Lawyer Issue

M&A risk from ACCC 

Statement of Issues (SOI) 

Zero Hours Means 

Zero Rights? 

Is Your Dealership Taking Advantage 

Of Employment Arbitration?

Content 

M&A risk from ACCC Statement of Issues (SOI) 4 

Pay TV: Ofcom Begins Review Of The Wholesale Must-Offer 7 

Contact 

www.lawyerissue.com 

Consumer Contract Regulations 10 

New York Court Explains When Lost Profits Are Recoverable 14 

Zero Hours means Zero Rights? 16 

Hong Kong Modernisation Of Trust Law Long Overdue 19 

FFIEC Issues Joint Statement On Increased 

Risk Of ATM Cyber-Attacks 22 

Second medical use patents and indication carve-outs 24 

Work And Travel Guidance For F-1 Students With Pending H-1B 

“Change Of Status” Applications And “Cap-Gap” 

Employment Authorization 30 

Supreme Court Hears Argument in Limelight v. Akamai 34 

Whose Motion Picture Is It Anyway 

- Does The Actress Own The Motion Picture? 36 

Is Your Dealership Taking Advantage Of Employment Arbitration? 40 

Because match-fixing just ain’t cricket 43 

Tax consciousness and trust in international tax planning: 

The substance of the matter 45 

Recent case law affecting french cfc rules 48

Anti-trust/Competition Law 

M&A risk from ACCC 

Calendar 

Year 

Number of SOIs 

issued 

Not opposed 

Not opposed 

(subject to conditions) 

Opposed 

Review 

Statement of Issues (SOI) 

By Nick McHugh, Norton Rose Fulbright 

When the ACCC decides to publish a Statement of Issues (SOI) there 

are flow on effects for potential transactions. We’ve crunched the numbers 

to determine how a SOI affects your exposure to M&A risk and in 

turn, your strategy. 

2008 14 43% 14% 14% 29% 

2009 8 50% 12.5% 25% 12.5% 

2010 12 39% 15% 23% 23% 

2011 5 80% 20% 0% 0% 

2012 14 36% 7% 43% 14% 

2013 10 40% 30% 20% 10% 

2008- 

2013 

63 44% 16% 23% 17% 

Merger review in Australia 

Where a merger or acquisition could have 

competition law implications in Australia, the usual 

course is for parties to seek an informal merger 

clearance from the ACCC prior to completion. Whilst 

parties are not obliged to notify the ACCC, failing 

to do so may result in the ACCC independently 

investigating the merger which can be disruptive. If 

the ACCC ultimately has concerns, it can take legal 

action to obtain a court order to block or unwind it. 

Under its informal merger clearance process, the 

ACCC will consider whether or not a proposed 

transaction has the effect or is likely to have the effect 

of substantially lessening competition. In doing so, it 

may clear a transaction in “pre-assessment stage”, or 

undertake a more in-depth review. 

The review stats 

Statement of Issues (to those in the know, an “SOI”). 

The Statement of Issues will detail the ACCC’s 

concerns and seek public comment on these issues 

before the ACCC makes a final decision on whether or 

not to oppose the transaction. 

A small number of Statements of Issues are published 

each year. In the 2012-13 financial year, only around 

seven non-confidential applications filed during that 

financial year progressed to a Statement of Issues. 

This was less than 3% of all merger filings for that 

period 1 . 

Statistically, the release of a Statement of Issues 

means that the transaction has put the ACCC 

on comparatively high alert. On face value, the 

publication of a Statement of Issues may seem 

damning to the prospects of the transaction being 

cleared. However, the statistics tell another story. 

In the table above: 

• “Not opposed” refers to the applications which 

the ACCC concluded that the transaction would 

not be likely to substantially lessen competition. 

• “Not opposed (subject to conditions)” refers to the 

applications which the ACCC concluded would not 

substantially lessen competition, subject to the 

fulfilment of certain undertakings by the merger 

parties. 

• “Opposed” refers to the applications which 

the ACCC concluded would have the effect 

of substantially lessening competition, which 

equates to 23%. 

• Finally, 17% of applications over which the ACCC 

issued a Statement of Issues had the application 

withdrawn (review suspended). This may have 

been for a combination of commercial reasons, 

including deal fatigue or the passing of a deal 

sunset date and concerns that the ACCC would 

oppose the merger through the courts. 

and/or require the parties to proceed, cause them 

to dedicate significant expertise and resources to 

answering the ACCC’s concerns. That is one reason 

that could explain why the ACCC’s concerns appear to 

be able to be dispelled more often than not. 

Maximising your chances 

So how then, do parties maximise the chance that the 

outcome of their transaction won’t defy the statistics? 

Among other things, they should: 

1. judge the scale of notification/application 

required having regard to: 

a. the post-merger market position and 

counter factual; 

b. the likely market feedback and opposition 

to the transaction; and 

c. the ACCC’s Merger Guidelines. 

Only a relatively small proportion of informal merger 

clearance applications are subject to an in-depth 

Crunching the SOI numbers 

It is pertinent to note that whilst the statistics 

vary year-to-year, across the six years combined, 

2. if a Statement of Issues is released: 

review by the ACCC that extends to market inquiries. 

In the 2012-13 financial year for example, only 76 of 

289 applications (or 26%) were opened for review 

by the ACCC. The remainder were cleared in preassessment 

stage. 

Over the calendar years from 2008 and 2013, the 

ACCC published 63 Statements of Issues. The table 

below illustrates the ultimate outcome of the ACCC’s 

deliberations where a Statement of Issues was 

published. 

conditional and unconditional approval made up 

60% and only 23% of transactions found themselves 

formally opposed. This bodes as a positive 

reinforcement for entities that are subject to a 

Statement of Issues that it is more likely than not 

a. comprehensively respond to matters 

raised in the Statement of Issues; 

b. engage directly with ACCC staff to obtain a 

sense of their key concerns; and 

If, after review of the transaction and the making 

of market inquiries, the ACCC has real competition 

concerns about the transaction, it will release a 

1 Note that in this period 6 confidential merger clearances were 

opposed, meaning that a Statement of Issues would have been published 

had the merger been public 

that their transaction will be cleared. Of course, the 

issuance of a Statement of Issues can be a wake-up 

call to merger parties and, assuming that sunset 

dates and other deal-related imperatives permit 

c. consider whether or not there are any 

divestiture or behavioural undertakings 

that can be offered to the ACCC that might 

answer (or lessen) its concerns. 

4 | LawyerIssue 5


What if your deal is opposed? 

For the most part, a transaction will generally not 

proceed if the ACCC opposes it. However, the 

informal merger clearance process is just that. An 

ACCC opposition in itself has no legal force and does 

not prevent a transaction proceeding. 

Of course, if the ACCC is of the view that the 

transaction would be likely to substantially lessen 

competition in contravention of the Competition and 

Consumer Act, it can apply to the Court to have the 

transaction halted. Also, post-completion it is open to 

the ACCC to seek orders unwinding the deal and/or 

pecuniary penalties against merger parties in excess 

of $10 million. Whilst pecuniary penalties are seldom 

sought, this is a clear deterrent to avoiding the 

voluntary informal clearance process and can present 

a useful alternative to divestiture orders when a 

transaction has already proceeded. 

There are other avenues that may be pursued by a 

party that receives an opposition, still has an appetite 

to proceed but desires comfort before doing so. 

• Apply to the Australian Competition Tribunal to 

“authorise” the transaction. This process permits 

an assessment of the transaction on a broader 

set of criteria – the Tribunal must consider the net 

public benefit of the transaction when weighed 

against the anti-competitive detriment. This 

course was recently adopted by AGL when the 

ACCC informally opposed its proposed acquisition 

of Macquarie Generation 1 . The outcome is not yet 

known. 

1 Application by AGL Energy Limited for merger authorisation 

– ACT 1 of 2014 

• Seek a declaration from the Federal Court of 

Australia that the transaction is not likely to 

substantially lessen competition and therefore 

not contravene the Competition and Consumer 

Act. This course has rarely been taken up but AGL 

was successful in 2003 in doing so. 2 Each of these 

alternatives is available to a party even if they 

have not been through the informal clearance 

process. However, it is uncommon for parties to 

opt for a far more involved and potentially lengthy 

process instead of the ACCC informal process 

unless the circumstances of the transaction are 

unique. 

Conclusion 

All is not lost if the ACCC takes a close look at your 

merger. Mostly, those that are reviewed are cleared. 

Even the release of a Statement of Issues will not 

statistically correlate to an adverse final decision by 

the ACCC. However, a smooth and speedy clearance 

process is always desirable and demands the 

dedication of resources and expertise accordingly. 

Where the release of a Statement of Issues cannot 

be avoided, the strategy going forward must be 

carefully managed. Although an adverse decision 

does not technically close out alternatives, it creates 

significant deal risk and, where possible, should be 

contemplated in transaction documentation at 

the outset. 

Norton Rose Fulbright has a market leading 

Competition and Antitrust practice. Please contact 

Nick McHugh if you would like to know more about 

merger clearance issues and the implications for your 

business. 

2 Australian Gas Light Company (ACN 052 167 405) v Australian Competition 

& Consumer Commission (No 3) [2003] FCA 1525 

Pay TV: Ofcom Begins 

Review Of The Wholesale 

Must-Offer 

by Rob Roskin 

BIO: Rob Roskin is a trainee at Charles Russell and to date has 

worked in the Real Estate and Family departments and is currently in 

the Corporate and Commercial department. He is also a member of 

the firm’s Technology, Media & Telecommunications group. Rob has 

completed a client secondment with ITV, where he worked on a wide 

range of media and commercial matters. Please see www.charlesrussell. 

co.uk for more information. 

Nick McHugh 

Head of Antitrust and Competition, Australia, Sydney 

T: +61 2 9330 8028 / F:+61 2 9330 8111 

Email: nick.mchugh@nortonrosefulbright.com 

Pay TV: Ofcom begins 

review of the wholesale 

must-offer imposed on Sky 

in respect of Sky Sports 1 

and 2 

On 16 April 2014, Ofcom announced that 

it has begun a review of the wholesale 

must-offer (“WMO”) obligation imposed 

on BSkyB (“Sky”) in relation to Sky Sports 

1 and 2. 

All pay TV operators will be following 

closely the outcome of (1) Sky’s Supreme 

6 | LawyerIssue 

7


Court appeal into Ofcom’s powers to 

pricing policy revolved around the prices 

had jurisdiction under Section 316 of the 

Sky maintains that Ofcom’s 2010 decision 

intervene with pay TV price-setting; and (2) 

which Sky had set to Virgin Media via its 

Act to impose the WMO condition in Sky’s 

is flawed and that the WMO obligation 

The Supreme Court 

Ofcom’s review of the WMO. 

rate-card. In its statement, Ofcom found 

broadcasting licences. 

ought to be removed. Sky has applied 

is considering an 

that the rate-card prices were set so as to 

to the Supreme Court for permission to 

application from Sky 

The WMO restriction imposed by Ofcom 

allow a retailer with Sky’s scale to compete 

The CoA handed down its judgment in 

appeal on this basis. 

for permission to 

in March 2010 required Sky to offer to 

effectively with them, but that there was 

February 2014. The CoA held that one of 

appeal the Court of 

Appeal’s judgment“ 

wholesale Sky Sports 1 and 2 to other 

retailers. Ofcom’s decision has since been 

only room in the market for one such 

retailer (“Second Competition Concern”). 

Ofcom’s principal duties in carrying out 

its functions is to further the interest of 

In light of the fact that the Court of 

Appeal and the CAT confirmed Ofcom’s 

the subject of appeals to the Competition 

consumers in relevant markets, where 

jurisdiction under Section 316 of the Act, 

Appeal Tribunal (“CAT”) and the Court 

Accordingly, Ofcom imposed the WMO 

appropriate by competition. One of 

and given its ongoing duty to ensure fair 

of Appeal (“CoA”). The Supreme Court is 

remedy by way of a licence condition in 

those relevant markets must be pay TV. 

and effective competition in this market, 

considering an application from Sky for 

Sky’s broadcasting licences whereby the 

Accordingly, Ofcom had jurisdiction under 

Ofcom has decided to review the WMO. 

permission to appeal the Court of Appeal’s 

wholesale price for Sky Sports 1 and 2 

Section 316 of the Act to impose the WMO. 

This review will take account of any 

judgment. 

would be 10.5% below the then current 

changes in the market since 2010. 

Background 

Ofcom Pay TV Statement 

cable rate-card when sold as a bundle, and 

23.4% lower than the rate-card when sold 

on a standalone basis. 

The CoA was highly critical of the CAT’s 

approach to the competition concerns 

raised by Ofcom. Although the CAT had 

One to Watch 

Ofcom is separately considering a 

On 31 March 2010, Ofcom published its 

final statement concluding its investigation 

CAT Judgment 

considered Ofcom’s Core Competition 

Concern, it had not considered Ofcom’s 

complaint from BT under the Competition 

Act 1998 which alleges that Sky has 

into the pay TV market, following a three 

Sky appealed Ofcom’s WMO decision on 

Second Competition Concern in respect of 

abused a dominant position in relation 

year investigation and three consultations. 

the basis that Ofcom had no jurisdiction 

rate-card prices. 

to negotiations over the supply of Sky 

It found that Sky had exploited its market 

under Section 316 of the Act to impose 

Sports 1 and 2 for BT’s YouView platform. 

power to restrict the wholesale supply 

the WMO remedy. Virgin Media and BT 

The CoA concluded that this amounted 

BT alleges that Sky’s offer to supply 

of its core premium channels to other 

(intervening) argued that the WMO did not 

to an error of law, such that the 

those channels was conditional on BT 

retailers on other platforms. Ofcom 

go far enough. 

