International Trade and Intellectual Property: from Basic Steps to Complex Matters
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Asters is a full-service independent national law firm that has maintained a strong presence in Ukraine since 1995. The firm provides efficient transactional legal advice and represents clients on a broad spectrum of matters arising in the course of doing business in Ukraine.
Asters is the winner of 2015 and 2014 Law Firm of the Year: Ukraine and the CIS award by The Lawyer, holder of 2014 Ukraine Law Firm of the Year award by Who’s Who Legal, and named No. 1 law firm in Ukraine according to the 2011-2014 Top 50 Law Firms Annual National Ranking by Legal Practice Weekly.
Asters offers a full range of legal services and maintains a high reputation for its expertise in a wide array of practices, such as banking and finance, capital markets, corporate and M&A, competition and antitrust, dispute resolution, energy and resources, environment, family law, intellectual property, international trade, labor and employment, real estate, restructuring and insolvency, taxation, telecommunications, and white collar crime.
The firm has extensive industry-specific experience and plays a leading role in advising clients in various market sectors, including agriculture, automotive, aviation, banking and finance, energy, infrastructure and transport, insurance, media and advertising, oil and gas, pharmaceuticals and healthcare, private equity, real estate and construction, retail and consumer goods, telecommunications and IT.
Asters' attorneys regularly handle a variety of complex matters and the largest transactions for multinational corporations and major local companies, including, inter alia, GlaxoSmithKline, Sopharma, S.C. Johnson & Son, The Boeing Company, Coca-Cola, General Electric Energy, Glencore International AG, Deer & Co, Kodak Health Group, ED & F Man, L’Oreal Ukraine, Marathon Oil, News Corp., Nissan Motor, Nokia Corporation, Novartis AG, Philip Morris, Shell, Siemens AG, Telenor, Thyssen Krupp Elevator and many others.
Asters is an exclusive Ukrainian member of professional networks such as World Services Group, L2B Aviation, Biolegis, IsFin and Legalink, and is a long-standing member, both at corporate and individual level, of numerous professional associations, chambers of commerce, business associations, and international and local bar associations. Asters is the only Ukrainian law firm to be the exclusive Warsaw Stock Exchange IPO Partner.
In this article we have compiled practical information which may be relevant for Ukrainian companies doing trade business with foreign markets.
Why Trade Contracts are so Important
A commercial contract contains formal contractual arrangements, which reflects the underlying deal and commercial conditions between the parties on how such a commercial deal would be structured and arranged. It is important that the contract includes not only essential and mandatory provisions and conditions, such as payment terms, submission of orders, sanctions for non-performance of obligations by the parties, etc., but also conditions that could be potentially relevant for the parties in the detailization of their liabilities.
It is especially important when it comes to violations of contractual arrangements by any of the parties, and a party initiates court proceedings. In such a case, in addition to the mandatory conditions of the contract (terms, price, etc.), special conditions, such as, guarantees or warranties, restriction of liability as to the amounts, terms or conditions and applicable fines for non-performance, stated or implied, would be essential.
Therefore, international trade for importers, exporters and producers starts from choosing the type of contract that would regulate trade relations. Since trade relations may vary from simple import/export structures to manufacturing, the types and level of complexity of agreements would vary.
International Trade Structures and Types of Trade Contracts
The system mentioned below of contractual arrangements versus trade structures is rather conditional. However, it gives some guidelines on how the relations may be or could be structured.
The type of contract normally depends on the method of market entrance.
Market Access — Supply Contract
Sale and purchase or supply agreement is normally applied at the initial stage of trade, when the company enters and establishes trade relations in a particular market. In this case, trial volumes of the product are supplied and tested on the market.
At this initial stage, the sale and purchase contract normally applies. The contract defines the subject matter, which names the precise types of products, the volumes, quality, other essential conditions, including the delivery terms, ordering, supply and payment conditions, price, the settlement procedure, the delivery and acceptance conditions, sanctions and fines, arbitration conditions, etc. In more complicated cases, the parties may agree the licensing and certification conditions, warranties, discount policy, marking, etc. When drafting such a contract, the formal provisions of applicable Ukrainian legislation should be taken into consideration as well as applicable provisions of international laws and regulations. It is essential to make appropriate stipulations as to currency control, language, Incoterms. The contract should encounter relevant requirements of Ukrainian customs legislation, and in certain cases, EU and WTO provisions.
