UK Withdrawal Agreement Becomes Law

On January 23, the European Union (Withdrawal Agreement) Bill became an Act of Parliament and is now legally binding in the UK. The purpose of this legislation is to give binding force to the withdrawal agreement that was made between the UK and the EU on October 19, 2019.

The next step will be for the withdrawal agreement to be ratified by the European Parliament, which is scheduled for January 29. If this vote is passed, the UK will leave the EU on January 31, 2020. The UK will then enter an ‘implementation period,’ during which all EU laws will continue to apply in the UK, while the UK and the EU negotiate their future relationship. This implementation period is scheduled to end on December 31.


©2020 Katten Muchin Rosenman LLP

For more Brexit developments, see the Global Law section of the National Law Review.

Brexit: Turkeys Voting for Christmas?

Brexit delayed again – now it’s off to the races in a General Election

Despite having finally achieved a Parliamentary majority in favour of a way of delivering Brexit, in the Second Reading of the Withdrawal Agreement Bill on 22nd October, Prime Minister Boris Johnson decided – in the face of Parliament’s refusal to allow him to put the Bill through very rapidly so as to meet the 31st October Brexit deadline – to pursue a General Election instead of pushing the Bill through.

After some “after you, Claude” to-ing and fro-ing, the EU agreed to the request to extend the Article 50 deadline of 31st October which the Prime Minister had been forced by Parliament to send. The EU did so under condition that there should be no re-opening of withdrawal negotiations, no disruption to EU business by the UK (including the UK appointing a member of the new European Commission), and that the UK could leave earlier if the ratification process completed earlier.

A delicate game ensued in Parliament about the basis for a decision to hold the election, with opposition parties wanting to remove the Prime Minister’s discretion over the date of the election, and to make it impossible for him to try again to push the Withdrawal Agreement Bill. On 28th October Parliament rejected the Prime Minister’s attempt to secure an election on 12th December. Parliament then decided on 29th October that the election should be held on 12th December. The difference between the first 12th December and the second 12th December would take too long to explain, and would anyway test the sanity of all but the most extreme political geek.

And so the unhappy child of Theresa May’s disastrous 2017 election fades into the twilight…

The election Bill still needs to go through the House of Lords (unlikely to be problematic) and receive Royal Assent, and the House of Commons needs to tidy up some necessary business. So on current plans Parliament will dissolve on Wednesday 6th November for MPs to campaign for the General Election on Thursday 12th December. The British electorate, used to voting at national level every five years, had a General Election in 2015, the Brexit referendum in 2016, a further General Election in 2017, and now a third General Election in 2019 (the Scots also had an independence referendum in 2014).

Was the 2017-2019 Parliament a travesty of democratic accountability, or a powerful example of representative democracy grappling with issues which had split the nation in two through a binary exercise in direct democracy? Historians will judge. It was certainly a tough one for individual MPs, who regularly found themselves objects of extremely hostile, sometimes violent, social media messaging. Parliament certainly seemed to reflect accurately the division in the electorate, which the polls show has not shifted significantly throughout the period since the 52:48 result of the 2016 Brexit referendum.

“Prediction is very difficult, especially if it’s about the future” – Nils Bohr

So what’s going to happen in the 12th December election? It will be the first December election for almost a century, and the hardest to predict for many decades. Will Boris Johnson scoop the Leave vote across the country, or will Nigel Farage’s Brexit Party damage the Conservatives by arguing that Johnson’s Brexit deal is not really Brexit? Will the clarity of the Liberal Democrats’ Remain position help them and weaken Labour, or will Labour be able to sit on the fence on Brexit and focus the campaign on Tory austerity and public services?

The next six weeks will be exhilarating, confusing and passionate. They will decide the future course of the nation. Nothing more will happen on Brexit until after the election. Whether the election provides a clear way forward will depend on whether a party achieves a clear majority or the election produces another hung Parliament. Watch this space…


© Copyright 2019 Squire Patton Boggs (US) LLP

Read more about Brexit on the Global Law page on the National Law Review.

UKIPO Knocks Undefeated Reds off Their Perch: The Liverpool Trademark and Lessons for Brand Owners

To the interest of many a scouser and football fan alike, Liverpool Football Club’s attempt to register as a UK trademark LIVERPOOL has been rejected by the UKIPO on the grounds that the word is of “geographical significance” to the city. Liverpool FC had filed its application in regards to various goods in relation to football and the filing had attracted significant public attention.

Other English football clubs (Everton, Chelsea and Tottenham) have managed to register several trade marks for each of their respective area names. In addition Southampton Football Club has managed to register SOUTHAMPTON as an EU trade mark. As a result, it is not surprising that Liverpool FC would seek to register a similar mark to help protect its valuable brand.

