Intellectual Property regulatory corrections; border measures and penalization

Intellectual Property regulatory corrections; border measures and penalization - CorralRosales - Lawyers Ecuador

The National Assembly gave way to the partial objection issued by the Executive Branch, thus approving the “Law that Reforms Various Legal Bodies to Reinforce the Prevention and Combat of Illicit Commerce to Strengthen the National Industry and Promote Electronic Commerce.” In addition, the law foresees reforms in the matter of intellectual property.

In particular, this reform includes provisions regarding (i) intellectual property crimes, their punishment and handling, expanding the punishable acts, and (ii) the border measures process.

I. Intellectual Property Crimes

The Executive Branch veto sought to correct certain inconsistencies and drafting errors in the text approved by the Assembly. As a result, it details criminal conduct in a much better way, the conditions that must be taken into account to assess the existence of the crime and how these crimes are to be treated and judged.

The reform of the criminal law, if it refers to the COIP then it should be named. It establishes that, for these behaviors to be considered crimes, they must include several elements that would differentiate it from a “simple” infringement of intellectual property rights since its sanction is conditioned to the knowledge of the violation, a lucrative purpose, and the commercial scale.

These conditions include criminal offense and penalizing whoever manufactures, commercializes, or stores labels, stamps, or containers containing trademarks or denominations registered in the country.

It also sanctions whoever separates, starts, replaces, or uses labels, stamps, or containers that contain registered trademarks in the country to use them in products of different origin, fills containers identified with a foreign brand with spurious products, stores, manufactures, uses, offers for sale, sells, imports or exports products covered by an invention patent, utility model, industrial design, a plant variety (including its material for reproduction, propagation or multiplication) or a layout design.

It also includes possible infractions -which from our experience, will make up the vast majority of intellectual property criminal actions- against whoever stores, manufactures, uses, offers for sale, sells, imports or exports a product or service that uses an unregistered distinctive trademark identical or similar to one registered in the country; the competitive connection between the infringing products or services and those identified by the registered trademarks must be clear.

Additionally, the law eliminates the condition of a minimum amount to constitute a crime, clarifying that to consider the offending conduct a crime (on a commercial scale), the magnitude, economic value, quantity, and impact on the market must be considered. It also specifies that in foreign trade cases, it is regarded as a crime when the goods are valued at more than 50 unified basic salaries (SBU) – US $ 20,000 to date – stipulating that the cost of the original product must be taken into account for this valuation.

Regarding the sanctions, the law establishes an incarceration sentence of 6 months to 1 year, confiscation (of the seized products), and a fine of 8 to 300 SBU (US $ 3,200 to US $ 120,000 to date). In addition, the following are reinstated as an aggravating factor for the criminal offense: (i) having received a warning of the offense; (ii) that health-related objects cause damage to health; and (iii) that the crime is committed concerning unpublished works.

Regarding copyright, the same conditions described before apply. In addition, the following actions are sanctioned with the penalty indicated in the previous paragraph: alteration or mutilation of a piece of work; the registration, publication, distribution, communication, or reproduction of a foreign work as one’s own; unauthorized reproduction or in a number greater than the authorized number of the work, provided that the damage is greater than 50 SBU (US $ 20,000 to date); public communication of works or phonograms; introduction to the country, storage, offering for sale, sale, lease or circulation of illicit reproductions of works, by any means; unauthorized retransmission of radio broadcasting, television and in general any signal that is transmitted through the radioelectric spectrum; manufacture, import, export, sale or lease of devices, systems or software that allow deciphering an encrypted satellite signal carrying programs or telecommunications in general.

The reform makes an essential clarification about certain conditions on the crime, such as the precise meaning of the term “commercial scale” and how to assess the value of the products.

The law also includes provisions on the destination of the seized products, which may be considered free of charge to cover social needs by the State or destroyed. They must have the report of an expert duly accredited by the Judicial Council. He has to clarify whether the products must be destroyed or render useless “the aspects of the same that violate or transgress the intellectual property, as long as this action does not harm the nature or the functionality of the merchandise.”

Finally, the law includes conciliation is as a dispute resolution mechanism.

In conclusion, the reform is positive because it seeks greater agility in processing and prosecuting intellectual property crimes.

II. Border Measures

After almost five years of a legal vacuum in this matter, the Executive Branch veto, accepted by the Assembly, also corrected the inadequate text approved by the Legislature returning the “mixed” system to the country for the execution of measures on the border. It allows the National Customs Service of Ecuador (SENAE) to be the first filter of infringing products entering or exiting the country, suspending the customs process provisionally, which has to be confirmed by the local intellectual property office.

The reform empowers SENAE to: (i) suspend the customs procedure for products that, in any way, violate intellectual property rights, (ii) alert the holders of these rights, and (iii) provide adequate information to act in these cases.

The suspension of the customs process will initially be five days. During these five days, this suspension must be communicated to the importer, the right holder, and the local intellectual property office. After that, it will have three days to decide on a resolution.

The law maintains the obligation to provide sufficient information to the intellectual property authority about the infringing products and the conditions of the infringement, and the possibility of inspecting the products involved.

The authority may sanction the offender with a cash penalty ranging between 1.5 and 142 SBU (US $ 600 to 56,800 to date).

Per the regulations of the Andean Community, the reform provides that the right holder initiates at their discretion an administrative, civil, or criminal action when the adoption of the border measure has been confirmed. Although there is a contradiction with the supranational norm regarding the term to present it (10 days), it prevails. The holders of intellectual property rights will have a predominant performance in these cases since they must participate actively, both in the criminal proceedings and in the cases of border measures, accompanying the authorities through all the steps.