CAT’s judgment could not be upheld. 

wholesaling BT Sport channels to Sky for 

found that this was prejudicial to fair and 

Accordingly, the matter has been remitted 

retail on Sky’s satellite platform. 

effective competition, contrary to Section 

In August 2012, the CAT confirmed 

to the CAT for further consideration of the 

316 of the Communications Act 2003 (the 

Ofcom’s power under the Act to impose 

Second Competition Concern. 

“Act”) and therefore reduced consumer’s 

choice. 

the WMO, but upheld Sky’s appeal on 

the basis that Ofcom’s Core Competition 

Next Steps 

Concern was unfounded. The CAT 

Ofcom has welcomed the CoA’s decision 

Ofcom’s main concern was that Sky was 

found that Sky had generally engaged 

that the judgment of the CAT had failed 

deliberately withholding wholesale supply 

constructively in negotiations with other 

properly to consider Ofcom’s findings that 

of their premium content in pursuit of 

retailers. 

there was ineffective competition in 

strategic incentives unrelated to the 

commercial considerations of revenue and 

profit maximisation (“Core Competition 

Concern”). 

Ofcom was also concerned that Sky’s 

CoA Judgment 

The CoA granted BT permission to appeal 

in relation to the CAT’s treatment of 

Ofcom’s Second Competition Concern. Sky 

cross appealed (again) on whether Ofcom 

the market. 

Rob Roskin 

Charles Russell Speechlys LLP 

T: +44 20 72035000 

Email: Robert.Roskin@crsblaw.com 

8 | LawyerIssue 

9

Consumer Protection 

Consumer Contract 

Regulations 

by Sakil A. Suleman 

The Consumer Contracts (Information, Cancellation and Additional 

Payments) Regulations 2013 (the “CCRs”) come into force in the UK 

on 13 June 2014. 

If your business 

involves the sale 

of goods and services 

to consumers, it is 

highly likely that the 

“ 

CCRs will impact 

your business. 

The CCRs make some significant changes 

in the law relating to consumer protection 

and apply to consumer contracts made 

on-premises (through retail stores), made 

at a distance (including online sales) and 

off-premises (e.g. doorstep sales). 

The CCRs introduce a number of 

important changes which potentially may 

be burdensome for businesses and will 

require retailers to review their processes, 

policies, terms and conditions and record 

keeping across all of their sales channels 

to ensure that they are compliant with 

the new law and they have taken steps 

to properly mitigate any new risks. In 

particular, the CCRs introduce specific 

rules for the first time in the UK relating to 

the supply of “digital content”. The CCRs 

will also apply to on-line auction sites. 

If your business involves the sale of goods 

and services to consumers, it is highly 

likely that the CCRs will impact your 

business. If you haven’t already started to 

consider the implications of the CCRs, time 

is running out. 

Background 

The CCRs were adopted by the UK on 13 

December 2013 and implement most of 

the provisions of the EU Consumer Rights 

Directive (Directive 2011/83/EU), with the 

aim of harmonising consumer protection 

rules across all Member States. The 

implementation of the CCRs has caused 

some confusion amongst businesses as 

originally the Directive was planned to 

be implemented through the broader 

changes being introduced to consumer 

protection law under the Consumer Rights 

Bill, which is still going through Parliament. 

However, to meet the deadline for the 

Directive, the Government has been 

forced to implement the provisions 

separately through the CCRs. 

The CCRs will replace the current law on 

distance sales set out in the Consumer 

Protection (Distance Selling) Regulations 

2000 and the current law on door step 

sales set out in the Cancellation of 

Contracts made in a Consumer’s Home or 

Place of Work etc. Regulations 2008. 

The CCRs will apply to all contracts between 

a consumer and trader concluded from 13 

June 2014, except for certain types of excluded 

contracts (such as contracts for gambling, 

package travel and certain financial services). 

Key Highlights 

“ 

a. Cooling Off Period – the CCRs 

extend the period in which a consumer 

can cancel a contract at will (without 

having to give any reason) from seven 

working days (for distance contracts) and 

seven calendar days (for off-premises 

contracts) to 14 calendar days for both 

distance and off-premises contracts. For 

supply of goods, this period commences 

after the day on which the goods are 

delivered to the consumer or its nominee. 

For supply of services, the period 

commences after the day on which the 

consumer enters the contract. This period 

is extended if there is a breach of the 

information requirements (see below). The 

legislation also provides for circumstances 

in which the provision of services can 

commence before expiry of the cooling off 

period, subject to the express request of 

the consumer. 

b. Model Form – the CCRs states that 

a trader must give or make available to 

the consumer a model cancellation form 

that is in a prescribed form to enable the 

consumer to exercise his/her cancellation 

rights. Although the trader is obliged 

to provide the form, the consumer 

does not have to use the form and can 

communicate his/her decision to cancel in 

any other way (this doesn’t even have to 

be in writing). 

c. Right to Refund – where a consumer 

has exercised his/her right to cancel, the 

retailer must reimburse the total price 

paid for the goods or service, including 

the cost of delivery (but the trader does 

not have to reimburse the additional cost 

of any premium delivery option beyond 

the cheapest delivery service offered 

by the trader). The trader must process 

the refund within the timescales set out 

in the legislation. The trader may make 

an appropriate deduction if the value of 

the goods have been diminished by the 

consumer beyond that which is necessary 

to establish the nature and functioning of 

the goods received – i.e. if the consumer 

has used the goods beyond that which is 

reasonably necessary to inspect the goods 

as he/she could do if the goods were 

purchased on-premises. The consumer 

must bear the cost of returning the goods, 

unless the trader has failed to make this 

clear to the consumer pre-contract or if by 

its nature the goods cannot be returned 

by post. 

d. Cancellation and Ancillary 

Contracts – cancellation of the main 

contract will automatically trigger the 

termination of any ancillary contracts, 

such as any insurance or maintenance 

contract for the goods. This will be the 

case even where the ancillary contract is 

not between the consumer and the trader, 

but is with a third party. The consumer 

need only exercise his/her right to cancel 

vis-a-vis the trader and it will be the 

trader’s responsibility to inform the third 

party of the cancellation. 

e. New Information Requirements 

– the CCRs introduce a checklist of 

information which traders must make 

available to consumers pre-contract. The 


Consumer Protection 

list of information varies depending on 

the channel of sale, with requirements for 

on-premises, off-premises and distance 

contracts. The CCRs imply a term into each 

consumer contract that the trader has 

complied with its information obligations. 

Although this requirement is not new for 

online sales, the information required to 

be provided is now more detailed and 

there are also certain changes to the 

form in which the information needs to 

be provided. The requirement to also 

provide this information in a “durable 

medium” remains. For on-premises sales, 

the requirements include providing details 

of a trader’s complaint handling policy and 

details of relevant guarantees and aftersales 

services. 

f. Obligation to Pay – before 

consumers commit to an order online, 

traders must now make clear to 

consumers that they will be required to 

make payment once they commit to an 

order. If this involves the click of a button 

to complete the order, the button must 

carry the words “order with obligation to 

pay” or a “corresponding unambiguous 

formulation indicating that placing the 

order entails an obligation to pay”. The 

legislation is very prescriptive on this 

requirement and it is clear that many UK 

retailers currently do not comply with the 

required wording. 

g. Additional Payments and Tick 

Boxes – the CCRs ban pre-ticked boxes 

for any supplementary goods and services 

(e.g. such as warranty support, insurance, 

express delivery etc.) Such additional 

services must be actively selected by 

the consumer if they wish to purchase 

the additional service rather than the 

consumer being forced to un-tick the 

selection. 

h. Delivery of Goods – unless the 

trader and consumer agree otherwise, 

the trader must deliver the goods without 

undue delay and in any event within 

30 days from the date the contract was 

entered into. 

i. Telephone Helpline – where a trader 

offers a telephone helpline for consumers, 

including for after-sales support, the 

CCRs provide that the trader must offer 

a number that charges no more than 

the basic rate. The legislation does not 

prohibit premium or revenue sharing 

numbers but requires the trader to also 

provide a basic rate alternative which 

must be communicated as prominently 

as any other number. The Department 

for Business Innovation & Skills provides 

some useful guidance on this requirement. 

Digital Content 

The CCRs introduce a new category of 

service – “digital content”, for which a 

different set of rules apply in relation 

to the consumer’s right to cancel. This 

term is given a broad definition and 

covers software downloads as we well 

as downloads and streaming of online 

games, music, films, apps and in-app 

purchases across all platforms (including 

computers, tablets and smartphones). 

Accordingly, these new rules will have 

wide application and will impact on most 

media and gaming businesses. The new 

requirements include the following: 

• A trader cannot make the digital 

content available before expiry of the 

cooling off period unless the consumer 

has given its explicit acknowledgement 

prior to the download commencing, 

expressly waiving his/her right to 

cancel. Provided this is properly 

complied with, the consumer will lose 

his/her right to cancel as soon as the 

download starts. 

• Traders must provide consumers of 

digital content with information about 

the functionality of the content and 

details of compatibility with hardware 

and software and information on any 

technical restrictions. 

• A trader must provide the consumer 

with a copy of the contract on a 

durable medium, which must be done 

within a reasonable time after the 

contract is concluded. 

Further changes are shortly to be 

introduced for digital content. For 

example, under the Consumer Rights Bill, 

digital content must satisfy a minimum 

standard similar to physical goods – it 

must be of satisfactory quality, fit for its 

purpose and meet its description. 

Sakil A. Suleman 

Partner, London 

T: +44 (0)20 3116 3601 / F: +44 (0)20 3116 3999 

Email: ssuleman@reedsmith.com 

Implications for Business 

A failure to comply with the CCRs may 

result in a trader facing a criminal 

conviction and/or a fine. Depending on 

the type of breach, the contract with the 

consumer may also be invalid. Combined 

with the obvious reputational damage, 

the consequences of non-compliance may 

be severe. On the plus side, it is hoped 

that the new law will make cross-border 

trading easier by making the laws across 

the EU more consistent. 

Given the way the CCRs have come about 

and short time given to businesses to 

prepare, retailers need to ensure they 

have understood the new requirements 

and made appropriate changes in advance 

of the deadline of 13 June 2014. 

If you require any assistance with this or 

have any questions on this note, please 

contact SakilSuleman (+44 203 116 3601, 

ssuleman@reedsmith.com) or your 

regular Reed Smith contact. 

Sakil is a Partner in the firm’s EME Corporate Group and his practice focuses on handling corporate and 

commercial matters. He specialises in mergers & acquisitions (public and private), private equity, company 

law and large commercial transactions, including joint ventures, strategic alliances, franchising, technology, 

outsourcing and IT/ecommerce. 


Corporate/Commercial Law 

New York Court Explains 

When Lost Profits Are 

Recoverable 

by Christopher M. Caparelli, David W. R. Wawro 

The New York Court of Appeals, the state’s highest court, recently held in 

a 4 to 3 decision that a plaintiff could recover lost profits for a breach of 

contract—even though the contract precluded recovery of consequential 

and special damages. The decision is noteworthy for contract drafters who 

are advised to expressly exclude lost profits in a limitation-of-liability provision 

when that is the parties’ intention. 

The decision in Biotronik, A.G. v. ConorMedsystems 

Ireland, Ltd. concerned an exclusive distribution 

agreement for the sale of a medical device. Prior 

to the end of the agreement’s term, the defendant 

manufacturer took the device off the market and 

terminated the agreement. The manufacturer 

paid the plaintiff distributor € 8.32 million and a 

20% handling fee to reimburse the distributor for 

its inventory and the costs associated with the 

termination. 

The parties’ agreement, governed by New York 

law, contained the following provision limiting the 

damages available in the event of a breach: 

Neither party shall be liable to the other for any 

indirect, special, consequential, incidental, or punitive 

damages with respect to any claim arising out of 

this agreement (including without limitation its 

performance or breach of this agreement) for 

any reason. 

The distributor sued for lost profits of $85 million 

related to the discontinued resale of the devices 

under the agreement. It argued that lost profits were 

“general damages” not precluded by the agreement’s 

damages limitation. The trial court disagreed and 

dismissed the lawsuit because it concluded that lost 

profits were consequential damages excluded by the 

parties’ agreement—a unanimous Appellate Division 

affirmed. 

The Court of Appeals reversed, with the majority 

holding that “damages must be evaluated within 

the context of the agreement, and that, under 

the parties’ exclusive distribution agreement, the 

lost profits constitute general, not consequential 

damages.” 

General damages are the natural and probable 

consequence of the breach of an agreement, 

including “money that the breaching party agreed 

to pay under the contract.” Consequential or special 

damages, on the other hand, do not directly flow from 

the breach of contract. 

In the context of resale and distribution agreements, 

a distinction is drawn between lost profits that would 

have flowed directly from the contract and those 

that would have resulted from a separate agreement 

with a nonparty, i.e., a collateral transaction. 

The distinction is not, however, a bright line and 

determining when lost profits are general rather 

than consequential damages requires a “casespecific 

approach.” The Court acknowledged that 

the application of the rule to specific contracts and 

controversies can be “elusive.” Indeed, nine judges 

(the trial judge, the appellate panel, and the Court of 

Appeals dissenters) concluded that the distributor’s 

Christopher M. Caparelli 

Counsel, New York 

T: 212.880.6268 / F:212.682.0200 

Email: ccaparelli@torys.com 

claimed lost profits in the Biotronik case were 

consequential damages, while only the four judges in 

the Court of Appeals majority determined otherwise. 

