Hughes v Paxman [2006] EWCA Civ 818

Case No A3/2005/2472[2006] EWCA Civ 818
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION (PATENTS COURT)
The Hon Mr Justice Kitchin
CH4/2005/APP/0429
Venue Royal Courts of Justice, Strand, London, WC2A 2LL
Friday 23 rd June2006
Before
THE MASTER OF THE ROLLSLORD JUSTICE JACOBLORD JUSTICE NEUBERGER
Between
Derek HughesAppellant/Neil PaxmanRespondent/
(Transcript of the Handed Down Judgment ofSmith Bernal WordWave Limited190 Fleet Street, London EC4A 2AGTel No: 020 7421 4040 Fax No: 020 7831 8838Official Shorthand Writers to the Court)
Iain Purvis and Giles Fernando (instructed by Messrs Walker Morris) for Appellant/RespondentPiers Acland and Ulick Staunton (instructed by Messrs Lupton Fawcett) for Respondent/Applicant
JudgmentDate 2006-06-23
[1]This appeal is from a judgment of Kitchin J of 21st October 2005. The question is whether a reference under s.37 of the Patents Act 1977 should be struck out. There were two points said to justify this, one of jurisdiction and one of company law. Mr Probert, acting for the Comptroller, had found in favour of the referrer (Mr Paxman) on the jurisdiction point but in favour of the respondent (Mr Hughes) on the latter. So he struck the reference out. Kitchin J upheld the decision on jurisdiction but reversed that on the company law point. So he re-instated the reference.[2]Mr Iain Purvis argued the case for the appellant, Mr Hughes. On the jurisdictional point Mr Piers Acland argued that for the respondent, Mr Paxman. Mr Ulick Staunton was to have argued the company law point for Mr Hughes, but in the event, we did not need to call upon him to add to the points made in the skeleton argument.

Background

[3]Kitchin J summarises the position uncontroversially in paragraphs 7-26. For present purposes it suffices to say: i) Mr Hughes and Mr Paxman are the registered co-proprietors of the patent. ii) By the reference Mr Paxman asks for a determination of whether a licence under the patent should be granted to a company called Brewfitt Ltd to distribute and sell in the UK articles covered by the patent called trim coolers. The primary intention is that they should be made by an Italian company called Celli SpA. However at paragraph 46 of Mr Paxman’s Statement wider relief is claimed, for instance that he should be able to licence a company set up by himself – the details are set out by Kitchin J at [10]. iii) There is a considerable dispute between Mr Paxman and Mr Hughes as to what was agreed between them. They had formed a company called Trim Cool Ltd. Until November last year (after Kitchin J’s judgment) they were the sole directors. The only two shares are in the name of Mr Hughes but he acknowledges that one is held on trust for Mr Paxman. The company has few assets and is now deadlocked. In November 2005 Mr Paxman resigned as a director. iv) As a consequence of that resignation it is now accepted that, even if Mr Hughes is right on the company law point, it has fallen away as a substantive reason for a strike out. It is only now pursued on the question of costs. v) Trim Cool was intended to be the vehicle for the exploitation of the patent. It is a matter of dispute as to whether there is any binding agreement between the parties or with Trim Cool.