However, as a result of the filing the club received significant backlash from the people of Liverpool, including their own supporters, and – probably in a related move – Liverpool FC has said that it does not plan to appeal the refusal and it has withdrawn the application. An additional trade mark application for LIVERPOOL with different claims has also been withdrawn.

The matter presents a great case study for brand owners on balancing the need to protect their brand whilst being considerate of the potential adverse PR that will come with the application for certain trade marks.

Innovation in protecting your brand

Brand owners certainly need to adopt innovative tactics when looking to fight counterfeiters and to protect their brand and Liverpool FC has shown a keen eye to identifying new brand assets.

Liverpool FC may have been unsuccessful with this application but they recently successfully applied to trade mark the phrase “LET’S TALK ABOUT SIX BABY” in the UK. The saying was coined by Reds Manager Jürgen Klopp when he ended his run of six successive final defeats and claimed a first trophy as Liverpool FC’s manager with the UEFA Champions League triumph earlier this year. No doubt will form an important part of the club’s merchandise moving forward and is a cunning registration.

Consideration of PR implications

However, all innovative steps in brand protection must be considered in their context.

Liverpool FC argued that the trade mark application was purely “in the context of football products and services” and to stop counterfeiters from benefiting from the sale of counterfeit Liverpool FC products. However, this does raise the question as to why the existing portfolio of club name, mottos and logos would not be sufficient to defeat the majority of inauthentic products that are currently on the market.

In addition, the vitriol with which the application was greeted raises further queries concerning the club’s decision to apply to register the trade mark. The Liverpool FC supporters group ‘Spirit of Shankly’ called the UKIPO’s rejection of the application a “victory for common sense” and declared that the word LIVERPOOL belongs to the “city of Liverpool”. Supporters also took the decision to wear non-official items of clothing carrying the club’s name and logo during a match against Newcastle in protest.

As a result, the case highlights the perils brand owners face when pursuing a robust approach to protecting their brand, particularly when looking to register terms as trade marks with cultural significance. Applicants must bear in mind the negative PR that can accompany any new filing strategy.


Copyright 2019 K & L Gates

ARTICLE BY Simon Casinader and Niall J. Lavery of K&L Gates.
For more trademark law, see the National Law Review Intellectual Property law page.

Trade Mark Re-filing And Bad Faith – Go Directly To Jail. Do Not Pass Go, Do Not Collect $200

Hasbro Inc. (Hasbro), owner of the well-loved board game Monopoly, suffered a defeat on 22 July 2019, before the EUIPO Board of Appeal in relation to the MONOPOLY trade mark. The EU registration for the MONOPOLY trade mark was partially invalidated as it was found that Hasbro had acted in bad faith when filing the application as part of a ‘trade mark re-filing’ programme.

Background

Hasbro applied to register the trade mark MONOPOLY for goods and services in Classes 9, 16, 28 and 41 of the Nice Classification. The application was published on 9 August 2010 and the mark was registered on 25 March 2011. Kreativini Dogadaji d.o.o (KD) filed an application for invalidation of the trademark in 2015, arguing that it had been registered in bad faith on the basis that the mark was a repeat filing of three identical earlier trade mark registrations for MONOPOLY.

Acting in bad faith

The EUTM Regulation states that a trade mark shall be declared invalid where the applicant acted in bad faith at the time of filing the application for the trade mark. However, EU trade mark law does not provide a definitive clarification of bad faith and ‘bad faith’ is not defined in the EUTM Directive or Regulation. The most notable case from the CJEU dealing with bad faith is the Lindt Goldhase-case (C-529/07) which sets out three areas of consideration:

  1. the applicant knows that a third party is using, in at least one member state, an identical/similar sign for an identical/similar product or service for which the registration is sought

  2. the applicant’s intention of preventing that third party from using the sign, and

  3. the degree of legal protection enjoyed by the third party’s sign and by the sign for which registration is sought.

Nonetheless, these factors are only examples and are not exhaustive, ‘bad faith’ cannot be restrained to a limited set of circumstances.

Findings of Board of Appeal

The Board of Appeal found that Hasbro had a dishonest intention at the time of filing the contested EUTM on the basis that Hasbro had previously filed and successfully registered MONOPOLY as an EUTM on three previous occasions. This dishonest intention was found because Hasbro had repeated filings in effect to circumvent the legal risk of removal due to non-use after five years. Although Hasbro claimed it had been adding more goods and services with each subsequent re-filing, the Board of Appeal did not deem it an acceptable excuse. The Board therefore invalidated the MONOPOLY mark for all goods and services identical or similar to those covered by the earlier trade marks.

