Pharmalicensing brings you advice, commentary and analysis from industry experts.
Vicky Clark, Principal, VC Legal
The most contentious issue when parties are contemplating entering into any kind of research agreement (including contract research and collaborative research agreements) is the manner in which the fruits of the research will be owned and exploited by the respective parties. During the course of tense and protracted negotiations, it may sometimes seem a simple and fair solution for the parties to own the results of the research jointly. But what does joint ownership mean and what are the consequences of an agreement that provides for the joint ownership of research results? This article will address this question and consider two recent cases that provide interesting lessons for parties contemplating joint ownership of patents.
What does joint ownership mean?
It is important first to distinguish between the results of research and the intellectual property rights that relate to them. The results of research essentially comprise information and physical materials, such as chemical compounds, formulations or cell lines. The intellectual property rights relating to such information and physical materials may comprise know-how and/or trade secrets, patents (if the information or materials amount to inventions), copyright (for example in any written works or software created during the research) and design rights (for example in any physical prototypes created). In the bio-science sector, patents tend to be the most significant IP right relating to the results of research so this article will focus on the consequences of joint ownership of patents.
Where both parties to a research collaboration are making significant contributions to the research, whether providing finance or contributing technology or resources, it can sometimes seem unconscionable for the results to be owned exclusively by one or other party. It is consequently not uncommon to see agreements in which the results of research, together with any and all intellectual property rights relating to them (often referred to in R&D agreements as ‘Foreground’), are jointly owned by the parties. It can, however, be very difficult to interpret provisions of this nature. This is because there is no single legal definition of what joint ownership means in relation to the information, materials and IP rights that comprise the Foreground.
For example, consider physical material, such as an innovative cell line, which may arise from a research collaboration. If the parties jointly own the cell line, the following questions arise:
It is very difficult to answer the above questions if the agreement between the parties does not expressly address the issues. Deadlock between the parties can very easily arise as the law does not provide a standard set of answers. If a dispute arose between the parties, the English courts would seek to determine the intention of the parties and would attempt to imply terms into the agreement to give it business efficacy. There is a risk that if the court felt unable to ascertain the parties’ intentions, it might hold the agreement to be void for uncertainty. Either way, it would involve a protracted court case to answer these questions and ultimately the result may not suit either party.
The above questions address the ownership of the cell line itself, that is, the physical material. A different set of rules may govern the joint ownership of the intellectual property rights relating to the physical material. Taking the example of the cell line, let us assume that the parties to a collaboration jointly own the Foreground and obtain granted patents in a number of territories in relation to the cell line. In the absence of express terms in the agreement, the implications of joint ownership of the patents will generally be addressed by legislation.
Patents and joint ownership
In relation to UK patents, section 36 of the Patents Act 1977 (‘the Act’) addresses the rights of co-owners. It states that, subject to an agreement to the contrary, each co-owner has the right to exploit the patent itself but it must obtain the other owner’s consent: (a) to amend or revoke the patent; (b) to grant a licence under the patent; or (c) to assign or mortgage its share of the patent. In the bioscience sector this has significant implications. It is unusual for a biotech company to develop, manufacture and market a product itself. Invariably, at some stage in development, the product will be licensed to a pharmaceutical company. If the patents relating to the product are jointly owned and the parties cannot agree the terms upon which to a grant a licence to a third party, this could effectively restrict the exploitation of the technology. There is a mechanism in the Act which is intended to enable parties to resolve such deadlock. It is possible, under section 37(1) of the Act, to apply to the Comptroller to determine the basis on which the parties are entitled to license the UK patent. This is what happened in two recent cases which are considered below. (1)
The risk of a Comptroller’s decision is that it will not in practice satisfy either party. The process is public and may result in the disclosure of sensitive commercial and technical information. What is more, it is possible that the rights of the co-owners may vary from territory to territory. The Comptroller only has jurisdiction to determine the rights of the co-owners in respect of the UK patent.
