Advantages of the simplified joint-stock company

simplified-joint-stock-company-corporate-milton-carrera-lawyers-ecuador

The main advantage of the Simplified Joint-Stock Company is its flexibility to adapt to the particularities of each business. Its formation process is very agile and its shareholders have ample freedom to establish the rules of its operation in the bylaws. Therefore, entrepreneurs can count on a legal figure that allows them to develop formal businesses that are entirely adapted to the will of the partners and the peculiarities of the businesses.

Small and medium-sized companies will be the most benefited by this new type of corporate association. Its main advantages are the following:

  1. Incorporation of the company: The creation of this company does not require a public deed, it is constituted by a private document, with the exception of those cases in which real estate property is contributed.
  2. It can be a single-member company: The company can be incorporated and exist with a single shareholder, natural or legal person.
  3. Flexible capital structure: There is no minimum capital and there is no percentage that must be paid at the time the company is incorporated. However, the term for the payment of the capital will not exceed 24 months.
  4. Multiple corporate purpose: The corporate purpose can be broad, that is, it can include many activities without being related to each other. If the corporate purpose is not specified in the act of constitution, it is understood that the company may carry out any lawful activity.
  5. Indefinite term: It is not mandatory to establish a term for the company. Failure to do so implies that it is indefinite.
  6. Principle of existence of the company: The existence of the company occurs with the registration of the contract or unilateral act of creation before the Registry of Companies of the Superintendence of Companies, Securities and Insurance. It is not required the registration before the Mercantile Registry, which simplifies the procedure and reduces costs.
  7. Free negotiation of the shares: The shares are freely negotiable unless the bylaws states the prohibition to do so. This prohibition may not last for more than 10 years.
  8. Change of control in the shareholder company: The bylaws can establish the obligation of shareholder companies to inform the Simplified Joint-Stock Company about any operation involving a change of control. In the event of a change of control, the general meeting of shareholders of the Simplified Joint-Stock Company may exclude shareholder companies in which such event has occurred.
  9. Shareholder agreements with binding force: Shareholder agreements on the transfer of shares, preference and restrictions to transfer them or to increase share capital, exercise of the right to vote, share´s representative at the meeting and any other lawful matter are mandatory for this type of company. To comply with this, such agreements must be kept in the offices where the administration of the company works. Otherwise, without affecting the force and effect between the parties, such agreements do not bind the Simplified Joint-Stock Company.
  10. Auditis optional: The existence of an audit body is not mandatory, but the bylaws may foresee its creation.

Milton Carrera
Senior Associate en CorralRosales
mcarrera@corralrosales.com

Procedure for the Exchange of soon-to-be-expired Medicines

medicines-procedure-for-the-exchange-mario-fernandez-lawyers-ecuador

Article 175 of the 2006 Health Law required medicines suppliers  to exchange products that are about to expire in accordance with “… with what the corresponding regulation establishes.”[1]

Almost 13 years after the aforementioned law entered into force, Ministerial Agreement No. 00015-2019 published in Official Registry No. 30 on September 2, 2019 issued the “Soon-to-be-expired General Medicine Exchange Regulations” (hereinafter, the “Regulations”), which are mandatory for all health establishments and warehouses of the institutions of the National Health System.

Due to the time it took to issue the regulation, doubts have arisen about theirs application. This article summarizes and clarifies the implemented procedure.

The procedure[2] for the exchange  of medicines in general, biological medicines and medicine kits containing medical devices (hereinafter and collectively, “medicines”), which are about to expire, has the following stages:

  1. Periodically, the person in charge of the information system of the pharmacy, medicine cabinet and / or warehouse of the institution of the National Health System will send the head of the requesting unit the stock of those medicines that are about to expire and subject to exchange.
  2. The technical manager of the pharmacy or warehouse and the staff in charge of the medicine cabinet of the institution will carry out the physical verification along with the warehouse keeper who will draw up the list of medicines subject to exchange.
  3. The head of the institution´s requesting unit will prepare the technical report of the medicines to be exchanged, taking into account the information sent by the technical manager of the pharmacy or warehouse or the staff in charge of the medicine cabinet and will request the supplier the respective exchange.
  4. The supplier will notify the head of the requesting unit of the date, information and quantity of the medicines to be exchanged.
  5. The head of the requesting unit will notify the technical manager and the warehouse keeper of the exchange to be executed.
  6. Once the technical manager and the warehouse keeper have been notified, the medicines that are about to expire shall be placed in the warehouse withdrawal area for the respective exchange.
  7. The person in charge of the warehouse will deliver the medicines that are about to expire to the supplier. Then, a reception delivery document[3] will be drawn up and signed between the person in charge of the warehouse, the head of the requesting unit and the supplier.
  8. The supplier will deliver the “new” medicines to the warehouse manager for the corresponding technical and administrative reception, in which the quantity and technical specifications of the medicines will be verified in accordance with the internal procedures that each institution of the National Health System has for this purpose.
  9. A record will be drawn up and signed[4] for the receipt of the “new” medicines between the person in charge of the warehouse and the supplier. Said act must be verified and signed by the head of the requesting unit.
  10. The institution must prepare the complete file on the exchange. The responsibility for filing said files shall be laid down in the instructions drawn up by each institution.