The majority observed that “[t]he agreement was 

not a simple resale contract, where one party buys a 

product at a set price to sell at whatever the market 

may bear.” Rather, the agreement included target 

volumes and a formula for determining the price the 

distributor paid the manufacturer for the devices 

based on actual sales and the resale prices. The Court 

likened the agreement to a “joint venture” and held 

that the manufacturer agreed to pay the distributor’s 

profits because they flowed directly from the pricing 

formula. Noting that both parties depended on the 

device’s resale for their respective payments, the 

majority concluded that “the agreement reflects 

an arrangement significantly different from a 

situation where the buyer’s resale to a third party is 

independent of the underlying agreement.” 

The dissent criticized the majority for accepting the 

distributor’s “creative” reading of the agreement’s 

pricing formula and remarked, “[c]reativity on this 

scale is no boon in the commercial world, ‘where 

reliance, definiteness, and predictability are such 

important goals of the law itself, designed so that 

parties may intelligently negotiate and order their 

rights and duties.’” 

The take-away from the Biotronik case for the 

commercial world is that parties to New Yorkgoverned 

contracts intending to exclude lost profits 

in the event of a breach cannot assume that the 

exclusion of consequential or special damages will 

suffice. Contracting parties should expressly exclude 

“lost profits.” 

David W. R. Wawro 

Partner, New York 

T: 212.880.6288 / F: 212.682.0200 

Email: dwawro@torys.com 


Employment and HR 

by Richard Isham 

Hours 

Zero 

means 

Rights? 

There is a common misconception – ask Sports Direct – that those on 

“zero hours” contracts have no rights at all. 

There is no definition at law of a “zero 

hours” contract; the Government has 

defined it as a contract pursuant to which 

“the employer has no obligation to offer 

work to the worker and the worker has no 

obligation to accept any work that may be 

offered”. Other definitions simply allude to 

the fact that the employee/worker has no 

set hours and no right to receive work – but 

may be obliged to accept any work that is 

offered. 

Whether the individual is an “employee” 

or a “worker”, will depend on the usual 

multiple test, including the “mutuality 

of obligation test” – not present in the 

Government’s definition. 

However, and something Sports Direct 

overlooked, “workers” have rights too 

– NMW; protection against: unlawful 

deductions, discrimination, automatically 

unfair dismissal; the right to: paid leave, 

part-time status protection, rest breaks, 

statutory minimum notice periods, 

collective redundancy consultation 

and TUPE. 

The real mischief, as far as the government, 

provoked by the labour party, is concerned, 

behind zero hours and non-guaranteed 

hours contracts (“NGHC”) – apart from 

obvious abuses – is that they tend to be 

linked to very low rates of pay (a result 

of the NMW) and taken up by the more 

vulnerable workers – women wanting parttime 

work, students and the elderly. 

The average number of hours worked by 

those on NGHCs, is 25 hours per week 

(compare fixed hours employees at 37 

hours per week) and the average hourly pay 

is £8.83 (compare fixed hours employees 

at £13.39). These factors combine to 

make NGHC workers susceptible to the 

slightest change in mortgage rates, utility 

bill increases, as well as prime targets 

for “pay day loan” companies, creating 

the unvirtuous circle of servitude – and a 

population of workers afraid to complain 

about their lot. 

The Labour Party’s recently suggested 

panacea is more regulation, including: 

the right to demand fixed hours after 

six months on a NGHC; the automatic 

conversion of a NGHC to a fixed hours 

contract after 12 months (subject to opt 

out) and protections against: being forced 

to be on call; exclusivity of employer 

and cancellation of shifts at short notice, 

without pay/compensation. 

There is, as yet, no mention of any antiavoidance 

provisions, so the ”astute” 

employer can just: offer a five month 

contract or terminate the worker in month 11. 

For some, zero hours work; for others it 

can be a form of servitude. However, if 

you use such contracts, remember workers 

do have rights – subject, of course, to their 

ability to pay the Tribunal fees to enforce 

them: for failure to pay wages, notice pay, 

redundancy and ante-natal care (the most 

common complaints) an issue fee of £160 

and a hearing fee of £230 equals £390, 

divide that by £8.83 means that such a 

worker has to do a minimum of 44 hours of 

work to afford the fees. 

Maybe the pragmatic/cynical answer to the 

question in the title is “Yes”…but don’t rely 

on it, these contracts are under scrutiny. 

Practical tips 

• Plan ahead to move from the 

“exclusive” form of zero-hours contract, 

to an arrangement whereby the 

employee does not need to accept work 

Richard Isham 

Partner 

T: +44 20 7395 3133 / F: +44 20 7406 1603 

Email: risham@wedlakebell.com 

that is offered, and can work for other 

employers. This may involve a closer 

analysis of when additional hours are 

needed, and which workers in the pool 

can work those hours. 

• Consider how important employee 

retention is in your business. If your 

business will suffer from having to 

terminate workers every five or eleven 

months, you will need to plan a move 

to fixed-hours contracts after these 

time periods elapse. 

• f you currently do not give workers 

the minimum statutory rights set out 

above, it would be prudent to remedy 

this position going forward to reduce 

the risk of future claims in the light of 

the Sports Direct litigation. 

*The statistics and hourly rates are from ONS, 

LFS and/or the TUC 

Expertise 

Richard advises on all aspects of employment law, both contentious and non-contentious. 

He mainly advises corporate clients on a broad range of employment issues, including collective cross-border 

issues, harmonisation of terms and conditions and policies, redundancies, dismissals, policies on discrimination, 

data protection and monitoring, bonus schemes and corporate governance. 

He advises on the applicability of TUPE to business sales and outsourcing contracts and advised the successful 

appellant before the EAT in one of the leading cases on TUPE, Michael Peters Ltd v Ian Farnfield and Michael 

Peters Group plc. 


Hong Kong Modernisation 

Of Trust Law Long Overdue 

by Alfred Ip, Scherzade Burden 

The New Trustee Ordinance (the “Ordinance”) came into effect on 1st 

December 2013. A summary of major changes are as follows: 

1. Statutory Duty Of Care 

With the new s3A of the Ordinance, the 

Trustee who holds out as having any 

special knowledge or experience or is 

acting in the course of his business or 

profession would be reasonably expected 

to have such special knowledge or 

experience. 

For professional Trustees, they are now 

expected to exercise their care and 

skill with their special knowledge or 

experience. 

2. Restriction on Exoneration 

Clause 

The new s41W of the Ordinance restricts 

a professional trustee from exonerating 

himself from liability for a breach of 

trust arising from his own fraud, wilful 

misconduct or gross negligence, or 

allowing himself to be indemnified under 

those circumstances. Any clause in the 

trust to such effect will be construed as 

invalid. 

3. Settlor’s Reserved Powers 

to Invest 

s41X allows the settlor to reserve 

the power of investment or asset 

management under the trust. A Trustee 

who acts in accordance with the exercise 

of the power or function is not in breach 

of the trust. 


Family and Matrimonial 

Hong Kong’s 

trust law is based 

mainly on the 

common law. It 

is complemented 

by the Trustee 

Ordinance and the 

Perpetuities and 

Accumulations 

Ordinance. 

“ 

In the past such reserved power may 

invalidate the trust as the settlor may be 

regarded as having full control over the 

assets under the trust. At the same time, 

losing control over the trust assets is one 

of the main deterrents for a lot of high net 

worth individuals to set up a trust. 

4. Forced Heirship Provisions 

s41Y of the Ordinance provides that 

forced heirship rules, which are commonly 

7. Trustee’s Powers of 

Delegation 

The new Part IVA authorises the 

delegation of ‘delegable functions’ to 

certain persons, bringing Hong Kong laws 

into a comparably similar position with the 

UK and Singapore. 

Trustees are now empowered to appoint 

agents, with certain restrictions on the 

number of agents and delegable functions. 

reviewed and any antequated provisions 

changed. 

The major changes have been outlined 

above. 

The Trust (Amendment) Ordinance 2013 

is the product of four long years’ work 

between Hong Kong Trustees’ Association 

(HKTA), the Society of Trusts and Estates 

Practitioners (STEP) and the Financial 

more attracted to set up trusts in Hong 

Kong. In time the government hopes that 

if this does indeed happen then it will 

increase Hong Kong’s stature as a strong 

international asset management centre. 

Aside from the politico-economic reasons 

for the government modernising Hong 

Kong Trust law, it will also afford greater 

protection to beneficiaries since there 

is now stronger statutory control upon 

found in continental European countries 

The terms of such appointments must 

Services and Treasury Bureau. 

Trustees who previously were able to 

such as France, Italy and Germany, to 

not contravene s41E(3), which includes 

limit their liability through various clauses 

name a few, and China, have no effect 

on trust created in Hong Kong. In other 

words, people from those countries or 

other countries with forced heirship rules 

can inject assets into a trust set up in 

Hong Kong without worrying about the 

same being attacked after they passed 

sub-delegation, restriction on liability and 

conflicts of interest. 

When trustees delegate asset 

management functions, the trustee is 

required to provide a written investment 

policy statement. Trustees can only 

The primary aim of the new Trust law is 

to boost the competitiveness of the Hong 

Kong trust services industry and make it a 

stronger competitor against jurisdictions 

such as Singapore. 

“ 

in the Trust Deed. The new law severely 

limits Trustees from limiting their liability 

in the Deed. 

Trusts Practitioners will be relieved 

that the law has finally been enacted. 

Many consider it to have been a long time 

away. 

appoint professional nominees and 

coming. It will now be interesting to see 

5. No rule against Perpetuities 

custodians for asset management 

functions. Trustees are expected to 

review the performance of the agent, 

The government hopes that by bringing 

the law largely into line with Singapore 

and the UK that settlors, particularly 

if in the years to come, the government’s 

hopes for Hong Kong to become the asset 

management centre of choice for settlors 

The accumulation period of 80 years 

nominee or custodian regularly. If this 

those from civil law jurisdictions, will be 

are realised. 

has been abolished, which means 

requirement is not met then the Trustee 

theoretically a trust can carry on forever 

fails to satisfy the statutory duty of care 

until it is terminated. 

and therefore cannot be exempt from 

6. Simplified Procedure to 

Remove Trustee 

liability. 

Conclusion 

New s40A allows beneficiaries to give a 

Hong Kong’s trust law is based mainly 

written direction to a trustee directing 

on the common law. It is complemented 

the trustee to retire the trust, and such 

trustee must make a deed to that effect 

upon certain criteria as set out in ss(3) 

being complied with. New s40B applies 

when the trustee becomes mentally 

incapacitated. 

by the Trustee Ordinance and the 

Perpetuities and Accumulations 

Ordinance. Those Ordinances, which were 

enacted in 1934 and 1970 respectively, 

have not been substantially reviewed or 

modified since that time. It was therefore 

Alfred Ip 

Partner, Notary Public and 

CEDR Accredited Mediator 

T: (852) 2868 0696 

Email: alfred.ip@oln-law.com 

Scherzade Burden 

Estate Planning/Wills and 

Probate 

T: (852) 2868 0696 

Email: s.burden@oln-law.com 

high time that Hong Kong Trust law was 


Finance and Banking 

FFIEC Issues Joint Statement 

On Increased Risk Of ATM 

Cyber-Attacks 

By Derek W. Edwards 

This month, the Federal Financial Institutions Examination Council 

(FFIEC), whose members include the Board of Governors of the Federal Reserve 

System, the Federal Deposit Insurance Corporation (FDIC), the National 

Credit Union Administration (NCUA), the Office of the Comptroller of the 

Currency (OCC), and the Consumer Financial Protection Bureau (CFPB), 

issued a Joint Statement to financial institutions concerning the increasing risk 

of cyber-attacks on ATMs. The attacks can result in “cash-out fraud” characterized 

as “Unlimited Operations” by the U.S. Secret Service. 

hours, as reported by the Daily News. As the FFIEC 

observes, in such “Unlimited Operations,” cyber 

criminals may (i) gain access to web-based ATM 

control panels and (ii) manage the amount of 

money customers may withdraw within a set time 

frame, the geographic limitations of withdrawals, 

the types and frequency of fraud reports that a 

service provider sends to the financial institution, 

the designated employee that receives these 

reports, and other management functions related 

to card security and internal controls. 

Removing withdrawal and other limits and controls 

reduces the number of counterfeit cards and 

transactions necessary to perpetrate “cash-out 

fraud” at ATMs, increasing the risk to financial 

institutions. Without such limits and controls, socalled 

“cash crews” can empty innumerable ATMs 

in single transactions. 

The FFIEC expects financial institutions to address 

the growing risks of such “Unlimited Operations,” 

taking steps as set forth in the Joint Statement. The 

FFIEC warns that financial institutions that issue 

debit, prepaid, or ATM cards may face a variety of 

risks from Unlimited Operations including fraud 

losses, liquidity and capital risks (depending on the 

size of the institution and the losses incurred), and 

reputation risks. 

Further, financial institutions that outsource card 

issuing to card processors may initially be liable 

for losses even if the compromise occurs at the 

processor. 

Biography 

The payments processing, financial technology, 

and financial services world is evolving rapidly, 

and public and private companies, acquirers, 

payment processors, financial institutions, and 

ATM operators across the country depend on 

Derek Edwards to answer their needs. 

