Omnibus Directive: A New Deal for EU Consumers – Part 3

On 7 January 2020 the European Commission’s (informally referred to as the Omnibus Directive) came into force and must be implemented in Member States by 28 November 2021. This is the third and final instalment of our three-part blog exploring the Omnibus Directive and what it means for stakeholders at all levels. In Part 1 we looked at the background to the directive, its key features and the next steps in its implementation. In Part 2 we looked in more detail at the objectives and specific provisions of the directive and in this Part 3 we will look at the potential implications of the directive for traders and also the decisions that Member States will need to take in implementing the directive.

What are the practical implications of the Omnibus Directive for traders and other stakeholders

The Omnibus Directive will likely have the greatest impact on traders given that, while the majority of changes will benefit consumers, it is traders (and in some respects online marketplaces) on whom the obligations under the Directive (and corresponding national implementing legislation) will ultimately fall. Traders and online marketplaces, particularly larger operators who are more likely to be a target for Member States, regulators and activist consumers, will have to consider carefully how best to implement the changes required so as to ensure compliance with the new (or enhanced) obligations under the Omnibus Directive.

Traders will be mindful of the increased penalties under the Omnibus Directive (up to 4% of the annual turnover of the trader in the Member State or Member States where an infringement took place or €2m where information on turnover is not available, with the option for Member States to introduce fines which exceed these thresholds). This will no doubt help to drive awareness of and compliance with Member States’ consumer laws. In the same way that the introduction of the GDPR (and its associated penalties) made personal data a key concern for businesses, some traders may find that readiness for the implementation of the Omnibus Directive becomes part of the board-level agenda.

We have set out below some of the practical implications for traders and online marketplaces resulting from changes brought in by the directive both from a legal and an operational perspective.

Legal considerations

  • Unfair contractual terms

Traders will need to review their standard consumer terms and conditions and ensure that none of the provisions would be considered unfair in any of the jurisdictions in which the terms and conditions apply.

This is a particular concern for traders who provide services across a range of Member States and utilise the same or similar standard terms and conditions across all countries concerned – this one size fits all approach may be subject to greater scrutiny and challenge going forward, especially if there is divergence among Member States in the implementation of (or potential exposure to) the directive.

Ongoing review and adaptation of standard terms and conditions will be important to ensure continued compliance, particularly in light of developing guidance, court decisions and enforcement action.

  • “Free” service contractual rights

Providers of formerly “free” digital services in exchange for personal data will need to put in place appropriate terms and conditions (perhaps by way of click-through terms and pop-ups) to ensure that consumers are apprised of their new rights (e.g. the right of withdrawal) and have access to relevant pre-contractual information in relation to such services.

Those providers should also review their contractual agreements with third parties (including any third party recipients of consumer personal data) to ensure that, if a consumer exercises one of their new rights (such as withdrawal), this does not have unintended knock-on consequences.

  • Disclosing of allocation of responsibility for compliance between online marketplaces, traders and private individuals

Online marketplaces will be obligated to disclose the professional status of traders operating on their platform and how responsibility for compliance with relevant consumer laws is allocated between the marketplace and its trader. Marketplaces will need ensure they maintain accurate and up-to-date information from each trader (e.g. by carrying out a survey to obtain the relevant information). They may also need to update their T&Cs with traders (both private individuals and corporate) to ensure that these reflect the correct allocation of compliance responsibility and risk.

The fact that online marketplaces will be made responsible for private individual traders’ compliance with consumer law means that online marketplaces are likely to need to re-assess their own risk profile and make changes to their platforms to mitigate any associated risk accordingly. This may lead to fundamental changes in the way these platforms currently operate and the ease with which individual traders are able to “hop on” and “hop off” different online marketplaces.

  • Compliance based on value judgments

There are various new requirements under the Omnibus Directive compliance with which will inevitably involve a value judgement, including:

  • what constitutes a ‘clear and comprehensible’ way of presenting to consumers the parameters used to rank search results (and the relevant importance of such parameters), especially if search ranking employs complex algorithms (or indeed AI-led processing, where not all AI decisions are readily explainable); and
  • what amounts to ‘significantly different composition[s] or characteristics’ when assessing whether two or more products which are identically marketed in different Member States are in breach of the new dual-quality product rules.

These and other requirements will likely require an analysis of what occurs operationally when a consumer interacts with the relevant platform, marketing materials or products. Inevitably, traders will need to take a risk-based approach to compliance, especially when weighing up multiple options and approaches to the way they market goods and services to different consumer markets.

  • Consumer content

Traders will need to exercise increased caution where they use consumer-generated online content. New limitations in relation to such usage rights as well as new obligations in relation to provision of such content to the consumer-owner may require changes to internal policies and procedures so as to ensure employees are aware of and are able to comply with the relevant rules.

These changes also mean that (other than in very limited circumstances, such as where the consumer-generated content only relates to the consumer’s activity when using the digital content or digital service supplied by the trader) traders will no longer be able to rely on terms and conditions which grant them the ability to license consumer-generated content to third parties.

