In post-patent issuance proceedings before the US Patent and Trademark Office (USPTO) – inter partes review (IPR), covered business method (CBM), and post-grant review (PGR) – parties almost invariably submit expert testimony. Depending on the type of post-issuance proceeding, the testimony can relate to prior art, claim construction, patent-eligibility, or formal requirements for patentability including adequacy of written description, enablement, and definiteness.
In contrast, patent applicants almost never submit expert testimony to the USPTO prior to issuance of the patent. The great majority of the time, such testimony is unnecessary. Patent attorneys representing clients before the USPTO have at their disposal patent specifications and drawings on which to rely for support for arguments to the USPTO Examiner. If the patent examiner applies prior art against the claims of the pending application, an attorney can point to contrary statements or holes in the prior art, and argue for patentability over the prior art based on those contradictions and/or omissions. The attorney also can point to contradictions, omissions, and/or logical leaps in the patent examiner’s reasoning or analysis.
But this is not always enough. Sometimes the patent examiner just does not credit attorney argument appropriately. Prosecution can be prolonged and patent applications may be abandoned as a result of the attorney’s inability to convince the patent examiner based on the four corners of the patent document and the prior art. For example:
The patent examiner may not interpret a patent claim term correctly because the patent specification provides conflicting or different definitions of the term, or no definition at all.
The patent examiner may not understand language in the prior art properly because of differences or changes in usage of terms in the field.
The patent examiner may not understand how the invention works, or more particularly, how someone of working skill in the technical field could implement the invention based on the description in the patent specification and drawings.
There may be evidence of non-obviousness, such as commercial success of products or services embodying the invention, a long-felt need for the invention, or failure of others to develop the invention. Some of the evidence may be factually based, but needs to be tied to the point(s) of novelty of the invention.
What can an attorney do? There is the appeal process: putting the disagreement before the Patent Trial and Appeal Board (PTAB), a tribunal within the USPTO, for reconsideration by other technically skilled decision-makers. There are then further avenues of appeal – the Court of Appeals for the Federal Circuit, and even the US Supreme Court. But such appeals are progressively more expensive and, in the absence of substantial points that the patent examiner and the PTAB missed, the chances of success are usually low. As a result, a company often performs triage on its problematic patent applications, appealing some and abandoning others.
There is also an alternative. While the application is pending, a declaration of a technical expert, with strong credentials in the relevant technological area, could tip the scales in favor of patentability. So long as expert testimony does not bear on the ultimate legal conclusion at issue (e.g. obviousness, enablement) and even if the testimony is opinion testimony, it is entitled to weight, as provided by Manual of Patent Examining Procedure (MPEP) § 716.01(c). The MPEP discusses the submission of expert declarations in several areas:
MPEP § 716 (Affidavits or Declarations Traversing Rejections) generally discusses types and content of expert testimony, and how a patent examiner should treat that testimony.
MPEP § 1504.03 (Nonobviousness) refers to the use of expert testimony to rebut a prima facie case of obviousness.
MPEP § 2107 (Guidelines for Examination of Applications for Compliance with the Utility Requirement) refers to the use of expert testimony to establish usefulness, or utility, of an invention, and how a patent examiner should treat that testimony.
MPEP § 2107.03 (Special Considerations for Asserted Therapeutic or Pharmacological Utilities) refers to the use of expert testimony to evaluate effectiveness of therapeutics and reasonable expectation of success.
MPEP § 2145 (Consideration of Applicant’s Rebuttal Arguments) refers to expert testimony about the level of skill in the art, among other things.
MPEP § 2164.05(a) (Specification Must Be Enabling as of the Filing Date) also refers to the use of expert testimony about level of skill in the art, in the context of enablement under 35 U.S.C. § 112.
Providing expert testimony during prosecution does not always convince an Examiner to allow the pending patent claims. Appeal still may be necessary. But even so, the expert testimony makes the record more complete, and can contribute to success on appeal.