For over a decade, Derek has advised them 

on consumer, merchant, and inter-company 

disputes, as well as defended consumer 

class-action lawsuits under financial services 

legislation, including the following: 

• Electronic Funds Transfer Act (EFTA), 

Regulation E 

• Fair Credit Reporting Act (FCRA) 

• Fair Debt Collection Practices Act (FDCPA) 

• Truth in Lending Act (TILA) 

• Americans with Disabilities Act (ADA) 

• Telephone Consumer Protection Act (TCPA) 

Derek responds as novel legal issues arise. He 

is a frequent speaker concerning mitigating 

litigation risk for ATM operations. He has 

presented twice at meetings of the ATM Industry 

Association, including at its annual meeting, and 

to the Tennessee Bankers Association. 

The FFIEC expects financial institutions to take steps 

to address this threat by reviewing the adequacy 

of their controls over their information technology 

networks, card issuer authorization systems, systems 

that manage ATM parameters, and fraud detection 

and response processes in order to avoid large 

dollar losses. In so doing, the FFIEC’s members 

appear ready to scrutinize the security of financial 

institutions’ ATM operations. 

The risk of large dollar losses from “Unlimited 

Operations” is not speculative. Indeed, it happened 

on December 22, 2012, and February 19 - 20, 

2013, after hackers breached the networks of two 

processors of prepaid debit card transactions. 

The cyber criminals used the stolen information 

to create debit cards and withdraw $45 million in 

36,000 ATM transactions in 26 countries in just 10 

Derek W. Edwards 

Partner 

T: 615.850.8192 

Email: derek.edwards@wallerlaw.com 


Food, Drugs, Healthcare, Life Sciences 

Second medical use 

patents and indication 

carve-outs 

By Wayne Condon 

The development of new chemical compounds (and increasingly of biologics) 

for the treatment of human medical ailments remains the primary 

focus of the world’s major pharmaceutical companies. 

However, the immense cost associated with the 

development of new chemical entities and biologics 

provides great incentive for pharmaceutical 

companies to research new uses for existing 

drugs. Although there is still a substantial cost in 

developing a new indication for a known drug, it is 

proportionately far less costly than developing a new 

chemical entity based on original research. 

Australia is one country that offers incentive in 

the development of new uses for known drugs by 

permitting such developments, that are novel and 

inventive, to be patented. The decision in National 

Research Development Corp v Commissioner of 

Patents (1959) 102 CLR 252 made this clear. 

Against this background, this article examines: 

• Second medical use patents. 

• Indication carve-outs. 

• The recent High Court decision in the leflunomide 

case. 

Second medical use patents 

There are numerous examples where new uses for 

known drugs have provided substantial advances in 

the treatment of patients: 

• Thalidomide, originally developed as a hypnotic in 

the 1950s and subsequently taken off the market, 

is now being used as an immunomodulator in a 

variety of diseases. 

• Duloxetine, a serotonin and noradrenalin 

reuptake blocker, developed for the treatment of 

depression, is being used in the management of 

detrusor instability. 

• Buprenorphine, prescribed for control of 

moderate pain in low dosages, has been used for 

the interruption and maintenance of heroin and 

other opioid addictions in high dosages. 

• Zoledronic acid, first used in the treatment of 

tumour induced hypercalcemia, has been found 

to be effective against osteoporosis. 

Second medical use patents present a dilemma to 

classical patent doctrine. Lord Hoffman (Merrell Dow 

v Norton [1996] RPC 76) neatly summarised the issue 

when he said that “ever since the power of the Crown 

to grant monopolies was curbed by Parliament and the 

courts at the beginning of the seventeenth century, it has 

been a fundamental principle of UK patent law that the 

Crown could not grant a patent that would enable the 

patentee to stop another trader from doing what he had 

done before”. 

Impact of product information 

leaflet 

In permitting patents to be granted for second 

medical uses of known drugs, problems can arise 

when a generic manufacturer is required to fully 

adopt the product information leaflet of the 

originator’s product, in order to obtain marketing 

approval: 

• The generic company’s product information 

leaflet may be required to include all the medical 

indications for which the originator’s product is 

registered, including patented indications. 

• This could give rise to secondary patent 

infringement. If the patented indication is a 

second medical use for a known drug product and 

the first use is not patented, the result may be a 

de facto extension of the originator’s first patent 

monopoly. 

Hypothetical example 

To take a hypothetical example: 

• An originator develops and patents a compound 

for the treatment of tinea (compound A). The 

patent for compound A and the use of it in the 

treatment of tinea will expire after 20 years (or, if 

there is an extension of the patent term granted 

in Australia, for a period up to 25 years). 

• After expiry of the patent, any generic company 

can market a drug containing compound A, in 

Australia, for the treatment of tinea (and any 

other non-patented indication). 

• The originator company continues research 

and development work on compound A and 

subsequently discovers that it is also useful in the 

treatment of acid reflux. 

• Assuming this new indication is not obvious, the 

originator can obtain a patent for the treatment 

of acid reflux using compound A. This method 

of treatment patent expires some time after the 

term of the original compound patent and the use 

of the compound for the treatment of tinea. 

• The product information leaflet for the 

originator’s product includes both tinea and acid 

reflux. 

• A generic company is required to adopt the 

originator’s product information leaflet in full. It 

is effectively prohibited from selling compound 

A at all until expiry of the acid reflux patent. This 

is because the product information leaflet states 

that the product is to be used to treat acid reflux, 

in infringement of the originator’s second medical 

use patent. 

• This, in effect, gives the originator an additional 

exclusivity period for the underlying compound 

for the treatment of tinea, to which it is not 

entitled. 

Indication carve-outs 

The Australian Therapeutic Goods Administration 

requires the sponsor of a generic pharmaceutical 

product to include a product information leaflet 

with the product. This must be in substantially the 

same form as the product information leaflet for 

the originator product (section 23(2)(ba) Therapeutic 

Goods Act 1989 ( Cth) and Guidance 8: Product 

Information, available at www.tga.gov.au). However, 

it does permit the generic sponsor to “carve-out” 

specific indications. This practice is sometimes 

referred to as “skinny labelling”. 

Although the relevant therapeutic goods 

requirements permit such indication carve-outs, 

this does not address the legal consequences of 

marketing a generic with those carved-out indications. 

Prescribing practices 

In most countries, including Australia, medical 

practitioners prescribe a specific drug without 

reference to the indication for which it is being 



prescribed. Consequently, the dispensing pharmacist, 

when filling a prescription, will not usually know the 

indication for which the drug is being dispensed. 

He/she will often give the patient the option of 

choosing a generally cheaper generic version of the 

drug, where available, irrespective of whether the 

indication for which the patient is to be treated is on 

the prescription. 

is authorising the use of the product when the 

Patents Act gives the patentee the exclusive 

right to authorise other persons to exploit the 

invention during the patent term. 

Contributory patent infringement 

the product is itself infringing. 

In a second medical use claim, it is clear that section 

117(2)(a) is not relevant as, by definition, the product 

is capable of more than one use. 

It is highly likely that a court would conclude that 

the supply of a generic drug will infringe a method of 

treatment claim, under section 117(2)(c), if both: 

The amendment carved out from the registered 

indications, psoriatic arthritis and psoriasis, 

so that the only indication referred to was the 

treatment of active rheumatoid arthritis. The 

application to vary the first injunction order was 

refused. 

Section 117 of the Patents Act is a controversial part 

of Australia’s patent legislation, and has been subject 

to considerable judicial scrutiny over the past two 

decades. 

The application to vary the 2008 order was based 

on the submission by Apotex that, in light of the 

changes to the product information leaflet, there was 

no serious question to answer in respect of section 

117(2)(b), which was relied on by Sanofi to establish 

infringement. 

Consequently, even where the generic sponsor has 

“carved out” a patented indication for a drug, there 

is no guarantee that the drug will not be used for a 

patented indication. 

It provides that if the use of a product by a person 

infringes a patent, the supply of the product to 

that person is an infringement of the patent by 

the supplier, unless the supplier is the patentee 

or licensee of the patent (section 117(1), Patents 

Act). The use of a product by a person is any of the 

following: 

• The generic is supplied in Australia, with an 

approved indication for the treatment of a 

medical condition, and the method of treatment is 

the subject of a granted patent. 

Second medical use claims 

Although the patentability of second medical use 

claims has been regarded for many years as settled, a 

recent challenge to that position brought the issue on 

appeal before the High Court of Australia (Apotex Pty 

Ltd v Sanofi-Aventis Australia Pty Ltd [2013] HCA 50) (the 

leflunomide case). 

• The product information leaflet which 

accompanies the generic includes the patented 

indication. In those circumstances the product 

information leaflet would amount to instructions 

for use of the product in an infringing manner. 

The patent in issue had a single claim, that is, “a 

method of preventing or treating a skin disorder, 

wherein the skin disorder is psoriasis, which comprises 

administering to a recipient an effective amount of a 

pharmaceutical composition containing as an active 

ingredient a compound of formula I or II [the compound 

being leflunomide]”: 

The real question arises where: 

In Australia, methods of medical treatment per se are 

patentable. There is no need to resort, for example, 

to Swiss-type claims, although claims of that kind are 

also permissible in Australia. 

The more controversial issue in Australia is not 

whether second medical uses of a known drug 

should be patentable, but in what circumstances is a 

patent for a second medical use of a known product 

infringed? 

In Australia, there are three potential ways a 

patentee can argue that the supply of a generic is an 

infringement of a method of treatment claim: 

• Section 117 of the Australian Patents Act 1990. 

This is commonly known as the “contributory 

infringement” section of the Patents Act. 

• Principles of joint tortfeasorship. The company 

marketing the generic, by the act of supply, is 

aiding, inducing or procuring the infringement 

of the patent, by patients who use the products 

according to the patented method. 

• Authorisation. The company supplying the generic 

• If the product is capable of only one reasonable 

use, having regard to its nature or design, that use 

(section 117(2)(a), Patents Act). 

• If the product is not a staple commercial product, 

any use of the product, if the supplier had reason 

to believe that the person would put it to that use 

(section 117(2)(b), Patents Act). 

• In any case, the use of the product in accordance 

with any instructions for use of the product, or 

any inducement to use the product, given to 

the person by the supplier, or contained in an 

advertisement published by or with the authority 

of the supplier (section 117(2)(c), Patents Act). 

Although the wording of the section is not as clear as 

it could have been, it is reasonably apparent that the 

supply of a product will infringe a patent in one of 

three situations: 

• If the product is capable of only one use and that 

use is an infringing one, supplying the product is 

an infringement. 

• If the product is not a staple commercial product 

and the supplier had reason to believe that the 

person would put it to an infringing use, supplying 

the product for that use is infringing. 

• If the supplier provides instructions for use of the 

product supplied, or advertises the product for a 

specific use or otherwise induces the use of the 

product so as to infringe a patent, the supply of 

• The supplier of the generic receives marketing 

approval for non-patented indications, carves out 

from the required product information leaflet the 

patented indication (for the second medical use) 

and supplies the generic only for use for nonpatented 

indications. 

• In those circumstances, can section 117(2)(b) still 

be relied on by the patentee to prevent supply of 

the generic, even where there are non-patented 

indications for that product? 

That was the question which, ultimately, the 

Australian High Court recently had to answer in the 

leflunomide case. 

The leflunomide case 

Trial decision 

The leflunomide proceeding (Apotex Pty Ltd v Sanofi- 

Aventis Australia Pty Ltd [2013] HCA 50) relevantly 

started as follows: 

• In October 2008, Apotex consented to a 

preliminary injunction restraining it from 

supplying or offering to supply in Australia any 

product containing leflunomide, where Apotex 

had reason to believe that the product may be 

used for the treatment of psoriatic arthritis. 

• In 2010, Apotex sought to vary the terms of 

the preliminary injunction order, in light of an 

amendment to its product information leaflet. 

• Apotex submitted that its new product 

information leaflet made reference to active 

psoriatic arthritis but not to psoriasis. In those 

circumstances, Apotex argued that it had no 

reason to believe that a person would use its 

leflunomide product for an infringing use. 

• However, the evidence at trial established that 

psoriasis is a diagnostic criterion of psoriatic 

arthritis. Nearly every person with psoriatic 

arthritis has or will develop psoriasis. 

• The evidence therefore established that the 

administration of leflunomide to a person with 

psoriatic arthritis will treat that person’s psoriatic 

arthritis and psoriasis, or treat that person’s 

psoriatic arthritis and prevent psoriasis. 

• Apotex’ approved product information leaflet 

instructed medical practitioners to use its 

leflunomide product for the treatment of psoriatic 

arthritis. It was therefore argued by Sanofi that 

the approved Apotex product information leaflet, 

in fact, instructs medical practitioners to use 

leflunomide to treat psoriasis. 

• It was said to follow that Apotex must have reason 

to believe that the person to whom the product 

is supplied (by inference, a rheumatologist 

prescribing the product to a patient) will put 

Apotex’ leflunomide product to use for the 

treatment of psoriasis, thereby enlivening section 



117(2)(b) (it was held that leflunomide is not a 

staple commercial product). 

At trial, Sanofi’s argument was accepted and the court 

held that Apotex was liable for contributory patent 

infringement, under section 117(2)(b) of the Patent 

Act. 

Appeal 

The matter went to the Full Court of the Federal 

Court of Australia on appeal and the appeal judgment 

was delivered in July 2012. The Full Court agreed 

with the analysis of the trial judge with respect to 

the application of section 117(2)(b), and dismissed 

Apotex’ appeal. Apotex sought leave to appeal to 

the Australian High Court which granted leave and 

allowed the appeal. 

High Court judgment 

As is often the case, the High Court judges delivered 

separate judgments that differ slightly in emphasis 

from one another. 