The Expotech case
In the Expotech case the parties, BSP International Foundations Limited (‘BSP’) and Expotech Limited (‘Expotech’), had been granted joint ownership of a patent relating to a device developed by the companies as a result of a collaboration. (2)
There had been a number of previous hearings between the parties relating to the patent during which it had been decided by the Hearing Officer that the patent should be jointly owned and that each party would be entitled to grant licences without the consent of the other party. 3 The Hearing Officer had reached this decision as he was satisfied that one of the parties, Expotech, did not have the means to manufacture the technology itself. The Hearing Officer gave the parties the chance to agree the terms upon which each was entitled to grant licences, in particular the royalty to be paid by each party to the other on sales of products utilising the technology. The parties could not, however, agree terms so the matter was referred back to the Hearing Officer.
Having considered the detailed submissions of the parties, the Hearing Officer decided to set the royalty rate at zero. This meant that neither party had to account to the other in respect of any sales of the patented technology or in respect of any licences granted to third parties. The Hearing Officer reached his decision on the basis that: (a) it was not clear either using a ‘comparables’ approach or a ‘profits available’ approach what the right royalty rate should be; and (b) BSP manufacture in the United Kingdom but Expotech are likely to manufacture abroad. As the Hearing Officer could only rule on the UK patent, it was possible BSP would be forced to pay a high royalty (on products it manufactures in the United Kingdom) but Expotech would pay none (on products manufactured outside the United Kingdom on its behalf). Having previously determined that the contributions of the parties to the technology were fairly equal, the Hearing Officer was keen to make an order that would give a fair balance to the parties. By setting the royalty rate at zero the Hearing Officer recognised that this could lead to unfairness. BSP had the means to manufacture and were manufacturing products using the technology. Expotech did not have the means to exploit the technology and there were significant barriers to a licensee entering the market due to investment costs. Hence there was a chance that Expotech’s only chance of benefiting from the technology would be via a royalty from BSP. The Hearing Officer decided on the basis of all the submissions, however, that:
There is less risk of unfairness if I set a zero royalty rate than if I set the royalty at the sort of level Expotech propose, and so that is what I will do. I use the term ‘risk’ quite deliberately. Because I am only dealing with a small part of the overall picture – i.e. I am only dealing with the GB patent – I do not think there is any way I can come up with a conclusion that will guarantee fairness to both sides.
The Expotech case illustrates a number of important points. There is a mechanism via section 37(1) of the Act to resolve deadlock between the parties as to how a jointly owned patent should be exploited. The mechanism (via an application to the Comptroller) can be lengthy and costly and may not achieve a result that either party is happy with. It may also result in important commercial information being made available to the public (in this case detailed sales figures).
The mechanism cannot resolve a dispute between the parties on an international level as the Comptroller has no jurisdiction over foreign patents. Indeed, in the Expotech case the Hearing Officer refused a request by BSP for an undertaking from Expotech that neither it nor its sub-licensees would enforce any foreign patent rights that they may have against products manufactured by BSP in the United Kingdom but sold abroad.
If the parties jointly own a family of patents, legislation in each individual jurisdiction in which the patent is granted will determine the rights of the co-owners. The co-owners may be forced to take advice from local lawyers in each territory in which the patent is granted and apply to the local courts to determine the rights of the parties to exploit the patents. If the rights vary between territories, this could be a major hurdle to any attempt to establish a coherent, international approach to exploiting the patent portfolio (see below for a brief discussion of the position of co-owners of US patents).
The Paxman Case
Eric Paxman and Derek Hughes were joint owners of a patent relating to a new type of drinks cooler. Little had been done to exploit the patent as the parties had fallen out and could not agree on how to exploit the invention. Mr Paxman sought permission, under section 37(1) of the Act, to grant licences under the patent without the consent of Mr Hughes. Mr Paxman’s claim was originally struck out on the basis of a technicality. The Hearing Officer decided that if relief were to be granted to Mr Paxman it would be in breach of his fiduciary duties as a director to a company previously formed by Paxman and Hughes with the intention of exploiting the patent. (4)
Mr Paxman appealed to the High Court against this decision. Kitchen J decided that the Comptroller did not take account of the full matrix of facts relevant to the case when he reached his original decision. Hence the response of the High Court, after a detailed consideration of the facts and the law, was to refer the matter back to the Comptroller for a repeat hearing of the matter. Two judgments later the parties are no nearer to reaching a resolution of their dispute, the patent remains subject to deadlock and is unexploited. As with all technology, the clock is ticking and every day reduces the useful lifespan of the patent.