The submission of expert testimony in a pending patent application also can be helpful after the patent issues, for example, if a patent challenger tries to invalidate the patent. If the expert testimony already in the patent prosecution file bears on the same or a similar issue, and addresses the same or similar facts that a patent challenger tries to rely on in a post-issuance proceeding, a patent owner can use that expert testimony to prevent the patent challenger from meeting the burden of showing likelihood of success if a post-issuance proceeding were instituted.
It is better to have such expert testimony be part of the file history than to submit it after a petition is filed. In deciding whether to institute a post-grant proceeding, the PTAB must take into account a patent owner’s preliminary response to the petition including any “testimonial evidence, usually expert testimony, that the patent owner presents. In this situation, the PTAB must view any factual disputes that the testimony raises in the light most favorable to the petitioner, not to the patent owner. 37 CFR § 42.108(c). However, having expert testimony already part of the file while the patent application was pending makes that testimony part of the record. The patent owner is entitled to rely on the record – including expert testimony submitted during prosecution – to oppose institution of a post-issuance proceeding.
Using expert testimony in a pending patent application does raise a concern that, in the event that the patent gets litigated, defense counsel can use the expert’s statements to the patent owner’s disadvantage. For example, litigation counsel could identify adverse admissions about either the scope of the patent disclosure, or the interpretation of the prior art, or the meaning of a particular claim term, or statements about enablement. For an issued patent, the concern is legitimate. However, if the patent never issues, then the concern is moot.
Expert testimony is not a tool of first resort in pending patent applications. It can, however, be an important tool for addressing rejections in important patent applications and, once part of the record, may help in post-issuance situations as well.
In a press release published on February 14th, 2019, the European Commission announced, as part of the Digital Single Market strategy, a draft regulation aimed at creating a fair, transparent and predictable business environment for businesses and traders when using online platforms. The new rules are underpinned by an impact assessment that incorporates evidence and stakeholders’ views collected during a two-year fact-finding exercise.
The regulation will be directly applicable, preventing Member States from setting additional rules in the areas explicitly covered by the new rules.
Scope of the regulation (stakeholders and territory)
The regulation covers “online platform intermediaries and general online search enginesthat provide their services to businessesestablished in the EU and that offer goods or services to consumers located in the EU. This regulation is intended to apply throughout the European Economic Area.
”Online search engines” are defined as those that facilitate web searches based on a query on a subject and provide results in various formats corresponding with the search request.
“Online platform intermediaries” include third-party e-commerce market places, app stores, social media for business and price comparison tools.
However, the following are excluded:
online advertising, payment services, search engine optimisation and services that connect hardware and applications that do not intermediate direct transactions between businesses and consumers, as well as intermediaries that operate between businesses only (such as online advertising exchanges).
online retailers, such as grocery stores (supermarkets) and retailers of brands, to extent that such online retailers directly sell only their own products, without relying on third party sellers and are not involved with facilitating direct transactions between those third party sellers and consumers.
A ban of certain unfair practices from platforms
Clearer terms and conditions
Under the draft regulations, platforms must provide clear, precise and intelligible terms and conditions for sellers so they can provide free and informed consent. This obligation highlights a current context in which numerous clauses from important digital companies’ terms and conditions are frequently declared unlawful by courts.
When changing terms and conditions, at least 15 days’ prior notice will also be required, to allow companies to adapt their business to such changes.
No more sudden, unexplained account suspensions
The draft regulation follows the 2018/334 recommendation from the European Commission dated March 1st 2018 against unlawful online content and particularly recital 20 under which content providers must be informed of a decision to delete content stored on their request or to limit its access and be able to contest the decision by counter notification.
The draft regulation sets out that digital platforms can no longer suspend or terminate a seller’s account without clear reasons and possibilities to appeal. Platforms will also have to reinstate sellers if a suspension was made in error or due to a technological problem.
Transparency concerning the functioning of ranking algorithms
Market places and search engines will have to indicate the main parameters that they are using to rank goods and services on their websites so that the sellers can compete effectively.