The Jurisdiction Issue

[4]This is a stark point of law. Does the Comptroller have jurisdiction under s.37(1) on the application of one co-proprietor to order that licences under the patent be granted. My answer is “yes.” I turn to explain why.[5]Unfortunately it is necessary to set out rather a lot of the turgid statutory provisions concerning entitlement and co-ownership. I set out the current form of the Act as amended, this being the form at the date of the reference.[6]The starting point is the default position for co-proprietors:
“36.-(1) Where a patent is granted to two or more persons, each of them shall, subject to any agreement to the contrary, be entitled to an equal undivided share in the patent. (2) Where two or more persons are proprietors of a patent, then, subject to the provisions of this section and subject to any agreement to the contrary - (a) each of them shall be entitled, by himself or his agents, to do in respect of the invention concerned, for his own benefit and without the consent of or the need to account to the other or others, any act which would apart from this subsection and section 55 below, amount to an infringement of the patent concerned; and (b) any such act shall not amount to an infringement of the patent concerned. (3) Subject to the provisions of sections 8 and 12 above and section 37 below and to any agreement for the time being in force, where two or more persons are proprietors of a patent one of them shall not without the consent of the other or others grant a licence under the patent or assign or mortgage a share in the patent or in Scotland cause or permit security to be granted over it.”
[7]So, absent any agreement, any co-proprietor can exploit the patent himself or by his agents but he cannot sub-licence a third party. “By his agents” has a wide meaning covering any “home use” – see Henry Bros v MoD [1997] RPC 693 at 709 (Jacob J) and [1999] RPC 442 at p.450 (per Robert Walker LJ). But it does not include simply licensing the patent to a third party, which is what Mr Paxman seeks here.[8]This default position can obviously produce very different commercial situations for co-proprietors. For instance one may be an individual with no manufacturing capacity or capital whereas the other may be a formidable industrial empire. In such a case the latter co-proprietor could happily exploit whereas the former could not. In another scenario neither co-proprietor may have the wherewithal to exploit the patent. Unless they can agree there will be deadlock – with the practical consequence that the patent cannot be exploited at all.[9]Subsection (3) is “subject to the provisions of” ss.8, 12 and 37. So one goes to these to see what they relevantly say: Determination before grant of questions about entitlement to patents, etc. 8.-(1) At any time before a patent has been granted for an invention (whether or not an application has been made for it) -(a) any person may refer to the comptroller the question whether he is entitled to be granted (alone or with any other persons) a patent for that invention or has or would have any right in or under any patent so granted or any application for such a patent; or(b) any of two or more co-proprietors of an application for a patent for that invention may so refer the question whether any right in or under the application should be transferred or granted to any other person; and the comptroller shall determine the question and may make such order as he thinks fit to give effect to the determination. (2) Where a person refers a question relating to an invention under subsection (1)(a) above to the comptroller after an application for a patent for the invention has been filed and before a patent is granted in pursuance of the application, then, unless the application is refused or withdrawn before the reference is disposed of by the comptroller, the comptroller may, without prejudice to the generality of subsection (1) above and subject to subsection (6) below - (a) order that the application shall proceed in the name of that person, either solely or jointly with that of any other applicant, instead of in the name of the applicant or any specified applicant; (b) where the reference was made by two or more persons, order that the application shall proceed in all their names jointly;(c) refuse to grant a patent in pursuance of the application or order the application to be amended so as to exclude any of the matter in respect of which the question was referred;(d) make an order transferring or granting any licence or other right in or under the application and give directions to any person for carrying out the provisions of any such order.” “Determination of questions about entitlement to foreign and convention patents, etc. ” 12.-(1) At any time before a patent is granted for an invention in pursuance of an application made under the law of any country other than the United Kingdom or under any treaty or international convention (whether or not that application has been made) - (a) any person may refer to the comptroller the question whether he is entitled to be granted (alone or with any other persons) any such patent for that invention or has or would have any right in or under any such patent or an application for such a patent; or (b) any of two or more co-proprietors of an application for such a patent for that invention may so refer the question whether any right in or under the application should be transferred or granted to any other person; and the comptroller shall determine the question so far as he is able to and may make such order as he thinks fit to give effect to the determination.” “Determination of right to patent after grant 37.-(1) After a patent has been granted for an invention any person having or claiming a proprietary interest in or under the patent may refer to the comptroller the question - (a) who is or are the true proprietor or proprietors of the patent, (b) whether the patent should have been granted to the person or persons to whom it was granted, or (c) whether any right in or under the patent should be transferred or granted to any other person or persons; and the comptroller shall determine the question and make such order as he thinks fit to give effect to the determination. (2) Without prejudice to the generality of subsection (1) above, an order under that subsection may contain provision - (a) directing that the person by whom the reference is made under that subsection shall be included (whether or not to the exclusion of any other person) among the persons registered as proprietors of the patent; (b) directing the registration of a transaction, instrument or event by virtue of which that person has acquired any right in or under the patent; (c) granting any licence or other right in or under the patent; (d) directing the proprietor of the patent or any person having any right in or under the patent to do anything specified in the order as necessary to carry out the other provisions of the order.” (a) order that the application shall proceed in the name of that person, either solely or jointly with that of any other applicant, instead of in the name of the applicant or any specified applicant; (b) where the reference was made by two or more persons, order that the application shall proceed in all their names jointly; (c) refuse to grant a patent in pursuance of the application or order the application to be amended so as to exclude any of the matter in respect of which the question was referred; (d) make an order transferring or granting any licence or other right in or under the application and give directions to any person for carrying out the provisions of any such order.” (a) who is or are the true proprietor or proprietors of the patent, (b) whether the patent should have been granted to the person or persons to whom it was granted, or (c) whether any right in or under the patent should be transferred or granted to any other person or persons; (a) directing that the person by whom the reference is made under that subsection shall be included (whether or not to the exclusion of any other person) among the persons registered as proprietors of the patent; (b) directing the registration of a transaction, instrument or event by virtue of which that person has acquired any right in or under the patent; (c) granting any licence or other right in or under the patent; (d) directing the proprietor of the patent or any person having any right in or under the patent to do anything specified in the order as necessary to carry out the other provisions of the order.”[10]So there is separate, but parallel, provision for pre-grant (s.8), foreign (s.12) and post-grant (s.37) situations. In Markem v Zipher [2005] RPC 61, although applications were brought under s.37 for granted patents and under s.8 for an application, the parties conceded that there was no material difference between the sections so the case was decided simply under s.8 (see p.794). Similarly here: it cannot matter whether a reference is made pre- or post-grant. The result must be the same.[11]The argument for Mr Paxman runs thus: i) He is a person “having .. a proprietary interest .. in the patent”. So he is a person who can refer a question under s.37(1). ii) The question referred is whether any “right … under the patent should be granted to any other person.” iii) Whatever might be said about the word “right” in other contexts, here Parliament must have included the grant of a licence under the patent because s.37(2)(c) is explicit on the point (a point not in dispute). iv) The Comptroller can, once a question is referred by a person entitled to refer, make “any order he thinks fit.” So the Comptroller can settle the terms of any licence – the only restraint on his powers here being that he must act rationally, fairly and proportionately and must have regard to all the circumstances of the case.[12]The argument for Mr Hughes is equally short. It is that s.37 is only about determination of legal rights. It does not confer a wide jurisdiction for the Comptroller to grant or order a co-owner to grant, a licence to third parties. The arguments in support of this are: i) The very sidenote to the section (which can be taken into account, see p.636 of the current edition of Craies on Statute Law) reads “Determination of Right to Patent.” ii) The decision in Markem is to the effect that s.8 and s.37 are concerned with legal rights only. iii) The word “should” in s.37(1)(b) is plainly referring only to legal rights: “should the patent have been granted to the person to whom it was granted” can only sensibly involve deciding such rights. So it would be very odd if “should” had a wider meaning, encompassing purely commercial considerations, in s.37(1)(c). iv) It is unlikely that Parliament would confer such a wide discretion on the Comptroller – he is given no guidance as to what to take into account. The suggested jurisdiction is so vague that it is arbitrary, unlike the other cases where the Comptroller is empowered to grant a compulsory licence. v) Moreover such an arbitrary jurisdiction should not be read into the statute because so to do would infringe Art. 1 of Protocol 1 to the European Convention on Human Rights.

