“No Deal Brexit: What U.S. Lawyers Need to Know”
Business Law Alert 11/27/18 Edward J. Hannon and Nicole A. Bashor
On June 23, 2016, voters in the United Kingdom (UK) were asked to determine whether the UK should leave the European Union (EU). The result of the referendum was in favor of leaving. Under what has become known as Brexit, which comes from a merging of the two words Britain and exit, the UK triggered Article 50 of the Lisbon Treaty in March 2017, which set a firm timetable for the UK to leave the EU on March 29, 2019.
For lawyers in the United States, the implications that Brexit may have for clients should not be ignored. For U.S. companies that have a subsidiary in the UK, the implications of Brexit can be somewhat obvious, including, for example, how Brexit will affect the subsidiary’s ability to transfer goods and services in other European countries, how Brexit will impact the cost of goods and services for that subsidiary, and how Brexit will affect the subsidiary’s work force. However, even if a client does not have a subsidiary in the UK, the implications of Brexit will likely touch the client in one way or another.
For example, if a client is part of a supply chain that includes a participant in the UK, the exit of the UK from the EU could increase the time it takes to move products through the supply chain. In addition, if a client collects data from users in the UK, data privacy rules imposed on these activities could be different from those that apply to the rest of Europe. Also, if the client has intellectual property that is used in the UK, the rules that apply to protecting that property could be affected.
What Is the European Union?
The EU is an economic partnership that currently includes the following 28 countries: Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the UK. Almost all of the EU member countries are part of a border-free zone, which allows for the free movement of people to work and live. Thus, for most of the EU, an employer located within one country does not have to consider immigration restrictions if its employees or other service providers are located in another country within the EU.
For goods and services, the EU can be viewed as a single market that allows goods to move freely as if the member states were a single country. In general terms, for the transfer of goods and services within the EU, there is a single set of laws that govern.
What is Article 50?
Prior to 2009, there was no formal arrangement to address how a country could exit the EU. In 2009, the member countries of the EU entered into what is known as the Lisbon Treaty, which, in Article 50, spells out the mechanics that must be followed if a member country wishes to exit the EU. In general terms, Article 50 provides that any member country that desires to leave the EU must notify the European Council and negotiate its withdrawal. Article 50 provides for a two-year period for the exiting country and the EU to reach an agreement on the terms of the exit. Article 50 also provides that this two-year period cannot be extended unless each member country agrees to the extension.
As noted above, the UK provided formal notification to the European Council in March 2017. As a result, unless the two-year negotiation period is extended by agreement of the remaining 27 countries, March 29, 2019, would be the deadline to conclude the negotiations on the terms of the exit by the UK from the EU. While the UK and the EU can continue to discuss the terms of trade between the UK and the remaining members of the EU after the two-year period, once the two-year period expires, the UK would have no further rights as an EU member and, for purposes of the movement of goods and people between the UK and the EU, the UK would be treated as a “third country,” as defined in EU treaties.
Where do Brexit Negotiations Stand?
As of October 2018, no final deal had been reached on the terms of the UK’s exit from the EU. Even if the UK and the EU cannot reach a deal, the UK will no longer be part of the EU as of March 29, 2019. As of October 2018, the parties appear to have reached a tentative agreement on the following issues: (i) how much money the UK will pay to the EU upon its exit, and (ii) what happens to citizens of the UK who currently live in an EU country and what happens to the citizens of an EU country who live in the UK. Because the UK includes Northern Ireland, negotiations appear to have stalled on the mechanics of maintaining the non-existence of a physical border between the Republic of Ireland and Northern Ireland.
It also appears that there is a tentative agreement on allowing for a 21-month transition period that would run from March 29, 2019, to December 31, 2020, to implement procedures related to the post-Brexit relationship between the UK and the EU. The EU has reported that during this transition period, if enacted, the free movement of people that currently applies to EU member countries will continue to apply to the UK and the EU. Notwithstanding the concept of this transition period, it would come into play only if the UK and the EU agree to a Brexit deal (which would need to occur prior to March 29, 2019, unless there is unanimous consent among all of the EU countries to extend this date).
What Could Happen Under a No-Deal Brexit?
Among the issues that are implicated by a no-deal Brexit is what standards will apply from a food and products safety and regulatory point of view. Under the rules of the EU, there is a single market set of common regulations, which set forth, among other things, quality and safety standards for food and products. If a no-deal Brexit occurs, it appears that there may be some degree of chaos on how products produced in the UK will be certified as being compliant with EU regulations.
Another area of concern arises from the transfer of goods between the UK and the EU. Under the single market approach of member countries of the EU, goods can be shipped without customs or inspections between member countries. If there is a no-deal Brexit and the UK is treated as a third country, it is possible that each ship moving products from the UK into the EU would be subject to a security and customs inspection and goods produced in the UK that are deemed non-compliant with EU standards would be barred from entry and would need to be shipped back to the UK.
From a legal perspective, one of the more relevant issues that would arise from a no-deal Brexit is how the laws of the EU will be applied in the UK. The highest legal authority in the EU is the Court of Justice of the European Union. Specifically, the Court of Justice of the European Union interprets and enforces the rules of the single market. For example, in the case of disputes between member countries, the matter would come before the Court of Justice of the European Union. In a post- Brexit world, the UK would have its own court system that would be separate from the Court of Justice of the European Union. As a result, in the case of a no-deal Brexit, it is unclear whether the regulatory rules established by the EU could be subject to different interpretations in the UK than in the EU.
In light of these potential issues, even if a U.S. business does not have a physical presence in the UK, agreements entered into by the U.S. business could still be affected by a no-deal Brexit.
