articles to allow each of the appointed directors to serve as directors without being members. Therefore, the articles were amended, through the conduct of the members, to allow Ms Decoteau, Ms Riley and Mr Riley to be qualified to serve as directors both at the time of their respective original appointments and for all times in the future.

Comment

The case serves as a comprehensive guide to the law surrounding how amendments can be made to articles of association other than by way of a special resolution of the shareholders.

It is also a message to smaller companies, whose affairs are often less formally documented, that changes, welcome or otherwise, to a company’s formal constitutional documents can occur through conduct and, accordingly, it is important, for the sake of certainty, to ensure that articles of association are followed or, if no longer workable, amended as necessary through a special resolution of the shareholders.  

I think Sherlock Holmes, himself, with his famous expression can best sum up the court’s position on amending articles of association through conduct: “when you have eliminated the impossible, whatever remains, however improbable, must be the truth”.

Financial promotions: an introduction

Most founders would agree that fundraising for a company in the early stages can be very challenging.  Quite often founders turn to friends, family and other third parties for equity finance.  If a person intends to invite or induce to engage in investment activity during the course of business, it is important to bear in mind the rules of UK’s financial promotions regulations.  The following note intends to provide only a brief introduction to the Financial Conduct Authority’s (FCA) financial promotion regime. 

Under section 21 of the Financial Services and Markets Act 2000 a (natural or legal) person must not, in the course of business, communicate an invitation or inducement to engage in investment activity unless the promotion has been made or approved by an authorised person or it is exempt.  It is a criminal offence for an unauthorised person to communicate a financial promotion in breach of the section 21 restriction.  The penalty could be either a fine or up to two years’ imprisonment, or both.  Further, any agreements entered into by a person as a customer as a result of an unlawful financial promotion are unenforceable against that customer.

The purpose of the section 21 restriction is to protect uninformed and unsophisticated investors from being misled into investing in a company which might lead to losing their entire investment.  Hence the restriction applies to formal communications such as business plans and prospectuses as well as to informal communications such as a conversation with a potential investor at a social event.

The three main elements that make a communication a financial promotion are:

  1. the communication is an invitation or an inducement to engage in investment activity;

Communications that are purely factual often do not amount to an invitation or inducement unless they have a promotional element.  Merely asking a person if they wish to enter into an agreement where there is no element of persuasion or incitement will not amount to an invitation.  An objective test is to be applied in establishing whether a communication is an invitation or an inducement.

  1. the communication is made in the course of the business;

The intention of this limb is to exclude genuine non-business communications such as communication between family members and friends.  An issue arises where capital is raised for small private companies.  The FCA’s view is that where such a company is already in operation, it will be acting ‘in the course of business’ when seeking to generate additional share or loan capital.  At the pre-formation stage, however, it will often be the case that individuals who are proposing to run the company will approach a small number of friends, relatives and acquaintances to see if they are willing to provide start-up capital.  In the FCA's view, such individuals will often not be acting ‘in the course of business’ during the pre-formation stage of a small private company.

  1. the communication does not fall within one of the exemptions set out in the Financial Promotion Order (“FPO”).

The FPO provides several exemptions from the section 21 restriction. 

The most useful exemptions to small private companies are:

Investment professionals

The section 21 restriction does not apply to communications which are made only to recipients whom the person making the communication believes on reasonable grounds to be ‘investment professionals’ or may reasonably be regarded as directed only at such recipients.  An "investment professional" includes:

  1. an FCA authorised firm such as a bank, broker or financial intermediary; or
  2. any other person whose ordinary activities involve them in carrying on the activity to which the communication relates for the purpose of business carried on by him or where it is reasonable to expect that individual to carry on such an activity for the purpose of business; or
  3. a government, local authority or an international organisation; or
  4. any person who is a director, officer or employee of any person listed in (i) to (iii) where the communication is made to that person in their capacity as such.

In order to rely on this exemption, it is necessary that the communication contains, or is accompanied by, a clear indication that the communication is directed only at investment professionals.  In addition, it is necessary to have in place proper systems and procedures to prevent recipients other than investment professionals (or investors permitted under one of the other exemptions) engaging in the investment activity to which the communication relates.

