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What are Intellectual Property Rights?

This article considers the precise nature of intellectual property rights so that due consideration can then be given to associated tax implications.

Discussions between taxing authorities and taxpayers or their advisors concerning the transfer pricing implications of using, licencing, or transferring intellectual property rights (IPR) cannot proceed efficiently unless both sides understand precisely what the "asset" in question actually is. Fundamental to this is the basis of IP law, the law that gives rise to the IP under consideration.

Contrary to the view commonly held by many, IP actually comprises a series of negative rights. Intellectual property rights provide the owner with the ability to prevent others from using the IP, rather than the mirror image, a positive right to use the IP itself. The author of software, the inventor of a gadget, or the creator of a brand need no registration or recognition of their ideas in law as a prerequisite to themselves using or exploiting them for gain. Rather, they need IP rights as a means to prevent others from so doing. Hence, IP is a monopoly granted by law and payments for use of IP – royalties or licenses – are actually payments in return for non-exercise of an IP proprietor's right to prevent that use.

Such a monopoly is limited, and precisely defined, by the law that creates it. Activities that fall outside of the limited monopoly are not at all prevented – even if they generate significant income for someone other than the IP owner. In addition, IP rights might expire. The monopoly over use of an invention or expression of an idea might come to an end because it had a certain life expectancy – patents and copyright, for example – or through specific application of the law under which the IP was created – non-use of a trademark, for example. These matters are also important because no license or fee can be demanded in return for the non-exercise of "rights" that do not exist.

Understanding this basis in IP law is critical for tax advisors, as it determines the commercial transaction(s) in the sale or licensing of IP, which in turn drive the correct taxation of activity occurring between connected persons (source and value). It is not sufficient, in arguing that a license should be imposed between connected persons, to show that one party has created something intangible of value and that it is being exploited by another person for commercial gain. One must show that:

  • The creator has proprietorial IP rights; and
  • That these rights are being infringed by the other party through its exploitation of the IP, such that
  • Payment would be demanded in exchange for non-exercise of those preventative rights.

We now apply these concepts to one class of IP, trademarks.

UK Trademarks

In relation to a trademark registered in the UK, the rights of a proprietor of a mark are defined by UK law based on the Trade Marks Directive (TMD) (2008/95/EC and Directive (EU) 2015/2436) and the Community Trade Mark Regulations (CMTR) (EC 207/2009). The structure of the TMD (article 5) and the CTMR (article 9) is to state a general proposition that the mark confers exclusive rights, and then describe those rights in negative terms, that is, the ability to prevent others from using the trademark.

This approach is consistent with UK law and court decisions that precede the directives noted above:

Inter Lotto (UK) Ltd v Camelot Group plc [2003] EWHC 1256 (Ch), [2004] RPC 8 Laddie J said: "The section does not stipulate that the proprietor of the registered mark has an 'exclusive right to use' the mark. It stipulates that he has the 'exclusive rights in the trade mark which are infringed by use of the trade mark in the United Kingdom without his consent'. In other words, registered trademarks, like all other statutory intellectual property rights, do not give a right to the proprietor to use, but give him the right to exclude others from using."

In Pinterest Inc v Premium Interest Ltd [2015] EWHC 738 (Ch), [2015] FSR 27Arnold J said that the same principle applied to a Community Trade Mark (CTM), and the contrary proposition – that the CTM was a positive right of use – was not even arguable.

This negative basis of right – the right to prevent others from using a trademark – was the underlying reason for the rejection of one of the grounds of challenge by various tobacco companies to the laws in UK and Australia concerning the plain packaging of cigarettes. The prevention of use of their trademarks in relation to consumer sales packaging was not the confiscation from the trademark owner of their property. Their IP was not the ability to use the trademark themselves, but to prevent others from so doing. That monopoly was intact, even if they were themselves prevented from using their trademarks on tobacco packaging intended for sale to consumers. (See the UK Court of Appeal decision in British American Tobacco UK Limited (and others) and The Secretary of State for Health [2016] EWCA Civ 1182.).

Just the UK, or a global concept?