Regarding the procedure, the following requirements must be taken into account:

  • Supplier must withdraw the medicines subject to exchange up to one month before the expiration date.
  • Medicines that are about to expire must be exchanged for medicines with the same technical specifications and a shelf life of at least twelve months.
  • Withdrawal of medicines that are about to expire and the delivery of the “new” medicines may be carried out at different times, subject to an agreement between the parties, provided that the provisions of the Regulations are complied with.

Here are some details regarding doubts that may arise in the application of the Regulation:

  • Exchange of medicines that are about to expire is regulated regardless of the date on which they were purchased. Therefore, it also applies to the exchange of medicines that were purchased before the Regulation entered into force.
  • A maximum of one exchange for each acquisition will be accepted[5]. In addition, for exchanges involving the health establishments of the Comprehensive Public Health Network – RPIS, it must be taken into account that:
    • The percentage of exchange cannot be greater than fifteen percent (15%) of the total volume of the medicine purchased in each acquisition process.
    • In purchases through corporate reverse auction or other joint mechanisms, the indicated percentage will not be applied, but the provisions of the specifications prepared by the Commission of Public Purchases. In no case may they contemplate a percentage higher than ten percent (10%).

Although the Regulation does not expressly[6] indicate it, it is considered that these percentages would apply only to the replacement of the medicines and not to their withdrawal, in accordance with the provisions of article 175[7] of the Health Law. Therefore, the supplier would have the obligation to withdraw all the medicines that are about to expire, but their replacement will be limited to the percentages established in the Regulation.

  • In the case of vital[8] medicines or medicines that are difficult to access for rare or orphan
  • [9] diseases, which are about to expire, the Regulation establishes that the supplier must carry out the number of exchanges that are necessary, without considering the percentage of medicine to be replaced in each exchange.
  • If the supplier justifies that it cannot make the exchange with the same products, the Regulation allows it to be carried out with other medicines with an equivalent economic value. If this is not possible, the supplier, in agreement with the buyer, must reimburse the institution the respective value.

In conclusion, while the Regulation for the exchange of medicines is welcome, it is necessary for the authority to clarify rules that may lead to confusion, without waiting for conflicts to arise from  different ways of interpreting and applying the Regulation by the acquiring institutions.

Mario Fernández
Associate at CorralRosales
mfernandez@corralrosales.com


[1] Art. 175.- Sixty days before the expiration date of the medicines, the pharmacies and medicine cabinets will notify their suppliers who have the obligation to withdraw said products and exchange them in accordance with the provisions of the corresponding regulations. (highlighted out of text).
[2] Ministerial Agreement No. 00015-2019, Official Registry 30, September 2, 2019, Art. 9.
[3] In accordance with number 6 of article 9 of the Regulation, based on this act, the institution will generate the release of the medicines in the inventory control information system that it has.
[4] In accordance with number 8 of article 9 of the Regulation, based on this act, the institution will generate the entry of the “new” medicines in the inventory management system that it has.
[5] Art. 1 of the Regulation defines the acquisition of medicines as “… the process by which medicines are purchased in general, biological medicines or medicine kits that include sufficient medical devices to meet the expected demand, according to the corresponding contracting mechanism and based on the approved schedule. ”
[6] Ministerial Agreement No. 00015-2019, Official Registry 30, September 2, 2019, Art. 12.
[7] Art. 175.- Sixty days before the expiration date of the medicines, the pharmacies and medicine cabinets will notify their suppliers, who have the obligation to withdraw said products and exchange them in accordance with the provisions of the corresponding regulations. ” (Highlighted out of text).
[8] The Regulation defines vital drugs as those indispensable or irreplaceable drugs to safeguard the life or alleviate the suffering of a user / patient or a group of users / patients. Each health establishment will define its list of vital drugs, through the Pharmacotherapy Committee or whoever takes its place
[9] The Health Law defines rare or orphan diseases as those potentially fatal, or long-term debilitating, low prevalence and highly complex diseases.

 

Compliance as a business culture

compliance-business-culture-maria-isabel-torres

Strict compliance with legal and ethical standards is a requirement for all companies today. To that end, each company must develop a culture of prevention through a regulatory compliance program, known as “compliance”. Compliance applies to all actions, relationships and procedures of the company and, therefore, all actions of managers and employees must be subject to this culture.

Keep in mind that not complying with legal obligations, not only could bring economic sanctions to those who act in this way, but could even cause criminal charges not only for the people who committed such acts but also for the companies themselves that are active subjects of the crime as stated in the Comprehensive Organic Penal Code that came into force in 2015.

The adoption of a compliance program is not simple, since it implies changing the culture of a company, not only by its partners, shareholders, managers and workers, but also by customers and suppliers.