The law maintains the possibility of requiring the person requesting the adoption of a border measure to provide a guarantee or surety that will be proportional to the possible economic and commercial impact generated by the suspension, to protect the importer or exporter from a possible case of abuse of rights.

This reform corrects elements that have caused a notable increase in intellectual property infringements in Ecuador and led to actions against retailers or small merchants. Unfortunately, these elements have left importers or wholesalers who are the primary beneficiaries of the illicit trade unpunished.

The reforms will come into force after its publication in the Official Registry.

Eduardo Ríos
Asocciate at CorralRosales
eduardo@corralrosales.com

The acquisition of medicines through small amount

The acquisition of medicines through small amount - CorralRosales - Lawyers Ecuador

The small amount is a public procurement procedure regulated in the Organic Law of the National Public Procurement System (hereinafter, the “LOSNCP”), the Regulation to the LOSCNP (hereinafter, the “Regulation”), and the Codification and Updating of Resolutions issued by the National Public Procurement Service (hereinafter, the “Codification”).

Public entities[1] can make direct contracts with suppliers through the small amount as long as they meet the following requirements:

  • The object of the contract must be: (i) the acquisition of standardized goods or services[2], which do not appear in the electronic catalog[3]; (ii) the acquisition of non-standard goods or services; or (iii) the contracting of works, solely and exclusively for the repair, remodeling, adaptation, maintenance or improvement of an existing construction or infrastructure. In no case can consulting services be hired[4].
  • In the year, the amount of the contract must not exceed the value that results from multiplying the coefficient 0.0000002 by the Initial State Budget for the corresponding fiscal year. In 2021, this value is $ 6,416.07.

Article 332 of the Codification provides that, during the year, the contracting entities may consolidate their needs and carry out a single contract for a small amount or carry out several such amounts for the same good or service, but the amount of the consolidated contract or the total amount of individual contracts may not exceed the maximum value indicated. 

These contracts may or may not be part of the annual planning that public entities are obliged to carry out[5]. But, in any case, the “small amount” tool must be used within the COMPRAS PÚBLICAS Portal[6] (www.compraspublicas.gob.ec) to publish: the needs of goods, works or services, the information of the public servant responsible for the hiring, the email in which they will receive the offers of the interested suppliers, and the maximum delivery time of said offers.

To participate in a contract for a small amount, suppliers do not need to be registered in the RUP[7]. Suppliers will be selected under the following criteria[8]:

  1. In standardized goods and services, the supplier that offers the lowest price must be chosen.
  1. In non-standard works or goods and services, the supplier that offers the best technical, financial, and legal conditions must be chosen, without the lowest price being the only selection parameter.

Once the contracting has been carried out, the contracting entities must publish its relevant information on the COMPRASPUBLICAS Portal. This information and that which, at any time, is required by[9] the National Public Procurement Service (hereinafter, “SERCOP”), will serve for this body to identify if there are non-compliance with the requirements applicable to this figure or if it was used to circumvent[10] other hiring procedures. If there are non-compliances, SERCOP will inform the competent control bodies so that they can initiate the corresponding actions.  

There are special or exceptional cases[11]in relation to this type of contracting for a small amount, such as the acquisition of medicines.

The LOSCNP does not expressly foresee the acquisition of medicines for a small amount, however this is possible under numeral 2 of article 54.2. of the Law[12], since medicines can be classified as standard goods. 

The Regulation develops this figure as follows:

“Art. 85.4.- Application of small amounts.- In duly justified and exceptional cases, contracts for the acquisition of medicines and strategic goods, the amount of which is equal to or less than multiplying the coefficient 0.0000002 of the Initial State Budget, will be carried out for a very small amount , in accordance with the provisions issued by the SERCOP for this purpose, and provided that the good is not available in the virtual repertoire for direct purchases enabled in the PUBLIC SHOPPING Portal.

The acquisition of medicines by this procedure will be within the current National Basic Medications Table. “[13] (highlighted out of text)

Although the Regulation uses the name “virtual repertoire” and not “electronic catalog” as happens in small amounts for other standardized goods, the fundamental requirement is the same: the good must not be available on the COMPRASPUBLICAS Portal for direct purchases. Additionally, the Regulation clarifies that only the medicines that appear in the current National Basic Medicines Table may be purchased.

Therefore, the small amount of medicines comes when the good: (i) is not available in the virtual repertoire enabled in the COMPRASPUBLICAS Portal (hereinafter, the “Directory”); (ii) is included in the current National Basic Medicine Chart; and (iii) the amount of the contract does not exceed the established limit.   

Reforms[14] to the Regulation and Codification provide that the contracting entities of the Integrated Public Health Network[15] (hereinafter, “RPIS”) have the obligation to contract storage and distribution and delivery or dispensing services of medicines, prior to their acquisition (hereinafter, the “Services”).  

So far, the Services have not been contracted by the RPIS. However, when this happens and the SERCOP communicates it[16] on the COMPRASPUBLICAS Portal,  Chapter II of Section III of Chapter II of Title VIII of the Codification will come into force. It contemplates specific regulations that all public entities must comply with to acquire medicines for a small amount. Among the new provisions, the following stand out: 

  1. The circumstances are established for the small amount to proceed, according to the contracting entity: 
  1. For RPIS entities, it proceeds when the medicines are not available in the Directory. In this case, the contracting of the Services is not mandatory, so the cost of the delivery-receipt of the medicines must be included in the acquisition.
  • For other public entities, it is appropriate if the medicine has not been contemplated in the annual planning or, if it has been included, it does not constitute a constant and recurring requirement during the year, that can be consolidated in a contract whose amount exceeds the maximum allowed.
  1. The contracting entities, through electronic means, may invite various suppliers, whether natural or legal persons, national or foreign, as well as their associations or consortiums. In the invitation, the entities must include the technical specifications of the medicine and the delivery conditions.
  1. The entities must have at least three offers, prior to selecting the supplier. If this is not possible, the entity must justify that it carried out all the actions and requirements necessary for this purpose.
  1. Invited providers, who do not necessarily have to be registered in the RUP, must necessarily present the medicine’s marketing authorization.