Reasoning on Jurisdiction

[13]As I have said I have no doubt about the disputed jurisdiction. My first reason for so holding is that I cannot imagine for a moment that Parliament could have intended it to be possible that exploitation of an invention could be frustrated by a deadlock situation. The whole point of the patent system was and is to encourage innovation and the exploitation of inventions. That is indeed why, where patented inventions have not been exploited, subject to certain conditions, there is provision for compulsory licences.[14]Next, there is no doubt that under the previous legislation such jurisdiction existed. Counsel have traced it back to an amendment made to the Patents Act 1907 by the 1932 Act, although their researches did not extend so far as to find out why the provision was introduced then. Section 37 of the Act as amended provided “Joint ownership of a patent.(1) Where, after the commencement of this Act, a patent is granted to two or more persons jointly, they shall, unless otherwise specified in the patent, be treated for the purpose of the devolution of the legal interests therein as joint tenants, but, subject to any contract to the contrary, each of such persons shall be entitled to use the invention for his own profit without accounting to the others, but shall not be entitled to grant a licence otherwise than with their consent or in accordance with directions given under this section, and, if any such person dies, his beneficial interest in the patent shall devolve on his personal representatives as part of his personal estate.(2) The comptroller may, upon application for relief under this subsection being made to him in the prescribed manner by any one or more of joint patentees, and after giving to the other joint patentees an opportunity of being heard, give such directions in accordance with the application as to the sale or lease of the patent for the invention, or as to the grant of licences in respect thereof, or otherwise, as to the use and development of the rights thereunder as appear to him to be just and expedient, and it shall be the duty of all the joint patentees to give effect to any directions so given.”[15]The jurisdiction was continued by s.55(1) of the 1949 Act which read:
“55. – (1) Where two or more persons are registered as grantee or proprietor of a patent, the comptroller may, upon application made to him in the prescribed manner by any of those persons, give such directions in accordance with the application as to the sale or lease of the patent or any interest therein, the grant of licences under the patent, or the exercise of any right under the last foregoing section in relation thereto, as he thinks fit.”
[16]Mr Blanco White in the 4th Edition (1974) of Patents for Inventions noticed particularly that the provision:
“goes beyond a mere power to determine rights and allows the breaking up of a deadlock produced by insistence of one co-owner on his right to prevent the others from dealing with the patent”
[17]It is worth noticing that the power extended not merely to the grant of licences. The Comptroller could order sale or lease of the patent too. This is consistent with the rules as to co-ownership of property generally. In the only reported case I have found under the provision, Florey’s Patent [1962] RPC 186, the Comptroller used his power under s.55(1), invoked by six of seven co-owners, to order the remaining owner to join with them in assigning the patent. And when he failed to do so, the Comptroller did it for him exercising his power under s.55(2). It was a very important order commercially – the patent was for the major antibiotic cephalosporin and the assignment was to the National Research and Development Corporation so that the latter body could licence its development and production. But for the beneficial power given by s.55, the obstinate co-patentee could well have prevented or impeded the public from getting this major antibiotic.[18]So the jurisdiction clearly existed for the 45 years prior to the 1977 Act. Nothing in the Report of the Committee to Examine the Patent System and Patent Law Cmnd 4407 of 1970 (the “Banks Committee”) which preceded the 1977 Act suggested there was any problem with it, though, apart from Florey’s Patent, there are no reported cases of its exercise. No mischief of the previous law giving a reason for cutting down the jurisdiction can be identified.[19]The sidenote point does not advance the argument much. For on any view the Comptroller is being given a power to grant licences in some circumstances – which is not a “Determination of Right to Patent” as such. As Craies observes, the function of a sidenote “is merely to serve as a brief, therefore possibly inaccurate, guide to the content of the section.”[20]Nor does Markem help. It is true that this court held in an entitlement disputethat one was concerned with legal rights, not with who invented first. But the decision was nothing to do with a dispute between co-owners.[21]The semantic argument based on “should” in both s.37(1)(b) and (1)(c) has no purposive basis. It is looking at the words as words, rather than trying to understand from the words used what it is that Parliament was intending to convey to the reasonable reader.[22]Moreover it breaks down for another, albeit purely semantic, reason. Section 8 (also s.12) does not have two “shoulds.” The entitlement question is governed by the “shouldless” ss. (1)(a). “Should” only appears in the subsection for disputes between co-proprietors. So, for s.8 the “two-should” argument, could not run. And, as I have said, the position must be the same whether the dispute starts pre- or post- grant.