Transparency of certain practices
If a platform provides the consumer its own goods and services, or has concluded more favourable agreements with other business partners, it will be required to inform the other sellers on the nature and content of such commercial advantages for itself or its partners.
The platforms will also have to indicate what data they are collecting and the means by which it is being processed, in particular how data is shared with business partners. Where this concerns personal data, the GDPR provisions will of course apply.
Benefit for consumers
Countries such as France, already regulate such platforms but the rules are more consumer oriented (“Platform to consumer” or P2C). The Commission’s view is that consumers will benefit from increased transparency as the identity of the business offering the goods and services will be more visible. As they will also be able to see where general search results are influenced by a payment, for example one that was made by a website owner, consumers will be able to make more informed choices.
More generally, the EU Commission hopes that consumers will benefit from expected increases of competition, as well as better quality and lower prices of goods and services for the consumer.
The draft regulation encourages alternative dispute resolution which will help resolve more issues out of court, saving businesses time and money.
Platforms must set up a specific internal complaint-handling systems to assist business users. The idea is to facilitate communication between platforms and sellers without immediately going to court. This will allow businesses to lodge complaints directly with the platform for example, as a result of an action or decision taken by them or as a result of a technological problem. Platforms will need to respond to complaints appropriately and communicate the outcome to businesses.
Platform intermediaries shall name specialised mediators they agree to engage with, in their terms and conditions. Users should not have to bear more than half the costs.
Small enterprises with fewer than 50 staff members and generating less than €10 million turnover will be exempt from these obligations.
Actions by business associations
In case of any violation of the regulation’s provisions, it is proposed that organizations and associations representing business users’ interests will be able to take platforms to court to stop any non-compliance with the rules, either before a judge, or public authorities with enforcement powers appointed by Member States.
It is hoped that this will help overcome a fear of retaliation, and lower the cost of court cases for individual businesses, if the new rules are not followed.
In addition, Member States can appoint public authorities with enforcement powers, if they wish, and businesses can turn to those authorities.
The new regulation will apply 12 months after its adoption and publication, and will be subject to review within 18 months thereafter, in order to ensure that they keep pace with the rapidly developing market.
The EU has also set up a dedicated “Online Platform Observatory” to monitor the evolution of the market and the effective implementation of the rules.
In France, the French Posts and Electronic Communications Regulation Authority (ARCEP), in a press release of 22 February 2019, welcomed the fact that the draft regulation also applies to mobile apps as “a major milestone in open devices”. “App stores are a central focus in the regulation’s enforcement, along with voice assistants which are now an integral part of online search engines. On the matter of operating systems, ARCEP is pleased to note that they are mentioned as technical means that online platforms can use to promote their own services.”
The best preparation for diligence begins well in advance of any discussions with companies interested in investing in or purchasing assets of the innovating company. Ideally, the innovating company should implement policies and practices from day one of the company to help avoid problems that will inexorably come to light under the scrutiny of diligence. Inventorship, the starting place for chain of title on patents, and ownership are fundamental to any deal, and can cause havoc when a company gets it wrong.
The share of U.S. granted patents naming more than one inventor continues to grow, with more than 20% of all patents granted in 2016 naming four or more inventors. More inventors means potentially more inventorship and ownership issues to confirm, clarify, and correct in preparation for diligence.
The innovating company whose technology is to be scrutinized should put in place policies that describe the inventorship determination process. Having an inventorship determination process that is open, inclusive, and fair can prevent issues with disgruntled employees who are terminated after the deal is complete. See our related blog for suggestions for making the process fair and open. Any issues identified in the process should be confronted within the organization quickly and effectively.
This determination process should include a review of contributions of employees of the innovating company, as well as the contributions of any others who may have participated in the inventive process. For example, special issues arise when the innovating company in-licenses technology from or collaborates with universities, or uses contract research organizations (CROs). These relationships should be investigated fully to identify any inventions arising outside of the innovating company.