Here are some of the key steps to adopt an effective compliance program:

  1. Start at the head of the institution: any change in the culture of a company starts at the top; therefore, the first step is for managers to have precise knowledge of what compliance entails, such as corporate culture and the willingness to adopt it. Therefore, it is up to them to transmit the adoption of the program to all levels, which implies the necessary commitment of everyone to strictly comply with it.
  2. Prevention and analysis: it is necessary to carry out a diagnosis regarding the approach that the program will have, this approach must be adapted to the individual characteristics of each company. For example, an organization that performs public procurement must implement a different compliance plan, compared to a company that mostly sells to the private sector. Once the areas of greatest risk have been identified, the necessary resources will be assigned to make the changes.
  3. Education: education is essential to achieve culture change. It is essential that all or at least the absolute majority of workers understand the scope of compliance. This ensures that any non-compliance that could harm the company is reported on time. Education programs must be continuous (at least every 6 months), personalized for each role, and must provide information on the legal framework for compliance.
  4. Communication: Internal regulations of companies contained in a code of conduct must be clear, affordable, and permanently communicated to their workers. It should include topics such as: corruption, blackmail, bribery, conflicts of interest, tax evasion, money laundering, among others. In addition, it must establish who is responsible for the compliance program and the mechanism through which employees can report or consult a case where a breach could happen.
  5. Relevance: the importance of the program must be determined, and the personnel and resources required for its implementation must be assigned to it. Otherwise it could become “dead letter” without any significance for the company that adopts it.

The additional costs that implementing a compliance program may eventually demand are fully justified if, with its deployment, the company achieves an unblemished reputation for strict compliance with the law and ethics in its business relationships with shareholders, customers and suppliers. This behavior will translate into better positioning in the market and the consequent increase in sales.

María Isabel Torres
Associate at CorralRosales
mtorres@corralrosales.com

The re-domiciliation of ecuadorian companies

re-domiciliation-of-ecuadorian-companies-corporate-milton-carrera

In today´s globalized economy, it is necessary for countries to provide a legal framework that allows companies to conduct their businesses in the jurisdiction that is most convenient to their interests. The re-domiciliation of a company, that is, the transfer of the registered office to a foreign country while maintaining its legal personality and therefore its assets, rights and obligations, allows it to fulfill this purpose.

In Ecuador, no legal rules have been developed that expressly regulate the process of re-domiciliation to a foreign country, so it is necessary to find alternatives that allow its implementation within the rules of the Companies Law.

The domicile of a company is not only a requirement for its constitution, but it grants it a national identity and therefore membership in a legal system. The re-domiciliation of companies is a figure currently recognized by many legislations, precisely in order to allow companies to develop their businesses with wide freedom and without affecting the rights of third parties. In order to facilitate re-domiciliation, it is necessary that the law of the country where the company intends to transfer its domicile accepts it, recognizing its pre-existence and assets acquired in the country of origin. By transferring the registered office to another country, the company adopts the nationality and legal system of the host country. Although the Companies Law does not contain specific rules that govern the re-domiciliation process, it does provide for the change of address without making a distinction whether it is carried out within or outside the country, from which it is concluded that both are allowed and are subject to similar formalities.

Once the re-domiciliation has taken place, the Superintendence of Companies, Securities and Insurance will be responsible for ordering the cancellation of its registration in the Commercial Registry without the company being liquidated, precisely because it maintains its legal personality, assets, rights and obligations, in the receiving country.

The cancellation is the registry operation that has the sole and exclusive purpose of leaving the original registration without effect and make it public.

In conclusion, we consider that under corporate law, the change of address of an Ecuadorian company to another country is valid and legal, assuming that the legislation of the receiving country allows it; therefore, the re-domiciled company will maintain its legal personality, assets, rights and obligations. However, in order to expedite this operation, the re-domiciliation process must be expressly regulated as soon as possible.

Milton Carrera
Senior Associate en CorralRosales
mcarrera@corralrosales.com

Negotiable commercial invoices in Ecuador

negotiable-commercial-invoices-commercial-ramon-paz-y-mino

The most frequent criticisms to the Commercial Code (C. Com.) might be over-regulation, lack of dissemination and discussion. Composed of 1348 articles, 3 general provisions, 1 transitional provision, 5 derogatory provisions and 1 final provision, the Commercial Code (C. Com.) entered into force on May 29, 2019. This was the awakening of a new set of norms that regulate a significant portion of the commercial activity in Ecuador. However, the legislator, irresponsibly, failed to grant a transition period prior to its entry into force, as done with other regulatory bodies. This, in one way or another, prevented traders and businessmen from having a reasonable period of time to inform themselves adequately about the new contract types and to anticipate the impact that it could generate in the development of their business.

Negotiable commercial invoices (FCN, for their acronym in Spanish) are not new. Article 201 of the 1960 Commercial Code, as subsequently amended, provided that: “Commercial invoices containing an unconditional payment order, acceptance of which is signed by the purchaser of goods or his delegate, with the express statement that these have been received satisfactorily, shall be called “negotiable commercial invoices” and shall have the nature and character of securities.”