The Key Takeaways

Hasbro did try to argue that their re-filing tactic was common practice in maintaining ownership of a trade mark, which it is, but the decision highlights that a tactics popularity does not equate to acceptability or legality. Brand owners should carefully consider the risk of invalidation or opposition on the basis of bad faith when filing future trade mark applications for existing brands.


Copyright 2019 K & L Gates
ARTICLE BY Niall J. Lavery and Simon Casinader of K&L Gates.
For more trade mark cases, see the Intellectual Property law page on the National Law Review.

Brexit – Here We Go Again

The new Prime Minister of the UK, Boris Johnson, has taken up office following his decisive (66% : 34%) victory in the contest among Conservative Party members who were presented with a choice between him and the Foreign Secretary, Jeremy Hunt. He promised during the campaign to take the UK out of the EU by 31 October (when the extension to the Article 50 Brexit process expires) “do or die”. In his first speech as PM, he again underlined his determination that the UK should leave the EU by 31 October. He said that his intention was that this should be with a new deal – “no deal” was a remote possibility which would only happen if the EU refused to negotiate. But it was right to intensify preparations for “no deal”, which could be lubricated by retaining the £39 billion financial settlement previously agreed with the EU.

So the starting gun for the next phase of Brexit has fired.

What Does the Campaign Tell Us About the Approach to Brexit?

The Conservative leadership election campaign happened in two parts. The first, among MPs, whittled the long list of candidates down to two. Perhaps conscious of the broad spread of opinion among Conservative MPs, both final candidates took a nuanced line during that phase, stressing their desire to leave the EU with a (revised) deal. In the second phase, which involved selection between the two by the broader membership of the Conservative Party (roughly 160,000 people), the tone hardened notably. Polling suggests that a majority of the Conservative Party membership puts delivering Brexit ahead of the economy, the survival of the union of the UK and even the survival of the Conservative Party itself (polling after Theresa May’s European Parliament elections suggests that two thirds of party members voted for another party in those elections, with nearly 60% voting for Nigel Farage’s Brexit Party). Only averting the prospect of a Jeremy Corbyn-led Labour Government is apparently a higher priority for Conservative Party members. Responding to this sentiment, the position of both candidates became harder through the second phase of the campaign. While both favoured leaving with a deal, both were clear that the threat of a “no deal” exit must be real in order to stimulate further negotiations with the EU. Both, therefore, also favoured ramping up “no deal” preparations. In the end, the main difference between the two candidates was that Jeremy Hunt could countenance a “short” further delay to Brexit if that was necessary to secure a deal from the EU, whereas Boris Johnson promised that the UK would leave the EU on 31 October “come what may, do or die”. Significantly, in one of the last public hustings during the campaign, Boris Johnson also ruled out making changes to the Irish border backstop in the Withdrawal Agreement. His approach to how to deliver Brexit could be summarised as: deliver on citizens’ rights straight away, have a “standstill” on trade (not clear how this differs from the transitional period in the Withdrawal Agreement – it would certainly involve zero tariffs on both sides, but unclear whether it would involve regulatory alignment (see trade negotiations section below), still less continued jurisdiction of the European Court of Justice), resolve the Irish border through a comprehensive trade agreement and create “constructive ambiguity” about whether/when the UK would accept the €39 billion exit settlement in the Withdrawal Agreement – presumably making it contingent on the trade agreement. Boris Johnson called for optimism and determination to secure this outcome.

What Do the Key Ministerial Appointments Tell Us About Brexit?

In appointing his Cabinet, Boris Johnson has made far-reaching changes which shift the profile of government decisively towards pro-Brexit. All ministers were required to subscribe to keeping the possibility of “no deal” Brexit open. The principal portfolios concerning Brexit are all held by people who are either comfortable with, or even favour, a “no deal” Brexit. This looks like – and is no doubt intended to be seen in Brussels as – a government fully committed to a “no deal” Brexit, if necessary. Perhaps the most interesting appointment was, however, not of a minister at all, but of Dominic Cummings, campaign director for Vote Leave in the 2016 referendum, as a senior adviser. Taken together, this looks like a team both strongly committed to delivering Brexit and ready for a public campaign (election or referendum), if necessary.

What Happens Next?

The new Prime Minister effectively has more than five weeks’ respite from Parliamentary scrutiny, as Parliament starts its summer recess and returns on 3 September. This gives him time to consolidate his team, articulate his strategy (including boosting preparations for a “no deal” Brexit), and explore the possibilities for further negotiation with the EU. But even within his own party, on both pro-Leave and pro-Remain sides, he is, in effect, on probation.