In case of trade with any «branded» products, special attention should be given to the «exhaustion of rights» concept.
Exhaustion of Rights
Existing Ukrainian laws do provide for the “exhaustion of rights principle”, which means that once the product where the intellectual property is embodied legitimately and is brought into civil circulation it can be freely sold and this shall not be an infringement of the intellectual property right.
For example, according to the On Protection of Rights to Marks for Goods and Services Act of Ukraine the exclusive right of a trademark owner to prevent others from using the trademark shall not cover use of the trademark for a product that has been brought into civil circulation by, or under the consent of, the trademark owner provided that there are not reasons to forbid such use in connection with the further sale of the product (such as e.g. worsening of the product quality).
However, it is not specified whether the exhaustion is national (i.e. the product needs to be brought into circulation in Ukraine) or international (i.e. the exhaustion will work regardless of where the product is brought into circulation).
It is worth mentioning, for the purposes of comparison, that in the European Community the exhaustion is regional. That is, it applies to the products brought into civil circulation within the Community. In the Russian Federation, to the contrary, the national exhaustion is provided.
The above-mentioned makes it still unclear whether the purchaser needs to obtain a trademark license to import the products; how the issues of so-called “parallel imports” should be addressed in Ukraine and whether there are efficient methods to prevent or protect from such imports.
Market Share Expansion — Distribution Contract
The distribution contract normally applies at the next stage, when the company, in addition to the sale of its products on the market, intends to expand its market share and wants the distributor to provide additional services, such as marketing, merchandising, advertisement, guarantee replacements, etc. When drafting such a distribution contract, in addition to the provisions applicable to the sale and purchase or supply contracts, the provision of legislation, which regulates the particular spheres, such as exclusivity, antimonopoly, merchandising, should be encountered. In cases when trading includes advertising of “branded products”, special attention should be given to proper structuring of IP rights transfer.
The covenants under a distribution arrangement often include those in connection with promotion of supplied products in order to raise sales. In this shall be noted that applying a trademark in advertising is considered to be use of the trademark. The aforesaid “exhaustion of rights” principle does not specifically cover use of a trademark in advertising. Therefore, to be on the same side the distributor shall need a license from the trademark owner (that may either coincide with the supplier or be another entity, depending on the structure of the respective company or group of companies).
The license, at least strictly limited to promotional use, is granted in many cases. It is up to the parties whether to include the license in the distribution, supply or other contract related to delivery of products, as the case may be, or a separate license agreement. However, there are certain issues regarding payment of royalties for such license triggering tax implications. Where royalties are not provided for by the respective agreement and, consequently, not paid by the licensee, the value of the license shall be considered for tax purposes.
Further Market Expansion — Supply to Related Party — System of Contracts
The next stage of market intervention would be establishing a subsidiary on the market. In most cases this step contemplates shifting profit center from the trade company to a subsidiary located on the local market. Normally, in addition to all aspects, defined for two previous stages, business entity enters into license or sublicense contract on transfer or use of IP rights, contract on provision of services, etc. to handle various aspects of relations between a parent company and subsidiary, or with any company of group companies. In this eventuality, customs aspects (documentary support in trade with related party), tax aspects (transfer pricing, beneficial ownership) and IP aspects (royalty payment, license and sublicense arrangements) should be properly structured and documented.
Presence on Market — Manufacturing
In certain cases, a business group may consider establishing manufacturing capacities on the market. This structure is attractive and effective when trade can be performed from the production facilities on the market, or, trade with related markets due to FTAs, or other benefits available thereof. In this case, a system of contractual relations should apply. Special attention should be given to the licensing and regulatory aspects of the particular industry, rules of origin, transfer and realization of IP rights and efficient tax structuring. Provisions of FTAs and/or special trade remedies should be taken into account.
Supply of products may be part of the franchising arrangement whereby the complex of intellectual property rights and relevant experience is licensed. Franchising is a model of business that is actively used worldwide.
In this regard it should be also noted that according to recent amendments to the Civil Code of Ukraine effective as of 5 April 2015 the requirements regarding registration of franchising agreements were abolished. This shows the trend towards decreasing the number of barriers for foreign trade and, consequently, elimination of relevant risks.