The jurisdiction of the Comptroller in relation to foreign patents was also raised in the case. One of the parties to which Mr Paxman was seeking to grant a licence was an Italian company. It was held that the Comptroller did not have jurisdiction to make an order in respect of the equivalent Italian patent. If the Italian company intended to manufacture the product in Italy, Mr Paxman would need to make a separate application (if such an application is possible) to the appropriate forum in Italy. It was acknowledged, however, that there was nothing to prevent the Hearing Officer from granting a licence to the Italian company to use the GB patent in the United Kingdom. Hence during the High Court appeal, Kitchin J advised Mr Paxman to amend his pleadings to make it clear that he does not seek any relief outside the jurisdiction.
The case illustrates some of the risks of joint ownership. Although section 37(1) is intended to help the parties to avoid deadlock in relation to jointly owned patents, the proceedings can be long and uncertain. In this case, the corporate structure that the parties had put in place has complicated the facts and made it more difficult for Mr Paxman to avail himself of the remedies provided by the Act.
Other jurisdictions
As stated above, the position of co-owners is further complicated by the different rules and regulations that apply to co-owners in different jurisdictions. In the United States, for example, in the absence of an agreement to the contrary, each of the co-owners of a patent may make, use, offer to sell or sell the patented invention within the United States without the consent of the other owner and without accounting to the other owner. (5) This right has been held to extend to a right of each co-owner to grant licences under the patent without the consent of the other party. The consequence of this is that neither party can grant an exclusive licence under the patent without the consent of the other party.
The harsh consequences of such a regime are well illustrated by the case of Ethicon Inc v US Surgical Corporation. (6) Ethicon had been granted an exclusive licence under the patent that was the subject of the litigation by the sole inventor cited on the patent. Pursuant to its exclusive licence, Ethicon sued US Surgical for infringement of two of the 55 claims of the patent. US Surgical avoided liability by obtaining a retrospective licence from a third party, Young Jae Choi, who maintained that he should have been cited as an inventor on the patent. On appeal, the Federal Circuit confirmed that Choi was an inventor of the two claims under which he had purported to grant a licence to US Surgical and hence, as a legitimate licensee, Ethicon’s claim for infringement against US Surgical was dismissed. The decision was somewhat controversial as the court held that despite contributing to only a few of the claims of the patent, Choi had the right to grant licences under all of the claims.
Hence the regime that applies to US patents is different from that which applies to UK patents. Consider a situation in which a UK company and a UK university enter into an R&D agreement under which all inventions arising from the research are to be jointly owned. The company handles the patent applications for inventions arising from the research and files for, and obtains, granted patents in the United States and the United Kingdom in the joint names of the company and the university. The parties cannot agree as to how the patents should be exploited. The company applies to the Comptroller at the UK patent office for a right to grant a licence under the UK patent to a global pharmaceutical company. In the meantime, the university, keen to recover some revenue under the patent, grants a licence to a different global pharmaceutical company under the US patent. The university receives significant up-front fees for the US licence, and the company is not entitled to recover a share of these or any future fees or royalties under the licence. What is more, the company, which is bogged down with expensive and time consuming litigation in the United Kingdom, will be prohibited from granting a world-wide exclusive licence to any third party, due to the existence of the pre-existing licence in the United States. This position is unlikely to be the most effective or lucrative way to exploit the patent family for either party and may also delay the time it takes to launch the technology on the market.