The Parliamentary arithmetic has not changed significantly from that faced by Theresa May, but by carrying out such a substantial eviction of Mrs May’s ministers, Boris Johnson is likely to have increased the number of opponents to his Brexit policies on the Conservative back benches. They now also have an important figurehead in former Chancellor Philip Hammond. The Prime Minister has no majority without the support of the 10 Northern Ireland Democratic Unionist Party (DUP) MPs. And, within the Conservative Party, the hard Brexit supporting European Research Group (ERG) is now balanced by an anti “no deal” faction bolstered by ministers who resigned because they could not support his approach to Brexit or were sacked by him. Technically, the government’s majority, including the 10 DUP MPs, is down to two (three including one MP under criminal investigation). A by-election on 1 August is likely to reduce that by one. If the PM tries to push through a deal based on the existing Withdrawal Agreement (with changes to the accompanying Political Declaration about the future relationship, to which the EU has said it is open), he risks losing the DUP and some ERG from his majority. If his policy becomes “no deal”, he risks losing the more pro-European faction. In either case, he lacks a majority to deliver the result. The two big questions are whether Parliament (which has a substantial anti “no deal” majority) can find a way to erect a legal barrier to a “no deal” Brexit and, if not, how many Conservative MPs would really vote against their own party in a confidence vote to force either a change of direction or a fresh election – several have already indicated that they would do so if necessary. All of which points to the same Parliamentary deadlock Theresa May faced returning in September. So, unless the PM can come up with a renegotiated deal which the DUP and ERG would accept, the only way out of the deadlock would be to go back to the people. Mr Johnson’s strong opposition to a further referendum would make that a politically difficult choice. Current polling suggests that an election before Brexit is delivered would be a high risk strategy for the Conservatives.

As one influential commentator put it, the strategy may be to try for a new deal and see if the EU blinks. If they do not, go for “no deal” and see if Parliament blinks. If it does not, hold an election or referendum – an election is probably higher risk, but can be done more quickly and does not involve going back on strongly expressed views of the Brexiteers, including Mr Johnson.

What About the Europeans?

The debate about Brexit over the Conservative Party leadership campaign has been an entirely Brit-on-Brit affair, with reference to the EU position, but no engagement with it. European leaders’ reactions to Boris Johnson becoming Prime Minister have been polite, but also uncompromising, showing no willingness to re-open the Withdrawal Agreement. Michel Barnier looked forward to working with the Johnson Government to facilitate the ratification of the Withdrawal Agreement – signalling that negotiation is possible about the accompanying Political Declaration on the future relationship, and possibly other complementary accords, but not the Withdrawal Agreement itself. If the EU sticks to this position – and the EU team follows the UK Parliamentary arithmetic closely, so they know how much resistance there will be to “no deal” – the prospects for finding an agreed way forward look slim.

So “No Deal”, Then?

In April, we assessed the possibility of a “no deal” Brexit as very low. It has clearly now increased and, with a Cabinet committed to “no deal” if there is not a new deal, there are a number of ways in which it could come about. But Parliament’s majority against “no deal” remains, and there remain a number of obstacles to “no deal” in Parliament and in the economic analysis of the impact of “no deal” Brexit if the UK and EU are not able to agree on tariff-free trade using GATT XXIV. While some form of political process – such as an election – looks more likely than moving straight to “no deal” if the EU talks fail to yield a result, companies should certainly now put in place “no deal” contingency arrangements.

Free Trade Agreements

There are three interlinked free trade agreements (FTAs) in play: EU-US, EU-UK and UK-US. During the leadership campaign Boris Johnson spoke about making very rapid progress on the UK-US FTA (at one stage suggesting having a limited agreement in place by 31 October), but also about finding the long-term solution to the Irish border issue in the UK-EU FTA. In practice, it is likely that the UK-EU FTA has to come before the UK-US FTA, not least because the more the UK aligns to US regulatory standards through a UK-US FTA, the harder the solution to the Irish border issue will be – nowhere more so than in agriculture. The UK-EU FTA also has a unique character, in that the two parties start from a position of zero tariffs and complete regulatory alignment and the negotiation will, therefore, be about how far and in what respects to diverge. Both the EU-US and UK-US FTAs will have to address some highly charged political issues (agriculture, public procurement (in particular healthcare) and climate change); it could be argued that the UK would secure a better result on these issues by allowing the EU to find a politically workable way forward with the US first.

In an illustration of the complex interaction in the trade policy approach, the UK government has not been able to roll-over the EU-Canada FTA (CETA) into a bilateral UK-Canada FTA. This is because the Canadian government has analysed the impact for Canadian businesses of the UK moving to the interim “no deal” tariff policy published by the UK earlier this year – 87% of imported goods would be tariff-free to prevent harm to consumers – and concluded that the impact would be small. UK exporters to Canada would, however, face full Canadian WTO tariffs, rendering trade in some sectors unviable.