But, in market practice, few traders issued FCNs, possibly out of ignorance, because they considered them to be too stringent (in terms of their issuance requirements) or impractical.

In recent years, some traders have used the issuance of FCNs as a mechanism to obtain liquidity, including for trading through the country’s stock exchanges. Reports from the Quito Stock Exchange show that FCNs have acquired importance in the local market. According to the information of said institution, in 2018, US$271,777,234 FCNs were traded, as of June 2019 this amounted to US$184,297,068 and in January 2020 US$115,066.25.

Currently, FCNs are (i) sales vouchers, (ii) negotiable and executive securities when they contain an unconditional payment order, acceptance of which is signed by the purchaser of goods, interests or services or his delegate, with the express statement that these have been received satisfactorily, or that have been tacitly accepted” (Art. 203 C. Com.)

FCNs can be issued in physical, electronic or dematerialized form. If in physical form, 3 copies must be produced, namely, the original for the buyer or purchaser, and two copies for the issuer. Only the first copy is negotiable; the others contain the phrase “NON-NEGOTIABLE”.

For electronic issuance, the issuer shall mandatorily “send or make the electronic voucher available to buyers or purchasers under the conditions, in the timing and by the means established by the country’s internal tax administration entity. Not sending these vouchers, their unavailability or inaccessibility are equivalent to withholding them.” (Art. 204 C. Com.)  The dematerialization of FCNs must be done in accordance with the provisions and regulations of the securities market. This implies a book entry in a system for the registration or booking of the securities. In other words, there is no cardboard representation of the document, as it will be supported by electronic accounting records.

Please note that physical and electronic invoices are traded by endorsement, while for dematerialized invoices the transfer is perfected with registration in the respective bookkeeping system and that, in addition to the requirements determined in the tax regulations, the FCNs must compulsorily contain the following:

  • Be identified as “NEGOTIABLE COMMERCIAL INVOICE”
  • The payment date and place. If payment by installments is established, the number of installments, the due date and the amount to be paid for each of them, as well as the unpaid balance, shall be indicated. The term of payment may not exceed 360 days from the issue of the invoice. (short term security)
  • The unconditional order to pay a certain amount of money
  • The clear specification, in figures and in writing, of the amount to be paid and the currency in which it will be done
  • The express statement by the buyer or purchaser to receive the goods, interests or services to his or her full satisfaction
  • The physical or electronic signature of the issuer of the invoice or of the respective delegates
  • The physical or electronic signature of the buyer or purchaser of the goods, interests or service or their respective delegates
  • The signature of the acceptor contained in the invoice or attached document, except in the case of tacit acceptance, which we will review later.
  • In the case of a physical commercial invoice, information on the endorsements with the identification requirements will be incorporated on the back of the document or attachment

With regard to the acceptance, the Commercial Code will facilitate claims, providing that the buyer-purchaser, his delegate or agent must expressly accept the contents in writing, either in the same document or in a physical or electronic attachment, which must include the date of receipt. In accordance with the provisions of the previous Code, the FCNs will be considered to have been tacitly accepted if, within 8 days of the date of receipt, no claim has been made regarding its contents.

What is important and new is that the Commercial Code recognizes 3 complaint procedures, which must be proven by whoever intends to benefit from this:

  1. The possibility of returning the invoice without acceptance, with the text “cancelled” or with the acceptance tested.
  2. Expressly claim its contents by letter, together with the return of the invoice without acceptance or with the acceptance tested or with the request for the issue of a credit note.
  3. In case of an electronic or dematerialized invoice, the claim will be made through the request for issuance of a credit note or cancellation of the invoice.

On the other hand, in the case of a legal collection action for non-payment events, a claim must be filed in executive proceedings provided that the following requirements are met:

  1. The invoice has not been returned or claimed by any of the mechanisms referred to above.
  2. Its payment is currently due, and the executive collection action has not prescribed.
  3. The obligation is clear, pure, determined and liquid.

In conclusion, the contribution of the Code of Commerce is valuable regarding the regulations that govern FCNs, as it benefits commercial practice and inserts dynamism into businesses. This has become an attractive business strategy to obtain greater liquidity and to have highly liquid securities.

 

Ramón Paz y Miño
Senior Associate at CorralRosales
rpazymino@corralrosales.com

Measures to mitigate the effects of COVID-19 on labor issues

measures-effects-covid-19-labor-issues-marta-villagomez

The arrival of COVID-19, cataloged as a global pandemic, and the measures that Governments have adopted to mitigate its effects, have brought a deep economic crisis that affects directly both employers and workers.

According to ILO’s (International Labor Organization) official data, it is estimated that COVID-19 could cause the loss of 25 million jobs worldwide.

In Ecuador, the President of the Republic declared a state of emergency and suspended on-site labor activities from March 17th to April 12th. This period may be extended according to the development of the pandemic.

Those entities that perform activities within health, safety, airports, financial, food, pharmacies and exporting sectors and its supply chain are authorized by the Government to operate.

Entities belonging to other sectors are able to operate if services they provide and the activities carried out by their workers can be performed from home through “emergency telework”, as the authority has called it.