Until these regulations come into force, the provisions developed at the beginning of this article must be applied. Notwithstanding this, the SERCOP has established that, during this transition period, the contracting entities of the RPIS may carry out various small amounts of medicines in the year and their total amount may exceed the maximum value, provided that“… due to external factors, outside of the contracting entity duly justified, the contracting cannot be consolidated to use a contracting procedure under a common or special regime, other than the Small Amount. “[17]

Additionally, as of August 10, 2021, according to the fifth[18]  and tenth[19] reformed provisions of the Organic Law Reform of the Organic Criminal Code on Anti-Corruption, all public entities must obtain a prior report of relevance and favorability from the State Comptroller General to celebrate the small amount and any other contract under the LOSCNP.  

In conclusion, the acquisition of medicines for a small amount is exceptional and is subject to specific requirements. However, the dispersion of the applicable norms and their constant reforms generate confusion and an inappropriate use of this figure. For this reason, suppliers must be duly informed to avoid risks in the conclusion or execution of contracts, as well as in subsequent controls by the competent bodies.

[1] When speaking of “public entities”, reference will be made to those provided for in article 1 of the LOSCNP.

[2] According to Article 42 of the Regulation, standardized goods and services are “… those whose characteristics or technical specifications… are homogeneous and comparable under equal conditions”.

[3] In accordance with numeral 3 of article 6 of the LOSNCP, the electronic catalog is the registry of standardized goods and services published on the COMPRASPUBLICAS Portal for direct contracting.

[4] Codification and Updating of Resolutions issued by the National Public Procurement Service, Official Registry 245, January 29, 2018, Art. 330, no. 4.

[5] Organic Law of the National Public Procurement System, Official Registry 395, August 4, 2008, Art. 22.

[6] The COMPRASPUBLICAS Portal is the Official Computer System of Public Procurement of the Ecuadorian State, as provided in numeral 25 of article 6 of the LOSCNP.

[7] Numeral 29 of article 6 of the LOSCNP, defines the Unique Registry of Suppliers or RUP as “… the Database of the suppliers of works, goods and services, including consulting services, authorized to participate in the procedures established in this Law . “

[8] Codification and Updating of the Resolutions issued by the National Public Procurement Service, Official Registry 245, January 29, 2018, Art. 336.

[9] Regulation to the Organic Law of the National Public Procurement System, Official Registry 588, May 12, 2009, Art. 60.

[10] Numeral 2 of article 330 of the Codification provides that “Contracts for Small Amounts must not be used as a means of circumventing pre-contractual procedures.”.

[11] For example: leasing of goods, acquisition of fuels in operations of the entity, purchase of air tickets, contracting of travel agencies, acquisition of spare parts or accessories, among others.

[12]Art. 52.1.-Contracts of a small amount.- It may be contracted under this system in any of the following cases: […] 2.-Contracts for the acquisition of goods or provision of standardized services, except consulting, which do not appear in the electronic catalog and whose amount is less than multiplying the coefficient 0.0000002 of the initial budget of the State of the corresponding fiscal year… ”

[13] Regulation to the Organic Law of the National Public Procurement System, Official Registry 588, May 12, 2009, Art. 85.4.

[14] In this regard, Executive Decree No. 1033, published in Official Registry No. 208 of May 21, 2020, Section II of Chapter VII of Title III of the Regulations was amended; Resolution No. RE-SERCOP-2020-0111, published in the Official Registry Special Edition No. 1078 of September 28, 2020; and Resolution No. RE-SERCOP-2021-0114 published in Official Registry No. 432 of April 15, 2021.

[15] “… Made up of the set of public institutions that provide health services and which are known as << health subsystems >>, made up of the MSP, the IESS, the Social Security Institute of the National Police (ISSPOL) , ISSFA and the Complementary Health Network ”. Ecuador Constitutional Court of Ecuador, “Sentence No.: 679-18-JP / 20 and accumulated”, in Judgment No.: 679-18-JP and accumulated, August 5, 2020, 17.

[16] Codification and Updating of the Resolutions issued by the National Public Procurement Service, Official Registry 245, January 29, 2018, Twenty-fifth Transitory Provision.

[17] Codification and Updating of Resolutions issued by the National Public Procurement Service, Official Registry 245, January 29, 2018, Twenty-eighth Transitory Provision, no. 3.

[18] “… In the event of determining the relevance and favorability … the rest of the procedure established for this purpose in the law may be continued on a regular basis …”

[19] “… The Office of the Comptroller General of the State will issue a report of relevance, as a prerequisite for the signing of the public procurement processes determined in the law on the matter, by public sector entities and agencies …”

Mario Fernández García
Asocciate at CorralRosales
mfernandez@corralrosales.com

ASIPI Seminar | Beyond a year of change

ASIPI Seminar | Beyond a Year of Change - CorralRosales - Lawyer Ecuador

CorralRosales will participate in the next seminar organized by the Inter-American Association of Intellectual Property (ASIPI), titled “Beyond a year of change“, which will take place from May 23 to 25, 2021.