However the order of negotiations takes place, the three FTAs are effectively interlinked, and it will be important to ensure, for example, that something desirable in the UK-US FTA is not rendered more difficult to achieve by something agreed within the UK-EU FTA.

 

© Copyright 2019 Squire Patton Boggs (US) LLP
For more Brexit developments, see the National Law Review Global page.

New Application of Anti-Money Laundering Rules to Art Transactions

Art dealers and intermediaries are about to face new transparency regulations in several European nations. Art brokers and dealers involved in any cross-border transactions with people in E.U. nations should pay careful attention to the new rules as they roll out over the next year.

I. New European Union Rules

A recent European Council Directive will likely have a significant impact on European art and antiquities transactions by requiring brokers and dealers to identify buyers and sellers in most transactions.  The Directive, intended to increase transparency in the art market, aims to make it harder to launder money through anonymous art sales.

This Directive builds on more broadly applicable European Council directives designed to prevent abuse in financial transactions. (Council Directive 2015/849, art. 2 (EU) (“Fourth EU Money Laundering Directive”)). The Fourth EU Money Laundering Directive targets both money laundering, i.e., the transfer, concealment, or acquisition of property derived from criminal activity, as well as terrorist financing, i.e., providing funds that may be used to carry out terrorist activities.  (Fourth EU Money Laundering Directive, art. 1).

The recent Fifth EU Money Laundering Directive expands the scope of these rules to art dealers and brokers, specifically:

persons trading or acting as intermediaries in the trade of works of art, including when this is carried out by art galleries and auction houses, where the value of the transaction or a series of linked transactions amounts to EUR 10 000 or more; and

persons storing, trading or acting as intermediaries in the trade of works of art when this is carried out by free ports, where the value of the transaction or a series of linked transactions amounts to EUR 10 000 or more.

(Council Directive 2018/843, art. 1 (EU) (“Fifth EU Money Laundering Directive”)).

Under the new Fifth Directive, art gallerists, auction houses, brokers and dealers must conform to due diligence requirements designed to increase transparency, including:

…identifying the customer and verifying the customer’s identity…

identifying the beneficial owner and taking reasonable measures to verify that person’s identity…

verify[ing] that any person purporting to act on behalf of [a] customer is so authorised and identify[ing] and verify[ing] the identity of that person…

(Fourth EU Money Laundering Directive, art. 13).

The Fifth EU Money Laundering Directive will have a significant impact on legitimate art transactions.  Those involved in such transactions will need to take appropriate steps to determine the real parties in interest in the art transaction. This requirement runs counter to the industry practice in many transactions, where agents and intermediaries sometimes control information about the ultimate buyer.

The Fifth EU Money Laundering Directive became operative on July 9, 2018 but has no force until adopted in the national law of EU Member states. States have until January 2020 to adopt the provision into their national laws. Electronic copies of the Directives may be found here and here.

II. New Rules in the U.S.

U.S.-based art dealers, brokers, gallerists and auction houses should carefully consider how the Fifth Directive will apply to them if they are involved in art transactions occurring at least in part in E.U. Member states that have implemented the Directive in their national law. As with other E.U. rules, such as the E.U. General Data Protection Regulation, the applicability of E.U. law to U.S. entities is not always straightforward.

Here in the U.S., legislators have proposed similar rules, but none have yet been acted on. In the last session of Congress, a bipartisan House bill was introduced to amend the Bank Secrecy Act (31 U.S.C. §§ 5311 et seq) to include “dealers in art or antiquities.” (115 H.R. 5886). Like the E.U. Fourth Directive, the Bank Secrecy Act aims to prevent money laundering and terrorist financing, in part through recordkeeping standards and mandated reports of possible criminal activity. If the Act were amended to include those involved in art transactions, art dealers would be subject to the same requirements.

Electronic copies of the proposed bill (now expired) can be found here, and the Bank Secrecy Act can be found here.

 

© 1998-2019 Wiggin and Dana LLP

Brexit: Bracing for IP Changes

The United Kingdom is due to leave the European Union on March 29, 2019 (Brexit day). If the UK does leave the EU under the currently proposed terms, then the UK would enter a so-called transition period ending on December 31, 2020 and the current status quo would effectively be maintained during this period. However, the UK Parliament recently refused to ratify the current terms of withdrawal and there remains a risk that there will be a “no-deal” Brexit that would not include any transition period. From an intellectual property perspective, these uncertainties and tentative changes should be taken into consideration in the upcoming weeks when developing international filing strategies.

Trademarks

A no-deal Brexit has substantial implications for the continued protection and enforcement of EU trademarks in the UK. However, the position as it stands under the current agreement will be as follows:

  • EU trademark registrations currently on the register will have a duplicate UK registration automatically added to the UK register (no new filing required);
  • Current EU applications will have the same procedure once registered, even if the registration date is post-Brexit; and
  • For trademark applications post-Brexit, two filings will have to be made to cover the former 28 countries of the EU (one UK direct application and one EU application).