  • Backlisted activities

Traders will need to ensure that they are not undertaking any blacklisted activity. This may seem straightforward, but in practice some of these restrictions are open to interpretation (and may be interpreted differently in each Member State’s local implementing legislation). For example, the Omnibus Directive requires that traders are prohibited from manipulating consumer reviews, but it is not clear whether this would include practices such as:

  • displaying positive consumer reviews for slightly different models or variants of the same product across the related models or variants; or
  • removing a negative review which contains offensive or harmful content (rather than, for example, removing only that part which is considered offensive or harmful).

Careful thought will need to be given to these and other borderline cases. Additionally, ensuring employees are aware of what could constitute blacklisted activities, by way of internal policies, training, or otherwise, could also be useful and necessary practical compliance mechanisms, especially if a trader is operating an extensive e-commerce platform with significant consumer engagement.

  • Personal right of redress and regulatory responses

The introduction of a personal right of redress for breaches of consumer rights obligations will empower consumers to pursue compensation for damage, receive a price reduction or terminate a contract. Traders will need to consider from a legal and public relations point of view how they will adapt to and manage the rise of empowered and activist consumers.

Interacting with, and responding to, regulators will also require some recalibration, not least because of the enhanced role of regulators in enforcement and the potential for significant penalties. As with the introduction of GDPR and the growth of data privacy officers and teams, the introduction of new internal policies and the adaptation of organisational structures to accommodate new (or enhanced) consumer rights supervisory and compliance roles will in many cases be necessary to respond to these changes.

  • Target compliance in M&A scenarios

From an M&A perspective, given the potential fines under the Omnibus Directive, a target’s compliance with its consumer rights obligations will likely become a greater area of focus during the due diligence process, as well as becoming an important consideration when drafting and negotiating warranties and indemnities. In some sectors and for some deals, potential risk and exposure to enforcement action may even be determinative of deal value and viability.

  • Member State derogations

The potentially-wide range of derogations that Member States can introduce (see further below) means that traders and online platforms will need to monitor individual Member State implementation to ensure compliant operation in each jurisdiction where they offer goods and services to consumers.

Operational considerations

  • Information provision

Online marketplaces will need to update their platforms to include relevant information required under the Omnibus Directive as well as keeping track of any additional local-law information requirements. This may involve an assessment of whether certain information is presented only on the local version of a particular platform or if a generic “international version” may be more suitable. This will include managing the type and standard of disclosure – for example in relation to when a review has been paid for. There will be a careful line to tread here between including the relevant information and disclosure without over-complicating the offering, dissuading or turning off consumers from using the site or inhibiting conversion of consumer interest into a successful transaction.

  • Reviews

Traders will need to evaluate and consider how best to integrate consumer review verification processes into their existing systems. For some, this will require the introduction of technological or other solutions to support this requirement – which may in turn add to the overall cost of compliance.

  • Consumer communication

The flexibility provided by the directive for traders to introduce different methods of communication is positive, with a vast array of options available (see our thought piece on the ‘Future of Retail’ for more on this). Accordingly, traders will be able to trial and use the consumer-communication interface that best suits their brand, systems, and other needs. However, traders must remain mindful of the requirements to store and provide a written record of any consumer communication. As with other compliance-driven requirements, traders will need to consider optimal and efficient ways of doing this, especially if they are operating at scale or offer a number of channels for consumer engagement.

  • Consumer content access

As consumers are now the beneficiaries of free and quick access to any content they create, traders will need to have in place efficient and cost-effective content retrieval mechanisms so that the facilitation of this right does not become a logistical or financial burden.

  • Dual-quality products

Traders will need to identify any dual-quality products (i.e. those which are manufactured with significantly different compositions or characteristics but under the same branding) and assess whether it is feasible to eliminate the dual-quality issue by aligning production processes across Member States, or alternatively considering a re-brand so as to make clear to consumers that the products are different. In addition to decisions around product manufacture, there will no doubt be concerns to overcome here around dilution of brand goodwill, especially where a trader is known for a “hero” product or has built up significant product recognition in two Member States for a dual-quality product.

  • Pricing considerations

New price transparency requirements will have a number of operational impacts. For example, if frequent discounting is a fundamental feature of a trader’s sales strategy, it will be important to put in place processes that ensure a particular price has been in place for at least thirty days before applying and marketing a discount against such price. This may be challenging where pricing and discounting decisions are not made centrally within the business.

Similarly, traders that use dynamic/personalised pricing mechanisms will need to find ways of indicating where a price has been altered for a particular consumer based on data held by the trader. This may not be straightforward where the pricing is based on automated decision-making. It will be interesting to see whether traders eventually provide the ability for consumers to opt out of personalised pricing – and whether this becomes a selling point for traders who choose to do so.

  • Responding to consumers’ rights of redress

In addition to the legal considerations referred to above, and in the same way that companies have had to respond to data subjects’ ability to enforce personal rights under the GDPR, traders will need to consider the extent to which they need to scale-up their capacity and ability to facilitate and respond to consumers who wish to exercise their new rights under the Omnibus Directive. This will inevitably involve building out customer service management capabilities (i.e. through setting up call/chat-centres, developing new escalation processes and training).

This issue may be particularly acute in relation to traders of “free” digital services who will now be subject to a range of new obligations requiring interaction with consumers (such as the provision of pre-contractual information and the requirement to enable a consumer to withdraw from a contract). This may in turn create opportunities for other third parties to provide consumer engagement and compliance-focused solutions to these and other traders.