Specific Areas of Note
Any company that has a presence, or includes a business partner, in the UK should consider the implications of Brexit on its supply chain. More specifically, there are potential tax and import/export/customs issues that will arise. A tax professional should be consulted to discuss the nuances, but one such scenario that is predicted is the repercussions of the value added tax becoming a cost once the UK leaves the EU. Further, in the absence of a trade deal between the UK and the EU, World Trade Organization tariff rates will apply on goods shipped to and from the UK. From the standpoint of shipping and logistics, companies may want to undertake an audit of their business partners in their supply chains and shift their preferred business partners to be located in the jurisdiction of their customers, or in a jurisdiction that would not be subjected to the stringent customs procedures predicted to be implemented in Brexit. Of particular note are companies that sell products with a short shelf life. These companies should pay careful attention to any discussion regarding the change in customs procedure and should anticipate additional cost and delay as their goods move from the UK.
A further area of concern for all businesses in a post-Brexit world is the ramifications for both existing and future intellectual property rights. The upside for companies is that most intellectual property filings in the future will continue to be streamlined through the use of various international treaties. For example, trademark filings in the UK and Europe will still be able to be accomplished post-Brexit via a single procedure utilizing the Madrid Protocol, an international treaty that allows the owner of a trademark to file a single international trademark application and apply for trademark registration in any of the participating countries. Similarly, the Hague Agreement provides for a registration procedure that leverages a single application that is used to protect industrial designs. Importantly, the UK joined the Hague system in June of 2018, which allowed applicants to use the process to protect their industrial designs in the UK. Finally, an applicant will still be able to utilize the Patent Cooperation Treaty to file a single patent application that can then be nationalized into the jurisdictions that have signed on to the treaty.
Although new intellectual property filings are mostly unchanged, there are some obstacles with existing intellectual property rights that should be reviewed. The most important change post-Brexit is that Registered Community Designs (RCDs) and European Unitary Trademark Registrations (EUTMs) will no longer provide protection in the UK (although they will provide protection in the other member states). Additionally, there is a transition period being contemplated that would allow the RCDs and EUTMs to remain in effect until the end of 2020. The details have yet to be finalized, but the UK government has stated that it is a priority to help intellectual property rights holders maintain their rights in the UK post- Brexit. One suggestion is the conversion and automatic grant of UK-registered designs and trademarks that spawn from the corresponding RCDs and EUTMs .
Finally, there are a number of nuanced issues related to trademark registration, use, and maintenance that will be impacted. For example, the UK has a bona fide intention to use requirement with respect to trademarks. It is not known whether a EUTM owner would need to show the mark is in use/ is intended to be used in the United Kingdom. Conversely, EUTMs that are currently only used in the UK may become vulnerable to cancellation for non-use in the remaining EU states. There are other trademark-specific issues that may be implicated by Brexit, including recognition of seniority claims, determination of the appropriate filing or priority dates in the newly created UK-registered designs and trademarks, and implications of non-use of the trademark in either of the UK or EU.
Contracts and Licenses
Brexit will also have a significant impact on contracts and licenses that include parties in the UK or EU. Almost every contract includes a choice of law and/or dispute resolution provision that could be implicated post-Brexit. For example, existing contracts may include reference to the UK courts as the arbiter of any disputes due to the perceived sophistication of the UK courts with respect to commercial matters. Companies outside of the UK may be inclined to revise agreements to remove or renegotiate provisions that tie dispute resolution or choice of law to the UK.
Further, settlement, licensing, consent, co-existent agreements, and the like all typically include specific geographic limitations or restrictions. Existing agreements may be impacted if the geographical territory included in the agreement is the EU. It is unclear how such provisions will be interpreted in a dispute in the future, but a business would be well-served by undertaking an audit of existing agreements to understand the potential risk. Further, new agreements should be clearly drafted to define geographical scope, choice of law, and dispute resolution provisions with Brexit in mind.
The EU entered a new era in May 2018 in the protection of personal data with the introduction of the General Data Protection Regulation (GDPR). The GDPR impacts all businesses that trade in the EU or hold personal data of EU citizens and imposes stringent requirements related to consent and collection and storage of personal data. The UK has adopted the GDPR so the provisions will apply to anyone doing business with the UK or collecting data of UK citizens post-Brexit.
Implications of a No-Deal Brexit and Human Capital
As noted above, most of the EU is included in a free travel zone that allows for the border-free movement of people. In a no- deal Brexit, this freedom of travel with respect to the UK could cease. However, there is a provision in a treaty between the UK and the Republic of Ireland that would preserve some degree of a free-travel zone.
Currently, citizens of the UK and citizens of the Republic of Ireland are allowed passport-free travel between their countries. In that this free-travel zone is unrelated to Brexit, free travel between the UK and the Republic of Ireland in a post-Brexit world would allow employees to travel between a company located in the UK and a related company located in Ireland without restriction. In that the Republic of Ireland would remain in the EU, the free-travel zone between the UK and the Republic of Ireland would allow for the creation of a dual-headquarters structure that would allow a company to remain in the UK but set up a subsidiary in Ireland, which would be able to avail itself of all of the benefits afforded to EU member countries.
Brexit, with or without a deal with the EU, will have an enduring impact on any business with operations or business partners in the UK. The most valuable assets of a business, including its products, people, and intellectual property, will all be subject to additional requirements and face new business and legal challenges in a post-Brexit world. A company would be well served to plan for Brexit now and seek advice from with relevant professionals in the consulting, tax, and legal arenas.