Brexit implications for US Businesses

By David Gent

10-2018

On 29 March 2017, the UK Government served formal notice under Article 50 of The Treaty on European Union to terminate the UK's membership of the EU (following the June 2016 UK referendum on EU membership). Based on Article 50, the EU Treaties shall cease to apply to the UK and the UK exit will take effect on 29 March 2019. If a Withdrawal Agreement is agreed by the UK and EU and is approved by the UK Parliament, this will include provisions for a transitional or "implementation" period to the end of 2020, during which EU law will continue to apply in the UK. Any Withdrawal Agreement is expected to include an outline of a future UK/EU relationship agreement, in the form of a political declaration, to be negotiated during the transitional period. If no Withdrawal Agreement is concluded, i.e. in a "no deal" or "hard Brexit" scenario, EU law will cease to apply in and to the UK on 29 March 2019.

Continuing uncertainty

There has been no change as yet to Britain's trading relationships with the EU and the rest of the World or to English law. However, the British exit (Brexit) vote has created a range of uncertainties, which include:

  • What will be Britain's future relationship with the EU?  The terms of any deal with the EU remain to be negotiated and then approved by the British Parliament, most other EU governments and the European Parliament, and so Britain's future trading relationship with the EU remains uncertain.
  • What will be Britain's future relationship with non-EU countries?  When the UK leaves the EU it will lose the benefit of EU trade agreements with non-EU nations, unless it is able to agree a roll-over of the EU terms into a new agreement between the UK individually and the relevant country, which is a stated aim of the UK government.The UK will then have the freedom to negotiate new trade agreements independently, but only after it has left the EU customs union, i.e. only after the end of the transitional period if a Withdrawal Agreement is concluded. US President Donald Trump has promised the rapid conclusion of a trade agreement with the UK to help the UK Government make Brexit a “great success”. He told The Times newspaper “We’re going to work very hard to get it done quickly and done properly. Good for both sides”. On 16th October 2018, US Trade Representative Robert Lighthizer (President Trump’s chief trade negotiator), wrote to Congress that the administration was looking to form a new “cutting-edge” free trade agreement with the UK “as soon as [the UK] is ready” following the UK’s exit from the EU.
  • What will be the effect on English law?  Under the terms of the European Union (Withdrawal) Act 2018, the 1972 European Communities Act, which gives EU law primacy over UK law, will be repealed. All EU regulations which are currently directly applicable in the UK under EU law (and all statutory instruments implementing EU law under the 1972 Act) will be retained in UK law, subject to a power of amendment (or repeal) by secondary legislation, within a two year period, to remove or adapt any specific provisions which focus on the EU, EU institutions or member states.In this way, the UK will retain a functioning statute book comprising a domestic law version of EU laws as at the date of Brexit.    
UK as a gateway to Europe?

At present, US businesses that wish to trade or invest in the EU often establish operations in the UK as a stepping stone to trading with other EU countries. Will they still do so if the UK’s trade agreements with the US and EU are less enabling or in a state of flux?

Where US or other non-European businesses maintain a European distribution centre in the UK, they should consider the potential for double tariffs on products exported to the UK and then re-exported to the EU27 following Brexit and the UK's departure from the EU customs union.  Such products are likely to face tariffs on entry into the UK (subject to any new UK free trade agreement and subject to WTO rules), and then further tariffs under the EU customs union on re-export to the EU27.

In relation to services, non-EU businesses which take advantage of UK subsidiaries or establishments for purposes of the EU single market rules, will no longer be able to rely on a UK regulatory authorisation as a basis for "passporting" of such services provision into the EU27.  The ability of UK services providers to provide services into the EU27 will be governed by any relationship agreement that may in due course be entered into between the EU and the UK.  However, it is thought unlikely that the EU will agree to any mutual recognition of "home" state services authorisations in the manner of the single market regime, and compliance with "host" state rules will probably be required.

There is a real risk associated with the UK's departure from the European Digital Single Market. The drive behind the Digital Single Market was to provide better online access to products and services at reduced costs, generally increase adoption and acceptance of digital services, and promote common data protection laws.  In addition, the UK will lose the ability to influence the development of the Digital Single Market and the EU27 will lose the UK's input. There are significant differences in the attitudes of different European countries towards the use of social and digital media marketing and, in the absence of the UK, these differences may now widen.

Contracts

Existing commercial contracts with UK parties may be affected by the terms of future trade agreements (including any new trade barriers or tariffs), continuing currency fluctuations, and the ability of UK nationals to work in the EU and of other EU nationals to work in the UK (see Employment implications below).  