Extra-territoriality and Brexit

These legal and operational considerations will be important for all business-to-consumer companies who intend to offer physical or digital goods, content, or services to EU consumers. It remains to be seen how the new measures will be enforced against traders who are established outside the EU (but who sell into the EU). Interestingly the EU Parliament’s Committee on the Internal Market and Consumer Protection has recommended that one of the objectives of the upcoming Digital Services Act should be to close the existing legal loophole allowing suppliers based outside of the EU to sell products online to European customers which do not comply with Union rules on safety and consumer protection (see here for more on this).

From a UK perspective and as mentioned in Part 1 of our series, the UK looks likely to adopt measures which are similar in scope to those of the Omnibus Directive, but in any case UK-based traders who sell into the EU will need to be conversant and compliant with the requirements of the Omnibus Directive in a post-Brexit world.

What decisions will Member States need to make

Member States will have some leeway when it comes to implementing the Omnibus Directive into local law. The directive explicitly leaves room for specific derogations, including in relation to the ability to impose:

  • more aggressive regimes to counteract misleading marketing and selling practices in the context of unsolicited home visits or trader-organised excursions to promote or sell products;
  • additional information provision requirements on online marketplaces; and
  • perhaps most notably, higher fines for infringement.

Another important consideration for Member States will be whether to extend the consumer rights under the relevant implementing legislation to consumers in ‘third countries’ (i.e. thereby allowing a consumer in a third country who purchases from a Member State-based trader to benefit from the new (or indeed any) consumer protection rights in that Member State).  This latter point will have clear ramifications for UK consumers post-Brexit in that, as discussed above, while UK-based traders will likely be subject to some form of enhanced consumer rights regime, UK-based consumers purchasing from EU-based traders may not necessarily be the beneficiary of such consumer rights.

 

Hayley Brady
Hayley Brady
Consultant, Head of Digital and Media, London
+44 20 7466 2079

James Balfour
James Balfour
Associate, London
+44 20 7466 7582

Jeremy Purton
Jeremy Purton
Senior Associate, Digital TMT and Sourcing, London
+44 20 7466 2142
Terence Lau
Terence Lau
Senior Associate, Digital TMT and Sourcing, London
+44 20 7466 2441

Alasdair McMaster
Alasdair McMaster
Associate, London
+44 20 7466 2194

Summary of the report concerning the Telecommunications and Other Legislation Amendment (Assistance and Access) Act 2018

On 9 July 2020 the Independent National Security Legislation Monitor (‘INSLM’) issued a report recommending amendments to the Telecommunications and Other Legislation Amendment (Assistance and Access) Act 2018 (Cth) (‘TOLA’). The main focus of the INSLM’s report was the power granted under the TOLA to police and intelligence agencies to request or compel technical assistance from designated communications providers (‘DCPs’). DCPs include all carriage service providers and entities that supply or install carriage services or develop software in connection with those services.

The assistance that can be requested or compelled under the TOLA from DCPs includes providing the content and metadata of their customers, as well as technical assistance to circumvent any encryption or other electronic protection of such content and metadata. The TOLA permits this kind of technical assistance to be requested or compelled without judicial or other independent authorisation, and without any requirement to keep adequate records. However, any notice compelling such assistance must be reasonable, proportionate, technically feasible and not result in a systemic vulnerability.

The INSLM’s report did not recommend any changes to the powers under which relevant agencies can request assistance from DCPs.

However, the INSLM did recommend:

  • the introduction of a new statutory office of the Investigatory Powers Commissioner (‘IPC’) to monitor the manner in which the power to compel technical assistance from DCPs is exercised. The INSLM’s report recommended that the IPC be a retired judge of the Federal Court or Supreme Court of a State or Territory, and be appointed on the advice of the Attorney-General and following mandatory consultation with the Leader of the Opposition.
  • that the IPC should be appointed as a part-time Deputy President of the AAT as the head of a new Investigatory Powers Division (‘IPD’), with the power to approve and conduct hearings concerning all notices compelling technical assistance from DCPs. This measure is aimed at ensuring that all assessments of the reasonableness and proportionality of a notice compelling technical assistance are conducted independently, to ‘engender[] the necessary trust in the minds of members of the public that the powers are being exercised in a manner that is no more than necessary’.
  • that the IPC should be required to concur in the appointment of a suitable number of eminent, independent technical experts who would be assigned as part-time Senior Members of the IPD.

Finally, an important further recommendation made by the INSLM is to extend the powers afforded by the TOLA to integrity and anti-corruption agencies. This recommendation was specifically extended to the foreshadowed, but yet unestablished, Commonwealth anti-corruption commission.

Kwok Tang
Kwok Tang
Partner, Corporate, Sydney
+61 2 9225 5569

Peter Jones
Peter Jones
Partner, Corporate, Sydney
+61 2 9225 5588

COVID-19: THE ECONOMIC IMPACT ON THE EUROPEAN VENTURE CAPITAL INDUSTRY

The COVID-19 pandemic is creating significant economic challenges for industries world-wide. The European venture capital industry and the start-up ecosystem it supports is no exception.