The most important Intellectual Property association in Latin America is organizing this event, which will be held online through an innovative platform, in which all members will be able to participate free of charge.  

The academic program will address current topics, as well as networking activities, which will involve a high level of participation.

Academic Program

Sunday, May 23 2021

  • 09:00h. – 12:00h. EST-USA: Administrative Council Meeting (for ASIPI members only)

Monday, May 24 2021

  • 08:00h. – 09:00h. EST-USA: ASIPIfit
  • 10:00h. – 10:20h.  EST-USA: Opening
  • 10:20h. – 10:50h. EST-USA: Opening Keynote Speaker – How Will AI shape the future of the IP system?
  • 11:00h. – 12:15h. EST-USA: Key Note Panel: Social platforms and freedom of speech, what is the right balance and should social platforms be entitled to censor speech?
  • 14:30h. – 16:00h. EST-USA: New road ahead for patentability of a new wave of technologies
  • 14:30h. – 16:00h. EST-USA: Trademarks as a living organism
  • 16:30h. – 17:30h. EST-USA: ASIPI CLUB: Brainstorm IP
  • 16:30h. – 17:30h. EST-USA: ASIPI CLUB: Regions and Gastronomy
  • 16:30h. – 17:30h. EST-USA: ASIPI CLUB: Books
  • 17:30h. – 18:30h. EST-USA ASIPI CLUB: Movies/series
  • 17:30h. – 18:30h. EST-USA: ASIPI CLUB: Wine
  • 17:30h. – 18:30h. EST-USA: ASIPI CLUB: E-sports and videogames
  • 19:00h. – 20h. EST-USA: Bingo

Tuesday, May 25 2021

  • 08:30h. – 09:00h. EST-USA: ASIPIfit
  • 10:00h. – 11:00h. EST-USA: CEJ Meeting/ Working Committee Presidents and Secretaries and Special Commissions
  • 11:30h. – 12:30h. EST – USA: Key Note Panel: New Intellectual Property Issues for Tech Startups in Latin America
  • 14:15h. – 15:45h. EST-USA: The new reality of the justice system
  • 14:15h. – 15:45h. EST-USA: Compulsory Patent Licenses in the Context of the COVID 19 Pandemic
  • 16:00h. – 17:30h. EST-USA: The new music industry
  • 16:00h. – 17:30h. EST-USA: The new vision for law firm management, what’s next?
  • 17:45h. – 18:30h. EST-USA: Non-Fungible Token’s – The New Crypto Storm
  • 18:30h. – 18:30h. EST-USA: DJ Closing

CorralRosales Will participate as a golden sponsor, register and don´t miss it! You can do so by clicking here.

Terms and conditions of the productive employment agreement

Terms and conditions of the productive employment agreement - CorralRosales - Lawyers Ecuador

In 2015 the fixed-term employment agreement, which allowed the hiring of employees for one-or two-years, was repealed from the Labor Code. As a result, the open-term agreement became the most widespread agreement for employment relationships covered by the Labor Code.

The open-term employment agreement grants the employee a high degree of stability, since it protects him/her in the event of unilateral termination and grants him/her the right to the payment of significant severance packages.

The pandemic caused by Covid-19, and its strong impact on the Ecuadorian labor market, made it necessary for the government to regulate new contractual mechanisms that make the hiring of employees more flexible, that adjust to the reality of each company and guarantee employment rights.

Since March 2020, the following types of agreements have been regulated: (i) agreement for work or services within the core business; (ii) emerging employment agreement; (iii) employment agreement for productive sectors, among others.

This article analyzes the employment agreement for productive sectors, also known as “productive employment agreement”, regulated by the Labor Ministry on October 30, 2020, through Ministerial Agreement MDT-2020-220. The regulation seeks to promote job creation in these sectors through a mechanism that allows them to cover the different needs of their activity.

Pursuant to Article 2 of the Organic Code of Production, Commerce and Investment (“COPCI”): “Productive activity shall be considered as the process by which human activity transforms inputs into lawful, socially necessary and environmentally sustainable goods and services, including commercial and other activities that generate added value.

As a consequence, this agreement may be implemented by companies whose purpose or activity is (i) to transform inputs into lawful goods and services; (ii) to generate commercial activities; and/or (iii) to generate added value.

The productive employment agreement subjects employment relationships to the following conditions:

  • Term: The term will be equivalent to the duration of the work, service or activity to be performed, up to one year, renewable once for the same term.

The employment relationship will be terminated upon completion of the work, the service or the established term, without the need of any other formality. The employer must pay the employee the proportional amounts corresponding to the thirteenth and fourteenth remunerations and vacations, without the payment of a resignation bonus or severance payment for unfair dismissal.

If at the end of the agreed term the employment relationship continues, the agreement becomes an open-termeagreement.

  • Trial period: It may provide for a trial period of up to 90 days.
  • Special working hours:
  • The 40 hours per week may be distributed in up to 6 days per week.
  • The parties may agree to increase the hours of the daily workday in exchange for additional rest days. In no case the workday shall exceed 12 hours per day.
  • If the activities performed require uninterrupted services, the parties may agree on consecutive working days, which may not exceed 20 consecutive working days.
  • Night shift: If more than 50% of the workday is performed between 6:00 a.m. and 7:00 p.m., the entire workday will be considered a day shift, i.e., night shift surcharge is not applicable.
  • Living expenses: When geographical characteristics limit the employee´s free mobility to their place of residence, the employer must provide employees with housing, food and transportation.
  • SUT registration: The employer has 15 days to register the employment agreement in the Labor Ministry online system “SUT”.
  • Severance: In the event of early termination by unilateral decision of the employer -before the culmination of the service or the expiration of the term- employees are entitled to the payment of a severance package for unfair dismissal.