Whether Brexit provides grounds for termination of an existing contract will depend very much on the particular terms and specific facts. Parties could seek to rely on material adverse change or force majeure clauses as grounds for termination following Brexit but their success will come down to the interpretation of the particular clause and the particular facts of the case. Changes in a party's economic circumstances have generally not been held to qualify as force majeure events under English law. It is also possible that parties could seek to argue that a contract has become frustrated as a result of Brexit but again, such an argument will depend on the facts of the particular case.

Brexit may affect disputes over contracts between a party based in the UK, such as a subsidiary of a US company, and a party in another EU Member State or where the subject matter of the contract has some connection to a Member State. EU regulations impact on the choice of forum, recognition and enforcement of judgments, service of legal process and the choice of governing law of contracts. The UK will lose the reciprocal benefits provided by these arrangements as from Brexit (or the end of any transitional period).

Existing disputes with UK/EU elements are unlikely to be affected in the short to medium term, for as long as existing EU laws will continue to apply. In the longer term, Brexit may affect claims based on EU laws and impact on the rules on service of legal process and the rights of enforcement of judgments between the UK and other EU Member States.

For new contracts, parties are focusing more on governing law and dispute resolution mechanisms and some parties are opting for arbitration clauses on the basis that enforcement is through the New York Convention of 1958 rather than EU regulations.

In drafting new contracts, parties should expressly take account of Brexit.  For example, territorial provision referring to the EU should make clear whether this means the EU countries as at the date of the agreement or the EU countries at the relevant time (in the latter case excluding the UK as from Brexit).

Employment implications

For US companies with nationals from other EU Member States working in the UK, the rights of those individuals to continue to live and work in the UK following Brexit are unclear. The Prime Minister has said that she would like to guarantee the rights of the 3 million EU citizens who were settled in the UK before the referendum, including their right to remain in the UK. However, she says that this is dependent on other EU nations agreeing an equivalent deal for British nationals living in other EU Member States. As a result, the position remains one for negotiation, albeit as an “important priority” for the UK.

The end to the free movement of EU nationals to the UK, given as an objective in negotiations by the Prime Minister, may also make it more difficult for US companies with operations throughout the EU to relocate employees from other EU Member States to the UK and vice versa.

An audit of a company's workforce will help to identify individuals who may be affected, including those who may be able to apply for citizenship or permanent residence and to enable targeted communications to employees who may be most affected. Plans for recruitment and secondment of staff may also be impacted.

Intellectual property implications

The effects of a Brexit on intellectual property law are likely to be significant, especially as regards the unitary character afforded to some IP rights, notably Community, i.e. EU trade marks and design rights. The draft UK/EU Withdrawal Agreement provides that the UK will provide for equivalent UK intellectual property rights to those that currently subsist in the UK by virtue of Community rights. In addition, the UK Government has stated that even on a "no deal" Brexit its aim is to ensure continuity of protection for Community right holders. Accordingly, all existing EU trade mark/registered community design right holders will be granted an equivalent trade mark or registered design right in the UK. In respect of pending applications, applicants will have a grace period of 9 months to apply in the UK for the same mark or design to retain the priority date of the original application.

The UK has announced that it will ratify the Agreement on a Unified Patent Court, which means that the UPC system should go ahead but with a delayed start date of some time in 2019 (although the whole process is currently being delayed in the German courts). Whether the UK will remain within the UPC post-Brexit is a matter of debate, since although it is not an EU institution, certain EU principles and structures are embedded within the UP system. Most importantly, enforcement rights may be an issue as the Prime Minister has said that one of her objectives is to bring an end to the jurisdiction of the European Court of Justice in Britain.

Interestingly, as regards exhaustion of intellectual property rights, the UK government has stated in a notice published in September 2018 that it intends to provide, as a matter of domestic law, that UK intellectual property rights which have been "exhausted" through a placing on the market in the EEA (the European Economic Area, i.e. the EU and EFTA member states other than Switzerland) by or with the consent of the rights holder, will also be "exhausted" for purposes of UK law after Brexit, at least during an interim period. This means that UK rights holders will not be able to invoke their intellectual property to prevent importation to the UK of products that they have marketed or licensed to be marketed in the EU. By contrast, EU27 (or EEA) intellectual property rights in products placed on the market in the UK by or with the consent of the rights holder after Brexit are unlikely to be exhausted in the EU/EEA, meaning that rights holders could generally prevent the parallel importation of such products from the UK to the EU/EEA after Brexit.

Other implications

This note covers the position only at a general level, not by reference to sector-specific requirements.  US and other non-European businesses should take account of sector-specific rules and regime changes affecting their UK operations, that will be brought about by Brexit.

This is an amended and updated version of articles previously published in the California Daily Journal and insidecounsel.com.

 

Authors

Gent-David

David Gent

Legal Director
UK

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