Recent Trends

Before the onset of the pandemic, European venture capital deal activity was very healthy. Whilst there was a downward trend in terms of deal count (attributable to late-stage VC investments attracting the majority of venture capital funding), aggregate deal value was at record highs. Furthermore, extensive corporate venture capital participation in European deals was continuing, venture capital-backed exits were at healthy levels (particularly in the software sector) and the number of venture capital funds and capital raised had picked up significantly.

Impact of COVID-19

The COVID-19 pandemic will more than likely result in a decline in venture capital deal volume over the short to medium term, particularly for start-ups in the travel, leisure, events and retail sectors given the contraction in consumer activity and Government responses to the pandemic keeping people home. Venture capital investors and corporates who have raised venture funds will be examining start-up founder teams, products, markets and exit strategies more closely; corporates who invest off balance sheet are likely to refrain from investment activities to preserve cash reserves; and financial investors who prefer liquid assets such as hedge funds may put a hold on their venture capital investment activities.

Mitigating the downturn

Across Europe we are seeing some evidence of Government-backed and other stimulus efforts to help mitigate the downturn for start-ups. For example, in the UK, the British Private Equity and Venture Capital Association (BVCA) has recommended that the government put in place an emergency convertible loan funding facility, with government funding being supplemented by the private sector. The UK Treasury is currently weighing up this proposal.

The BVCA is also engaged on a range of other COVID-19 issues affecting the venture capital industry, including faster approvals of EIS/VCT funding and faster payments of R&D tax credits; relaxation of state aid rules on EIS/VCT schemes; deferral of income tax and VAT payments; extending business rates relief to all businesses unable to operate because of government restrictions; extending the job retention scheme; and suspending wrongful trading rules.

France, through its dedicated agency BPI France, is setting aside €80 million to invest in start-ups which are seeking to raise finance, alongside matched investments from the private sector.

The German public venture capital umbrella-fund-investors, KfW Capital and the European Investment Fund, will be put in a position to step into the shoes of defaulting fund investors.

Both France and Germany have also extended their liquidity schemes so as to be available to start-ups.

The Dutch government is increasing its guarantee of start-up loans from 50% to 67.5% for loans of up to €266,667, while Sweden has extended its existing support for starting a business from 6 to 12 months.

Impact on Valuations, Due Diligence and Deal Terms

For those start-ups who are able to attract venture capital investment during the downturn, there is likely to be a downward shift in valuation, in particular for later stage start-ups as they are more often valued relative to public markets. This could trigger down-round protection provisions, and founders and other ordinary shareholders should understand the impact on post-financing equity stakes – other options such as bridge financing or negotiating with investors to waive or partially reduce anti-dilution adjustments may need to be considered.

In terms of due diligence, in the short term we expect increased due diligence timelines due to the physical challenges in creating and populating data rooms and an inability to conduct in person due diligence sessions, site visits and management meetings, and also due to investors examining start-up founder teams, products, markets and exit strategies more closely. There will likely be an increased focus on business supply chain, operations and continuity due diligence, as well as the potential impact of COVID-19 on earnings projections, the execution of business plans, material contracts and general working capital and liquidity.

Finally, there may also be a shift towards more investor-friendly deal terms. Some examples include:

  • Participating preference shares: investors may require participation rights which entitle them to receive their preference amount first in a liquidation event, with any remaining preference shares on an “as-converted” basis. Participation may be uncapped, or capped (typically at 3-5 times the amount originally invested including the amount of the liquidation preference).
  • Liquidation preferences: investors may require the amount of the liquidation preference to be a multiple of the purchase price of the preference shares given that liquidation preference is typically a function of the perceived risk of the investment. 2-4 times preference would be typical.
  • Anti-dilution protection: investors are likely to require that their economic ownership in the company is protected against possible dilution that may occur as a result of additional issuances of shares at a lower purchase price than paid by the investor, without the investor having to make a material new investment. We would expect weighted average formulas to remain the norm however.
  • Dividends: we could see a shift to holders of preference shares having a cumulative dividend right entitling them to be paid, in addition to their liquidation preference, an amount equal to a certain percentage per year of the purchase price for the preference shares.
  • Pay-to-play provisions: investors will strongly resist pay-to-play provisions which would require them to provide continued financial support in future financings (dilutive or otherwise). If included, a less severe restriction could be for investors to convert their preference shares into another series of preference shares (often referred to as ‘shadow preference shares’) that retain some or all of their liquidation preference but lose anti-dilution protection.
  • Special approval rights: these protections will take on increased importance for investors in the current environment. For example, these would typically include amending articles to affect rights of preference shareholders; increase/decrease of authorised preference shares; authorise or issue equity securities senior to or on parity with preference shareholders; liquidation / dissolution / winding-up; merger / acquisition / sale of substantially all assets of the company; voluntary liquidation or dissolution; dividends, distributions and share repurchases (subject to customary exceptions).
  • Redemption rights: minority investors in a later-stage profitable company may want to have some ability to exit the investment through redemption rights. We would not expect these rights to be unrestricted, rather available only in specified circumstances, subject to there being sufficient available profits e.g. if an exit has not taken place within a specified period.
  • Board representation: the usual shareholding threshold for a venture investor to have a right to designate a representative to serve on the company’s board of directors may be reduced (somewhere in the region of 10% is typical under ordinary circumstances). This will allow the investor to monitor the company’s decision making (in addition to standard information rights) and to ensure that it is well run from an administrative and corporate governance point of view – something which will be particularly important in an economic downturn).
  • Warrants: we may see more warrants being issued to investors as a bonus for cash investment in the current climate.