In conclusion, the productive employment agreement is a flexible employment mechanism, since it allows to dynamize the labor market and with it the country´s economy. In turn, employers can hire employees in compliance with employment obligations, adjusting to their needs and without generating additional costs upon termination of the employment relationship.

Marta Gisela Villagómez
Associate at CorralRosales
mvillagomez@corralrosales.com

How to create effective Non-Disclosure Agreements?

How to create effective Non-Disclosure Agreements?

Competition among companies and the business opportunities, ventures, technologies and constant expansion into new international markets mean that companies must protect that which allows them to stand out and differentiate themselves from their competitors, meaning their information, their “singularities”.

This information and singularities can be of various kinds, for example: financial statements, data, processes, know-how, a specific material, recipes, a product, a strategy, a skill, some knowledge, a supplier, or a formula. In general, any business information that is confidential, sensitive, private and that they wish to keep secret because of the importance it represents for the viability of the business.

Non-Disclosure Agreements (“NDAs”) are documents that allow the protection of company information. An NDA gives those who sign it the security of being able to share information in the different stages of the commercial relationship (pre-contractual, contractual and post-contractual). That is to say, in the event that in the pre-contractual stage, it is decided not to continue with the commercial relationship, the information that has been provided will be protected. The same applies when the contractual relationship ends.

The following are some of the elements that must be included in the NDA for it to be effective:

  • Ownership of the information. It must clearly identify who is the owner of the confidential information that will be shared with the other party and how it is protected.
  • Detail, limitation and scope of the information to be shared. Within the agreement it is important to state what type of information will be shared between the parties so that it can be properly identified and individualized, thus providing certainty for the parties. The scope of the confidentiality obligation refers to the information that will be covered by this agreement, its characteristics, the areas involved that handle it and know it, identification, the level of care of the information, its treatment once the NDA is terminated.
  • The recipient party must be clear about the scenarios under which it is authorized and may disclose confidential information. This may occur, for example, in the case of its own employees, its suppliers or in response to a requirement made by a competent authority.
  • The term during which the agreement will be in force must be specified, which means, the time that the confidential information will be shared and the period during which the obligation to maintain the confidentiality of the information will be in force. The term of the obligation to maintain the confidentiality of the information is usually agreed for several years and may even exceed the commercial relationship between the parties or be indefinite. The term will depend on the nature of the information.
  • The penalty, fine or sanction to be imposed on the parties in case of breach of their obligation to maintain in reserve and confidentiality the information they have come to know must be quantified and respond mainly to the importance and sensitivity of the information that has been shared and to the damages caused against one of the parties.
  • Non-confidential information. All information that will not be considered confidential and therefore is not protected by the NDA should be noted. An example of this type of information is the one that can be found in public records of free access.
  • Conflict resolution. Adequate mechanisms should be established to provide a prompt remedy in the event of a possible breach by any of the parties. It is advisable to establish a contractual domicile. Arbitration is considered to be more agile than the ordinary administration of justice.

It is necessary to take into account that each case has its peculiarities and therefore the NDA must be designed for specific situations.

Darío Escobar
Associate at CorralRosales
descobar@corralrosales.com

Enforceability and validity of shareholder agreements

enforceability-and-validity-of-shareholder-agreements-lawyers-ecuador-corralrosales

Shareholders’ agreements are defined as those agreements entered into by some or all of the shareholders of a company in order to complete, define or modify their internal relations and the application of the rules stipulated in the bylaws. By means of these agreements the shareholders can regulate a great diversity of matters, without contravening the corporate bylaws, but determining their application to specific cases within the life of the company.

There are three types of shareholders’ agreements:  

  1. Relationship agreements: these regulate the reciprocal relationships of the shareholders directly and are therefore characterized by the fact that they have no repercussions whatsoever on the company. Some examples include pre-emption rights, drag or tag along clauses, joint sale rights, lock up obligations, among others.
  2. Attribution agreements: shareholders undertake certain obligations in order to grant advantages to the company. The most common attribution agreements include financing obligations from shareholders, but they may also include non-compete obligations, or similar.
  3. Organizational agreements: these regulate the organization, operation and decision-making within the company, such as, agreements on the management structure, on the dividend policy, on the power of a shareholder to request the dissolution and winding-up of the company if certain conditions are fulfilled, etc. These agreements are usually arranged through vote syndications.

Traditionally, the problem with respect to shareholders’ agreements revolves around two main issues: (i) their enforceability vis-à-vis the company, i.e., whether or not the agreement binds the company; and (ii) the matters that may be regulated by means of these agreements.

  1. The enforceability of shareholders’ agreements

Shareholders’ agreements have a contractual nature, and therefore are law for the parties in accordance with article 1561 of the Civil Code, but, naturally, they do not bind those who do not enter into them. Since the company in general does not enter into the shareholders’ agreement, it is considered as a third party thereof. This derives in its unenforceability against the company, the shareholders who have not entered into it, and its managers, which can significantly complicate its overall enforceability.   

Prior to the entry into force of the Companies Modernization Law, in December 2020, the law expressly provided for this unenforceability by stating that:  

Agreements between shareholders which establish conditions for the negotiation of shares shall be valid. However, such agreements shall not be enforceable against third parties, notwithstanding any civil liabilities that may arise, and in no case may they harm the rights of minority shareholders.”[1]

As a consequence, the company was left outside the scope of such agreements. The most common example is the recordation of a transfer of shares in the company’s Registry of Shares and Shareholders, when the transferability of said shares was limited by a shareholders’ agreement. Since the latter does not bind the company, the recordation is fully valid and the only remedy available to the injured party is to lodge a civil action for damages against the shareholder who breached the agreement.  