Some emergency measures have been established with the purpose of protecting employment and guaranteeing the health of workers, but also with the objective of preserving the financial stability of the employer. These measures are described below:

1. Suspension of work maintaining payment rights

For those entities that are required to suspend all or part of their activities as a consequence of the Government’s measures, the following should be considered:

  • Employer must pay its workers during the period on which activities are suspended.
  • Employer and its workers may agree on a payment schedule of the salaries accrued during the period on which activities are suspended.
  • Employer has the right to recover the period on which activities were suspended, increasing the working schedule up to 12 hours a week and 8 hours on Saturdays.
  • If worker does not fulfill with recovery time, employer may deduct from any future salary payments what employee had received during the suspension period.

In order to introduce suspension of work, employer must fulfill the online process implemented by the Ministry of Labor.

2. Reduction of working hours (work schedule)

Employers may reduce the working hours temporarily or permanently and reduce proportionally worker´s remuneration – including teleworkers – under the following scenarios:

  • With worker’s consent

According to article 82 of the Labor Code, it is possible to agree with worker to permanently or temporarily reduce their working hours and their remuneration proportionally. For its implementation, it will be necessary to enter into an addendum to the employment agreement and file such addendum with the Ministry of Labor and the Ecuadorian Institute of Social Security (“IESS”).

  • Without worker’s consent

According to article 47.1. of the Labor Code and Accord MDT-2020-077 issued by the Ministry of Labor, the latter may authorize the reduction of working hours. Such reduction will be mandatory for workers, under the following conditions:

  1. Working hours may not be reduced to less than 30 hours per week.
  2. The measure can be applied for up to 6 months, renewable for an additional 6 months.
  3. Employer contribution to IESS must be paid based on the full remuneration corresponding to 8 hours of work per day.
  4. In the event that during the reduction of the working hours the labor relationship is terminated without cause, severance shall be calculated based on the last monthly remuneration received by worker before the working hours reduction.
  5. If the company generates profits in the fiscal year in which the measure was applied, it will not be entitled to distributing dividends without first paying workers the balance they stopped receiving as a result of the reduction in working hours.

In order to introduce suspension of work, employer must fulfill the online process implemented by the Ministry of Labor.

3. Emergency vacation planning

During the health emergency, employer may require its workers to take any pending paid vacation time. Employer may also agree with its workers for them to take advance vacation time.

4. Work leave with or without payment

Additionally, employers may resort to the following alternatives in order to maintain employment and at the same time preserve the financial status of the company: 

  • Leave without payment

With worker’s consent, a “leave without payment” may be agreed. In order to apply such leave, an agreement must be entered between the parties. Under this alternative, the employment relationship does not end, worker holds his/her seniority in the company.

An exit notice for “leave without payment” must be registered in IESS online system. Therefore,  worker will not be covered by Social Security during the leave period.

  •  Leave with partial payment

With worker’s consent, a “leave with partial payment” may be agreed. In order to apply such leave, an agreement must be entered between the parties. Under this alternative, employer recognizes the worker a percentage of his/her remuneration during the leave period.

Contribution to the IESS will be made on the amount actually paid to the worker, but it may not be less than 50% of the statutory minimum wage (currently US$400.00).

5. Modification of working conditions

Employer and workers may agree on work alternatives established in the existing regulations, due to conditions arising from the COVID-19 pandemic, such as mobility restrictions, preventing infection risks and employer’s financial situation. All these must not imply a waiver to workers’ rights. For example, parties could modify the type of agreement or take health and safety measures such as workers’ remaining in suitable places inside the employer’s facilities, among many others.

6. Termination of the employment relationship

If it is not possible for employer to maintain its workers or part of them, company will be able to unilaterally terminate the employment contracts by paying the corresponding severance determined by law. Government has not established the intangibility of employment contracts due to the pandemic, except for those specific cases already provided by law.

Some lawyers have expressed their opinion that labor contracts may be unilaterally terminated without severance payments under these circumstances due to force majeure (restrictions imposed by the government). We do not agree with these criteria, due to the social nature of labor law, pro operario principle, and consequently, the possible risks employer would assume now and in the future.

Finally, it shall also be considered that workers who lose their jobs due to causes beyond their control and who meet the conditions established by  IESS – 24 accumulated monthly contributions and at least 6 continuous contributions immediately prior to termination – will be able to access “unemployment insurance” for a maximum period of 5 months, once 60 days have elapsed without employment.

 

Marta Villagómez
Senior Associate at CorralRosales
mvillagomez@corralrosales.co

Ecuador: the current conundrum of registered trade names that are not in use

trade-names-not-use-intellectual-property-katherine-gonzalez

Rights in trade names are acquired through their use; therefore, the registration of these before the Ecuadorian IP Office, or SENADI according to its official name and acronym, is merely declarative. There is currently a tendency to deny trademark registration based on already registered trade names, even if their use has not been demonstrated. This practice forces the applicant to file administrative or judicial challenges to try to remedy the situation.