If you have any questions, or would like to know how this might affect your business, phone, or email these key contacts.

Aaron White
Aaron White
Of Counsel, London
+44 20 7466 2188
Victor Chiew
Victor Chiew
Senior Associate, London
+44 20 7466 2197
Ghislaine Nobileau
Ghislaine Nobileau
Trainee Solicitor, London
+44 20 7466 7503

Gambling and the COVID-19 Crisis

Gambling Commission Guidance

The Gambling Commission has released new guidance acknowledging the increased challenges that businesses in the industry are facing as a result of the COVID-19 pandemic. The guidance explicitly reminds licensees that:

  • they are expected to follow Public Health guidance;
  • they should assess their ability for continued compliance with their relevant licence conditions and codes of practice (LCCP) and consider voluntary partial or full suspension of their offerings if full compliance is not possible;
  • those operating online must continue to act responsibly during a period where more users are likely to accessing their services from home;
  • licence applications remain a priority, however any documentation should be emailed or scanned to the licensee’s Account Manager and not sent by post; and
  • the Commission is unable to reduce fees or fast track applications.

The guidance also makes clear that although staff across the Gambling Commission will be working remotely and responses may be subject to delays, they can still be contacted for specific guidance.

Impact of COVID-19 on the gambling sector

In a similar story to many other industries, gambling businesses have been deeply affected by the COVID-19 epidemic and subsequent governmental responses. Companies owning large casinos or chains of retail locations are the most acutely affected, but with many major live sporting events being cancelled or postponed, online operators (particularly betting apps) are also having to adapt. Many are launching new betting pools related to politics or TV shows or leaning on smaller unaffected international events (rugby, horse racing, table tennis), esports, and daily-fantasy trade.

It’s worth noting that casinos and gambling clubs were specifically excluded from the UK Government’s 11 March announcement that they would make all retail, leisure and hospitality businesses exempt from paying business rates for 12 months. Retail betting shops will likewise be unable to benefit as they have been classified as financial, rather than leisure, services.

Despite the loss of revenue streams that is likely to result from the pandemic, those in the gambling industry should continue to act responsibly and may face criticism or even increased restrictions as the crisis evolves. This is particularly true for remote gambling services which are not dependent on live sporting events and which may see an uplift in users and frequency of use as the nation looks for new forms of entertainment that can be enjoyed from the comfort of their living rooms. On 22 March, a cross-party group of MPs examining gambling-related harms wrote an open letter to the Betting & Gaming Council (“BGC”) to urge the industry to protect customers’ wellbeing. They have suggested that the industry self-imposes a daily limit of £50 per customer and places a ban on opening multiple accounts to show that it is willing to act responsibly.

Looking Ahead

The industry will need to continue to adapt and innovate in response to the COVID-19 outbreak and ensure compliance with legislation and guidance at a time when they may face increased scrutiny. The BGC has written to the Chancellor of the Exchequer urging the Government to provide gambling retailers with business rates relief and take other measures to help ease the industry through the crisis. In positive news, industry titan Bet365 has guaranteed the jobs of its 4,389 employees until the end of August, but it remains to be seen if other companies will follow suit.

Hayley Brady
Hayley Brady
Consultant, Head of Digital and Media, London
+44 20 7466 2079

James Balfour
James Balfour
Associate, London
+44 20 7466 7582

Tamsin Rankine-Fourdraine
Tamsin Rankine-Fourdraine
Trainee Solicitor, London
+44 20 7466 7508

Budget 2020 – Investing in digital infrastructure, skills and R&D

On 12 March 2020, the Chancellor of the Exchequer, Rishi Sunak, presented the 2020 Budget – the first since the UK exited the European Union (available here).

The following announcements (some of which are new, but others build on previously announced measures) are likely to be of particular interest to the Technology, Media and Telecoms sectors:

  1. Improving digital connectivity: the government, in an effort to increase broadband and mobile coverage throughout the UK, is committing:
    • up to £510 million in funding as part of the Share Rural Network agreement, which the government expects to be matched by industry; and
    • £5 billion investment in gigabit broadband rollout for 20% of the country which are considered to be “hard-to-reach” areas.
  2. Investing in R&D: the government announced:
    • an increase in economy-wide investment in R&D to 2.4% of GDP by 2027, with an increase in public spending for science, innovation and technology to £22 billion per year by the year 2024-2025 – bringing direct support to R&D to 0.8% of GDP. The government intends part of this funding to be used to pursue “moonshot” scientific missions in order to solve issues such as climate change or the ageing population;
    • an increase in the R&D Expenditure Credit to 13%;
    • a consultation on whether the R&D tax credit should include investments in data and cloud computing to be held in the context of the Comprehensive Spending Review; and
    • £900 million investment to ensure UK businesses maintain their leadership position in high potential technologies. The government intends for a portion of this funding to contribute to the wider investment of up to £1 billion to develop the UK supply chains for the large scale production of electric vehicles (originally announced in September 2019).
  3. Creating a blue-skies funding agency: the government will invest at least £800 million in a new blues skies funding agency, modelled on the American Advanced Research Projects Agency–Energy, to focus on high-risk, high reward research.
  4. Closing the skills gap: as part of its plan to upgrade the nation’s infrastructure, the government wishes to increase the ability of colleges and institutes of technology to train the population for the industries of the future by announcing:
    • £120 million capital investment in eight new Institutes of Technology; and
    • £2.5 billion commitment to a new National Skills Fund to improve technical skills of adults across the country. The government will hold a public consultation on how to target this fund effectively to ensure it focuses on helping people gain skills for rewarding, well-paid jobs.
  5. Cutting the VAT rate for e-publications: in an effort to reduce the cost of living and widen access to e-publications, the government will cut the VAT rate for e-books, e-newspapers, e-magazines, and academic e-journals to nil from 1 December 2020. The government expects the benefit of this measure to be passed on to consumers.
  6. Increasing start-up funding: the government will allocate resources to the British Business Bank to invest an additional £200 million in UK venture capital and growth finance in 2020-21.
  7. Supporting the Fintech sector: in an effort to maintain the UK’s leading position in financial services innovation, the government plans to:
    • enhance coordination between regulators to ensure the regulatory regime is proportionate and effective, especially regarding the regulation of payments and cryptocurrencies;
    • conduct a review of the UK fintech sector, led by Ron Kalifa, in order to encourage growth and competitiveness in the sector; and
    • convene a summit on the data needed to increase access to funding and credit for SMEs.
  8. Piloting the Digital Trade Network in Asia Pacific region: the Department for International Trade and the Department for Digital, Culture, Media and Sport will pilot the Digital Trade Network in Asia Pacific in an effort to give innovative UK companies opportunities to access new markets in the region, while increasing support for exporters from regions outside London. In addition, the government has launched a consultation on the creation of 10 new Freeports.

The Budget 2020 also includes announcements relating to the Digital Services Tax previously announced (see our Tax Briefing) as well as measures to unlock competition in digital markets.

Hayley Brady
Hayley Brady
Consultant, Head of Digital and Media, London
+44 20 7466 2079

Ghislaine Nobileau
Ghislaine Nobileau
Trainee Solicitor, London
+44 20 7466 7503

Airbnb, TripAdvisor, Booking.com and Expedia strike data sharing deal with the EU

5 March 2020 saw the European Commission (EC) announce an unprecedented agreement with short-stay accommodation titans Airbnb, Booking.com, Expedia and TripAdvisor to share and publish data (on the number of nights booked and the number of guests staying) with the EC via Eurostat (the EU’s statistical office) (press release here). Eurostat will then aggregate the data by municipality and publish that data on a Member State and individual region level.

This collaborative venture represents an initial step by the EC in tackling the absence of regular and reliable data in this area, and recognises the need to balance: (a) the opportunities for micro-entrepreneurs using these growing platforms; and (b) adverse societal effect on local communities of landlords using their properties for short term lets, e.g. increasing property prices.

While this agreement has been universally welcomed, it is noted that there are other categories of information that could also be useful from a policy-making perspective, such as the number of listings, hosts, beds and types of accommodation.

A number of cities including Paris, Barcelona, Berlin and Amsterdam have previously sought to place restrictions on the use of short-stay accommodation platforms, but this has not always been successful. For example, on 19 December 2019, the Court of Justice of the European Union (the EU’s most senior court) ruled that Airbnb did not have to meet particular regulatory requirements as it was correctly classified as an intermediation service rather than an estate agent (a stark contrast to their ruling on Uber with respect to the transportation services space). This new data sharing agreement does not tackle the limited regulatory restrictions that can be placed on online platforms. However, the EC hopes that this data collaboration will allow for more informed and balance policymaking.

With a 2019 survey showing that 21% of EU citizens use a website or app to arrange accommodation, there have been numerous calls for a digital regulator to better police this space. It is thought that the much anticipated Digital Services Act will make some progress on this front, but the slow development of this legislation may struggle to match the evolving issues face by online platforms. That said, this remains an interesting example of big tech companies collaborating with supranational bodies on regulation, as well as regulators seeking to become better informed on the nature and effect of new technology platforms to ensure informed decision making in this space.

This information on short-stay accommodation is anticipated to be publicly available as soon as Q3 2020.

David Coulling
David Coulling
Partner, Digital TMT and Sourcing, London
+44 20 7466 2442
Miriam Everett
Miriam Everett
Partner, Head of Data Protection and Privacy, London
+44 20 7466 2378
Jonathan Stephenson
Jonathan Stephenson
Associate, London
+44 20 7466 2655

Artificial Intelligence in the Public Sector – a new regulatory field?

In our latest Public Law blog post, Andrew Lidbetter, Nusrat Zar, Jasveer Randhawa and Claire Hall discuss the Committee on Standards in Public Life’s recently published report on artificial intelligence and its impact on public standards. They comment on the Committee’s recommendations for the governance and regulation of AI in the public sector, aimed at ensuring high standards of conduct across all areas of public sector and private practice and the proposal for the Centre for Data Ethics and Innovation to act as the central regulatory assurance body.