In February 2020, with the introduction of the Simplified Stock Corporation (S.A.S.), the regulation of shareholders’ agreements shifted, as their enforceability against the S.A.S. is established, as long as the company is notified of the agreement:

(…) shall be complied with by the company when they have been submitted in the offices where the management of the company operates. Otherwise, despite their validity inter partes, such agreements shall become unenforceable for the simplified stock corporation.[2]

Subsequently, with the Law of Modernization of Companies, the regulation of the S.A.S. regarding shareholders’ agreements was extended to corporations and limited liability companies, so that they are obliged to respect such agreements when they have been notified of them. Thus, going back to the example mentioned above, the legal representative of the company will not be able to record a transfer of shares if it violates a shareholders’ agreement. In this way, the new regulation solves the problem of the unenforceability of these agreements.

      2. Matters regulated by shareholders’ agreements

The Law on Companies, when regulating shareholders’ agreements for S.A.S. (extended to corporations and limited liability companies), includes the following as matters that may be regulated by means of such agreements: 

the purchase or sale of shares, the preference for acquiring them or for increasing the capital stock, the restrictions for transferring them, the exercise of voting rights, the person who is to represent the shares at the meeting and any other lawful matter[3]

In order to establish what is understood by “any other lawful matter” it is necessary to consider not only the general law of obligations and the fundamental principles of private law, but also the mandatory rules contained in the Law on Companies. Consequently, it is not possible to agree, for example, on the transfer of shares by means of a private document, a quorum for attendance at general meetings lower than that established by law or the bylaws, or to regulate procedures for capital stock increase or dissolution and winding-up of the company.

In this regard, the Corporate Governance Standards issued by the Superintendence of Companies (although not binding, it is advisable to follow them to ensure good corporate practice), establish that shareholders’ agreements:

(…) should not bind or limit the exercise of the voting rights of any member of management on the Board of Directors, who shall faithfully fulfill their duty of loyalty and due diligence to the company, over and above private interests.”[4]

Therefore, the fact that the abovementioned article of the Law on Companies follows a numerus apertus system does not mean that all agreements entered into by the shareholders (lawful from the point of view of the law of obligations) are to be considered valid.

[1] Art. 191 of the former Law on Companies.

[2] Unnumbered article titled “Shareholders’ agreements” of the Law on Companies

[3] Ibid.

[4] Paragraph 6 of the section entitled “SHAREHOLDERS’ RIGHTS AND EQUITABLE TREATMENT” of the Corporate Governance Standards.

Sofía Rosales
Associate at CorralRosales
srosales@corralrosales.com

SENADI ignored the existence of renowned marks through an appeal resolution

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The Court of Justice of the Andean Community, a supranational body with competence to ensure compliance with Andean regulations, their uniform application and interpretation in the member countries, in the exercise of its power to interpret Decision 486 of the Andean Community, has repeatedly defined the figure of a renowned trademark or also known as highly renowned. Thus, it has expressly said that: “The notorious trademark regulated in Decision 486, which we can call an Andean notorious trademark, is that which is notorious in any member country of the Andean Community (…). The renowned trademark, for its part, is not regulated in Decision 486, but due to its nature, it receives special protection in all four member countries. “[1] Departing from the interpretation of the Andean Court, the National Service of Intellectual Rights (SENADI), in an appeal resolution, expressly ignored the existence of this figure, arguing that it is not specifically provided for in the Andean regulations.

The renowned trademark, whose special protection has been repeatedly recognized by the Court of Justice of the Andean Community, presupposes its knowledge by not only the specific consumers of the product or service in question, but that this level of knowledge is extended to the general public, even to those who do not consume the products or services protected by the trademark. The special protection on this type of trademarks seeks to prevent third parties’ illicit use of the prestige they possess.

An example of the special protection that the Andean regime grants to highly renowned trademarks is shown in the evidentiary field. Thus, it has been expressly established through numerous preliminary rulings that the renowned trademark does not need to be proven, since it is comparable to what is commonly known as a well-known fact.

Although this special protection is not expressly regulated in Decision 486 of the Andean Community or in the Organic Code of the Social Economy of Knowledge, Creativity and Innovation, as it has been expressly recognized by the Court of Justice of the Andean Community, through preliminary rulings, it forms an integral part of the Andean community law, to which Ecuador is subject to.

In the case at hand, a person applied for the registration of the trademark PIZZAS DEL VALLE[2], to protect the services of bars, cafes, restaurants, catering (international class 43 services). Against this request, a third party, owner of the DEL VALLE trademark, filed an opposition based on the similarities between the signs and the renowned nature of its trademark. In first instance, SENADI just focused on comparing products and services, and concluded that the trademark applied for was registrable. There was no pronouncement on the highly renowned name argued by the opponent.

The opponent filed an appeal in which, among other arguments, he insisted on the absence of a pronouncement on the argument of the highly renowned trademark. On this issue, SENADI pointed out: “As for the appellant’s allegation regarding the highly renowned DEL VALLE trademarks, Community legislation does not recognize the existence of this figure, but only that of notoriety (…)”[3] Within the same decision, it also pointed out that: “this Court denotes the fact that once the file has been reviewed, it has not been verified that the holder has provided sufficient material to verify the veracity of his statements in accordance with the factors stipulated in the regulations, having only limited itself to pointing out that said trademarks are easily recognized by the general consumer.

The aforementioned Resolution is contrary to the Andean regulations and specifically to the binding preliminary rulings of the Court of Justice of the Andean Community regarding the protection of trademarks in the member countries.