A trade name is any sign capable of identifying a person or business establishment in the exercise of its economic activity. Trade names are independent of the corporate name or commercial name. They can be the same or different. In any case they can coexist.

While trade names and trademarks both relate to a distinctive type of sign, trade names have some important differences compared to the latter. These differences and their treatment by the IP Office are those that eventually cause practical inconveniences that will be examined in this article. Among the most relevant differences are:

  • The rights to trade names are acquired through use; thus, the Andean and national regulations expressly state, “The exclusive right over a trade name will be acquired with its first use in commerce.” On the other hand, rights over trademarks are acquired only upon registration with the IP Office.
  • The registration of a trade name with the IP Office is only declarative, since the right arises only with the use, regardless of whether it is registered or not.
  • The rights to a trade name end once its use ceases or the activities of the person or company that uses it cease. In contrast, rights to a trademark will remain as long as renewed or not cancelled or invalidated.
  • Trademarks protect products or services, while a trade name identifies a commercial activity.

For the protection and defense of trade names, as with trademarks, there is the right of opposition against applications for signs that, among other grounds for refusal, are capable of creating confusion or association in consumers.

Article 416 of the Law of the Social Economy of Knowledge, Creativity and Innovation (hereinafter, Ingenuity Law) provides that: Declaratory registration of the Trade Name (…) In any case in which the exclusive right over a trade name is alleged or claimed, its public use must be proven, such use being continuous and in good faith, at least within six months prior to said claim or allegation. The proof of use will correspond to the owner of the trade name. For the purposes set forth in this subsection, if the holder is not a party to the respective procedure, he will be notified ex officio.” (emphasis added)

Therefore, if there is a trade name (registered or not) that is in use, its holder may file an opposition, in which case he will have to prove the use of the trade name, and the IP Office will decide on the granting or refusal of the applied-for mark.

The problem arises when a trademark similar to a registered trade name is applied for, and the owner of the trade name did not file opposition or, despite having done so, did not demonstrate the use of the trade name, which is essential to prove the existence of the right.

According to the Ecuadorian IP Office database there are about 30,000 registered trade names, which, depending on the validity of the registration, are potential obstacles to the registration of a mark even though many of them are not in use. The use of trade names is the prerequisite necessary for their validity and existence to comply with the Andean and national regulations.

As a consequence of the foregoing, the Ecuadorian IP Office currently tends to deny the registration of trademarks ex officio because they are similar to already registered trade names even without proving proper use of the latter.

The problem arises from the fact that the IP Office accepts applications for registration of trade names without requiring proof of use, as well as from the non-application of Article 416 of the “Ingenuity Law” regarding the obligation to require proof of use of trade names when they are invoked as the basis for the refusal of a trademark application. Conversely, the IP Office, despite not requesting proof of use in the two cases above mentioned, does so at the time of renewing the registration of the trade name.

To circumvent the problems derived from this practice, the Authority should apply the previously mentioned Article 416, notifying the holder of the trade name registration of its obligation to demonstrate its use; only when evidence of use is filed should the authority assess whether there is sufficient legal basis to prevent the registration of a third party’s mark.

In conclusion: only when certain as to the existence of the rights over the trade name should the Authority rule on an opposition or a refusal ex officio. Unfortunately, this does not happen in most cases, although the highest administrative authority has repeatedly expressed that a registered trade name whose use has not been proven should not prevent the registration of a trademark.

This would avoid numerous problems for users who are forced to incur unnecessary expenses and to further extend the time to obtain the registration of their mark by trying to remedy the situation through administrative and judicial challenges, which can take several years.

Some specialists in the area see a solution in the possibility of filing cancellation actions for lack of use against registered trade names. SENADI has not maintained a unanimous approach on this issue, since, although there are cases in which these actions have been accepted (Resolution of August 25, 2010 procedure No. 08-973-AC-RR. Trade name “Compacalza Leopard ”), the most common approach of the IP Office is to declare the inappropriateness of these actions due to the legal nature of trade name registrations and their declarative nature (for example, resolution No. 121-2013-CPI-1S issued in the process 07-050-AC-2S on March 5, 2013 of the trade name “Natusal”).

In order to eliminate the problems examined in this article, the IP Office could incorporate into the relevant trademarks regulations – the draft of which they are currently working on – a norm that reiterates the correct application of Article 416 of the “Ingenuity Law.”

Katherine González
Associate at CorralRosales
katherine@corralrosales.com

Case Highlight: Custodial sentences for the distribution of counterfeit pharmaceuticals

pfizer-case-highlights-pharma

Six people involved in the counterfeiting of pharmaceuticals have been handed prison sentences, representing the largest group of people sentenced for being part of a distribution network of counterfeit medicines, being found guilty of illicit association.

The Attorney General’s Office with the support of Customs and the Tax Crimes Unit, after a follow-up of several months that included telephone calls and personal follow-ups, carried out a simultaneous raid on several commercial premises and homes located in the cities of Quito and Ibarra. They seized hundreds of thousands of pharmaceutical products and arrested seven people involved in the operation.