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High Court grants proprietary injunction against Bitcoin exchange holding proceeds of ransomware attack

The High Court has held that cryptoassets (in this case Bitcoin) can be treated as property under English law. As such, the owner of a cryptoasset can, in appropriate circumstances, avail itself of the various proprietary remedies that a court is able to grant.
The practical significance here was that an insurer that had paid a Bitcoin ransom on behalf of its insured was entitled to take action to recover the sum from Bitfinex (the cryptocurrency exchange holding the funds), compel Bitfinex to provide information identifying the individuals who had received the Bitcoin and for the funds to be held on a constructive trust: AA v Persons Unknown who demanded Bitcoin on 10th and 11th October 2019 and others [2019] EWHC 3556 (Comm).
This is not the first case in which the English court has taken the view that cryptoassets are (or are likely to be) property under English law, a conclusion which also has wider significance for cryptoasset owners and investors more generally. However, the decision is noteworthy for the considerable weight the court appeared to give the recent UK Jurisdictional Task Force (“UKJT”) Legal Statement on Cryptoassets and Smart Contracts (on which we previously commented here).

Please click here to read the full article.

Andrew Moir
Andrew Moir
Partner London
+44 20 7466 2773
Rachel Lidgate
Rachel Lidgate
Partner London
+44 20 7466 2418
Charlie Morgan
Charlie Morgan
Senior Associate and Digital Law Lead UK
+44 20 7466 2733
Martin Hevey
Martin Hevey
Senior Associate
+44 20 7466 2631

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UKJT Legal Statement on Cryptoassets and Smart Contracts aims to give market confidence that England & Wales is a crypto-friendly jurisdiction

The UK Jurisdictional Taskforce (UKJT) published a Legal Statement on 18 November 2019 concluding that there is no bar under English law for cryptoassets to have the legal status of property and for smart contracts to be legally binding.

The UKJT is one of 6 taskforces under the Law Tech Delivery Panel (LTDP), a government–backed initiative established to support digital transformation in the legal sector. The Legal Statement, authored by Lawrence Akka QC, David Quest QC, Matthew Lavy and Sam Goodman, follows a consultation process launched in May 2019, with HSF providing input on the draft statement in advance of publication.

Sir Geoffrey Vos, who chairs the UKJT, acknowledged in his introduction to the Legal Statement that the topics covered in the statement will be (and will need to be) the subject of judicial decision in due course.  The Legal Statement is not binding on any court in England or Wales but it is intended to give greater market confidence that English courts will take a pragmatic and commercial approach when these issues come before them (at least until legislation addresses these issues expressly).

Cryptoassets as property

            Why does it matter whether or not a cryptoasset is characterised as property?

The evaluation of whether a cryptoasset has the requisite characteristics of property is of critical significance for a party’s rights and obligations in relation to the asset. The status of cryptoassets as property (or not) impacts upon the legal validity and enforceability (at law) of a transfer, the vesting of a cryptoasset upon a death of its ‘owner’, in instances of bankruptcy or corporate insolvency, what happens to the asset in the event of fraud, theft or breach of trust, the ability to grant security over a cryptoasset and many other similar questions. This is therefore a crucial question in giving investors legal certainty and the ability to predict how and through what means cryptoassets may represent a sustainable store of value.  The legal position of course needs then to be superimposed on the technical characteristics of the cryptoasset in question.  For example, even if it is legally possible to grant security over a cryptoasset, is it technically practical to do so?

            What does the Legal Statement conclude?

The Legal Statement is premised on the fact that a cryptoasset must be defined by reference to the rules of the system in which it exists. The authors do not seek to identify a ‘one-size-fits-all’ approach by which cryptoassets can universally be defined as property. Instead, they consider the necessary criteria for an asset to be defined as property, and they analyse how each of those criterion could apply to a cryptoasset.

The authors reference National Provincial Bank v Ainsworth H/L [1965] A.C. 1175  where it was said by Lord Wilberforce that before rights or interests can be admitted in property, those rights or interests must be definable, identifiable by third parties, capable in its nature of assumption by third parties and have some degree of permanence or stability. The Legal Statement also quotes the elements of certainty, exclusivity, control and assignability identified in more recent case law as essential to property rights (Fairstar Heavy Transport NV v Adkins [2013] EWCA Civ 886). The authors find there to be no bar, in principle at least, to a cryptoasset meeting each of those characteristics.

A potentially complicated area in defining cryptoassets as property under English law lies in the nineteenth century case Colonnial Bank v Whinney [1885]. In that case, Fry LJ said ”all personal things are either in possession or in action. The law knows no tertium quid (third thing) between the two.

The Legal Statement takes the view that a cryptoasset is more than merely information (which is not generally treated as property under English law), but that it is neither a thing in possession nor thing in action. Nonetheless, the authors advocate for cryptoassets to be treated as property as a novel kind of intangible asset. The Legal Statement highlights that Fry LJ could not have envisaged modern digital developments when he made his comments and that the English courts (and legislation in England & Wales) have in more recent times been prepared to treat novel kinds of intangible assets as property. Further guidance will be needed from the courts (or legislature) on this point in future to cement the greater certainty that the Legal Statement aims to provide.