Self-certified sophisticated investors

The section 21 restriction does not apply where the communication is made to individuals whom the person making the communication believes on reasonable grounds to be a self-certified sophisticated investor. 

A “self-certified sophisticated investor” is an individual who has signed a statement in the form prescribed by the FCA certifying that one or more of the following statements applies to him:

  1. he is a member of a network or syndicate of business angels and has been so for at least the last six months prior to the date on which the certificate was signed; or
  2. he has made more than one investment in an unlisted company in the two years prior to that date; or
  3. he is working, or has worked in the two years prior to that date, in a professional capacity in the private equity sector, or in the provision of finance for small and medium enterprises; or
  4. he is currently, or has been in the two years prior to that date, a director of a company with an annual turnover of at least £1 million.

For the exemption to apply, the certificate must have been signed within 12 months of the date on which the communication is made.  Communication to a self-certified sophisticated investor must also be accompanied by a suitable warning that the communication has not been approved by an authorised person and that reliance on the communication for the purpose of engaging in any investment activity may expose an individual to a significant risk of losing all of the property or other assets invested. Such a warning must either be given to the recipient at the beginning of the communication or, if this is not possible in light of the means of communication used, the recipient must be given an oral warning at the beginning of the communication and must be informed that a legible copy will be sent to him within two business days.

High net worth investors

The section 21 restriction does not apply where the communication is made to individuals whom the person making the communication believes on reasonable grounds to be a high net worth investor.  A certified high net worth individual is an individual who has signed a statement in the prescribed form (please see attachment) certifying that one or more of the following statements applies to him:

  1. he had an annual income to the value of £100,000 or more during the preceding financial year; or
  2. he had net assets to the value of £250,000 or more, where net assets do not include property that is a primary residence or any loan secured on this residence, rights under an insurance contract, or benefits in the form of pensions or otherwise that are payable on the termination of service, death or retirement, to which he may be entitled.

The FPO also contains exemptions in relation to financial promotions made to overseas recipients and certain one-off communications.  One key point to note for persons who intend to rely on these exemptions is that before any communication is made, they should be clear about the scope and extent of such communication – the narrower the target the lesser the risk of making an unlawful financial promotion.  The FCA has also published guidelines on financial promotions using social media.  An analysis of these guidelines by our financial regulation team can be found here.

If a person intends to communicate information which would amount to a financial promotion and if none of the exemptions set out in the FPO apply, then such financial promotion should be communicated or approved by an authorised person.

Companies and Limited Liability Partnerships (Filing Requirements) Regulations 2016

On 30th June 2016 the Companies and Limited Liability Partnerships (Filing Requirements) Regulations (the “Regulations”) came into force. The Regulations bring into effect various changes to company filing requirements contained in the Small Business, Enterprise and Employment Act 2015.

The following key changes are worth noting:

  • New regulation 18A of the Limited Liability Partnerships (Application of Companies Act 2006) Regulations 2009 – LLPs are no longer required to keep their own register of members and register of members’ residential addresses, and instead can choose to file the information with the Registrar at Companies House. Note, LLPs are also able to keep their register of persons with significant control at Companies House, by virtue of section 790X of the Companies Act 2006 and The Limited Liability Partnerships (Register of People with Significant Control) Regulations 2016.
  • New Part 8 of the Limited Liability Partnerships (Application of Companies Act 2006) Regulations 2009 – LLPs will no longer be required to file annual returns at Companies House, and may instead file a confirmation statement confirming that the information held in respect of the LLP is up to date. To be able to make the confirmation statement, the LLP will need to have notified Companies House of any changes to its registered office, members (including appointments, terminations and changes to details) and also any changes to the information that it has elected to keep on the public record (see above).
  • Amendments to section 1078A of the Companies Act 2006 – the new section will allow the Registrar to omit the date of birth of LLP members and persons having significant control of LLPs from the public registers maintained at Companies House.
  • New paragraph 13 of Schedule 1 to the Unregistered Companies Regulations 2009 – this amendment allows unregistered companies to deliver a confirmation statement instead of an annual return, bringing the position for unregistered companies into line with registered companies and LLPs.
  • Amendments to the classification system for company’s principal business activities – the Regulations also contain a classification schedule for types of company and adds additional codes for certain business activities.
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