On the issue of infringement, Hayne J (with whom 

French CJ agreed) considered that the issue of 

infringement has to be considered in the context of 

the regulatory background: 

• Apotex’ product was registered on the Australian 

Register of Therapeutic Goods (ARTG) as indicated 

for rheumatoid arthritis and active psoriatic 

arthritis, but not psoriasis not associated with 

manifestations of arthritic disease. 

• Their Honours considered that such a therapeutic 

good is separate and distinct from any other 

therapeutic good having different indications 

including, in particular, one that is indicated for 

the treatment or prevention of psoriasis. 

Their Honours held that, in those circumstances: 

• The supplier of the registered product would 

only have reason to believe that those to whom 

it supplied the product would put it to a use 

described in the indications for which the product 

was registered. 

• There was, in effect, no credible evidence to 

establish that Apotex had reason to believe its 

product would be put to an infringing use, that 

is, to treat psoriasis not associated with arthritic 

conditions. Their Honours emphasised the fact 

that the product was registered on the ARTG with 

an express exclusion of that indication for its use. 

Their Honours acknowledged that the administration 

of Apotex’ leflunomide to treat rheumatoid arthritis 

and active psoriatic arthritis would also be likely 

to relieve the patient’s psoriasis. However, they 

considered the Full Court’s construction of the patent 

claim to be correct, that is, confined to the deliberate 

administration of the compound to prevent or treat 

psoriasis. 

Crennan and Kiefel JJ (with whom Gageler J agreed) 

put their finding of non-infringement on two separate 

bases. 

First, their Honours referred to the fact that a 

person supplying the Apotex product but not using 

the patented method does not directly infringe the 

method patent. Their Honours then said “it is difficult 

to understand how the supply of an unpatented product, 

the use of which by a supplier would not infringe a 

method patent, can give rise to indirect infringement of a 

method patent by a recipient of the unpatented product 

from the supplier”. 

This statement is itself difficult to comprehend in the 

context of section 117. The section emphasises the 

ultimate use of the product being supplied. If the 

ultimate use of the product is a direct infringement 

of a method claim, section 117 operates to deem the 

supply of the product to be itself an infringement 

of the patent, in circumstances where either the 

product is only capable of one use, the product is not 

a staple commercial product and the supplier ought 

reasonably to have expected the product to be used 

for an infringing purpose, or the supplier in effect 

induces or encourages the infringing use. 

If the supplier uses the product supplied in 

accordance with the claimed method then the 

supplier will directly infringe the method claim. The 

fact that the person to whom the product is supplied to avoid liability for secondary patent infringement in 

is the one who uses the patented method ought not, Australia. 

logically, exculpate the supplier from liability, in the 

specific circumstances contemplated by section 117. The leflunomide decision may be confined to its own 

facts. In future cases, where there is more specific 

The second basis for non-infringement is similar to evidence of prescribing practices and the ultimate 

that relied on by Hayne J. Their Honours specifically use of a generic, from which an inference of direct 

referred to Apotex’ product information leaflet, which infringement can be drawn, a different conclusion 

does not, in terms, instruct recipients to use the might be reached on the application of section 

unpatented pharmaceutical substance in accordance 117(2)(b). 

with the patented method. 

The outcome of any such future case will also turn on 

They stated that “it was not shown, nor could it be the construction given to the asserted patent claim or 

inferred, that Apotex has reason to believe that the claims. In the leflunomide case, a narrow construction 

unpatented pharmaceutical substance, which it proposes was given to the claim. This effectively requires an 

to supply, would be used by recipients in accordance enquiry to be made into the object or end, in view of 

with the patented method, contrary to the indications in the method of treatment involving the administration 

Apotex’ approved product information document”. of a compound in issue. 

This rationale for the finding on infringement is Patent claims must be given purposive construction in 

evidence based. It seems to permit the possibility in Australia consistent with the context provided by the 

other cases that, with more specific evidence of the patent specification. There is no universal principle 

likely use of the product, or in circumstances from of construction which will apply to all patent claims 

which it might be inferred that such use would occur, protecting the second medical use of a known drug. 

infringement may be made out under section 

117(2)(b). 

Although some life has been breathed into indication 

Conclusions 

The decision of the Australian High Court is unlikely to a universal panacea. 

be the last word on whether indication carve-outs are 

an effective way for a generic pharmaceutical supplier 

Wayne Condon 

Principal, Lawyer 

Email: wayne.condon@griffithhack.com.au 

carve-outs as a non-infringement strategy in Australia 

following the leflunomide case, they are by no means 


Immigration 

Work And Travel Guidance For F-1 

Students With Pending H-1B “Change 

Of Status” Applications And “Cap-Gap” 

Employment Authorization 

by Susan J. Cohen and William L. Coffman 

Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. 

This advisory summarizes key travel and employment issues if you are 

an F-1 student with Optional Practical Training (OPT) employment 

eligibility and an H-1B filing on your behalf has been accepted by US 

Citizenship and Immigration Services (USCIS). USCIS will adjudicate 

these visa petitions over the next few months and approved petitions 

will have an October 1, 2014 start date. 

USCIS will adjudicate these visa petitions over the 

next few months and approved petitions will have an 

October 1, 2014 start date. The good news is that your 

OPT employment card is automatically extended, by 

operation of law, with validity to September 30, 2014 

under the “cap-gap” OPT extension rule. This means 

you can continue working legally even after the 

expiration of your OPT employment card. 

We recommend that you alert your school’s 

international student office by providing that 

office with a copy of the H-1B receipt notice. The 

international student office will use this receipt 

information to update your I-20 to show the extension 

of your OPT. 

International travel between now and October 1 is 

complicated, and whether you can travel and return 

to work before October 1 depends on your specific 

situation. As a general rule, it is safest not to travel 

during the cap-gap period. In all cases, travel as an F-1 

student with OPT requires a valid F-1 visa stamp, 

Form I-20 with updated authorization for travel from 

your school’s international student office, the OPT 

Employment Authorization Document (EAD), and 

proof of current employment in the US (employer 

letter and/or recent pay slips). 

Please note that any international travel carries risks. 

If your F-1 visa has expired and you need to apply 

for a new one, you may face delays for extra security 

clearances (221(g) administrative processing), or you 

may not be able to prove you have nonimmigrant 

intent, which is required for F-1 visa applications. 

Furthermore, even with a valid F-1 visa, admission 

to the US is up to the discretion of the US Customs 

and Border Protection (CBP) officer at the port of 

entry. We therefore caution you to carefully consider 

the need to travel as an F-1 student with OPT and 

list below some of the common scenarios and our 

recommendations. 

1. My OPT employment card has 

not expired and my H-1B petition 

has been accepted, but not yet 

approved. 

If you travel outside the US in this situation, the 

change of status part of your H-1B petition will be 

abandoned. This means that even when the H-1B 

is approved, your status will not change to H-1B 

because you departed the US while the H-1B “change 

of status” petition was pending. Your employment 

eligibility will end on September 30, 2014 with 

expiration of the cap-gap extension, and you will need 

to depart the US, apply for an H-1B visa stamp based 

on the petition approval, and reenter after October 1, 

2014 to activate your status as an H-1B worker. 

2. My OPT employment card has 

not expired and my H-1B has been 

approved. 

In this situation, according to guidance from USCIS, 

it is possible to travel and not abandon the change 

of status because it has already been approved 

and is for a date in the future. Since there is no 

abandonment, once you return to the US on your 

F-1 visa, your change of status will be effective 

on October 1. However, there is a very real risk in 

traveling in this scenario as upon approval by USCIS 

of your H-1B petition, the Student and Exchange 

Visitor Information System (SEVIS) may no longer 

reflect that you are an F-1 student and you may have 

difficulties entering the US in F-1 status. 

3. My OPT employment card 

has expired. 

In this situation, you are eligible to remain in the US 

and continue working under the cap-gap extension 

rule discussed above. However, there is no provision 

or guidance from USCIS that allows for reentry during 

this cap-gap period once your EAD has expired. 

Therefore, if you must depart the US during this 

period, you will not be able to return to the US until 

you obtain an H-1B visa stamp based on approval of 

the H-1B petition. 


Immigration 

Initial entry into the US on an H-1B visa is allowed 

up to 10 days in advance of the start date of the 

petition approval. So, for an October 1 start date, 

this entry date can be as early as September 21. 

However, you will not be able to resume employment 

until October 1, 2014. Unless there is an emergent 

need to travel and arrangements can be made 

for remote work outside the US, you should make 

no plans to travel after expiration of your OPT 

employment card. 

4. I need to depart the US and will 

not return until October 1 or later 

and will apply for the H-1B visa. 

You can apply for the H-1B visa stamp any time 

after approval of the H-1B petition as soon as you 

can schedule an appointment at the US Embassy 

or Consulate. The visa will not be effective until 

October 1, 2014, but you can, and are encouraged to, 

apply for it as soon as possible to avoid the rush in 

September. 

Please note H-1B nonimmigrants are allowed to 

enter the US up to 10 days in advance of the petition 

validity. However, you cannot start employment in 

H-1B status until October 1. This 10-day time period is 

intended to allow you to get settled in the US before 

starting employment. 

5. My H-1B petition was denied 

by USCIS. 

If your H-1B petition is denied and your OPT 

EAD is still valid, you are authorized for ongoing 

employment in the US until your EAD expires. 

However, cap-gap employment eligibility after 

expiration of the EAD is only valid while the H-1B 

petition is pending with USCIS. Therefore, you are 

no longer eligible to continue working in the US if 

your H-1B petition is denied and your OPT EAD has 

expired. 

The examples above all deal with the situation where 

the H-1B filing has been accepted by USCIS out of the 

quota. If the H-1B petition filed on your behalf was 

rejected, you may choose to travel if you have a valid 

F-1 visa stamp, Form I-20 with updated authorization 

for travel from your school’s international student 

office, the OPT Employment Authorization Document 

(EAD), and proof of current employment in the US 

in the form of an employer letter and/or recent pay 

slips. 

You may also stay in the US for 60 days after the 

expiration of your F-1 OPT status, but only for 

purposes of settling your personal affairs and 

domestic travel within the US. You are not allowed 

to work during this 60-day grace period. If you travel 

outside the US during the 60-day grace period, even 

if you do not plan to work upon your return, you will 

not likely be readmitted because you will be deemed 

to have departed the US at the conclusion of your 

F-1 program, thus fulfilling the need for the 60-grace 

period. 

The 60-day grace period is not meant to facilitate 

international travel and reentry — it is designed to 

allow F-1 students to remain in the US at the end of 

the F-1 program to settle their affairs until they are 

ready to depart the US. 

Susan J. Cohen 

Founder and Chair of the 

firm’s Immigration Practice 

T: 617.348.4468 

Email: SJCohen@mintz.com 

William L. Coffman 

Of Counsel 

T: 617.348.1890 

Email: WLCoffman@mintz.com 


Intellectual Property 

Supreme Court Hears 

Argument in Limelight v. 

Akamai 

Lucas I. Silva 

The Supreme Court heard argument yesterday in Limelight Networks, 

Inc. v. Akamai Techs., Inc., which concerns the standard for inducing 

patent infringement under 35 U.S.C. 271(b). 

For those who have not followed (or 

don’t recall) the case’s long and winding 

road to the Supreme Court, the plaintiff 

Akamai alleged infringement of method 

claims directed at efficient delivery of web 

content. Defendant Limelight maintained 

a network of 

servers and 

placed certain 

content 

elements on 

its servers, 

but it did 

not modify 

other content 

providers’ web 

pages itself, 

a step that was required by the asserted 

claims. Instead, it instructed is customers 

to carry out the modification. 

A jury nonetheless found that Limelight 

directly infringed the asserted claims. The 

District Court, however, granted judgment 

as a matter of law that Limelight could 

not directly infringe because it did not 

perform every claim step, either itself or 

through another acting at its direction or 

control. In December of 2010, a panel of 

the Federal Circuit affirmed. 

Akamai then sought rehearing en banc. 

Although Akamai had pursued its case 

under a theory of direct infringement, 

the Federal Circuit 

combined Akamai’s 

petition with another, 

McKesson v. Epic, which 

did involve a question of 

inducement under 271(b). 

In August of 2012, the 

en banc Court did not 

directly reach the issue 

of direct infringement 

under 271(a), but found 

Limelight liable for inducing patent 

infringement under 271(b) because 

it performed certain claim steps and 

induced its customers to perform the 

remaining step. In December of 2012, 

Limelight filed a petition for a writ of 

certiorari with the Supreme Court. 1 

1 Akamai filed a cross-petition for cert related to the en banc Court’s decision on the 271(a) 

issue, asking “whether a party may be liable for infringement under either section of the patent 

infringement statute, 35 U.S.C. §271(a) or §271(b), where two or more entities join together to 

perform all of the steps of a process claim,” but the Court had not granted the petition as of 

yesterday’s argument. 

This long and relatively complex 

procedural history made for a lively 

and somewhat scattered argument 

at the Supreme Court yesterday. The 

particular issue presented to the Court 

was “whether the Federal Circuit erred 

in holding that a defendant may be held 

liable for inducing patent infringement 

under 35 U.S.C. §271(b) even though no 

one has committed direct infringement 

under §271(a).” On the whole, the Justices’ 

questions suggested that the Federal 

Circuit had, in their view, erred. 

For example, in a telling moment, Justice 

Scalia accused the Federal Circuit of 

“avoiding the text of the statute” in 

finding indirect liability without direct 

infringement, a sentiment that prompted 

laughter in the courtroom and with which 

Justice Kagan agreed. However, Justice 

Breyer may have made the most revealing 

comment of all, stating “I become very 

nervous about writing a rule that 

suddenly might lead millions of people to 

start suing each other.” 