Tip for Investing Companies: During diligence, an investing company should assess the innovating company’s policies for determining inventorship and determine whether the process on its face appears comprehensive and fair. Investing companies should also ask whether there are any known inventorship issues and what, if anything, has been done in order to resolve them.
Inventorship is a key driver for patent ownership since it is the starting point for chain of title. An innovating company should review its employment agreement(s) for a present assignment clause – “I hereby assign” rather than “I agree to assign” or “I promise to assign.” It should also be confirmed that every employee has executed an employment agreement with an assignment clause.
Standard procedure should include obtaining executed assignments for each invention as close as possible in time to the patent application filing, i.e. when the inventors are more likely to be accessible and cooperative. Where this is not possible, the employment agreement can serve as evidence of assignment.
While these procedures may seem like givens, it is not uncommon for missing assignments and/or employment agreements to come to light in diligence.
Tip for Investing Companies: During diligence, an investing company should search public records for recorded assignments and review the content of the assignment documents to determine whether title has effectively passed to the innovating company. Investing companies should be wary where assignment documents are not publicly available, and should request that any unrecorded assignments be made accessible in diligence.
An innovating company should also review its collaboration agreements, to understand to whom each inventor is obligated to assign. Investigation beyond these agreements may also be needed.
In one common scenario, a university researcher hired to consult may execute an agreement with the company, with or without the university’s knowledge, purporting to assign their inventions to the company. Savvy universities, however, include assignment clauses in their employment agreements and in their IP policies that obligate their researchers to assign to the university.
In another common scenario, companies, particularly in the life sciences, use CROs for research which can lead to a CRO employee being an inventor on the innovating company’s patents. Agreements with CROs typically provide for the innovating company to be assigned ownership of CRO employee’s invention.
In both scenarios, and generally, care should be taken in how and in what order the assignments are executed. Where a third party inventor is obligated, by employment agreement or policy, to assign to her CRO- or university-employer, she should not assign directly to the innovating company. To ensure proper chain of title, the third party inventor should assign to her employer first, and her employer should assign to the innovating company second.
While this may seem self-evident, surprisingly, it is not uncommon to see assignments executed out of order with the result that the transfer to the innovating company is not effective. Unraveling and correcting this will be costly and may be difficult or even impossible to do.
Tip for Investing Companies: During diligence, the investing company should ask the innovating company to disclose whether there are any third party inventors; and in the case of a university researcher, whether the university has been made aware of the university employee’s consulting agreement with the innovating company and has agreed to the assignment obligations. Investing companies should keep in mind that once an asset is acquired, inventorship and ownership issues will become its issues.
Proper naming of inventors is critical for maintaining patent rights, as inventors are the first owners of the patent. Proper assignments thereafter are also necessary to ensure ownership transfers. Addressing inventorship and ownership issues early will help to ensure that diligence proceeds smoothly and the deal gets done.
 Office of the Chief Economist, IP Data Highlights, No. 2, February 2019.
Paolo Beconcini authored a piece looking at the China Trademark Office’s draft regulation, titled “Several Provisions on Regulating the Application for Registration of Trademarks,” that is now open for public comment. Beconcini wrote that this draft is the first attempt at providing a vetting system to spot and reject fraudulent trademark applications by malicious squatters and punishing bad actors and their trademark agents for such activity.
Lord Burnett of Maldon, the current Lord Chief Justice, has set up a new Advisory Body with the aim of ensuring that the Judiciary of England and Wales is fully informed about developments in artificial intelligence (AI).
In setting up the group, Lord Burnett recognised the importance of AI in today’s modern world, and the potential impact of AI on the work of the courts.
Professor Richard Susskind, President of the Society for Computers & Law, has been named chair of the body, and in a recent interview stated that AI has taken off in the last six or seven years, to the point where it has become “affordable and practical”. Professor Susskind believes that the new group will start a dialogue among the judiciary about “one of the most influential technologies that there is”, and recognises the importance of judges being open to the opportunities that AI technology could offer to the court system (with “practical tasks” cited as an example).