Under these prospective events moving forward, it is not anticipated that the EU Intellectual Property Office will decrease their costs for an EU application (because the territories covered decrease from 28 to 27). Accordingly, it may prove cost effective to file any anticipated EU applications before the March 29, 2019 deadline to avoid the need to file two applications.

Patents

There will be no change to the application processes for UK and European patents. Patents covering the UK are granted by two organizations: the UK Intellectual Property Office (UKIPO) and the European Patent Office (EPO). Applications for patents can be filed directly with the UKIPO or EPO, or can be made pursuant to an international patent application filed under the Patent Cooperation Treaty. Neither of these organizations are EU institutions and they will continue to function after Brexit.

Domain Names (.eu)

To register an .eu domain name, a person or entity must reside in or be established within the European Union. As a result, effective from March 30, 2019 (in the event of a no-deal Brexit) to January 1, 2021 (in the event the withdrawal agreement is ratified), entities that are established only in the UK – and natural persons who reside in the UK – will no longer be eligible to register .eu domain names, or to renew .eu domain names registered if they are .eu registrants, before Brexit day.

EURid, the registry manager of .eu domain names, has published a notice on its website which states that a no-deal Brexit will have the following consequences:

  1. UK registrants of .eu domain names will have until May 30, 2019 to update their contact details to an EU address or to transfer their domain names to an EU resident. During this period, their domain names will remain active but cannot be transferred to a UK registrant and will not be automatically renewed (but instead moved to “withdrawn” status).
  2. As of May 30, 2019 all registrants that do not demonstrate their eligibility will be deemed ineligible and their domain names will be withdrawn (that is, they can no longer support any active services such as websites or email), but they will remain in the .eu registry database and may be reactivated if the eligibility criteria are satisfied. On March 30, 2020 all the affected domain names will be revoked and will become available for general registration (which gives rise to a risk of cybersquatting).
© 2019 Varnum LLP
This post was written by Charles F. Gray and Erin Klug of © 2019 Varnum LLP.
Read more about Brexit on our National Law Review Global Page.

International Sanctions and the Energy Sector – Part 2: Russia

In the second part of this series we explore the EU and the US sanctions that have been imposed against the Russian energy sector.

RUSSIA

Background
The sanctions regimes against Russia were imposed in response to actual or alleged actions by the Russian government.  These included the annexation of Crimea and the destabilisation of Ukraine in 2014, plus the alleged malicious cyber activities aimed at interfering with or undermining the 2016 US presidential election.

They initially targeted a number of individuals and companies alleged to be involved in these actions or those close to the Russian government.  However, they have since been expanded to include sanctions prohibiting activity in certain sectors of Russia’s economy (in particular its energy industry) and have also targeted a number of the so-called ‘Oligarchs’ and the companies in their control.

More recently, sanctions have been imposed in the wake of the Novichok nerve agent attack in Salisbury, UK.

This article concentrates on the sanctions directly targeting the Russian energy sector.

The EU Sectoral Sanctions
The EU sanctions targeting the Russian energy sector are primarily contained in Council Regulation (EU) No 833/2014 (as amended) (the “EU Regulation”).  They seek to inhibit oil exploration and production projects in Russia:

  1. in waters deeper than 150 meters;
  2. in the offshore area north of the Arctic Circle; or
  3. which exploit shale formations by way of hydraulic fracturing.

(the “Targeted Projects”)

The sanctions operate in two key ways.  First, by preventing the sale, supply, transfer or export of the items listed in Annex II of the EU Regulation (which includes a number of items that can be used in the exploration or production of oil, for example, drill pipe and casing) by EU persons or from the EU for use in the Targeted Projects.1  Second, by prohibiting the direct or indirect provision of associated services necessary for the Targeted Projects, including: drilling, well testing, logging and completion services; and supply of specialised floating vessels.2

The EU Regulation also prohibits:

  1. certain dealings, directly or indirectly, with transferable securities and money-market instruments with a maturity exceeding 30 days and issued after 12 September 2014 by, or
  2. the making of loans or credit with a maturity over 30 days to,

certain Russian companies involved in the sale or transportation of crude oil or petroleum products, any non-EU subsidiaries owned 50% or more by them and any person acting on their behalf or at their direction.3  The companies currently listed in the EU Regulation are Rosneft, Transneft and Gazprom Neft.