The Legal Status of Smart Contracts

The overall conclusion in the Legal Statement is that smart contracts will, in the main, be treated by English courts no differently from ordinary contracts and therefore be subject to the usual rules of contract law. The authors conclude that the particular features of smart contracts, which they describe as automaticity, cryptographic authentication and lack of general comprehensibility to those uninitiated in the relevant coding language will not change the relevance and applicability of traditional legal principles.

            What is a smart contract?

The Legal Statement does not seek to give an authoritative definition of a smart contract. Instead, the authors focus on what is legally novel or distinctive in a smart contract compared to a traditional (natural language) contract. The Legal Statement identifies the key difference to be “automaticity” (the performance of the contract, at least in part, automatically and without the need for human intervention).

            Is a smart contract legally binding?

The Legal Statement suggest that the ‘automaticity’ of smart contracts and the mechanistic way in which computer code operates do not make smart contracts incapable of being treated under the law in the same way as conventional contracts.

            Interpretation of smart contracts

A judge is required to examine the intentions of the parties to a contract by reference to what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be. The modern approach under English law is to focus on the language of the parties to understand that intention. Unless the language is unclear or ambiguous, a court generally takes the straightforward approach that the language means what it says. Courts will only depart from this approach if the language is ambiguous, unclear or contradictory.

According to the Legal Statement, code is not normally susceptible to contractual interpretation because, the authors say, it is generally clear and unambiguous (this is because software will generally only ever run in a particular way – the way in which it has been coded to run).

The authors contend that this general clarity and lack of ambiguity does not justify smart contracts being declared a special category of contract where the normal rules of interpretation do not apply. They claim that a smart contract which consists purely of code with no natural language element should simply be regarded as an example of a crystal clear contract where there is no need or justification in parting from it or ascribing any additional meaning to it.

In cases where a smart contract is unclear, however, with the result that it does not run or does not have a clearly ascertainable ”meaning”, the authors suggest that ambiguities might be resolved by reference to other parts of the code that make the intended behaviour clear. Alternatively, they contend that there could be cases where examination of the code alone will not clarify the intention of the parties and that a judge will need to look beyond the code. The outcome of the judge’s examination in such instances will hinge on whether the code was intended to define the obligations or merely to implement them. When code defines the obligations, it will be necessary to investigate exactly what the code does (or should do). This may require the use of expert evidence.

Comment

Greater clarity on the status of cryptoassets under English law was badly needed. The Legal Statement provides helpful guidance for parties investing in cryptoassets and should enable better assessment of the legal and practical risks associated with these investments. That being said, there are a number of complex legal questions which have not been addressed in the Legal Statement or which will ultimately need a response from the English courts or legislature.

As to the status and interpretation of smart contracts, the Legal Statement’s over-arching conclusion that smart contracts are capable of giving rise to binding legal obligations is certainly welcome. A number of issues, however, are likely to complicate the practical application of that approach and will need to be considered in further detail on a case-by-case basis.

For example, it is perhaps overly simplistic to suggest that code is unambiguous in the circumstances where the program in question runs.  There are circumstances – for example so-called “race conditions” – where identical code can have a different effect depending upon the timing or sequence of external events. This issue is particularly acute for smart contracts, because those contracts will very commonly depend upon external events to define their execution.

Even when the code runs as it should, parties are likely to debate whether or not the way in which the code ran reflected their intentions accurately. The courts must also be able to interrogate the operation of the relevant program at a granular level, for example to assess whether the output and operation of the smart contract is out of all proportion to the legitimate interest of the relevant party (in the context of an alleged penalty, for instance).

Concepts such as the ‘objective meaning of words’ will require revisiting in some cases, in the context of smart contracts comprising only code, because coding languages by definition do not have the ambiguity associated with natural language.

The Legal Statement suggests that judges may be more willing to look at evidence extrinsic to the contract itself to construe code, for example, in instances where the code was merely intended to implement the contractual obligations rather than define them, or where the contract consists of both code and natural language. However, again, that might suggest a departure from the usual application of the parol evidence rule in the context of a natural language contract.

Until binding decisions are made on these issues by the courts, parties would be well advised to ensure that their smart contracts (the coded provisions) are contained within a traditionally recognised natural language contract which can be interpreted in accordance with well-established principles.  By integrating code and natural language into a smart legal contract, parties can harness the benefits of ‘automaticity’, while managing the legal risks associated with the code not performing in the way that one or both parties expected.

Given all of these complexities associated with cryptoassets and smart contracts, and bearing in mind the relatively slow adoption of less complex technical developments such as electronic signatures (which are explicitly said to be legally unforceable throughout Europe in the eIDAS Regulation), it remains to be seen how quick the adoption will be.  The Legal Statement is certainly a helpful step along the way.

Andrew Moir
Andrew Moir
Partner, Disputes, London
+44 20 7466 2773

Dorothy Livingston
Dorothy Livingston
Consultant, Competition, Regulation & Trade, London
+442074662061

Charlie Morgan
Charlie Morgan
Senior Associate, Digital Law Lead – London
+44 20 7466 2733

Anna McGowan
Anna McGowan
Professional Support Lawyer, Digital Technology, Media, Telecommunications, Sourcing & Data, London
+44 20 7466 2228