It is hoped that the advisory body will offer guidance to the senior Judiciary on:
The likely impact of developments in AI on the Judiciary and the court system;
Ways of ensuring that judges are sufficiently trained on AI and its impact; and
The most pressing legal, ethical, policy, cultural and economic effects of AI.
The 10-person team will be made up of both senior judges (including Lord Neuberger, past President of the UK Supreme Court, and Lady Justice Sharp, Vice-President of the Queen’s Bench Division), as well as leading experts on AI and law (such as Professor Katie Atkinson, past President of the International Association for AI and Law).
There is little doubt that automation already plays an essential role for the legal profession, for example, in large disclosure exercises. Legal technology is a big area for potential growth. As the use of AI becomes more commonplace in the courtroom, it will be important for the Judiciary to be conversant with developments in the sector, in order to understand how and why the technology was used in a particular case, and to assess the risks and shortcomings associated with the very nature of automation. The only way to understand the complexities of such issues is to be confident in the way the technology works.
The new rule will apply to both the broadcast and non-broadcast codes of advertising practice and come into force on 14 June 2019, stating that advertising “must not include gender stereotypes that are likely to cause harm, or serious or widespread offence”.
The introduction of the rule (as rule 4.9 in the CAP Code, and rule 4.19 in the BCAP Code), which is supported by additional guidance, follows a public consultation and the 2017 review of gender stereotypes in advertising by the Advertising Standards Authority (ASA) which considered the effect that adverts may have in emphasising such stereotypes.
Adverts under attack
Some brands do still use stereotypical gender characteristics to uphold and carry their message, and in the last few years the ASA has upheld a number of complaints where adverts have been found to objectify women (and men), including some ads which were intended to be viewed as humorous or lighthearted.
Even adverts which seek to challenge gender ‘norms’ will need to consider carefully whether they comply with the new rules. For example, Gillette recently ran a much-publicised advertising campaign (see here) which sought to challenge traditional views of what it means to be a successful man, particularly in light of the #MeToo campaign. The ASA received a “small handful” of complaints that the ad was an “assault on masculinity”, but the ASA concluded that it could not investigate the matter as the ad did not air in the UK. In any event, if aired in the UK the ASA is unlikely to conclude that the Gillette ad breaches the new gender stereotyping rules.
The ASA guidance sets out the key factors that will guide its assessment of whether an ad’s representation is like to cause harm or offence. These factors include the impact on a group of people who are being stereotyped. For example, will it have a harmful impact on those who hold protected characteristics (such as gender reassignment, sex, pregnancy, or sexual orientation), or other stereotypes such as those relating to age, race or religion?
The guidance also provides examples of scenarios involving gender stereotypes that would likely be unacceptable under the new rule. These include:
An ad depicting a man with his feet up and family members creating a mess around a home whilst a woman is solely responsible for cleaning the mess;
An ad that depicts a man being adventurous juxtaposed to a woman being delicate;
An ad that depicts a man or woman failing to achieve a task specifically due to their gender;
An ad that belittles a man for displaying emotional vulnerability.
Whilst ads may display people undertaking gender-stereotypical roles, such as a man doing DIY, it should not be presented in such a way that it suggests the role is unique to one gender or only available to one gender. The guidance highlights the importance in avoiding mocking or belittling people for not conforming to a gender stereotype.
The Director of the CAP warned, “harmful gender stereotypes have no place in UK advertisements. Nearly all advertisers know this, but for those that don’t, our new rule calls time on stereotypes that hold back people and society”.
Moving forward, advertisers and brands must avoid using comparative gender stereotypes or portraying gender stereotypes in a negative way. If you’re an advertiser and want to know whether the new rules may affect a campaign, please contact Squire Patton Boggs for practical guidance and advice.
ArsTechnica published an excellent piece on how the United States’ “broken” patent system permitted Theranos to obtain hundreds of patents for technology that did not work and did not meet the “enablement” requirement of 35 U.S.C. section 112. According to author Daniel Nazer, the USPTO did virtually nothing to ensure that Theranos’ technology had been reduced to practice or that its disclosures would enable others to use the technology. Based on the strength of its patent portolio, Theranos was able to solicit hundreds of millions in investments from venture capitalists and patent enforcement entities.