Finally, the EU Regulation states that prior authorisation is required in respect of the provision of certain assistance or financing related to the items listed in Annex II of the EU Regulation to individuals or entities in Russia or if the items are to be used in Russia.4

A separate EU regulation prohibits the sale, supply, transfer or export of certain goods and technology suited for use in the energy sector and for the exploration of oil, gas and mineral resources to Crimea or Sevastopol and any associated assistance of financing.5

The EU sanctions apply to anyone within the EU, any EU national or company incorporated in the EU (wherever they may be physically located), and to any business done in whole or in part in the EU.

The US Sectoral Sanctions
The US sanctions targeting the Russian energy sector are primarily contained in Executive Order 13662 (as amended) (the “Order”) and in the Countering America’s Adversaries Through Sanctions Act (“CAATSA”).

The Order applies to “United States persons”.6  However, it could also apply to non-US persons in respect of any transaction that causes a US person to violate the Order or causes a violation of the Order to occur in the US.

In similar fashion to the EU Regulation, Directive 4 of the Order seeks to inhibit oil exploration and production from the Targeted Projects.  It does this by preventing goods, services (other than financial services), or technology in support of exploration or production from being provided to certain restricted entities and their 50% or more subsidiaries.

However, following the introduction of CAATSA in August 2017, the US sectoral sanctions went a step further than their EU counterparts.  In particular, CAATSA extended Directive 4 to include oil projects outside Russia in which the restricted Russian entities have a 33% or greater ownership interest or own the majority of the voting rights.  The US sectoral sanctions can therefore impact projects located far from Russian borders.

The Order also attacks the ability of key companies in the Russian energy sector to access the international debt markets.  Directive 2 of the Order prohibits new debt with a maturity of more than 60 days being issued to certain entities and their 50% or greater subsidiaries.

CAATSA contains various additional provisions impacting the Russian Energy Sector.  In particular, it provides for the:

  1. mandatory imposition of sanctions on non-US persons who knowingly7 make a significant investment8 in a project intended to extract crude oil from deepwater, Arctic offshore or shale projects in Russia (section 225); and
  2. discretionary imposition of sanctions on a person (not limited to US persons) who knowingly:
    1. makes an investment of $1 million or more (or an aggregate value of $5 million or more over a 12‑month period), which directly and significantly contributes to the enhancement of the ability of Russia to construct energy export pipelines; or
    2. provides goods, services, technology, information or support to Russia, which could directly and significantly facilitate the maintenance or expansion of the construction, modernisation or repair of energy export pipelines. (section 232)

That section 232 refers to “energy export pipelines” is significant.  Unlike the previous sanctions targeting the oil sector, section 232 could be applied to pipelines carrying Russian gas, large amounts of which are imported by the EU.

These additional provisions purport to have extraterritorial effect, which means they are of concern to non-US persons who are otherwise outside the US jurisdiction.  Any non-US persons breaching these provisions may become subject to secondary sanctions that would severely restrict their ability to do business with the US and to access the US financial system, and therefore the international financial system.

The Reaction of Energy Companies
The sanctions imposed on the Russian energy sector have received mixed reactions among energy companies.  The differences between the EU and US sanctions, most especially the manner in which they are enforced, has led to the perception that US companies are more affected than their European counterparts.

Mostly, however, energy companies have been able to progress their projects unimpeded by the sanctions.  This likely reflects the types of projects being progressed in Russia since the sanctions came into force.

The EU and US sectoral sanctions target oil exploration and production from deepwater, Arctic offshore or shale projects in Russia.  Such projects are complicated and require the adoption of advanced techniques and technologies.  Accordingly, they are typically more expensive than, for example, conventional shallow water or onshore drilling operations.  Projects of this nature therefore tend to be uneconomic in periods of lower oil prices, such as those experienced since 2014.  For these reasons, it is possible that such projects might not have been pursued since 2014 even in the absence of sanctions.

In fact, Russian oil production has increased from 10.86 million barrels per day in 2014 to 11.23 million barrels per day in 2017, making it the world’s third largest producer in 2017 behind the US and Saudi Arabia.9  This is a clear indication that the sanctions have not had a significant impact on the Russian energy sector’s ability to produce crude.

Looking Forward
It is questionable whether the sanctions imposed on Russia’s energy sector have been effective.  They have not, it seems, prevented Russia from increasing its production of oil.  Neither have they prevented all deepwater, Arctic or shale projects from being progressed.  However, with higher oil prices than when the sanctions first took effect, the economics of such projects should become more palatable and Russia may begin to feel the impact of the sanctions to greater extents.

Furthermore, the extraterritorial aspects of CAATSA are likely to begin affecting the appetite of non-US persons to make significant investments in Russian energy export pipelines or in Russian deepwater, Arctic offshore or shale projects.  There is also the risk of further sanctions.  The US Energy Secretary, Rick Perry, recently indicated that sanctions on the Nord Stream 2 pipeline are possible and that further energy‑related sanctions are planned.10   In addition, further sanctions on Russia in relation to the Novichok nerve agent attack in Salisbury, UK are expected, although it is not yet clear what form they will take and whether they will target Russia’s energy sector.11

In the first part of this three part series we considered the impact of President Trump’s decision to re-impose sanctions on Iran’s energy sector with effect from 5 November 2018.

