Equitable Interests in Patents and Patent Applications

In Yeda Research and Development Company Ltd v. Rhone-Poulenc Rorer International Holdings Inc and Others [2007] Bus LR 1796, [2007] BusLR 1796, [2008] 1 All ER 425, [2007] UKHL 43 Lord Hoffmann described s.7 (2) and (3) of the Patents Act 1977 as "an exhaustive code for determining who is entitled to the grant of a patent." For determining entitlement to the grant maybe because s.32 (3) of the Act provides that
"Notwithstanding anything in subsection (2)(b) above, no notice of any trust, whether express, implied or constructive, shall be entered in the register and the comptroller shall not be affected by any such notice."
But not necessarily to ownership because s.30 (1) states that patents and patent applications are personal property and sub-section (3) adds that they may vest by operation of law in the same way as any other personal property.

Disputes over equitable interests in patents or patent applications are fairly rare but they can arose in circumstances that fall outside s.7 (2) or (3). One such instance arose in Foster’s Australia Limited v Cash’s (Australia) Pty Ltd [2013] FCA 527. Another was French v. Paul Julian Mason and another  [1998] EWHC Patents 290.  In Twentieth Century Fox Film Corp. and Others v Harris and Others [2013] EWHC 159 (Ch), [2013] 2 WLR 1454, [2014] 1 CH 41, [2013] WLR(D) 42, [2013] EMLR 16, a copyright case, it was argued unsuccessfully that the infringement of an intellectual property right creates a constructive trust in the fruits of such infringement. Of those three cases, the only one in which a constructive trust was actually found to have arisen was the first.  It has to be treated with some caution for, as Mr Justice Newey observed in Harris at paragraph [28 (ii)]:  "The Australian approach to constructive trusts is by no means the same as that in this jurisdiction."

In Forster's case Foster's Australia Limited ("FAL") the claimant (or "applicant" as it is called in Australia) was a member of a well-known group of companies in beer and other alcoholic beverages ("the Group"). FAL sued Cash's Australia Pty Ltd for patent and registered design infringements ("Cash"). Cash’s responded, in part, that the patents and designs in question were invalid and liable to be revoked because the original applications to IP Australia were not made in FAL’s name but in the name of another company in the Foster’s Group.  The Federal Court of Australia ordered the question of whether the patents and design registrations were invalid and liable to be revoked as preliminary issues.

At the time of the applications for the patents and registered designs Foster's Group Ltd ("FGL") was the ultimate holding company of the Group and FAL was its wholly owned subsidiary. Most of the staff working for the Group were employed by another wholly owned subsidiary of FGL called Foster’s People Pty Ltd ("People"). The contract of employment under which People employed its staff including the Group's in-house legal advisers and patent attorneys contained the following clause:
"In your role for Foster’s People [FPPL] you may be required to undertake duties relating to the business of any company in the Foster’s group of companies (Foster’s Group). The Foster’s Group comprises all companies related to Foster’s Group Limited (Foster’s) within the meaning of the Corporations Act 2001.
...
You must:
...
(c) Use your best endeavours to promote and enhance the interests, profitability, growth and reputation of Fosters and the Foster’s Group companies;
(d) Act in the best interests of Foster’s and not intentionally do anything which is or may be harmful to Foster’s or any Foster’s Group company ..."
The Group and its member companies adopted a policy known as the IP Policy which stated:
"Intellectual property constitutes one of the most valuable assets of the Foster’s Group, underpinning its brands, business operations, commercial relationships and innovations developed within the businesses.
...
Foster’s is committed to “best practice” management of its intellectual property assets to ensure that they are fully secured, controlled and utilised to best effect to support and promote its business objectives.
Specifically, Foster’s policy is to implement a global management approach to its intellectual property assets through centralised management of registrable intellectual property and the provision of advisory services to the Group’s businesses on the control and use of intellectual property generally. This purpose of this policy is to both ensure appropriate security of intellectual property assets and to extract maximum value from utilisation of these assets in the competition market place."
At the time of the patent and design applications it was common for FAL to be the registered proprietor of much of the registered IP rights ("IPR") relating to the Group’s beer business, although other companies within the Group frequently used those IPR.

By a written agreement dated 23 Dec 2008 FAL commissioned Dot Design Pty Ltd ("Dot") a product design and development company to design, manufacturer and deliver a range of draught beer tapware and handles for the Group's bars and pubs. The agreement provided for all IPR to belong to and be owned by FAL immediately and absolutely for its own use and benefit in any manner it sees fit without any further fee payable to or consent required from Dot. It also required Dot to assign or transfer all relevant IPR to FAL and sign off all such documents and do all such things necessary in order to give effect to that clause. Pursuant to that agreement Dot designed and developed a mounting device and badge holder for which the FGL applied for patents and registered designs.

