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is it ever right to sue a client?

Posted: 19 April 2011 | | No comments yet

Imagine that you are part of a small biotech company, BiotechCo, whose business is the development of delivery systems for pharmaceutical products. One of your team, who is in charge of developing sales with a large pharmaceutical company, Pharma Co, came to you three months ago with the possibility of a very interesting contract within that company. You went to a meeting where various things were discussed on a confidential basis. As a result of that, you now have a clearer idea of where the pharmaceutical company is aiming to take an important drug, which is approaching the end of its patent life. If BiotechCo can come up with a new improved delivery system, then you will assist Pharma Co in creating a significant market lead for their drug, and by so doing probably increase the chances of selling your portfolio of technologies to Pharma Co. You have set your best research brains on to the problem, and they have come up with a very clever device which uses technology that has been known outside the pharmaceutical sector for a non-medical purpose. Their developments have been reported to Pharma Co on a confidential basis and Pharma Co has been given a prototype. Pharma Co has done some tests on the device.

Imagine that you are part of a small biotech company, BiotechCo, whose business is the development of delivery systems for pharmaceutical products. One of your team, who is in charge of developing sales with a large pharmaceutical company, Pharma Co, came to you three months ago with the possibility of a very interesting contract within that company. You went to a meeting where various things were discussed on a confidential basis. As a result of that, you now have a clearer idea of where the pharmaceutical company is aiming to take an important drug, which is approaching the end of its patent life. If BiotechCo can come up with a new improved delivery system, then you will assist Pharma Co in creating a significant market lead for their drug, and by so doing probably increase the chances of selling your portfolio of technologies to Pharma Co. You have set your best research brains on to the problem, and they have come up with a very clever device which uses technology that has been known outside the pharmaceutical sector for a non-medical purpose. Their developments have been reported to Pharma Co on a confidential basis and Pharma Co has been given a prototype. Pharma Co has done some tests on the device.

Imagine that you are part of a small biotech company, BiotechCo, whose business is the development of delivery systems for pharmaceutical products. One of your team, who is in charge of developing sales with a large pharmaceutical company, Pharma Co, came to you three months ago with the possibility of a very interesting contract within that company. You went to a meeting where various things were discussed on a confidential basis. As a result of that, you now have a clearer idea of where the pharmaceutical company is aiming to take an important drug, which is approaching the end of its patent life. If BiotechCo can come up with a new improved delivery system, then you will assist Pharma Co in creating a significant market lead for their drug, and by so doing probably increase the chances of selling your portfolio of technologies to Pharma Co. You have set your best research brains on to the problem, and they have come up with a very clever device which uses technology that has been known outside the pharmaceutical sector for a non-medical purpose. Their developments have been reported to Pharma Co on a confidential basis and Pharma Co has been given a prototype. Pharma Co has done some tests on the device.

You have recently realised that the product that your research colleagues have developed could have a wider application than merely Pharma Co and its particular drug. Many drugs have this particular problem, and you therefore have a potential blockbuster of a product on your hands.

Pharma Co is delighted with the device, and you recently began to discuss entering into negotiations for a supply agreement with them for the whole of their requirements for this particular item. As part of the deal, however, you want to make it clear that you are not exclusively bound to them, and that you can actually sell this product to other third parties, providing such applications do not directly compete with Pharma Co’s Drug. You have no intention of undermining their particular market niche. Pharma Co has replied indicating that they have taken out a patent on the product, naming the employees who did the testing, and they are happy for you to sell to anybody else provided they have exclusivity for their particular market, and you pay them a royalty of 15 per cent on any other sale. Not surprisingly, this has caused some consternation within your business as, if you agree, BiotechCo will hardly make any profit on any sale that you make, whilst if you do not, then the capital cost of scaling up for the manufacture looks exorbitant. However, if you do not agree the supply agreement shortly, then your financing will become very difficult.

Whilst this scenario may seem far fetched, it is based upon similar facts which affected a client of the author’s although, of course, the facts and time scales have been changed to protect identities. The client, after taking advice, was able to consider what it needed to do by looking at the first principles established by the United Kingdom statutory framework, namely, the Patents Act 1977 and the Copyright, Designs and Patents Act 1988 (CDPA). There are other Acts which govern other intellectual property rights but for the purposes of the above scenario, those are not appropriate. So where to begin to analyse whether BiotechCo has any rights it can protect?

To start, one needs to look at who came up with the discoveries or created the inventions that may be patentable or created documents that might be protected as well. Only once you have identified these people can you really consider what the relative rights and wrongs of the scenario above are. In this instance, the people who came up with the development are the ‘best research brains’. Assume, for the moment, that these research brains are employees of BiotechCo and the problem becomes much clearer.

Under the Patents Act 1977, inventions created by an employee will belong to his employer for all purposes if it was made by the employee during the course of his normal duties or during the course of duties specifically assigned to him, in circumstances where it was reasonable to assume that an invention might actually arise. Applying the facts above, as employees of BiotechCo created inventions during tasks that were assigned to them where inventions might be expected to arise, then the invention(s) generated belong to BiotechCo. You should note that it is the person, or persons, who actually devised the invention that have the right to the patent. Someone who merely tests an invention formulated by others does not do enough to contribute to the invention.