This is not to say that the Justices fully 

embraced the petitioner’s arguments 

either. At different points, both Chief 

Justice Roberts and Justice Scalia 

expressed deep skepticism about a rule 

that would allow, in Justice Scalia’s words, 

a defendant to “violate the patent by not 

having one person do all the steps,” which 

Lucas I. Silva 

Associate 

T: 617.342.4021 

Email: lsilva@foley.com 

would be “just as effective in stealing 

the idea and yet there would not be a 

violation of the patent.” 

Chief Justice Roberts voiced a similar 

concern: “All you’ve got to do is find 

one step in the process and essentially 

outsource it … and you’ve essentially 

invalidated the patent.” However, the 

petitioner responded that a policy concern 

such as that would be better addressed 

through an act of Congress, and the 

Justices often returned to the fact that the 

direct infringement issue was not actually 

before Court. 

Making predictions is dangerous business, 

but the Court seemed unlikely to affirm 

the Federal Circuit’s en banc decision and 

find that a defendant can be liable for 

inducing patent infringement without an 

act of direct infringement. 

However, while expressing policy concerns 

about the the Justices were laser focused 

on the fact that the direct infringement 

question was not before the Court. 

Therefore, it seems most likely that the 

Supreme Court will simply reverse the 

en banc decision regarding 271(b), and 

remand to the Federal Circuit to decide 

the question on which it granted en banc 

review in the first place. 



Whose Motion Picture Is It 

Anyway - Does The Actress 

Own The Motion Picture? 

by Mark A. Fischer 

It was the casting call that would make her name known, but it 

didn’t bring the kind of fame for which she was hoping. In July 

2011, Cindy Lee Garcia landed a minor role in a motion picture 

that was to be called “Desert Warrior.” She received four pages of 

the script, performed her role, and was paid $500 for three days of 

acting. Little did she know, this brief performance would make her 

the center of an uproar in the Islamic world. 

When she accepted the role, Garcia 

believed she would be playing a concerned 

mother in an “historical Arabian Desert 

adventure film.” As it turned out, “Desert 

Warrior” was not realized as a full-length 

feature motion picture. Instead Garcia’s 

performance appeared in “Innocence 

of Muslims,” a 14-minute film depicting 

Mohammad in a generally unfavorable light. 

The producer redubbed her original lines 

with anti-Islamic content. Garcia learned 

about the real production about a year 

after the filming, when she began getting 

calls from reporters. She heard President 

Obama say that the film had contributed to 

the deaths of Americans due to violence in 

Benghazi, Libya. 

Garcia lost her day job, was bombarded 

with death threats, and felt unsafe traveling. 

So she turned to copyright law to try to 

limit distribution of the film. She filed eight 

Digital Millennium Copyright Act (“DMCA”) 

takedown notices with Google, which owns 

YouTube. 

Google refused to remove the video, so 

Garcia filed for a temporary restraining 

order (“TRO”). Her claim? Copyright 

infringement. The district court denied the 

request for the TRO, ruling that Garcia was 

not likely to prevail in her copyright claim 

because she had granted the producer an 

implied license to use her performance in 

the film. 

The Ninth Circuit Court of Appeals reversed, 

in a fascinating and important decision 

on February 26, 2014. The Circuit Court 

ordered Google to “take down all copies 

of ‘Innocence of Muslims’ from YouTube 

and any other platforms within its control 

and to take all reasonable steps to prevent 

further uploads.” 

To reach this result, the court made an 

apparently unprecedented finding: that 

the actress had an independent copyright 

interest in the section of the motion 

picture representing her fleeting creative 

contribution. 

Chief Judge Kozinski determined that (1) 

Garcia was not a joint author of the whole 

film; (2) Garcia made a severable creative 

contribution that gave her copyrights 

over her performance; (3) Garcia did not 

transfer her copyrights under the work 

for hire doctrine; and (4) Garcia granted 

the producer an implied license to use her 

performance in an adventure film, and the 

producer’s ultimate use of her performance 

in “Innocence of Muslims” exceeded the 

license. Let’s take a closer look at the case. 

Joint Authorship 

Typically, copyright law treats a motion 

picture as a “joint work” because of 

the many contributors involved in its 

production. Federal law defines a “joint 

work” as “a work prepared by two or 

more authors with the intention that 

their contributions be merged into 

inseparable or interdependent parts of 

a unitary whole.” This notion of multiple 

authors working together creatively on an 

inseparable product does not readily fit 

Garcia’s role. 

This fact is one reason that work-made-forhire 

can be so appropriate in the motion 

picture industry because, if properly 

documented, the employer is the “author” 

and owns the entire motion picture 

outright. Judge Kozinski wrote, “Garcia 

argue[d] that she never intended her 

performance to be part of a joint work, and 

under our precedent she doesn’t qualify as 

a joint author.” Garcia did, of course, intend 



for her performance to be part of some 

isolated to specific segments of a motion 

This case will likely heighten industry 

The majority’s opinion seems to elevate 

jointly-made work (i.e., the original motion 

picture? 

requirements that all creative participants 

performance into a significant right. The 

picture), but not this particular work (i.e., 

the short film). 

The Dissent 

in a motion picture sign work-for-hire 

agreements. In other words, having a work- 

dissent seems to blur the nuances of joint 

works and co-authorship. Both the majority 

Copyright Interest in Her 

Isolated Performance 

In a dissenting opinion, Judge Randy Smith 

submitted that it was not clear that Garcia 

would likely succeed on her copyright 

claim because (i) Garcia’s performance 

for-hire provision used to be very good 

advice. Post-Garcia this language may well 

be necessary to safeguard a producer’s 

rights. 

and the dissent are susceptible to further 

scrutiny. Google has asked the court to 

hear the case again “en banc,” which would 

be before eleven judges instead of three. 

Perhaps the most remarkable aspect 

was not a work, (ii) Garcia was not an 

of this case is the novel finding that an 

author of the clip, and (iii) Garcia’s 

Just as the famous Bee Gees copyright 

Throughout the suit, Garcia has had 

actress can have a severable, separate 

performance was not fixed. To the first 

infringement case over “How Deep is Your 

a pending application to register her 

copyright interest in her motion picture 

point, he posited that acting resembles 

Love?” changed the music business by 

performance with the Copyright Office. 

performance. Although not an author of 

the “procedure” or “process” by which an 

restricting the acceptance of unsolicited 

On March 6, 2014, the Office officially 

“Innocence of Muslims,” the court found 

original work is performed. 

music demos, Garcia will undoubtedly 

rejected her application and stated that 

that Garcia had some residual rights over 

impact motion picture industry practice. 

“the longstanding practices do not allow 

her creative contribution as “fixed” in the 

Then he pointed out the majority failed 

(Note that under California Labor Code 

a copyright claim by an individual actor or 

film. 

to analyze whether Garcia was an author. 

section 3351.5(c), there are special labor and 

actress.” 

He concluded that Garcia could not be 

employment issues relating to using work- 

Perhaps she could have been more 

an author because she was neither the 

for-hire arrangements, but that is a separate 

The judges have yet to vote whether the 

properly considered a joint author of 

“person with creative control” nor the 

discussion from the Garcia copyright issues.) 

court will rehear the injunction. Some 

the whole, with non-exclusive rights in 

the entire film – but under that theory 

she presumably could not have stopped 

distribution of the film because only an 

“originator of ideas or concepts.” 

This interpretation could, perhaps be 

plausible here where Garcia’s contribution 

What to think about the 

Garcia case? 

lawyers are fond of saying that “hard cases 

make bad law.” I’m not sure the case was 

initially all that hard. 

exclusive owner has that power over a 

was minimal, however it is not entirely 

Remember the circumstances of this case 

So here, at least, difficult facts have made 

copyrighted work like a motion picture. 

satisfying. Can an actor or actress 

are idiosyncratic: fraud, a non-commercial 

uncertain law. Undoubtedly there will be 

really never be the primary creator of a 

purpose, hate speech, death threats, and 

more to the story in this case or in cases yet 

Because acting goes beyond merely 

performance, even if given broad latitude 

international violence. The holding might 

to come. 

reading a script written by someone else, 

to interpret or improvise? 

be limited, but I believe the ramifications 

the court reasoned, Garcia possessed 

the requisite “minimal creative spark” to 

assert a copyright in what she added to 

The Practical Takeaway 

are deeper. 

the pre-existing material. 

If you’re in the business of producing 

motion pictures, TV shows, or other 

This logic has created a stir among 

moviemakers. Do extras own their splitsecond 

appearances in the background? 

collaborative works, it’s always been a 

very good idea to have all employees and 

contractors sign a written agreement 

Mark A. Fischer 

Partner 

Is that enough of a spark? What about the 

countless other ways people contribute 

artistically, ways that are eventually “fixed” 

containing explicit “work made for hire” 

language (or copyright assignments where 

appropriate). 

T: +1 857 488 4266 F: +1 857 401 3053 

Email: mafischer@duanemorris.com 

in a motion picture and can often be 


Litigation, Mediation & Arbitration 

Is Your Dealership Taking 

Advantage Of Employment 

Arbitration? 

By Matthew Simpson 

Many dealerships try to reduce the risk of high-dollar litigation and 

runaway jury awards by invoking mandatory arbitration for their 

applicants and employees. Employees who think that they were paid or 

treated unfairly are then required to bring the matter to an arbitrator 

rather than file a lawsuit in federal or state court. The arbitrator conducts 

a hearing and listens to both parties and their witnesses, just as a 

jury would in a lawsuit. 

But unlike a jury, the arbitrator can rely on his or 

her in-depth knowledge of employment law in 

reaching a decision, rather than the emotions and 

sympathies typically used by jurors to rule in favor 

of the employee. 

In the end, the arbitrator is more likely to reach 

the correct outcome under the law and is less 

likely to issue the kinds of awards that make the 

front page of your local newspaper. 

While arbitration agreements have come under 

attack by plaintiffs’ attorneys and the National 

Labor Relations Board, we have had recent 

success enforcing them for many of our dealership 

clients, even in states where arbitration is 

traditionally disfavored. 

In doing so, we have been able to prevent 

employees from bringing claims that they were 

treated unfairly (although perhaps not unlawfully) 

in front of sympathetic juries. 

Moreover, by invoking arbitration, we have been 

able to make employees bring their claims on an 

individual basis and have prevented them from 

bringing costly and time-consuming class and 

collective actions. 

Given these recent decisions, it may be time to 

consider whether arbitration is the appropriate 

way to handle claims brought against your 

dealership. If you already have an arbitration 

agreement in place, now is the time to update it to 

take advantage of recent legal developments. 

What Are The Advantages 

Of Adopting A Mandatory 

Arbitration Policy? 

1 

Arbitrations can expedite the resolution 

of employee claims. They can usually be 

completed within several months while 

litigation normally takes a couple of years. 

2It has the potential to be less costly than 

litigation. Because discovery is more 

limited than in a lawsuit and can be 

expedited, attorneys’ fees can often be 

reduced. One federal judge, who deals with 

employment-related lawsuits on a daily basis, 

has written: 

...our current legal system for resolving 

disputes is losing the respect of the public and 

is rapidly approaching failure...The arbitral 

process...nearly always exceeds the judicial 

process in speed, efficiency, and in expense. We 

should view it not with suspicion but with relief. 

Arbitration and other alternative methods 

of dispute resolution provide for ordinary 

citizens and businesses what our court system 

no longer produces with any regularity: 

Affordable, speedy justice. 

“ 

3It avoids the unpredictability of a jury 

trial. Cases are decided by professionals 

who are familiar with employment law 

rather than by a group of jurors who are 

almost always more likely to relate to 

the employee than to a company. Arbitrators are 

trained to base their decisions on legal principles 

rather than emotion. 

4It is generally more confidential than the 

court system. Lawsuits are a matter of 

public record. Arbitrations are not. 

It may prohibit employees from 

5pursuing class or collective actions. 

While the current administration 

continues to take the position that classaction 

waivers in arbitration agreements 

violate the National Labor Relations Act, the 

overwhelming majority of federal courts to have 

considered the issue have held that it does not. 

In fact, in the last year, four different federal 

appellate courts held that class action waivers 

are enforceable in arbitration agreements used 

for employment disputes. 

What Are The Disadvantages? 

Some employers worry that they may 

1experience an increase in claims and 

arbitrations if they make it easier for an 

employee to take a case to arbitration. 

But there are no studies that have shown 

this to actually be the case, and it has been 

our experience that arbitration policies do not 

increase the number of complaints filed. 

Plaintiffs’ attorneys realize that most 

2employment claims are covered by 

insurance and insurance companies do 

not like to spend money to defend claims. 

These attorneys also know that whether 

they are in court or in arbitration, even if they 

have a weak case, if they can run up the defense 

costs by filing motions, the insurance company 

will eventually cry “uncle” and settle the case. 

More and more plaintiffs’ attorneys are learning 

this trick, increasing the time it takes to resolve 

a claim and adding substantially to the cost of 

processing arbitration claims. 

3In court, employers often prevail early in 

the proceedings without going to trial by 

filing a motion for summary judgment. 

Judges with crowded dockets are not 

at all reluctant to grant such motions 

and dismiss the case where it is clear that the 

employee cannot prevail at trial. 

Arbitrators, however, appear to be far less 

inclined to dispose of a case on such a motion. 