The Theranos saga stands as a stark reminder to businesses that the mere fact that a patent exists is meaningless absent proven technology behind it. In other words, it is the technology that is the asset – not the patent. Businesses should keep in mind that patents exist to simply stake out a “claim” for the technology. Like a claim for a gold mine, a patent claim is worthless if there is no underlying value.
Cryptoassets are coming out of the shadows. Slowly but surely. Over the past decade or so, perhaps principally driven by huge gains (and losses) in the value of Bitcoin, there has been a palpable dawning recognition that cryptoassets, and the distributed ledger technologies (DLT) that underpin and encrypt them (such as Blockchain), are here to stay. Mainstream financial services are testing (and increasingly grappling to control) the investment market. At the same time, the rapid digitalisation of the global economy is suggesting new and potentially exciting applications for DLT across multiple sectors (including, for random example, in tax administration, collection and compliance).
As interest, and adoption, has grown, regulators have (necessarily) started to take a closer interest. They have been concerned most by the risks cryptoassets pose to consumers, and the integrity of the financial markets, that arise from the very characteristic that has made them so attractive: the decentralised, encrypted, nature of DLT. Determined to maintain its position as one of the world’s leading financial centres, the UK has dramatically stepped up its efforts over the past year. In March 2018, the Chancellor of the Exchequer established a ‘Cryptoassets Taskforce’, comprising the three cornerstone organisations of UK fiscal and monetary policy (HM Treasury, the Financial Conduct Authority (FCA) and the Bank of England) to formulate the UK’s policy and regulatory for cryptoassets and DLT.
The Nature Of Value
Broadly speaking, cryptoassets are easiest understood as being digital representations of value. And where value is found, taxation is unlikely to be too far away. The risks associated with cryptoassets, and the widespread perception of use in illicit financial crime, are exacerbated by the opportunities created for egregious tax avoidance and tax evasion. It is, then, no surprise that tax authorities are getting serious about how best to tap the revenue opportunity by bringing cryptoassets into the tax net. Easier said than done of course. Perhaps uneasy about how, where and when the value is created, or what it actually represents, pronouncements on the taxation of cryptocurrency have generally been tentative and heavily caveated.
Cryptoassets are capable of being transferred, stored and traded electronically. While acknowledging the evolution of cryptoassets (sometime referred to as ‘tokens’) is rapid, it is generally accepted that there are three broad (albeit not mutually exclusive) types:
Exchange tokens – commonly known as ‘cryptocurrencies’ (including the most widely known, Bitcoin) used as a means of exchange or for investment;
Security tokens – being types of investment issued to raise capital and which provide owners with certain rights (such as ownership, repayment of money, or a future entitlement); and
Utility tokens – also types of investment issued to raise capital but which can be redeemed for access to a specific product or service.
Importantly, while ‘cryptocurrencies’ can, and often are, used as a means of exchange, they are not considered to be currency or money on the basis that they are (currently at least) too volatile and not widely-accepted as means of exchange. Since cryptoassets (including Bitcoin, but also any one of the other 1,074 types) are generally traded on exchanges which do not use sterling, the value of any gain (or loss) will need to be converted into sterling for UK tax purposes.
Cryptotaxation In The UK
The UK tentatively dipped its tax toe in to the dark cryptoassets lake back in March 2014 when HM Revenue and Customs (HMRC) published a Policy Paper (Revenue and Customs Brief 9 (2014): Bitcoin and other cryptocurrencies) its initial thinking on the tax treatment of “activities involving Bitcoin and other similar cryptocurrencies”. Other than officially ruling out treating the buying and selling of cryptoassets as a gambling activity, little of technical substance has changed during the intervening five years but in December 2018 HMRC published a new Policy Paper (Cryptoassets for individuals) dealing exclusively with how individuals owning cryptoassets will be taxed.