[23]As to the overwide discretion point, its basis is supposed to be that in other compulsory licensing circumstances provided for in the Act, the Comptroller is given a much more confined discretion. I do not think this is a fair point. First I think that one should disregard here the amendments made to the 1977 Act in 1999 as a result of the Agreement on Trade-Related Aspects of Intellectual Property Rights of 1994 forming part of the Uruguay round of the World Trade Organisation agreements. The amendments cut down the power to grant compulsory licences and what can be granted by way of a licence. But it cannot seriously be contended that the amendments altered the construction of s.37.[24]Prior to the amendments the Act set out the circumstances under which the Comptroller was empowered to grant a compulsory licence in s.48. I do not set it out by reason of its length. What matters here is that, once the circumstances were such as to give jurisdiction, the basic rule was that the Comptroller could order the grant of a licence “on such terms as he thinks fit” (see s.48(2)). The only guidance as to the exercise of the discretion was provided by s.50 as it then stood: “Exercise of powers on application under section 48 50.-(1) The powers of the comptroller on an application under section 48 above in respect of a patent shall be exercised with a view to securing the following general purposes -(a) that inventions which can be worked on a commercial scale in the United Kingdom and which should in the public interest be so worked shall be worked there without undue delay and to the fullest extent that is reasonably practicable;(b) that the inventor or other person beneficially entitled to a patent shall receive reasonable remuneration having regard to the nature of the invention;(c) that the interests of any person for the time being working or developing an invention in the United Kingdom under the protection of a patent shall not be unfairly prejudiced. (2) Subject to subsection (1) above, the comptroller shall, in determining whether to make an order or entry in pursuance of any application under section 48 above, take account of the following matters, that is to say - (a) the nature of the invention, the time which has elapsed since the publication in the journal of a notice of the grant of the patent and the measures already taken by the proprietor of the patent or any licensee to make full use of the invention; (b) the ability of any person to whom a licence would be granted under the order concerned to work the invention to the public advantage; and (c) the risks to be undertaken by that person in providing capital and working the invention if the application for an order is granted, but shall not be required to take account of matters subsequent to the making of the application.” (a) that inventions which can be worked on a commercial scale in the United Kingdom and which should in the public interest be so worked shall be worked there without undue delay and to the fullest extent that is reasonably practicable; (b) that the inventor or other person beneficially entitled to a patent shall receive reasonable remuneration having regard to the nature of the invention; (c) that the interests of any person for the time being working or developing an invention in the United Kingdom under the protection of a patent shall not be unfairly prejudiced.[25]This does little more than list the sort of factors the Comptroller would have to take into account if he is to act rationally, fairly and proportionately, having regard to all the circumstances of the case. The “little more” that is added is that he should, in effect, have regard to the very reason why the compulsory licence was to be granted, e.g. non-working of the invention in the UK.[26]So in practical terms the Comptroller is given as much of a free hand under the compulsory licence sections as under s.37. The basis of the “too wide discretion” point is simply absent.[27]The point fails for another reason too. As I have said the jurisdiction, without any specific guidance as to how to exercise it, undoubtedly lasted for 45 years. It can hardly be said that Parliament cannot have intended to confer such a wide jurisdiction in the 1977 Act when it had already done so for so long without criticism.[28]Finally there is the Human Rights point. Mr Purvis did not contend that the mere fact of a jurisdiction to grant a licence at the behest of a co-owner was an infraction of Art 1 of the Protocol. Such a point would be hopeless – for if there is such a jurisdiction, then that must be taken into account as part of the very nature of the property right concerned. Co-ownership would carry with it the incidence that a licence could be granted. So the exercise could not amount to a deprivation of a possession, see e.g. the reasoning in Wilson v First County Trust (No.2) [2003] UKHL 40 [2004] 1 AC 816: “Art. 1 of the First Protocol .. does not confer a right of property as such, nor does it guarantee the content of any right of property” per Lord Hope at [106] Similarly in Matthews v MoD [2002] EWCA Civ 773 the fact that a claim in tort (accepted to be a “possession”) was subject to the issue of a certificate conferring immunity was held to be an incident of the possession, see [71].[29]Mr Purvis’ point was more subtle: that because the discretion was so wide and unguided it amounted to an arbitrary power to cut down the rights of a co-owner. Such a discretion would violate the principle of legal certainty. But once it is recognised that the Comptroller must act rationally, fairly and proportionately and have regard to all the circumstances of the case, the point simply falls away. There is no arbitrary power – merely a power to produce a fair commercial solution when co-owners cannot agree.[30]So, as I have said, I conclude there is jurisdiction.