Some feel that the aggrieved employee is always 

entitled to his or her “day in court” even if the 

case is weak or non-existent. It is also possible 

that the reluctance to throw out a case is due to 

the fact that it is not in an arbitrator’s financial 

interest to dispose of a case without a full 

hearing. 

4There is a risk that arbitrators might 

ignore the facts and dispense their own 

idea of justice, despite what the law says. 

Once an arbitrator makes a decision, it 


Litigation, Mediation & Arbitration 

is very difficult to convince a court to reverse it. 

Therefore, it is important to take great care in the 

selection of the arbitrator. 

Employees and applicants presented 

5with an arbitration agreement may well 

be suspicious and reluctant to sign. 

Therefore, it is important that employees 

understand that the policy does not 

prevent them from pursuing any legal claim that 

they might have or deny them any compensation 

that they might be entitled to. It simply moves the 

resolution of those disputes to a different and, we 

believe, a more efficient forum. 

Because the law in this area is still 

6developing, the courts may, in future 

decisions, restrict arbitration of some 

kinds of employment claims and could 

hold some arbitration agreements to be 

invalid. Therefore, your arbitration agreement 

should be drafted very conservatively to 

reduce the likelihood that a court would find 

it to be unfair to employees. It should also be 

reviewed periodically to ensure that it remains in 

compliance with the developing law. 

Our Advice 

In our judgment, the pros outweigh the cons for 

most employers, and especially for dealerships. 

While an arbitration policy will not solve every 

employee-related claim, and while there are still 

some unanswered questions about mandatory 

arbitration, an arbitration policy is an effective 

means of resolving employment claims without 

the expense and uncertainty of a jury trial. 

Studies have confirmed that jurors have a bias in 

favor of plaintiff employees in employment cases. 

Although it is possible that the law might change in 

the future, community attitudes probably will not. 

Most employers would be well advised to take this 

opportunity to ensure that at least some claims 

will not be decided by juries. 

If you have questions about whether an arbitration 

agreement is right for your dealership, or if you 

need to update your arbitration agreement to take 

advantage of recent developments in the law, let 

us know. 

Because match-fixing just 

ain’t cricket 

by Garth Gallaway, Daniel Kalderimis, Justin 

Graham and Josh Blackmore Chapman Tripp 

The Crimes (Match-fixing) Amendment Bill, introduced this week, 

clarifies that match-fixing to influence a betting outcome - rather than 

for tactical sporting reasons - is a crime in New Zealand. 

Responsibility for addressing less serious 

types of match-fixing will lie primarily with 

national sports organisations which, under 

a new policy developed by Sport New 

Zealand, are expected to implement rules 

to address the issue. 

The Bill 

December 2014, will help to address risks 

presented by our upcoming hosting of the 

Cricket World Cup and the FIFA Under 20 

(football) World Cup. 

If the Bill is implemented in its current 

form, New Zealand authorities could not 

prosecute for match-fixing undertaken 

wholly outside of New Zealand. 

Matthew R. Simpson 

Associate 

T: (404) 240-4221 F: (404) 240-4249 

Email: msimpson@laborlawyers.com 

The Bill would amend the Crimes Act 1961 

to bring serious match-fixing expressly 

within the existing offence of ‘obtaining by 

deception or causing loss by deception’ – 

punishment for which can include a term 

of up to seven years imprisonment. 

Certain match-fixing activity may already 

be caught by a range of other offences 

in both the Crimes Act and Secret 

Commissions Act so one effect of the Bill is 

to clarify the legal position. 

The Explanatory Note on the Bill explains 

that the proposed changes, which 

are planned to come into force on 15 

How effective will the 

change be? 

The change is an obvious one, given that 

the Australian Crime Commission has 

identified that organised crime (including 

sports betting) is moving into Australasia. 

It seems highly unlikely that New Zealand 

authorities will be able to identify and 

prosecute off-shore crime syndicates 

so the new law is likely to catch only the 

sportspeople involved. But, without the 

cooperation of the players, the syndicates 

will be considerably weakened. 


Media, Telecoms, IT, Entertainment 

The Sport New Zealand policy indicates the legal 

framework will be supplemented by a more 

collaborative approach between industry and 

government to addressing match-fixing. 

More anti-bribery and 

corruption law changes on 

the horizon 

The Organised Crime and Anti-Corruption 

Legislation Bill is expected to be introduced to 

Parliament later this year. 

Its purpose is to strengthen New Zealand’s 

anti-bribery and corruption laws generally, 

and it should reflect the recommendations 

for legislative change contained in the OECD’s 

rather damming report on New Zealand’s 

implementation of the OECD Anti-Bribery 

Convention. 

Daniel Kalderimis 

Partner 

T: +64 4 498 2409 

Email: daniel.kalderimis@chapmantripp.com 

Garth Gallaway 

Partner 

T: +64 3 345 9540 

Email: garth.gallaway@chapmantripp.com 

Josh Blackmore 

Partner 

Tax consciousness and 

trust in international tax 

planning: The substance 

of the matter 

by Taiwo Oyedele 

T: +64 4 498 4904 

Email: josh.blackmore@chapmantripp.com 

Justin Graham 

Partner 

T: +64 9 357 8997 

Email: justin.graham@chapmantripp.com 

The international tax community is becoming increasingly aware of 

the global trend to combat tax evasion backed by the G20 as well as 

the EU and promoted by the OECD with a mandate of implementation. 

The reasons for this unprecedented collective action are deeply 

rooted in the aftermath of the financial crisis that began in 2008 and, 

for many countries, is still ongoing. Nevertheless, one could also argue 

that the strong and definitive measures which the OECD intends to 

employ to battle tax evasion are the indirect results of a large scale lack 

of tax consciousness. 


Tax 

The OECD’s chosen weapons in this war 

really directed at the root of the problem? 

product of an individual’s environment on 

of the appropriate level of substance in 

on tax evasion are resourceful and include 

Is actual tax compliance the issue or is 

which he/she can exert influence. As such, 

the countries where (or through which) 

a Base Erosion and Profit Shifting (BEPS) 

that part of a wider problem being the 

tax consciousness is a reaction aimed at the 

corporations choose to operate. 

Action Plan, Automatic Exchange of Tax 

degradation of tax consciousness on a 

avoidance of negative actions such as non- 

Information through a Common Reporting 

global scale? 

compliance and it is (or at least, should be) 

Cyprus, a jurisdiction with one of the most 

Standard, new Transfer Pricing guidelines, 

aimed at the community. 

attractive tax regimes in the EU and a 

country by country reporting of revenues 

It is particularly challenging to expect from 

wide network of double tax treaties has 

and profit. 

multinational corporations employing 

It is not a coincidence that the aftermath 

a key role to play in this evolving tax level 

thousands of people in a number of 

of the financial crisis was characterized by 

playing field. As long as it becomes clear 

In short, initiatives aimed at not only illegal 

jurisdictions to not use double tax treaties 

an extraordinary failure of the ‘society’ in 

to all parties involved that the ‘good’ days 

practices but also tax planning strategies 

when it (still) is purely legitimate to do so. 

all affected countries. Perhaps, displaying 

of entering the international tax planning 

that take advantage of current rules, exploit 

While OECD Director, Pascal Saint-Amans, 

the positive effect of tax compliance on 

arena unarmed, are gone. 

gaps and ‘mismatches’ in laws with a view to 

may advocate that ‘Tax is all about trust’, 

corporations as well as on the countries 

shifting profits and making them ‘disappear’ 

it is difficult to see how rich taxpayers 

that benefit from this would prove an ally 

For more information on this article please 

for tax purposes. In essence, measures 

(corporations or individuals alike) are 

in the hands of the OECD and its efforts to 

contact Stella C. Koukounis at s.koukounis@ 

that will put an end to the abuse of double 

expected to trust their tax administrations 

eliminate tax evasion. 

sklawcyprus.com and for further details 

tax treaty benefits implemented almost a 

when all they perceive from this exercise is 

on our substance service offering please 

century ago with a view to facilitating cross- 

a large portion of their hard-earned profit 

A direct way of enhancing tax 

contact Charles Savva at c.savva@ 

border business. 

being taken away from them. 

consciousness while satisfying the high 

savvacyprus.com or +357 22516 671. 

thresholds of double tax treaty enjoyment 

While the intention of the international 

On the other side of the coin, taxes have, 

which the OECD is currently advocating and 

community to eliminate aggressive 

from antiquity, been both a moral as well 

soon to be implementing, is the creation 

tax practices may be noble and in fact 

as a statutory obligation, even though 

extremely necessary in the face of 

the emphasis on the moral aspect has, 

shortage of liquidity experienced by 

evidently, been dispensed with along the 

countries worldwide, skeptics fear that 

way. The overhaul of the international 

implementation of these measures will be 

tax system will be incomplete without an 

the sledgehammer that breaks the fragile 

equal effort to enhance the concept of 

economies of countries that have benefited 

tax consciousness in the minds of those 

(and continue to benefit) from flexible and 

who are expected and required to comply 

attractive taxation regimes. 

with their tax obligations diligently and 

consistently giving back to the society that 

On a similar footing, it is feared that these 

has enabled their operations to flourish and 

measures could backfire creating double 

bear fruit. 

standards among competing jurisdictions 

that have traditionally prospered from 

strong financial services sectors based on 

loose taxation systems. 

From the commercial side, such measures 

could drive those highly sought-after, 

International tax planning is under fire 

and it is likely to become cumbersome, 

possibly unavailable to everyone, in the 

future. Yet, it could be worth educating – 

reminding even- tax administrations and 

ultimately taxpayers of the reasons for 

Charlie Peter Savva 

Director 

T: +357 22516 671 

Email: c.savva@savvacyprus.com 

Stella C. Koukounis 

Advocate - Head 

of Corporate 

T: +357 22516 671 

Email: s.koukounis@sklawcyprus.com 

golden-egg bearing multinational 

this orchestrated effort by the OECD and 

corporations to remote jurisdictions in 

the international community to render tax 

their effort to safeguard corporate profits 

planning so difficult. Tax consciousness is 

from high taxation rates. The OECD actions 

not, as suggested by a leading German tax 

may appear to offer solutions but are they 

practitioner, a value by itself. It is the by- 


Wealth Management 

RECENT CASE LAW AFFECTING 

FRENCH CFC RULES 

by Nicolas André, SiamakMostafavi 

During the last 15 months or so, French tax courts have issued various 

decisions that have, potentially, a significant impact on the application 

of the French CFC rules (article 209 B of the French tax code (Code 

général des impôts, “FTC”)). 

Basic operation of the french 

cfc rules 

The French corporate tax rules are on a strict 

territoriality basis, i.e., only profits generated in 

France are liable to tax. 

Article 209 B introduces an exception to the above 

territoriality principle, and it may be summarized as 

follows: 

• if a French corporate taxpayer owns, directly 

or indirectly, more than a certain threshold 

(currently 50 percent) of the share capital or 

voting rights or financial rights of a non-French 

entity; and 

• such non-French entity benefits from a so-called 

“privileged tax regime” in the jurisdiction where 

it is located (i.e., its effective tax rate in such 

jurisdiction is more than 50 percent lower than 

the effective French tax rate which would have 

been applicable in similar circumstances); then 

• the French corporate taxpayer would be deemed 

to receive fully taxable dividends, from such non- 

French entity, in proportion to its participation in 

the latter. 

When the non-French entity is located within the 

European Union, a specific safe harbor rule applies 

whereby article 209 B is applicable only if the 

participation of the French corporate taxpayer, in 

the above entity, is an artificial scheme targeting the 

avoidance of French tax legislation. 

When the non-French entity is located outside of the 

EU, article 209 B is disapplied if the French taxpayer 

can evidence that the principal purpose and effect 

of the operations, effected by the above entity, do 

not consist of a transfer of profits to a tax-privileged 

jurisdiction (“General Safe Harbor”). Article 209 B 

provides that, inter alia, such evidence is deemed 

to be provided when the non-French entity has, 

principally, an effective industrial or commercial 

activity in the jurisdiction where it is located (“Deemed 

Safe Harbor”). 

Case law interpretation of the safe 

harbor rules 

The case law referred to, at the beginning of this 

section, concerns the interpretation of the above safe 

harbor rules, and although they relate to a period 

where the wording of article 209 B of the FTC was a 

bit different, the resulting principles are valid under 

the current version. 

The case law refers to two different situations, both 

involving a French bank: 

• In one case, the potential CFC subsidiary, based in 

Guernsey, had a private banking activity; the local 

effective rate of taxation was about 4 percent, 

and, accordingly, article 209 B would have been 

applicable unless the safe harbor rule could 

protect the French bank. 

• In the other case, the potential CFC subsidiary, 

based in Hong Kong, was active in the currency 

markets of the surrounding region; the effective 

taxation rate in Hong Kong was de minimis, i.e., as 

with the Guernsey entity, article 209 B would have 

been applicable if the safe harbor rule was not an 

effective defense. 

Without going into the procedural details, the cases 

were first decided by the lower courts, and afterward, 

the Supreme Court (Conseild’Etat) voided these 

decisions and referred them back to the lower courts. 

They were finally decided in summer of 2013. 

In both cases, the initial query was whether, for the 

purposes of the safe harbor rule, one should refer to 

the “purpose” or to the “effect” of incorporating the 

non-French entity in a tax privileged jurisdiction. 

The position of the French tax authorities was that 

only the “effect” should be taken into consideration, 

i.e., if the presence in the non-French jurisdiction 

enabled a reduction in tax liability (as defined by 

article 209 B), then any question about the motivation 

or “purpose” of such presence would be irrelevant. 