Avoiding deadlock and confusion
Joint or co-ownership does not have to be avoided at all costs. In some cases, it may be the best way to resolve negotiations between potential collaborators. One example may be when a company is funding research at a university which, under its internal rules or as a result of legislation, is obligated to own the results of its research. (7) Often such rules do not prohibit joint ownership. For the funding company, joint ownership is preferable to taking an exclusive licence, as if the company intends to further transfer the technology, it will be in a much stronger position if it is able to grant a head licence rather than a sub-licence. For example, if a biotech company licenses its technology to a pharmaceutical company, the pharmaceutical company will prefer to take a licence directly from the owner (or co-owner) of the technology. This is because sub-licences are more vulnerable to termination and it is more difficult to control the process by which the patents which are the subject of the licence are maintained and enforced.
If the parties decide that joint ownership is the solution, the important thing to remember is that the agreement between the parties should set out in detail the worldwide rights and obligations of the parties in relation to the jointly owned Foreground. As a minimum the agreement should provide for the following:
(1) Who is able to use the technology and for what purpose? Will each of the parties, for example, be restricted to a particular field?
(2) Who is able to licence the technology and on what terms? Will a party require the consent of the other co-owner? Will a royalty be payable to the other co-owner? Will the licensing party have to notify the other co-owner?
(3) Who is responsible for applying for, prosecuting and maintaining any patents relating to the technology? Generally it is advisable for one party to be responsible for the patents although the costs may be shared and the party controlling the patents should consult regularly with the other co-owner.
(4) A mechanism to resolve any deadlock in relation to matters that must be decided jointly by the parties. This may involve a reference to an independent expert or a right of one party to buy out the other co-owner if they cannot reach agreement on certain issues.
(5) How the parties should share or apportion any liability such as product liability or intellectual property infringement resulting from exploitation of the technology.
(6) The rights of the parties to assign or mortgage their interest in the patents.
(7) Which party will be responsible for pursuing infringers. What is apparent from the above list is that many of the provisions that are relevant to a licence agreement are also relevant to an agreement that provides for joint ownership. Hence joint ownership should never be seen as an easy way to avoid the drafting required in a licence agreement.
Conclusion
When negotiating in relation to how the results of research (and any intellectual property rights relating to them) are to be owned and exploited, joint ownership should never be seen as an easy way to avoid deadlock. Unless the parties give due thought to the implications of joint ownership and what the rights of the respective parties will be, choosing joint ownership could result in further deadlock, lengthy and expensive legal proceedings and a result that neither party anticipated or expected. Provided, however, that all the relevant considerations are addressed in the agreement between the parties, joint ownership can be an equitable and sensible way to protect the rights of both parties to the technology arising from a collaboration.
References
1) Elliott and BSP International Foundations Limited v Expotech Limited BL O/132/05, 12 May 2005, and Paxman v Hughes BL O/143/05, 23 May 2005, on appeal, re EP(UK) 1,048,609 B1 in the joint names of Mr Hughes and Mr Paxman [2005] EWHC 2240 (Pat), 21 October 2005.
2) The collaboration was actually between BSP and Clark Civil Engineering plc but Clark went into liquidation and was succeeded by Expotech.
3) See BL O/095/04 (1 April 2004) and BL O/189/04 (16 June 2004).
4) It was agreed that the company had been formed with the intention of exploiting the patent but Paxman argued that it was not trading and was not relevant to the proceedings. The Hearing Officer held that until the company was properly wound up, and Paxman was no longer a director, the potential breach of duty prevented the action from proceeding.
5) 35 USC § 262.
6) 937 F.Supp. 1015 (D.Conn. 1996), aff’d, 135 F.3d 1456 (Fed. Cir. 1998), cert.denied, 199 S. Ct 278 (1998).
7) Many universities in the US, for example, are obliged to own the results of their research.
To make any comments on this article, or to ask a question of the author, please contact the publisher. If you would like to submit an article please subscribe to our PL Intelligence service.
The opinions expressed in the articles published in this section do not necessarily reflect those of Pharmalicensing or UTEK Corporation. No actions including proposals to or agreements with other companies should be taken by any reader without obtaining specific business or legal advice. Neither the publisher nor the authors accept any liability for any actions or activities undertaken by any reader or other third party as a consequence of these articles or for any errors or omissions therein.
© Copyright 1995-2009 Pharmalicensing, a division of UTEK Europe Ltd 
All rights reserved. Terms and Conditions | Contact us
