Inventorship and Ownership – the Importance of Getting it Right

Anybody who works as a patent attorney for any length of time discovers that there is no shortage of people who are perfectly happy to bend the truth a little in order to achieve their objectives.  In the case of patents, such liberties with the facts tend to relate to matters of inventorship and ownership of patent rights.

A case recently decided by the Federal Court of Australia, Neobev Pty Ltd v Bacchus Distillery Pty Ltd (Administrators Appointed) (No 3) [2014] FCA 4, perfectly illustrates this point.  Here, a patent for an invention made by one person (Mr Scott) was filed and granted naming an additional inventor (Mr Hajdinjak) because he ‘wanted his name on the patent’.  Furthermore, the patent is registered in the name of one owner (Bacchus) even though, in truth, the rights are co-owned by Mr Scott’s company, in order to better satisfy the requirements for Bacchus to receive a government grant to assist in commercialisation of the invention.

The true circumstances have come to light because Bacchus got into financial difficulties and was placed in administration.  The administrators propose to sell the business, and the associated intellectual property along with it.  Neobev, which now owns all of the rights previously held by Mr Scott and his company, is disputing the administrators’ entitlement to do this – or, at least, to do it without obligating any purchaser to pay royalties to Neobev under an existing agreement with Bacchus.

The situation is something of a mess, which has cost the parties time and money to resolve in the Federal Court.  The reason for the mess is that the people involved cut corners and did as they pleased when times were good, without regard to what would happen if the circumstances were to change in the future.  The one fortunate aspect of the case is that Australia is not one of those jurisdictions in which incorrect recording of inventorship or ownership is, in itself, fatal to the validity or enforceablity of a patent.

In this case, the court has now ordered (Neobev Pty Ltd v Bacchus Distillery Pty Ltd (Administrators Appointed) (No 4) [2014] FCA 21) that the Register of Patents be rectified to show Mr Scott as sole inventor.  The court has also found that, despite Bacchus being recorded as the sole owner of the patent in question, in reality it is holding the patent in trust on behalf of itself and Neobev as joint beneficial owners.  For now, the Register will not be amended to show this joint ownership, because there is no actual error requiring correction in the trustee being recorded as legal owner, and to record joint ownership would effectively terminate the trust and distribute its property 50/50 between Bacchus and Neobev.  The court was unwilling to do this when it had not heard evidence on the nature of the trust, or considered the relevant state laws in relation to the trust and the powers of the trustee.

The Primacy of Inventorship

The first rule of patent law is that all patent rights originate with the inventor.  Anybody who wants to claim ownership of a patent, or of a patentable invention, needs to be able to show a valid chain of legal title originating with the inventor, and ending with themselves.  If there are multiple inventors, then a chain of title must exist from each one of them to the final owner.

Ideally, the Register of Patents reflects the true situation with regard to ownership and inventorship.  But, ultimately, if the Register does not match a provable legal position, then the legal position trumps the Register.  Before a patent is actually granted (i.e. when it is still an application) the Australian Patent Office will generally accept the assertions of the applicant as to ownership and inventorship.  And while falsely or fraudulently claiming entitlement to a patent is potentially a ground for revocation, the courts have considerable discretion not to revoke a patent on a ‘technicality’ of this kind, particularly if the problem can be resolved by appropriate orders for correction of the Register.

Indeed, the power of the courts to preserve the validity of a patent in cases where entitlement has been wrongly (though perhaps inadvertently so) claimed was enhanced by amendments included in the Intellectual Property Laws Amendment (Raising the Bar) Act 2012.  (See, in particular, section 138(4) of the Patents Act 1990.)

In the Neobev case, the court found that Mr Scott was the sole inventor because he alone had the necessary knowledge and technical background to conceive of the invention in question, and that Mr Hajdinjak, despite being named as an inventor on the patent application, had no ‘material effect on the final concept of the invention’ (at [109]).

Inventors and Patent Owners

The significance of the finding on inventorship is that Mr Hajdinjak never had any rights in relation to the invention (remember the first rule: all patent rights originate with the inventor).  Therefore, in determining the actual owner, or owners, of the patent, the court could have regard only to any transfer of rights made by Mr Scott.

Under Australian law (section 14 of the Patents Act), ownership of a granted patent can only be transferred by an agreement in writing, signed by both the assignor and the assignee.  No such requirements exist for an application (or, more fundamentally, an invention).

In the Neobev case, formal terms regarding ownership of the patent were never put in writing.  The court found that a verbal contract had been established, by way of a conversation which took place on 7 February 2005.  Although there were some differences between Mr Scott’s and Mr Hajdinjak’s recollections of the conversation, the court largely accepted Mr Scott’s account, and determined (at [104]) that:

…there was a high level of trust between Mr Scott and Mr Hajdinjak, and that Mr Scott was somewhat unsophisticated when it came to legal arrangements. He did not follow up discussions with formal agreements. Furthermore, while Bacchus was operating and bearing in mind the royalty agreements and, for example, the term of the March 2012 royalty agreement (i.e., 20 years from the date of the issue of the patent), the parties would not have had a particular need to direct their attention to ownership issues. Mr Scott was prepared to allow the 593 Patent to be in Bacchus’ name because of the requirements of the government grant. … Importantly, I do think that Mr Hajdinjak admitted in cross-examination that the culmination of the prior negotiations evidenced by the documents generated in late 2004 was an agreement (not [to] be documented) that ownership was to be shared equally between the Scott interests and Bacchus.

The consequence of this is ‘that the effect of the agreement as to joint ownership in circumstances where it was agreed that the patent was to be in Bacchus’ name is to give rise to an express trust over the 593 Patent in favour of Bacchus and [Mr Scott’s company] MSC in equal shares’ (at [114]).

Consequences

The rights previously held by MSC are now owned by Neobev, which is something that the administrators of Bacchus will need to deal with.  The fact that the rights held by Bacchus remain unclear – including whether or not it is able to assign the benefit of a licence to use the patented technology – is problematic.  It will be very difficult to find a buyer for a business that may not have freedom to operate as it had done prior to being placed in administration!

With the ownership questions resolved, and the court having highlighted the various outstanding issues, it would be good if the parties could now sit down and work out an agreement that will enable everybody to move forward without spending more time and money in court.

Conclusion – Valuable Lessons for Innovators

There are important lessons in this for all businesses dealing with the commercialisation of patented (or patentable) technology.

First, make sure you correctly identify the inventor, or inventors.  There are all sorts of ‘rules’ and guidelines about, but generally an inventor is someone who has contributed materially to the concept of the invention.  People whose contribution is financial, or who act under direction from an inventor, are usually not inventors themselves.  If in doubt, seek professional advice!

Second, having identified the inventor(s) make sure that the chain of title to the intended owner of the IP rights is solid.  This may require a review of the terms of employment agreements, and/or the preparation and execution of written assignment agreements.  Inventors should be appropriately compensated for assigning their rights.  For an employee, their salary may be sufficient compensation.  Non-employee inventors may require additional consideration, such as an up-front payment, a share of future royalties and/or a stake in the company seeking to commercialise the technology.  Again, professional advice may be needed.

Third, the business structures which may be established for the purpose of commercialising the invention should be clear and preferably agreed in writing.  Agreements between entities need to take into account the possibility of difficulties arising in the future.  It is easy to agree on how to proceed during the initial ‘honeymoon phase’ of an enterprise.  It is when the tough times arrive that you will learn whether your structures and legal agreements are any good!  Legal assistance is almost certainly essential here – and the cost of getting it right at the beginning will be far less than cost of Federal Court proceedings somewhere down the track!

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Tags: Entitlement, Inventorship, Ownership