Actually, the position of the French tax authorities 

seemed correct on the basis of the then-current 

version of article 209 B, which was indeed only 

referring to the effect (NB: the current version 

refers to the object and the effect). However, the 

Conseild’Etat decided that, despite the wording of 

article 209 B, one should refer to the motivation of 

the taxpayer for the purpose of the safe harbor rule. 

Indeed, the Conseild’Etat took the view that, from a 

constitutional perspective, the taxpayer should be in 

a position, when challenged on the basis of an antiabuse 

legislation (such as article 209 B), to provide 

the evidence that its operations were not principally 

tax motivated despite the local low effective rate of 

taxation. In other words, if only the effect was taken 

into account (i.e., the low tax rate), it would have been 

extremely difficult for the taxpayer to be protected 

under the safe harbor rule. Once this principle was 

established by the Conseild’Etat, the lower court 

decided as follows: 

• In the case of the Guernsey subsidiary of the 

French bank, the lower court took the view 

that the subsidiary was targeting international 

individual clients who were attracted by the 

banking and tax legislations applicable in 

Guernsey; in other words, these international 

clients, given their specific needs, would not 

have been attracted by the French bank acting 

from France. Interestingly, the lower court added 

that even if some of these clients were French, 

and they used French-sourced funds, the above 

reasoning should not be modified given that 

article 209 B targets the motivation of the French 

bank and not the motivation of its clients. 

• In the case of the Hong Kong subsidiary of the 

French bank, the lower court took the view that 

the subsidiary was managing the Asian currency 

position of the banks’ affiliates in the region 

(specifically by investing in the Korean market), 

and that such an activity could not have been 

effected from France given the time difference 

and the required expertise that may only be 

found locally. As with the Guernsey situation, the 

French tax authorities were arguing that some of 

the clients and funds available to the subsidiary 

were potentially of a French origin, and the court 

decided that even if these allegations were true, 

they would be irrelevant for the purposes of the 

application of the safe harbor rule. 

While it is too early to decide whether there has been 

a definitive change in terms of application of article 

209 B (from a safe harbor rule perspective), one can 

expect certain tendencies: 

• contrary to the position of the French tax 



authorities, the courts would take into account 

the motivation of the French taxpayer (and 

not only the effect of being located in a low tax 

jurisdiction); and 

again addressed the income tax treatment applicable 

to the capital gains realized by managers who are 

transferring shares carrying attached warrants 

(actions à bons de souscriptiond’actions, “ABSA”) 

that the managers were not effectively guaranteed 

against the loss of their investment, and that the 

sale price always reflected the market value of the 

relevant warrants. 

7. Company TP and Company Y entered into a 

forward sale agreement (“FSA”) pursuant to which 

Company TP undertook to sell, and Company Y 

undertook to buy, all of the B PShares held by 

• the Deemed Safe Harbor would be less used in 

the future as it would imply that the relevant 

activity is performed in the jurisdiction where 

the entity is located; typically, in the Guernsey 

situation discussed above, the General Safe 

Harbor was more efficient given the bank’s 

international clients (who are obviously not 

located in Guernsey). 

received as part of a management package within the 

context of a given LBO transaction. 

In several of the cases reviewed by the AoL 

Committee, the managers of a company about to 

be bought out had subscribed ABSAs in the holding 

company that was to carry the buyout. The number 

of shares that a given warrant could give right to was 

inter alia contingent upon the internal rate of return 

Allegedly tax-optimized 

structured financings 

The Q4 Opinions have also addressed two allegedly 

tax-optimized structured financings. 

Facts. The features of the first financing (“Transaction 

1”) may be summarized as follows (steps 2 through 8 

Company TP into Company Z, within a period 

of five years renewable once, and for an agreed 

price; 

8. Company Y and Company Z entered into a 

guaranty agreement (“GA”) pursuant to which 

Company Y undertook to make available to 

Company Z the funds needed in order to 

distribute the dividends attached to the B 

Aol committee opinions 

Pursuant to the AoL procedure, the French 

of certain other financial investors in such holding 

company. 

all took place on the same day, that is, the day after 

step 1 took place): 

PShares; 

9. The funds contributed by Company TP to 

tax authorities may, under certain conditions, 

As in many other similar cases, the French tax 

1. A French company X (“Company X”) successfully 

Company Z, by subscribing the B PShares, were 

recharacterize a given transaction if they can prove 

authorities have challenged the capital gains 

completed a takeover bid over a US company Y 

then made available to Company Y so that its 

that it is either fictitious or exclusively tax motivated. 

subsequently realized upon the transfer of the 

(“Company Y”), the holding entity of several US 

parent, Company X, could reimburse the financing 

If the tax authorities attempt to recharacterize a given 

ABSAs, on the basis that the managers were actually 

operating companies; 

debt pertaining to the aforementioned takeover 

transaction under the AoL procedure, the dispute 

benefitting from a profit-sharing scheme rather 

bid (Company Z inter alia provided (i) a loan to 

may be forwarded (either by the taxpayer or the tax 

than capital gains realized by an actual investor, and 

2. A US Company Z (“Company Z”) was subsequently 

certain US operating companies so that they can 

authorities) to the AoL Committee. 

that the income derived from such scheme was to 

set up in order to modify the financing of such 

distribute to Company Y dividends that had been 

be subject to personal income tax as employment 

takeover bid and issued three types of shares: 

voted before the Contribution, and (ii) a loan to an 

While the AoL Committee is an independent body 

income (in the cases at hand, the ABSAs had further 

preferred shares carrying increased voting rights 

affiliate of Company Y which then on-loaned the 

whose object is to issue nonbinding advisory 

been assigned to the plans d’épargne en actions 

(“A PShares”), preferred shares carrying no voting 

same amount to Company Y). 

opinions, such opinions are in practice closely 

of the managers, i.e., a type of shares savings plan 

rights but entitled to cumulative priority dividend 

followed as they (i) shift the burden of the proof, 

entitled to a favorable capital gains tax regime). 

rights that may be carried forward (“B PShares”); 

The features of the second financing (“Transaction 2,” 

for any subsequent litigation, to the party with 

and ordinary shares (“C Shares”); 

together with Transaction 1 the “Transactions”) may 

which the AoL Committee did not agree, and (ii) are 

Unlike certain opinions issued earlier in 2013, the Q4 

be summarized as follows (steps 2 to 4 took place 

generally viewed as influential on practitioners and 

Opinions sided with the French tax authorities. 

3. Company Y contributed certain US operating 

within the same week): 

tax courts (inter alia because of the qualifications of 

companies to Company Z and received the A 

the AoL Committee members: three judges from the 

The AoL Committee indeed found that while (i) the 

PShares (“Contribution”); 

1. Company X transferred the cash pooling activities 

administrative supreme court, a tax lawyer, a public 

managers had funded the ABSAs on their own and (ii) 

of its group to company B, a subsidiary located 

notary, a chartered accountant, and a university 

such funding was substantial compared to their global 

4. Company Z and Company Y, respectively, 

in Belgium (“Company B”), inter alia by increasing 

professor). 

income, certain features of the management package 

undertook to issue and subscribe the B PShares 

the share capital of Company B (NB: Company B 

should lead to the characterization of employment 

(“B PShares Subscription Right”); 

used the notional interest legislation in Belgium); 

We develop below two of the most noteworthy 

income: (a) the provisions of the ABSAs were 

topics covered by the opinions issued by the AoL 

such that the exercise conditions of the warrants 

5. A French Company TP (“Company TP”) and 

2. Company B provided a loan to Company TP 

Committee from October through December 2013 

amounted to an allocation among the managers of a 

Company Y entered into an assignment 

(“Loan”); 

(“Q4 Opinions”). 

pre-determined sum, and (b) the managers had a de 

and assumption agreement pursuant to 

Management packages in lbo 

transactions 

In various Q4 Opinions, the AoL Committee has once 

facto guarantee of recovering their initial investment, 

with the additional opportunity of realizing a 

substantial gain. 

Interestingly, the AoL Committee disregarded the fact 

which Company Y transferred the B PShares 

Subscription Right to Company TP; 

6. Company TP subscribed the B PShares and the C 

Shares using a shareholder loan from Company X; 

3. Company TP reimbursed to Company X a 

shareholder loan for the same amount; 

4. Company X increased the share capital of 

Company B by the same amount; 



5. Eighteen months later, Company TP reimbursed 

the Loan to Company B by using a shareholder 

loan from Company X, and Company B redeemed 

its share capital for the same amount. 

The French Tax Authorities’ Position. The French 

tax authorities challenged Transaction 1 on the 

ground that it amounted to a wholly artificial 

arrangement whose sole purpose was to allow 

Company TP to benefit from the French participationexemption 

regime with respect to the dividends 

received from Company Z B PShares. 

The tax authorities inter alia elaborated that the 

FSA essentially was a collateralized stock loan in 

respect of which Company TP was not exposed to any 

Company Z shareholder risk as (i) the reimbursement 

of its investment into the B PShares was guaranteed 

by the FSA, and (ii) the payment of the dividends 

was guaranteed by the GA. The tax authorities 

thus considered that the dividends distributed in 

respect of the B PShares were to be recharacterized 

as interest payments, and thus to be subject to 

corporation tax under the standard applicable 

regime. 

The tax authorities also mentioned that Transaction 1 

was treated, for US tax purposes, as an indebtedness 

resulting in the payment of the deductible interest. 

The French tax authorities challenged Transaction 2 

on the ground that it amounted to a wholly artificial 

arrangement whose sole purpose was to allow the 

deduction of interest expenses to Company TP. 

The tax authorities inter alia elaborated that (i) the 

combination of the capital increase of Company B, the 

Loan, and the reimbursement of the shareholder loan 

essentially was a share capital increase of Company 

TP, (ii) Company B was not autonomous vis-à-vis 

Company X in terms of material means and decisional 

process, and (iii) Company B was not bearing any 

financial risk with respect to the financings provided 

(the risk being borne by Company X as head of the 

group). 

The Taxpayer’s Position. With respect to Transaction 

1, Company TP articulated the following arguments: 

• Given the absence of third parties in the capital 

of Company Z, Company TP and Company Y had 

a common interest in jointly controlling Company 

Z, i.e., the investment of Company TP in the B 

PShares carried an actual shareholder intent; 

• As Company Z is a Delaware corporation, 

accordingly its corporate life and the 

characterization of the dividends it pays to its 

shareholders may be analyzed only from a 

Delaware corporation law perspective; 

• Under a general French tax law principle, a given 

company is free to choose its financial structure 

(debt versus capital); 

• Transaction 1 did not amount to a collateralized 

stock loan as Company Y did not subscribe the 

B PShares and could not have remitted them as 

collateral; 

With respect to Transaction 2, Company TP 

considered that the tax authorities have not 

demonstrated its exclusive tax motivation as 

Transaction 2 had no consequence on its taxable 

result (i.e., Company TP substituted the interest paid 

to Company X by the interest paid to Company B). 

The AoL Committee Q4 Opinions. With respect to 

Transaction 1, the AoL Committee found that, while 

formally documented as an equity investment of 

Company TP into Company Z, it essentially was a 

contractual arrangement whose purpose was the 

refinancing of Company Y by Company TP through a 

stock loan with the B PSharesposted as collateral for 

such loan. 

The AoL Committee consequently considered that the 

tax authorities rightfully applied the AoL procedure as 

Transaction 1 should be regarded as a wholly artificial 

arrangement whose sole motivation was to allow 

Company TP to benefit from the French participationexemption 

regime with respect to the dividends 

received from Company Z while the same dividends 

were viewed as deductible for US tax purposes. 

In order to justify its opinion, the AoL Committee 

listed the following points: 

• The Contribution actually benefitted to Company 

Y as a result of the various loans provided by 

Company Z; 

• The B PShares were (i) initially supposed to be 

subscribed by Company Y and (ii) eventually 

transferred to Company Y pursuant to the FSA; 

• Company TP undertook to sell the B PShares 

to Company Y within a period of five years, 

renewable once, pursuant to the FSA; 

• The rights attached to the B PShares, together 

with the FSA and the GA, effectively gave 

to Company TP rights similar to those that 

Company TP would have had under a stock loan 

collateralized by the B PShares; 

Nicolas André 

Associate 

T: +33.1.56.59.39.63 F: +33.1.56.59.39.38 

Email: nandre@jonesday.com 

SiamakMostafavi 

Partner 

T: +33.1.56.59.39.39 F: +33.1.56.59.39.38 

Email: smostafavi@jonesday.com 

• There was no economic motivation to Transaction 

1, whose sole purpose was to reduce the group 

taxable result in France while maintaining a 

deductible interest for US tax purposes; 

• Company Z had no employee, was not carrying 

out any activity, did not invest into any asset other 

than the US operating companies received upon 

the Contribution, did not receive any dividends 

from such companies, and was managed by 

Company Y directors (whereas Company TP 

did not have any representative at the Board of 

directors of Company Z). 

With respect to Transaction 2, the AoL Committee 

found that the tax authorities could not avail 

themselves of the AoL procedure as the taxable 

result of Company TP was not reduced as a result of 

the operations carried out (i.e., the same amount of 

interest would have been deducted by Company TP 

with or without Transaction 2). 

Nicolas André’s practice includes all aspects of French and international taxation relating 

to merger and acquisition transactions, real estate and private equity investments, and 

structured financial products. 

SiamakMostafavi focuses on the taxation of financial products and derivative instruments 

and is widely regarded as a leader in the field. He regularly assists numerous financial 

institutions, including in connection with their cross-border transactions. 


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