This type of decision confirms the need for the intellectual property offices of the member countries to implement permanent updating programs on the development of Andean community law. This would not only avoid damage to users due to an erroneous interpretation of the regulations and lack of application of binding rulings, but it would also raise the level of the decisions issued, so that, in addition to solving a conflict, they become a source of reference, for lawyers and users on intellectual property issues.

[1] Preliminary ruling 07-IP-2020 of May 8, 2020.

[2] Procedure SENADI-2018-61769 of August 29, 2018.

[3] Resolution No. OCDI-2020-1042 of December 23, 2020.

Katherine González H.
Associate at CorralRosales
katherine@corralrosales.com

New technologies and the transformation of the legal sector

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The application of technologies in the field of law is increasing in the world. The legal technology landscape (legaltech) comprises different categories of technology solutions. This article describes the various technologies that are expected to generate significant changes in legal services in the coming years: (i) Big Data Analytics; (ii) Artificial Intelligence; and (iii) Blockchain.

Big Data Analytics is a technology that allows you to analyze large amounts of data. It applies particularly to judicial activity since time and resources are saved in processing and analyzing information. For example, in a trial in which it is necessary to review several years’ emails, these can be analyzed with programmed software, in much less time and at a reduced cost. Big Data Analytics significantly reduces legal processes document analysis.

Besides, this technology can locate patterns of behavior of judges, courts, and other lawyers allowing to establish the probabilities of success in a judicial process more efficiently, the arguments of the claim, the value of damages that can be claimed, among other aspects. Therefore, the implementation of legal analytics is expected to make judges, arbitrators, and lawyers more efficient. 

 Artificial Intelligence is a technology aimed to replicate the human thought process/analysis, allowing machines to delegate tasks or make decisions. Artificial intelligence algorithms feed on a massive amount of data, which is why they use other technologies, such as the Internet of Things and Big Data, to obtain the expected results. The automation and application of Artificial Intelligence systems mainly replace more routine, repetitive, or mechanized tasks.

Some services offered by companies that use Artificial Intelligence are (i) solutions that automate the drafting and comparison of contracts and other legal documents; (ii) analysis and prediction of trial results; (iii) automation of legal investigation processes.

Blockchain is a technology that allows the shared recording of information. This registry has specific characteristics such as immutability, transparency, traceability, decentralization, publicity, distribution. It allows to carry out transactions of any type transparently, reliably, and securely without the need for an intermediary.

This technology is being implemented to register information. Some areas that will experiment significant change are real estate titles, apostilles, and other documents that require registration and/or certification. Blockchain will most likely replace some of the work that notaries and registrars do.

Another application of this technology is smart contracts, which are blockchain technology-based agreements automatically executed when they meet the stipulated conditions. These contracts are not yet used on a large scale, but their implementation will transform business transactions.

Adopting these technologies will bring benefits such as reducing time, costs, and risks in providing legal services improving access to justice. Similarly, suppose these technologies are used for data analysis, along with artificial intelligence. In that case, it could lead to obtaining more consistent sentences in judicial processes, reducing the chances of bias and corruption, providing greater legal certainty.

Lawyers must be prepared to use these technologies, as their adoption implies a transformation in the way services are provided. It is difficult to visualize all the changes coming with the implementation of Big Data Analytics, Artificial Intelligence, and Blockchain. Law firms must reaffirm that their objective is to provide services efficiently and transparently to benefit all citizens.

María Isabel Torres
Associate at CorralRosales
mtorres@corralrosales.com

Case highlight: CorralRosales´s Brand Protection Team has made history once again in the fight against counterfeiting

caso-de-exito-brand-protection-de-corralrosales-combate-a-las-falsificaciones-abogados-ecuador

Great news for Ecuador

The National Service of Intellectual Property Rights (SENADI) confirmed the adoption of border measures on the import of a container with more than 600,000 counterfeit goods of different marks, especially cell phone accessories and packaging, which would have been ready to be assembled and distributed across our country.

Customs in Manzanillo, Mexico, warned about the existence of a container in transit, with Guayaquil as its final destination, which contained suspicious goods corresponding to counterfeit goods of the best-known cell phone marks. CorralRosales followed the container’s route, which included previous transit through Cartagena de Indias-Colombia and the Port of Callao-Peru, constantly making sure that the cargo was not released at these ports or that it returned to its origin, which would have prevented the border measure.

Prior to the arrival of the container at the Port Terminal of Guayaquil, CorralRosales requested the National Customs Service of Ecuador to allow them to carry out an inspection in order to determine its origin and, especially, whether or not it contained counterfeit goods. Once the verification was completed, the local IP office (SENADI) was asked to adopt a border measure to prevent the nationalization of the container, as it contained counterfeit products, which was accepted by the IP authority. The process continues through an ongoing Administrative Action. Infringers may face a fine of up to US$ 56,800 once the Administrative Action is concluded, as well as the definitive seizure of the goods.

The historic decision made by IP authorities and the actions of CorralRosales guaranteed the intellectual property rights of the owners of the affected marks, as well as the rights of potential consumers of the counterfeit goods, as possible damage to electronic equipment was prevented and even catastrophes were avoided, such as fires and more*.

This action was possible thanks to the international cooperation of our partners and the coordination between the public and private sectors, which allowed the most important border measure in the history of Ecuador.

