Who owns the IP devised by a company director?

By Peter Knight.

Key Points:
Intellectual property created by a director who is not employed by the company does not belong to the company. Ownership of intellectual property should be documented at the start of the relationship, not fought over at its end.

Bold assumptions are often made by people in business together about the ownership of intellectual property. When a business relationship goes sour, those assumptions are often tested in court - and often found to be entirely wrong.

We do know that an employer holds the intellectual property generated by an employee in the course of his or her employment, whether it be the copyright in material created or the patent in an invention devised.

It is equally clear that the intellectual property of a contractor (any kind of contractor, whether standing in for an employee or not) belongs to the contractor, in the absence of a written assignment signed by him or her, even if the principal has specifically commissioned and paid for the creation (we looked at some of these issues in our last Insights).

What about a director who is not an employee of the company? Recently, the WA Court of Appeal examined this question thoroughly and gave an authoritative decision. In Eastland Technology Australia Pty Ltd v Whisson [2005] WASCA 144 it found that such a director is to be treated like a contractor, subject to the substantial directors’ duties he or she owes to the company.

Building a better syringe

Dr Maxwell Whisson had devised and patented three inventions for syringes in which the needles automatically retracted into the body of the syringe after use. Together with a group of interested parties, he formed a company for the purpose of exploiting these inventions. He was chair of the board of directors of this company, Eastland Technology Australia Pty Ltd, but never an employee. Dr Whisson licensed and subsequently assigned these inventions to Eastland, and then worked with Eastland on commercial exploitation of his inventions.

Later, when the company couldn't find commercial opportunities for its patented inventions, Dr Whisson and a collaborator, in their own time and in Dr Whisson’s kitchen, thought up an entirely different solution to the problem of exposed needles. Dr Whisson and his collaborator lodged five patent applications in respect of this invention in their own names.

Dr Whisson thought this new idea could save Eastland, and approached potential investors in Eastland’s name. He also informed the board of Eastland although, in order to preserve the patents’ validity, he could not give it precise details.

Dr Whisson and his collaborator then entered into an exclusive licence agreement with Eastland. Under it Dr Whisson got no licence fee, but Eastland had to pay for the prosecution of the patent applications. Dr Whisson saw his reward as coming from the improved value of his shareholding in Eastland, and he even volunteered to compensate his collaborator out of his own funds. Dr Whisson continued to co-operate with Eastland in seeking potential investors.

The parties fell out and Dr Whisson resigned his position on the board. Eastland sought orders that it was entitled to the ownership of the invention.

An obligation to allow exploitation?

Under general law, directors owe fiduciary obligations to the company of which they are directors. These include the duties to exercise powers for a proper purpose, to avoid conflicts of interest, and not to misuse information or their position.

Eastland argued that Dr Whisson had devised the inventions at a time when he was required by his fiduciary obligations to exploit any opportunity in the line of business of the company solely for the benefit of the company. Since Eastland was involved in the business of commercialising syringes designed to minimise the risk of needlestick injuries, any development of Dr Whisson in that field should belong to it.

However, even if the first part of this proposition were correct, and Dr Whisson had such fiduciary obligations, would the second part of the proposition follow: that the company should be the legal or even beneficial owner of the patents?

Eastland argued on a "line of business" test ie. that Dr Whisson could not pursue any opportunity that would have been commercially attractive to Eastland unless it first communicated this opportunity to the company, giving it the opportunity to exploit it.

The company does not own the invention

Even applying such a stringent standard, the Court found that the inventions did not belong to Eastland. Under the licence and assignment agreements entered into by Eastland and Dr Whisson, he had no contractual obligations even to develop improvements, let alone assign ownership of them to Eastland. The Court said that, in the absence of any contract, and even though Dr Whisson as a director might not have been able to exploit the invention (effectively in competition with Eastland), Eastland was not entitled to own the inventions.

In any event, Dr Whisson had done nothing in respect of the invention except for the purpose of benefiting Eastland. There was nothing in itself unusual or suspicious in Dr Whisson lodging patent applications in his own name; nor in his failure to disclose the precise nature of the invention to Eastland, having regard to the importance of confidentiality before lodging such applications. Dr Whisson had communicated to Eastland the general nature of what he was doing at a very early time. He thereafter entered into an exclusive licence with Eastland so that the invention could have been exploited by Eastland to its advantage.

Lessons for business

It is very common in the commercialisation of new technologies to find that companies have not paid attention to the ownership of the fundamental technologies brought to them by their founders. Often, this problem does not surface until a dispute arises, or the company has an opportunity to attract a commercial investor or to float.

This decision is a very useful summary of the current state of the law regarding the ownership of inventions devised by a director (or founder) of a company, which may be of value to the company. The position of a director is in marked contrast to that of an employee. While similar to an independent contractor in status, a director has much more substantial duties to the company.

The main lesson to draw from this case is that ownership of intellectual property should be documented at the start of the relationship, not fought over at the end of it.