S.15 of the Australian Patents Act 1990 is very similar to s.7 (2) of the British Act:
"Subject to this Act, a patent for an invention may only be granted to a person who:
(a) is the inventor; or
(b) would, on the grant of a patent for the invention, be entitled to have the patent assigned to the person; or
(c) derives title to the invention from the inventor or a person mentioned in paragraph (b); or
(d) is the legal representative of a deceased person mentioned in paragraph (a), (b) or (c)."
Similarly, s.13 (1) of the Australian Designs Act 2003 provides:
"A person mentioned in any of the following paragraphs is entitled to be entered on the Register as the registered owner of a design that has not yet been registered:
(a) the person who created the design (the designer);
(b) if the designer created the design in the course of employment, or under a contract, with another person – the other person, unless the designer and the other person have agreed to the contrary;
(c) a person who derives title to the design from a person mentioned in paragraph (a) or (b), or by devolution by will or by operation of law;
(d) a person who would, on registration of the design, be entitled to have the exclusive rights in the design assigned to the person;
(e) the legal personal representative of a deceased person mentioned in paragraph (a), (b), (c) or (d)."
Cash argued that both the patent and design registrations were invalid because FGL was neither the inventor nor the designer and it did not have a contract with the inventor or designer that fell within the provisions of either statute.

Mr. Justice Kenny decided both preliminary issues against Cash on other grounds. However, and this is the interesting bit, His Honour observed at paragraph [126]:
"There was an alternative analysis put forward by FAL at the hearing to the effect that FGL held the registration of the design as a constructive trustee for FAL. In this case, applications for registration of the designs were made by FGL, although FAL, not FGL, was entitled to registration of the designs. FAL had acquired its entitlement under a commercial agreement with Dot. As already noted, the agreed facts and the evidence made it likely that, save for Allen’s, no-one at FAL or FGL (or anyone else acting for them) knew that FGL, rather than FAL, was the applicant for registration. Save for Allen’s, the evidence justifies the conclusion that no representative of either company turned his or her mind to this fact until late on 13 January 2010, when Mr O’Keefe noticed what had occurred."
The judge continued in the next paragraph:
"In the circumstances of the case, I would find, if it were necessary to do so, that FGL held the applications for design registration and registration of the designs as constructive trustee for FAL. Both companies were, of course, members of the Foster’s Group; and, as the Policy of the Group stated, intellectual property of this kind was to be devoted to the interests of the Group, specifically by securing it and obtaining “maximum value from utilisation of these assets in the competition market place”. 
In support of that finding Mr Justice Kenny relied on Mr Justice Gordon's dicta in Figgins Holdings Pty Ltd v Registrar of Trade Marks (1995) 59 FCR 147 at 149:
"[W]here an application for registration is made by other than the true owner, the court may rectify the situation by imposing a constructive trust on the application and subsequent registration from the date on which the application was lodged and additionally or alternatively rectifying the register through substitution of the true owner’s name."
This rule derives from the High Court of Australia's decision in Chang v Registrar of Titles (Vic) [1976] HCA 1; (1976) 137 CLR 177 which was no doubt one of the authorities that Mr Justice Newey would have had in mind in Harris.

In French the claimant, one Christopher Simon French ("Mr French") had invented a sleeper earring which was marketed under the name "The Invincible". When he invented the sleeper the inventor was a director, shareholder and employee of a small close company called Acme Jewellery Ltd ("Acme") of which one Paul Julian Mason ("Mr Mason") was the other director and shareholder. Acme applied for and was granted patents for the invention.  Mr French and Mr Mason fell out big time as a result of which Mr French was excluded from the management of the company. Mr French sued for unfair dismissal, relief under s.459 of the Companies Act 1985 and a declaration that Acme held the patents on constructive trusts for Mr French. The unfair dismissal proceedings were compromised by a payment to Mr French from Acme. In the unfair prejudice proceedings Mr French also succeeded in obtaining an order for Mr Mason to purchase Mr French's shares at a valuation that allowed no discount for his minority share but on terms that Mr French would not apply for employee's compensation under s.40 of the Patents Ac 1977. The grounds upon which Mr French claimed an equitable interest in the patents was that Acme had been a quasi partnership and that the company and Mr Mason owed a fiduciary duty to Mr French to ensure that the objectives of the quasi partnership were carried out.  By applying for patents in the name of the company rather than that of Mr French the company and Mr Mason had breached that duty. In the words of the statement of clam:
"The lodging of the completed specification by [Mr Mason] in the name of [Acme] was unconscionable and a breach of the fiduciary duty owed by [Mr Mason] to [Mr French]. Once [Mr Mason] has, by procuring the dismissal of the Plaintiff, evinced an intention to repudiate the agreement between himself and [Mr French] as appears in Paragraph 9 herein, it was unconscionable to continue with the lodging of the specification in the name of [Acme] thereby appropriating [Mr French's] invention where [Mr Mason and Acme] have been unjustly enriched."
The company and Mr Mason applied for the claim to be struck out.

