Ralph M. Pais, left, and Jonathan S. Millard, right, of Fenwick & West. (Courtesy photos)
The vote of the U.K. Electorate to leave the EU has politicians, economists, lawyers and commentators from all sectors speculating on what will happen next and over exactly what period. While it is unlikely that there will be a sea change in the short term, at least legally, it is certainly prudent to prepare for the unknown. Below we set forth some immediate considerations for U.S. companies regarding funding, operations, intellectual property and employment law.
The ‘Brexit Hangover’
The most immediate impact will be an economic one—as we have already experienced in the days following the referendum. Short- and medium-term volatility in the currency and stock markets will likely impact business confidence; fears of a recession are real.
Companies that are already operating in the U.K. should consider their short-term needs such as liquidity, access to capital, assessment of counterparty risk and how to mitigate impacts to customer demand. Those that are reliant on investment should assess the extent to which they may need to access alternative sources.
For companies not already operating in the U.K. but considering it, now may be a good time to “wait and see.” For U.S. companies considering a first move to Europe, and who have been considering the U.K. as a good place to start, the Brexit vote may cause reconsideration. There are myriad factors for selecting a European location and they will vary from company to company, but the uncertainties of what may happen as a result of Brexit may end up putting the U.K. on the negative side of the scale.
There is not likely to be a dramatic change in the IP landscape necessitating an immediate overhaul of IP strategies.
Patents: A key uncertainty surrounds the future of the U.K.’s involvement in the Unified Patent Court system and the “one-stop shop” enforcement procedure. Some commentators suggest that the U.K. will cease to be involved, but another possibility is that the U.K. might be able to negotiate some form of “quasi-involvement.” The UPC has not come into force yet and has yet to be ratified by nearly half of the EU member states—so it is too early to tell. The European Patent Convention is not part of the EU and the system of European patents granted by the European Patent Office, and U.K. patents granted by the U.K. IPO, will remain unaffected.
Trademarks: The U.K. national trademark system will also remain unaffected. EU registrations applied for under the Madrid Protocol will no longer cover the U.K. and there is uncertainty at present surrounding the applicability of existing EU registrations in the U.K., and whether owners will be granted parallel U.K. rights with the same priority dates. Fenwick’s trademark team is advising companies to apply for U.K. registrations in parallel with EU registrations.
For active contracts that are governed by the laws of England and Wales, companies may want to assess whether the ensuing market disruption will likely trigger any termination events due to “material adverse effect,” “force majeure” or similar clauses. If the contractual relationship is otherwise working well, it is unlikely that either party will have incentive to invoke such rights. Existing U.K. contracts are also likely to have references to EU law littered throughout them. While this is not ideal, there is unlikely to be an actual change in the laws applicable to the U.K. for at least two years (and quite possibly substantially longer), so for most “day-to-day” contracts these references can be phased out during the usual renewal cycle as warranted by whatever changes in law emerge during the separation process. For particularly high-value and long-term agreements, more scrutiny may be required.
As to whether English law and English courts are still good options for governing and resolving disputes under international contracts, we see no major reason why they would not be. English law has evolved over centuries to a form that global companies are accustomed to. The U.K. as a jurisdiction is reliable, the courts are impartial and there is a strong rule of law. English contract law is largely unaffected by EU laws, so from a substantive legal aspect, nothing much will change. The U.K. will, however, have to negotiate an agreement with the EU regarding enforceability of judgments if it intends to remain a forum of choice for resolving disputes related to cross-border agreements.
The General Data Protection Regulation is due to come into force in May 2018, which will essentially harmonize all data protection laws throughout the EU. If the U.K. opts to remain part of the European Economic Area, it will pretty much be business as usual with the GDPR applying. Even if the U.K. was to adopt a different model, U.K. regulators and business have been deeply involved in shaping the GDPR and if the U.K. is to take advantage of the free movement of data safe harbor—and the other benefits that the GDPR provides—U.K. law will need to be closely aligned with the GDPR. Therefore, if companies have started their “GDPR preparation,” there seems to be no reason at present to warrant a change in approach. In addition, for those working through the quagmire of Model Clauses and the applicability of the Privacy Shield, there is no reason to depart from these arrangements until the new world becomes clearer.
There will inevitably be nervousness from the British workforce at this stage. Fears of recession, migration of jobs to the continent and downsizing are undoubtedly playing on the minds of many. From a practical perspective it is therefore important to consider the message that companies are sending to their employees. Consider whether to be proactive and approach the concerns head on or whether to be more reactive and wait to see how the situation pans out. Behind the scenes, it may be prudent to at least consider whether, in the worst case scenario, redundancies will be likely/possible and, if so, consider the implications. Other less drastic consequences, but still worthy of consideration, include visa status of employees, impacts on pension schemes and impacts on secondment arrangements.
From a legal perspective, as with the message for most of the above, there will be no immediate change in the law. Employment laws are often entrenched in the culture of a nation making them very difficult to change without a public outcry, and the U.K. is no different. It is therefore unlikely that there will be a material change to the substance of the core laws surrounding anti-discrimination, working hours, redundancy rules or maternity/paternity leave. Even though EU laws may no longer apply, it is hard to see where the U.K. government would materially depart from core principles.
Mechanics of Brexit
It is important to remember that the referendum was advisory in nature, so is not binding or mandatory. There is already much debate about the timing of the Brexit, with the U.K. seemingly buying time to figure out its position and the EU looking for a quick, clean separation. In terms of the mechanics, the U.K. will need to give notice to the EU under Article 50 of the Treaty of the European Union, which will trigger a two-year period during which the U.K. will negotiate the terms of its withdrawal. It is only at the end of this period that Brexit will occur.
Not only is there uncertainty surrounding when the U.K. will give notice under Article 50, there is also uncertainty surrounding how the post-Brexit landscape will look—the two being inextricably linked. There are a number of blueprints or models that may be followed, or an entirely new arrangement could be penned. The Norwegian Model is most talked about at present, which would involve the U.K. remaining part of the EEA in order to benefit from access to the single market, meaning that the U.K. would still have to financially contribute to the EU, remain subject to EU law and adhere to core principles, like free movement of persons. Other models would require varying degrees of compliance with EU trade policy and the possibility of negotiating bilateral agreements with member states. The key takeaway being that nobody knows which way this will go and it will take some time for us to observe and learn what direction the U.K. government elects to proceed and how the EU leadership respond.
As an aside, there is also a question around whether Brexit will even happen. There is a rising discontent among areas of the electorate that a number of key cornerstones of the Brexit campaign were based on flawed principles or broken promises. Whether that will lead to another referendum or another general election remains to be seen, but at the moment, there is no evidence to suggest there will be.
While the implications of Brexit will remain unclear in the short term, the prudent approach is to closely monitor the situation and don’t panic. The economic situation can change almost by the second, but from a legal perspective there is likely to be a period of uncertainty before anybody can opine with any authority on what to do with contracts, employees and business plans. Even in the medium term, one would hope that courts, regulatory bodies and governments alike will take a pragmatic approach to what will be the largest and most complex divorce in history.
Ralph M. Pais is a Fenwick & West partner based in San Francisco whose practice focuses on technology transactions. Jonathan S. Millard is a San Francisco associate in that practice group.
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