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1 Article 3 of the EU Regulation.

2 Article 3a of the EU Regulation.

Articles 5(2) and 5(3) of the EU Regulation.

Article 4.3(a) of the EU Regulation.

Article 2(b) of Regulation EU No 692/2014.

United States persons is defined as “any United States citizen, permanent resident alien, entity organized under the laws of the United States or any jurisdiction within the United States (including foreign branches), or any person in the United States” (Section 6(c) of Executive Order 13662).

7 “Knowingly” for these purposes means a person who had actual knowledge, or who should have known, of the conduct, circumstance or result.

8Guidance from the US Department of State that whether or not an investment is “significant” will be determined on a case by case basis taking into account inter aliathe nature and magnitude of the investment and its relation and significance to the Russian Energy Sector.

9here.

10here.

11 here.

 

© 2018 Bracewell LLP
This post was written by Robert Meade and Joshua C. Zive of Bracewell LLP.

Dutch Supervisory Authority Announces GDPR Investigation

On July 17, 2018, the Dutch Supervisory Authority announced that it will start a preliminary investigation to assess whether certain large corporations comply with the EU’s General Data Protection Regulation (“GDPR”) – see the official press release here (in Dutch).  To that end, the authority will review the “records of processing activities” from thirty randomly selected corporations which are located in the Netherlands.

Article 30 of the GDPR requires data controllers and processors to maintain a record of their processing activities.  These records must, among other things, include a description of the categories of data subjects and types of personal data processed, as well as the recipients of the data and the transfer mechanisms used.  While small organizations with less than 250 employees are generally exempted, but there are several exceptions to the exemption which may still cause this obligation to apply to them as well.

The thirty corporations will be selected from ten different economic sectors across the Netherlands, namely: metal industry, water supply, construction, trade, catering, travel, communications, financial services, business services and healthcare.

According to the authority, the correct maintenance of records of processing activities is an important first indication of an organization’s compliance with the new EU data protection rules.

 

© 2018 Covington & Burling LLP
This post was written by Kristof Van Quathem of Covington & Burling LLP.

Three Important Considerations For All Businesses in Light of GDPR

Today, the European General Data Protection Regulation (“GDPR”) takes effect. The GDPR is the most comprehensive and complex privacy regulation currently enacted. The GDPR can apply to a business or organization (including a non-profit organization) anywhere in the world and its potential financial impact is huge; fines can reach up to € 20 million Euros (over $23 million USD) or 4% of an entity’s total revenue, whichever is greater. Not surprisingly, the potential for this type of penalty has caused concern and chaos leading up to the May 25, 2018 effective date. In light of this significant international development, all organizations should consider the following:

1. Does the GDPR Apply?

If your entity “processes” the “personal data” of anyone within the European Union, then the GDPR may apply. “Personal data” under the GDPR is any information that could identify an individual, directly or indirectly, like a name, email address or even an IP address. The GDPR also broadly defines “processing” to include activities such as collecting, storing or using the personal data. For more information on how to determine if the GDPR applies to your entity, watch our 3-minute video on the subject.

2. If the GDPR Does Apply, What is the Compliance Strategy?

You need a plan. Yes, it would have been ideal to have it in place by today but if the GDPR applies to your entity, do not delay any further in creating a GDPR compliance strategy. A GDPR compliance strategy starts with a detailed examination of your entity’s data collection and use practices. Those practices must comply with the GDPR requirements and your entity may need to implement new or revised policies to address specific compliance requirements. This process is specific to the particular practices of each entity – there is no one-size-fits-all GDPR compliance program. You can find the regulatory language here.

3. Even If the GDPR Does Not Apply, How Do You Handle the Data You Collect?

Even if the GDPR does not apply to your entity, there are significant risks and liability surrounding the data collection and processing practices of any business. Data breaches happen every day. No business is immune. Each organization should closely examine its data collection and use practices and determine if it absolutely needs all of the data it collects. Then, the organization must determine whether the steps it is taking to protect the data it collects are reasonable in today’s environment. In Massachusetts, businesses must undergo this process and create a written information security plan. In Connecticut, having such a plan may help avoid a government enforcement action if you experience a data breach. In addition, the Federal Trade Commission and states’ Attorneys General are actively pursuing companies with questionable privacy practices.

© Copyright 2018 Murtha Cullina.
This post was written by Dena M. Castricone and Daniel J. Kagan of Murtha Cullina.