The UK tax consequences for UK tax paying individuals who hold cryptoassets will depend on what they do with the cryptoassets but, ultimately, will be dictated by existing principles that underpin the UK tax code. There are no plans to create special cryptotaxation rules for cryptoassets and DLT.
In the majority of cases, ownership of cryptoassets will be treated as any other investment. Just as with other holding of investment assets (e.g. shares) by individuals, any appreciation in value will be taxed (and any loss, relieved) on a subsequent disposal as a capital gain (and so subject to capital gains tax (CGT)). This is slightly odd because, by their very nature, cryptoassets are digital and are therefore intangible assets. Nonetheless, HMRC consider that provided they are capable of being owned, and their value can be realised, they will be chargeable assets for CGT purposes.
The exceptions are where individuals hold cryptoassets pursuant to:
Carrying on a trade – normal principles (including assessing the degree and frequency of activity, organisation, risk and commerciality) apply to decide. Individuals ‘trading’ in cryptoassets will be subject to income tax on their trading profits in the same way as any other financial trader buying and selling shares, securities or other financial products. HMRC say individuals will only be considered to be trading in exceptional circumstances;
Payment of earnings from an employer – in a similar way to the regime applying to other employment-related-securities, income tax and national insurance contributions will be charged on the value of the sterling value (at the time of receipt) of the cryptoassets received. An employer with a UK tax presence will, in most cases, need to operate PAYE. CGT will be applied at the time of a subsequent disposal;
Cryptoasset ‘mining’ (broadly, cryptoassets acquired for verifying additions to the DLT) – again, assuming the individual is not carrying on a trade of cryptoasset mining, income tax will be charged on the value of the sterling value (at the time of receipt) of the cryptoassets received and CGT will apply at the time of disposal; and
Cryptoasset ‘airdrops’ (broadly, cryptoassets acquired as part of a marketing or advertising campaign) – assuming the individual is not carrying on a trade, income tax will only be charged if the airdrops are received in return for a service provided. It will not apply if the individual receives them in a personal capacity without having to do anything in return. Once in the individual’s possession, however, CGT will be charged at the time of a future disposal.
Individual taxpayers will, in the majority of cases, need to self-assess their liability to UK taxation on their activities and investments involving cryptoassets. That, given the increasingly concentrated focus of HMRC on the area, will necessitate careful record keeping of asset types, dates, volumes, values and statement paper-trails sufficient to prove acquisitions and disposals.
Revised guidance on the business and corporate taxation treatment of cryptoassets in the UK is expected during the first half of 2019 but one might expect that a similar, first-principles based, approach will be reinforced there too.
Into The Global Light
The UK approach is only one of many possibilities. Different countries could conceivably take (indeed have taken) very different routes. Perhaps it is the rapidity with which the technology is shifting the scene, or the inherent confusion and disorganisation, but there has been a marked reluctance by tax authorities around the world to publish detailed guidance. The result is disparate approaches ranging from effectively banning the use of cryptoassets to a total reluctance to engage in regulation.
Ultimately, given the global nature of the digitalisation of the economy and the borderless growth in the evolution and adoption of cryptoassets and DLT, a global consensus-based approach would be preferable in the long-term. Given the OECD’s current efforts to develop a solution for the (income) taxation of the digitalisation of the global economy, it is disappointing (albeit entirely understandable) that cryptoassets only get a passing mention as deserving of further work (to analyse the risks of tax evasion and possible solutions, including more transparency, mandatory disclosure and information exchange) in its “Tax Challenges Arising from Digitalisation – Interim Report” (March 2018).
As the technology unpacks itself, the promise (largely unrealised to date) becomes more tangible, and authorities scramble to regulate and control developments and tax the revenue, cryptotaxation is certainly a trend to follow closely.
In a pair of unanimous rulings on March 4, 2019, the Supreme Court clarified (1) that the U.S. Copyright Office must issue a registration certificate before a plaintiff can commence suit and (2) that a prevailing plaintiff cannot recover fees for expert witnesses, jury consultants or other “costs” that are not specifically called for in the relevant statutes.