The Company Law point

[31]The argument here is based on the contention that Mr Paxman, whilst a director of Trim Cool, would have been acting in breach of his fiduciary duties to the company to seek the licensing of the patent to a third party.[32]It fails for two reasons, first that identified by Neuberger LJ during the course of argument and second that held by Kitchin J.[33]The first reason is simply this: that any violation of fiduciary duty is a matter between the company and Mr Paxman. It is not a matter which Mr Hughes, as a shareholder can complain about. And Trim Cool is making no complaint. What Mr Hughes is seeking to do is raise a third party right.[34]The second reason is that one cannot say now that there is any violation of a fiduciary duty. At present one simply does not know whether there is any contract between Trim Cool and the patentees, or if there is one what were its terms. The same goes for the position between the patentees. All is in dispute. So the utmost that can be said at this stage is that there was a general plan of the shareholders that the company they formed was to deal in the patented trim coolers. The existence of such an inchoate plan is not enough in itself to prove a violation of a fiduciary duty.[35]So I would dismiss the appeal. I would only add this. The current Statement of Grounds is plainly inadequate. It does not set out the terms of any proposed licence so the Comptroller does not know what he is being asked to grant. And in any event, without deciding the point, I doubt whether it would be proper for the Comptroller to grant to one co-owner an uncontrolled right to sublicense generally.

Lord Justice Neuberger:

[36]I agree.

Master of the Rolls:

[37]I also agree.