CORRALROSALES

“Simple” electronic signature, certified electronic signature, and scanned signature in contracts

la-firma-electrónica-simple-firma-electronica-certificada-y-firma-escaneada-en-los-contratos-mario-fernandez-abogados-ecuador

The COVID-19 pandemic has forced companies to adapt to the digital age through the use of Information Technologies (TIC’s) to guarantee the continuity of their operations, such as contract signing. The electronic signature has gained particular importance as a useful tool to avoid the parties’  physical concurrence when entering a contract. Also, it streamlines the process and improves document management.

Some people may confuse the electronic signature with the handwritten signature scanned and embedded in an electronic document; also, the electronic signature certified by an accredited local entity should not be confused with one that does not have said certification. 

This article analyzes the “simple” electronic signature, the certified electronic signature, and the scanned signature to differentiate them and determine the contract’s legal effects.

For the analysis, we assume a  contract between private parties that is not subject to any solemnity.

  1. “Simple” electronic signature and certified electronic signature

The electronic signature is regulated by the Law of Electronic Commerce, Signatures and Data Messages (hereinafter, “LCE”). It defines it as: “[…] the data in electronic form consigned in a data message, attached or logically associated with it, and that can be used to identify the owner of the signature with the data message, and indicate that the owner of the signature approves and acknowledges the information contained in the data message. “[1]

According to article 15 of the LCE, the electronic signature must meet the following requirements for its validity:

” a) Be individual and be linked exclusively to its owner;

b) That allows to verify the authorship and identity of the signatory unequivocally, through technical verification devices established by this law and its regulations;

c) That its method of creation and verification is reliable, safe and unalterable for the purpose for which the message was generated or communicated;

d ) That at the time of the creation of the electronic signature, the data with which it is created is under the exclusive control of the signatory, and,

e) That the signature is controlled by the person to whom it belongs. “[2]

The electronic signature has the same validity and  legal effects recognized in a handwritten signature (or physical signature).

The LCE does not use the denomination digital signature and electronic signature like in other countries to differentiate the electronic signature certified by an accredited entity before the competent authority in Ecuador (hereinafter, “Certified Electronic Signature”) from that electronic signature that does not have said certification (hereinafter, “Simple Electronic Signature”). The LCE calls both “electronic signature ”.

The electronic signature certificate is not a requirement for the validity of the electronic signature. According to the LCE, said certificate simply consists of “ […] a message that certifies the link of an electronic signature with a specific person, through a verification process that confirms their identity.”[3] and it is used mainly to “[…] certify the identity of the owner of an electronic signature […]”[4]

Consequently, the Simple Electronic Signature and the Certified Electronic Signature are valid. The difference between one and the other is in the presumption of legitimacy that the law grants to the Certified Electronic Signature when it is presented as evidence in a legal process:

“Art. 53.- Presumption. – When an electronic signature certified by an accredited information certification entity is presented as evidence, it will be presumed that it meets the requirements determined by law, and that consequently, the electronic signature data has not been altered since its issuance and that it belongs to the signatory ”. [5] (highlighted out of text)

It should be noted that the parties can agree to the use of electronic signatures generated through tools such as DocuSign, AdobeSign, among others. They do not necessarily have a local certification but are useful; they are within reach of any person, national or foreign, and expedite business.

When electronic signatures have a certificate issued and accredited by a foreign entity, it is possible to revalidate it[6] before an accredited Ecuadorian entity[7], with the same value as a local certificate. Notwithstanding this, the parties may agree to the use of electronic signatures and certificates that are not accredited. That agreement will be legally valid[8].

In short, if the Simple Electronic Signature meets the requirements provided for in the law, and its use is agreed between the parties, it can be used to sign contracts and it cannot be deprived of legal effects because it does not have a local electronic signature certificate. However, it will not enjoy the presumption of legitimacy that the LCE grants to the Certified Electronic Signature.

  1. Scanned Signatures

The Scanned Signature is only a facsimile of an original handwritten signature (hereinafter “Scanned Signature”). All a person has to do is scan their handwritten signature or that of a third party contained in a physical document to generate it and incorporate it into an electronic document.

The Scanned Signature is not regulated in the LCE, but it can be valid as long as the parties acknowledge such validity and it is part of a data message [9](eg in a document attached to an email). This is due to the principle of autonomy of the will and in view of the fact that data messages and documents incorporated by reference have the same legal value as written documents, as provided by law. In order to guarantee the validity of the Scanned Signature, it is important to observe the provisions of the LCE when sending, receiving and keeping the data message that contains the signed contract.

In conclusion, the Scanned Signature produces binding effects, provided that: (i) the parties so agree; (ii) the signed document is part of a data message and (iii) it is possible to access said data message, for later consultation. However, since this type of signature is not generated through a system that guarantees its authenticity, authorship and integrity, it cannot be considered an electronic signature.

[1] Ecuador, Law of Electronic Commerce, Signatures and Data Messages, Official Register Supplement 557, April 17, 2002, Art. 13.

[2] Ibidem, Art. 15.

[3] Ibidem, Art. 20.

[4] Ibidem, Art. 21.

[5] Ibidem, Art. 53.

[6] Ibidem, First General Provision.

[7] Ecuador, Regulation to the Electronic Commerce Law, Signatures and Data Messages, Official Registry 735, December 31, 2002, Art. 16.

[8] Ecuador, Electronic Commerce Law, Signatures and Data Messages, Official Registry Supplement 557, April 17, 2002, Art. 28.

[9] According to the Electronic Commerce Law, a data message “[…] It is all information created, generated, processed, sent, received, communicated or filed by electronic means, which can be exchanged by any medium. The following electronic documents, electronic records, electronic mail, web services, telegram, telex, fax and electronic data exchange will be considered as data messages, without this enumeration limiting its definition. “

Mario Fernández García
Associate at CorralRosales
mfernadez@corralrosales.com

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