In Fourth Estate Public Benefit Corp. v. Wall-Street.com, the Court held that plaintiffs alleging copyright infringement cannot commence a case for infringement without first applying for and receiving from the Copyright office a certificate of registration. The Court reasoned that registration of a copyright is “akin to an administrative exhaustion requirement that the owner must satisfy before suing to enforce ownership rights.” The Court was careful to point out that the Copyright Act permits preregistration in some cases, but those would be the only circumstances where an action can be commenced prior to a registration issuing.
The upshot is that content owners and practitioners should take care to ensure that they register all works. Not only does the law now clearly and ambiguously require it as a prerequisite to enforcing copyrights, pre-infringement registration is the only way to obtain statutory damages and attorneys’ fees.
We wrote about the arguments considered by the Court in a previous post, available here.
In Rimini Street, Inc. v. Oracle USA, Inc., the Court held that a district court’s discretion to award “full costs” does not include discretion to award expert witness fees or other “costs” that are not specifically permitted in 28 U.S.C. §1920. In its case against Rimini Street for copyright infringement, Oracle obtained a $12.8 million award of “costs” for litigation expenses such as expert witnesses, e-discovery, and jury consulting even though those “costs” are not generally permitted to be taxed. The district court had reasoned that the Copyright Act conferred discretion to award “full costs” that included all litigation expenses in addition to those enumerated in Section 1920
Writing for the Court, Justice Kavanaugh explained that the term “full” was a term of quantity or amount and does not expand the type of costs available to the plaintiff. The Court reasoned that:
A “full moon” means the moon, not Mars. A “full breakfast” means breakfast, not lunch. A “full season ticket plan” means tickets, not hot dogs.
The phrase “full costs” means just “costs,” i.e., those specifically delineated by Congress – which are quite limited. The Court noted the Copyright Act separately provides for attorneys’ fees in appropriate cases. (But, as we note above, a copyright plaintiff can only get its attorneys’ fees where it registers its copyright before the infringement occurs).
The agreed wording of the Directive, which was approved by the European Council on 20 February, has now been published and can be found here.
A few points to note on the final wording of the controversial articles 11 and 13:
Article 11 – requires EU Member States to put in place provisions which ensure that authors of content used on news aggregator sites receive “an appropriate share of the revenues… “obtained by such sites from using the content. Unfortunately, how one calculates what an “appropriate share” is remains unclear.
Article 13 – the final wording confirms that websites which host user-generated content need authorisation, such as a licence agreement, from copyright holders before they make copyrighted content publically available and encourages “cooperation between online content service providers and rightsholder” so as not to prevent non-infringing material being uploaded by users.
Paragraph 7 also makes it clear that no “general monitoring obligation” is placed on platforms, although under paragraph 4 they must use “best efforts” to obtain authorisation from rights holders and remove any infringing material “expeditiously” following notification.
This text is still subject to much criticism as the efforts which platforms are required to go to, both to obtain such authorisation and remove infringing content, is considered unclear.
The next vote
Notwithstanding opponents’ vocal concerns, members of the European Parliament’s Committee on Legal Affairs (JURI) voted in favour of the wording of the Directive on 26 February 2019, as approved by the trilogue negotiators.
Next, the Directive will be put to the European Parliament and voted on by MEPs. As anticipated, this vote is likely to take place either at the end of March or in April.
Even though the wording of the Directive has in theory been agreed, it is not safe just yet. The oppositions to the Directive, and in particular the controversial Articles 11 and 13, continue with vengeance. Demonstrations are taking place across the EU, a march took place in Cologne on 23 February, and online petitions and crowd funding pages have been set up to help support groups campaigning against the Directive. Some sources even say that 23 MEPs are planning on voting against the Directive.
The MEP vote is likely to take place after the UK is due to exit the EU, on 29 March 2019 (subject to any Brexit delay). If this is the case, as previously discussed, the Directive will not apply to the UK.
Further updates will be shared when they become available.