The application came on before Mr Justice Pumfrey.   The judge considered whether there had been an institutional constructive trust of a remedial constructive trust.

As to whether there had been an institutional constructive trust, His Lordship said at paragraph [13]:
"So far as the institutional constructive trust is concerned, the question is whether on the facts pleaded the plaintiff has the beneficial ownership of the patent. As I understand it, it is essential to consider the circumstances in which the disputed property (the invention) came into the alleged trustee's hands. Where it represents an advantage obtained by unconscionable dealing, or property obtained in breach of fiduciary obligations, or is obtained in consequence of a breach of trust, the position is no doubt clear. But the property subject to the alleged constructive trust must have come into the hands of the alleged trustee in consequence of such behaviour. In a case to which section 39 of the Patents Act 1977 applies, I am quite satisfied that there is no question of the employee retaining beneficial ownership as against the employer. Were this the case, the employer would require a licence to work the invention, a possibility of which there is no suggestion anywhere in the section. Where the section speaks of the invention being "taken to belong to his employer for the purposes of this Act and all other purposes" it is in my view plainly talking about ownership in a sense which is not technical, and which does not distinguish between legal and equitable ownership. It is talking of the ownership which permits the owner to deal with the patent and to work under it."
Mr French had relied on the quasi partnership under which he had  obtained relief under s.459. The judge observed that "the use of the term quasi partnership is merely use of a convenient shorthand to describe a relationship in which the just and equitable ground for winding up may be invoked" but it does not affect the status of any of the parties to such proceedings and in particular it does not make them into partners. In Mr Justice Pumfrey's judgment there was no basis upon which the invention in Acme's hands could be said to have been impressed with a constructive trust in favour of Mr French because of the circumstances in which the invention came to be held by Acme.

As to whether there had been a remedial constructive trust the judge started with the observation that Mr French has obtained compensation for his unfair dismissal, and has also obtained an order under s 459 for his shares to be purchased at a price which does not reflect the fact that they are a minority shareholding. Mr French had a claim for compensation in relation to the use of the patents by Acme under s 40 of the 1977 Act. He observed at paragraph [20]:
"Plainly a company owes no fiduciary duties to its directors, and the directors owe no fiduciary duties to the members. Unfair dismissal or dismissal in breach of the contract of employment is not a breach of a fiduciary duty by the employer. What gives rise to the claim in the present case is purely the personal relationship between Mr French and Mr Mason."
He concluded in the next paragraph:
"I am quite satisfied that the claim arising out of the dismissal of Mr French cannot give rise to an imposed proprietary remedy affecting the patent. There is no nexus between the alleged breach and the remedy sought. To stigmatise the dismissal as being in breach of a fiduciary duty is irrelevant. It cannot affect the remedy. So far as the claim in relation to the filing of the divisional in 1992 is concerned, I have already explained why, if Acme were entitled to the invention, the act of filing the divisional cannot be described as a breach of any duty at all. It follows that the claim for a remedial constructive trust must fail."
As I have noted above, one of the terms upon which Mr French was granted relief was that he would not claim  compensation under s.40. Referring to that provision, the judge struck out the claim on the ground that the action was also an abuse of the process of the court.

In Harris the claimants argued that, where a copyright is infringed, the copyright owner has a proprietary claim to the whole proceeds of the infringement. Those proceeds, it was submitted, are held on constructive trust for the copyright owner. In support of that contention the claimants argued that s. 96 (2) of the Copyright, Designs and Patents Act 1988 states that, in an action for infringement of copyright, "all such relief by way of damages, injunctions, accounts or otherwise is available to the plaintiff as is available in respect of the infringement of any other property right".  In their submission the words "or otherwise" could cover a proprietary remedy. Mr Justice Newey threw out the application on the grounds that it was unsupported by authority and wrong in principle though it was common ground that a copyright, like any other IPR could be held on constructive, implied and resulting trusts.

Although the comptroller has very extensive jurisdiction under s.8. s.12 and s.37 of the Patents Act 1977 which includes a power to revoke a patent under s.72 to allow a patent to be granted to the person entitled to it, it seems unlikely that he could determine the issues that arose in any of the cases that have been discussed above. Apart from every other consideration he is precluded by s.32 (3) from taking notice or being affected by any trust whether express, implied or constructive. That means that any consideration of such issues has to be by the Patents Court or the Intellectual Property Enterprise Court.

If anyone wants to discuss this article or any of the issues arising out of it he or she should call me on 020 7404 5252 or fill in my contact form. If he or she wants to discuss Foster's or any of other Australian case the best person to approach is Robert Griffiths QC who is also a member of the New South Wales Bar. Members of the public can also tweet me, write on my wall, or contact me through G+, Linkedin or Xing.

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