This approach is not confined to English law. The same basis of analysis was applied in JT International SA v Commonwealth of Australia [2012] HCA 43, (250) CLR 1 in deciding that the law requiring the plain packaging of cigarettes did not infringe the IP rights of the trademark proprietor. In (Case C-491/01) R v Secretary of State for Health ex p British American Tobacco (Investments) Ltd [2003] 1 CMLR 14 Advocate General Geelhoed said at [266] that

[t]he essential substance of a trademark right does not consist in an entitlement as against the authorities to use a trademark unimpeded by provisions of public law. On the contrary, a trademark right is essentially a right enforceable against other individuals if they infringe the use made by the holder.

This way of describing the rights conferred by the registration of a trademark is also found in article 16 of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs Agreement), which provides:

The owner of a registered trademark shall have the exclusive right to prevent all third parties not having the owner's consent from using in the course of trade identical or similar signs for goods or services which are identical or similar to those in respect of which the trademark is registered where such use would result in a likelihood of confusion. In case of the use of an identical sign for identical goods or services, a likelihood of confusion shall be presumed. The rights described above shall not prejudice any existing prior rights, nor shall they affect the possibility of Members making rights available on the basis of use.

In a ruling by the WTO Dispute Settlement Panel on a complaint by Australia (WT/DS290/R 15 March 2005) the panel said at [7.246]:

These principles reflect the fact that the [TRIPs Agreement] does not generally provide for the grant of positive rights to exploit or use certain subject matter, but rather provides for the grant of negative rights to prevent certain acts. This fundamental feature of intellectual property protection inherently grants Members freedom to pursue public policy objectives since many measures to attain those public policy objectives lie outside the scope of intellectual property rights and no do not require an exception under the TRIPS Agreement.

In the same ruling at [7.610] the panel specifically rejected an argument that there was a positive right to use a trademark.

Just Trademarks, or all IP?

These principles are not confined to trade marks. The protection granted by law in relation to other IP is also framed in the form of rights to negate the activities of others. Earlier we quoted Laddie J, in Inter Lotto (UK) Ltd v Camelot Group plc,

In other words, registered trademarks, like all other statutory intellectual property rights, do not give a right to the proprietor to use, but give him the right to exclude others from using. [Emphasis added].

Here Laddie J implies no limitation to the classes of IP that are defined by way of negative prohibition, and that is consistent with the approach taken in other cases stretching back over considerable time.

In the case of copyright, in the UK case of Ashdown v Telegraph Group Ltd [2001] EWCA Civ 1142, [2002] Ch 149 Lord Phillips MR said at [30] that:

… copyright is essentially not a positive but a negative right. No provision of the 1988 Act confers in terms, upon the owner of copyright in a literary work, the right to publish it. The Act gives the owner of the copyright the right to prevent others from doing that which the Act recognises the owner alone has a right to do.

The US Supreme Court, in Kimble v. Marvel Entertainment, LLC 576 U.S. _____ [2015], decided that no ongoing license could be charged in respect of an expired patent. The Supreme Court held that the expiration of the patent removed the proprietor's ability to prevent the use of the IP, and thereby to charge a fee for non-exercise of that right.

Lord Cranworth LC said in the UK case of Steers v Rogers [1893] AC 232, 235 (cited in JT International SA v Commonwealth of Australia):

What is the right which a patentee has or patentees have? It has been spoken of as though a patent right were a chattel, or analogous to a chattel. The truth is that letters patent do not give the patentee any right to use the invention – they do not confer upon him a right to manufacture according to his invention. That is a right which he would have equally effectually if there were no letters patent at all; only in that case all the world would equally have the right. What the letters patent confer is the right to exclude others from manufacturing in a particular way, and using a particular invention.

Conclusion

IP of any form is a legal monopoly granted by national law to prevent others from, for example, using an invention or copying the expression of an idea. Therefore, it is a "negative" right or prohibition. That law defines both the extent/limits of the monopoly and who has the monopoly right. An IP license or royalty is payment to the rights holder for non-exercise of those rights.

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