 Similarly, there may well be technical specifications or other written records for the device, as well as drawings of the device’s components, and even a prototype device which has been provided to Pharma Co. Under the CDPA, documents such as written specifications or descriptions essentially composed of writing are literary works protected by copyright. Drawings, sketches or other similar graphic works are artistic works also protected by copyright. Prototypes, and indeed manufacturing drawings intended to make an article, are protected by unregistered design right, an intellectual property right created under the CDPA, which lasts, in the broadest terms, for 10 years from the end of the year in which it was created. Additionally, these designs are also protected by a three year unregistered design right created by a European Regulation. As it is such a short-lived right, it has little commercial value in this illustration so we won’t consider it further. So who owns these rights?

Copyright in literary or artistic works made by an employee in the course of his employment belongs to his employer i.e. BiotechCo. Unregistered design right created by an employee in the course of his employment also belongs to his employer. All of the above therefore make it clear that BiotechCo owns all of the appropriate rights.

It is inevitable that Pharma Co will assert that it has acquired the rights because (a) it paid BiotechCo to do the development, (b) that the product was developed for it, and (c) if it hadn’t been for Pharma Co and its Drug, BiotechCo would not have developed the device. However, both the Patents Act 1977 and the CDPA make it clear that there can be no transfer of any intellectual property rights as between BiotechCo and Pharma Co unless it is in writing and signed specifically on behalf of the person assigning the rights i.e. someone with authority to sign on behalf of BiotechCo would have to have signed a document specifically assigning the patent rights, the copyright and the design right to Pharma Co.

In the absence of such a document, it would be difficult for Pharma Co to sustain its arguments that BiotechCo has licensed it. In the absence of any agreement trans – ferring the intellectual property, all of the intellectual property that has been generated in this new device remains with BiotechCo. Yet Pharma Co are asserting that they are entitled to the rights and are seeking money from BiotechCo for third party sales.

 So how does BiotechCo get over the next, major hurdle which involves some hard negotiations with its potential major customer? Clearly, this is a decision which faces many small businesses when dealing with a customer who could bring in significant business. Do you go so far as to sue your client?

There can be no right or wrong answer to this particular dilemma. However, in relation to the patent application that Pharma Co has taken out, the UK Patents Act provides that any granted patent can be revoked on application by the person properly entitled on the grounds that it was not granted to the person who was entitled to the grant of that patent, provided the application is made within two years after grant. Essentially this means that BiotechCo could challenge the Pharma Co’s patent. A similar principle applies in America, where it is not possible to enforce a patent where the wrong inventors are named on the face of the patent. As Pharma Co has wrongly named their own employees as the inventors of their patent applications, any patent granted in America would not be enforceable.

Additionally, the UK Patents Act 1977 allows questions of entitlement to the grant of a patent to be determined either before or after the grant of the patent. This means that BiotechCo could request the UK Intellectual Property Office (IPO) to register it as the proprietor, whether before or after the patent has been granted. The IPO can also consider questions about the entitlement to foreign patents and patents made under the various patent conventions that exist where these arise from the same facts. Similar proceedings could be brought before the UK courts. The IPO is certainly an effective choice of forum, the proceeding is somewhat more informal than the courts and is potentially cheaper, but with timescales of approximately three months (further extendible) to reply to any particular communication, these types of proceedings can take a long time. Additionally, any decision of the IPO is automatically appealable to the Patent Court of England and Wales.

If BiotechCo chose to go before the Court, the proceedings can be quite a lot quicker, although it is more likely to be more expensive than proceedings before the IPO. However, since 1 October 2010, a forum has become available that is dedicated to ensuring that SMEs and private individuals are not deterred from innovation due to the possible costs of litigation. The Patents County Court (PCC) in London has new rules that show a marked change in procedure, compared to the rest of English civil procedure. Many of the expensive stages of litigation have been all but removed from proceedings, and the little that remains will be under the strict control of the Court.

The Patents County Court Judge will only permit evidence other than that set out in or attached to the parties statements of case where he is convinced that the benefit of the additional evidence justifies its expense. This will limit the volume of documents to be reviewed and the number and complexity of witness statements and expert reports to be prepared. Indeed, the cases in which these documents will appear at all are likely to be in the minority.

One of the main concerns of the SME is the potential exposure to costs if it loses. This potential exposure has been drastically reduced in the PCC. The award of costs against a losing party is limited to a maximum of GBP 50,000; still a lot of money but much less than the one million GB pounds or so that can frequently be expected in the High Court.

Of necessity, this has been a brief discussion of the issues which affect not only the client illustrated above, indeed some of the relevant issues (what if the ‘research brains’ are consultants, what if the invention is not novel and others) have not been canvassed at all. As a result, and because each case will depend upon its own individual circumstances, the discussion above should be seen as illustrative only, and should not be relied on as providing concrete advice for your particular circumstances. Seek appropriate advice if the circumstances described in this article seem familiar to you.

About the Author

Jim Kinnier Wilson is a partner in Manches Technology and Media department in the Thames Valley and specialises in intellectual property. He has advised many science and engineering based clients on the protection and exploitation of their IP rights, especially in the pharmaceutical, biotechnology, agri-bio, medical device and veterinary medicine sectors.

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