Almost everyone involved in the illegal operation had family ties to each other or worked together for several years, using legal businesses as façades including several stores located in the center of the aforementioned cities. Those involved also distributed original pharmaceuticals, in inappropriate conditions, and even lacked authorization to store or distribute such products.

Through a private prosecution, CorralRosales formally participated in the proceeding on behalf of Pfizer, thereby joining the Attorney General’s Office as prosecutor. This allowed for a joint effort in which several investigations were carried out confirming that the seized products were counterfeit and the degree to which each person charged had participated in the illegal network.

Within the earlier hearing, the judge accepted the charges presented by the prosecution and by CorralRosales against all of those involved in the operation, following which the case went to oral trial before a criminal court consisting of three judges.

In the oral trial hearing that lasted several days, all the evidence collected in the investigative process was disclosed, proving the existence of the offence and the participation of each person accused.

In an oral sentence issued at the end of the hearing, the judges unanimously decided to sentence six of the seven defendants with three years in prison, highlighting the seriousness of the crime and its potential risks to the health and safety of the public.

Those sentenced requested conditional release, which would have meant no prison time being served. The prosecution did not present any opposition to this request, but CorralRosales objected on behalf of Pfizer. In particular, we emphasized the gravity of the crime and the ease with which the same offence could be committed again. The judges granted our request, thereby rejecting the petition of defense.

Those sentenced have appealed against the ruling. To date, the appeal has not been resolved.

The importance of this ruling lies not only in the number of people sentenced, but also for the way in which the proceeding was handled, in particular by turning it into an “illicit association” case in the face of the procedural inconveniences of investigating and prosecuting the matter under the sale of counterfeit pharmaceuticals.

This is the second sentence obtained in Ecuador for the counterfeiting of pharmaceuticals, and again a recognized international laboratory intervened. In addition, CorralRosales acted as a private prosecutor in both cases.

The sentence complies with the control and sanction responsibilities of the judicial authorities. Additionally, it seeks to be an exemplary sanction for potential offenders, and sets a precedent that should be used in similar cases.

 

CORRALROSALES

Commercial Companies of Benefit and Collective Interest

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The Superintendence of Companies, Securities and Insurance through resolution number SCVS-INC-DNCDN-2019-0021 published in the Official Registry number 107 of December 24, 2019 issued the instructions for the operation of the Commercial Companies of Benefit and Collective Interest. Below, we summarize its most relevant aspects:

  1. Any national company under control and supervision of the Superintendence of Companies, Securities and Insurance may voluntarily adopt the status of a Benefit and Collective Interest Company, without this implying a change in the type of partnership or the creation of a new partnership.
  2. To adopt the characterof a Benefit and Collective Interest Company , and thus develop its operational activities for the benefit of the interests of its partners or shareholders and is required to create a positive material impact, in the interest of the partnership and the environment at the same time. Companies must thus approve it through the general meeting of partners or shareholders with a majority representing at least two thirds of the subscribed or paid share capital, as applicable. The corporate bylaws must be amended, incorporating specific activities into the corporate purpose, through which these companies will fulfill the obligation to generate a positive social or environmental impact. Once the amendment of the bylaws is registered in the Mercantile Registry, the Benefit and Collective Interest Company will have the obligation to send said documentation to the Superintendence of Companies, Securities and Insurance for the corresponding update in the institutional database. Additionally, if the company considers it convenient, it may formalize the corporate action to change the company name and fulfill the other requirements established in the law, adding the expression “Company of Benefit and Collective Interest”, or the acronym B.I.C. to its denomination.
  3. In the companies in which the status of Benefit and Collective Interest Company is adopted, the dissenting or non-concurrent partners or shareholders of the general meeting that made said decision will have the right to separate from it, in the terms of article 333 of the Law of Companies (reimbursement of the value of its shares in accordance with the respective prepared balance sheet)
  4. The obligation to create a positive material impact on society and the environment may cover one or more of the following areas: a) governance, b) working capital, c) community, d) customers, and e) environment. Consequently, the administrators of a Benefit and Collective Interest Company must ensure compliance with the activities set forth in the statute, in one or more of these areas, in order to achieve the specific objectives incorporated in its social purpose.
  5. The area of ​​impact on governance is related to the corporate governance of companies. For such purposes, the administrators of a Benefit and Collective Interest Company may consider, among others, the following aspects:
    • The interests of the company and its partners or shareholders;The short, medium and long term consequences of decisions related to the operational activity of the company they represent;
    • The preservation and protection of the reputation and good name of the company;
    • The need to treat, in a fair and equitable manner, all partners or shareholders; and,
    • The expansion in the diversity of the administrative and supervisory composition of the company.
  6. The area of ​​impact on working capital will allow the administrators of the Benefit and Collective Interest Companies to consider the interests of their workers, considering among others the following aspects:
    • The establishment of reasonable compensation and analysis of wage gaps to establish fair standards in the collection of compensation;
    • The establishment of grants to train and professionally develop their working capital;
    • Promote the participation of workers in society, either through the acquisition of shares or shares, or by intervening in the company’s administrative bodies;
    • Determine flexibility alternatives for workers’ working hours, teleworking, or others, without affecting their remuneration;
    • Disseminate the company’s financial statements among its workers.
  7. The community impact area will allow administrators to consider, among others, the following aspects:
    • The need to foster social relations with the company’s creditors, suppliers and customers;
    • The impact of social operations on the community;
    • The effect of the operations of the company and its subsidiaries, if any, on the local, regional, national and even international economy;
    • The incentive of volunteer activities and the creation of alliances with foundations that support social work in the interest of the community as part of its social responsibility policy;
    • The main focus on contracting  services or acquiring goods of local origin or belonging to enterprises developed by women or ethnic minorities.
  8. The area of ​​impact on customers will allow administrators to address a social or environmental problem through, among other things, the following:
    • Provision of electricity or products that provide electricity, drinking water, affordable housing and other infrastructure;
    • Products or services that allow people to focus on income-generating activities such as computer, finance, mobile technology or services that optimize / increase business activities;
    • Products or services that improve the delivery of health services, health outcomes and healthy living, such as medicines and preventive health services;
    • Products and services that have an educational focus, such as schools, textbooks, media and independent arts, or preserve local culture, in the case of artisanal trade;
  9. The area of ​​impact on the environment will allow the administrators of a Benefit and Collective Interest Company, among other aspects, to consider the following:
    • Respect for the rights of nature enshrined in the Constitution of the Republic;
    • The impact of its operations on the environment;
    • The monitoring of gas emissions that cause a greenhouse effect;
    • The promotion of recycling or waste reuse programs;
    • The increase in the use of renewable energy sources and the implementation of energy efficiency measures.
  10. Annually, the legal representative of the Benefit and Collective Interest Company must prepare a management impact report choosing the most appropriate standards. It should give an account of the activities carried out to fulfill the obligation to create a positive material impact on society and the environment, the report must have a certification issued by an independent entity specialized in the fields that apply, and it will be presented to the general meeting for the purpose of acknowledgement and approval.
  11. The status of a Benefit and Collective Interest Company can be terminated by a modification of its bylaws, undoing the changes made to acquire said status. The corresponding resolution will be adopted by the general meeting of partners or shareholders with a majority representing at least two thirds of the subscribed or paid share capital, as applicable.
  12. If in the exercise of its control and surveillance authority, the Superintendence of Companies, Securities and Insurance verifies that the Company of Benefit and Collective Interest has not fulfilled its obligation to create a positive material impact on society and the environment in accordance with the provisions of its corporate purpose, or that its administrators have failed to comply with their obligation to prepare the management impact report, or who have breached the rules of this instruction, the Superintendence of Companies will proceed to notify the company of the violations in which it has incurred, so that within six months the company can rectify these breaches or modify its bylaws undoing the changes made to acquire the quality of a Benefit and Collective Interest Company.

If after this period, the company has not taken care of the notified breaches or modified its bylaws, it may be declared dissolved.

Milton Carrera
Senior Associate at CorralRosales
mcarrera@corralrosales.com

The Role of INEN in the Administrative Process for Regulatory Infringement

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The Ecuadorian Standardization Service (INEN) is part of the Ecuadorian Quality System and plays an important role in regulation, standardization and metrology. It also participates in administrative proceedings carried out by the Sub-Secretary of Quality for infringements.

INEN is responsible for conducting inspections to verify compliance with technical standards before and during an administrative proceeding. The first inspection, which can be ex officio or by complaint, is intended to determine the conformity or not of a product with the corresponding technical standards. If the result is “non-compliant”, the Sub-Secretary of Quality will bring a sanctioning administrative proceeding.

As an example, in the controls carried out in compliance with the Ecuadorian Technical Regulation RTE INEN 284 “Quantity of product in prepackaged / pre-encased”, a term of 30 days is granted for the company to amend or justify the nonconformities detected in the first inspection. At the end of the 30-day term, INEN carries out the second technical inspection and if the non-conformity still exists, the Sub-Secretary of Quality can apply the sanctions provided in the Law of the Ecuadorian Quality System.

The 30-day term granted to execute corrective actions is sufficient in the case of national products, but it is not sufficient for foreign products. This situation has caused several companies to be sanctioned without considering the time, costs, and other eventualities that importing products entails.

When applying sanctions, the Sub-Secretary of Quality takes into account the reoccurrence of such nonconformities, so it is very important that companies make the necessary changes and file the required technical justifications, as well as their legal arguments before the second verification.

As derived from the preceding paragraphs, the function of INEN is to ensure compliance with mandatory technical standards whose main objective is to protect consumers.

INEN is part of several international organizations and applies international standards or parameters in the controls it performs; an aspect that has contributed to the acquisition of new skills, the application of new guidelines, and the accumulation of experience in the execution of its work. This office has put emphasis on the above-mentioned quality controls, especially regarding the net content of a product. To do so, it has adopted a monthly schedule to perform random inspections and verifications for each type of product.

Miguel Maigualema
Asociado en CorralRosales
miguel@corralrosales.com