Ownership of a Patent was Transferred from a Director to the Corporation as if the Director were an Employee

Ownership of a Patent was Transferred from a Director to the Corporation as if the Director were an Employee

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Nature-Control Technologies Inc v Li, 2014 BCSC 1868

This case was a business dispute in the Supreme Court of British Columbia between Nature-Control Technologies Inc. (“Nature-Control”), a business that sells chemicals for the pulp and paper industry, and one of its directors, Dr. Meng Jun Li (“Dr. Li”).  Nature-Control alleged that Dr. Li improperly diverted a business opportunity for selling bleaching and brightening products from Nature-Control to one of his other companies, SouthMountain Trading Inc. (“SouthMountain”). [1] Among the issues was the ownership of four patents relating to chemicals for the pulp and paper industry.

The Court ultimately determined that Dr. Li breached his fiduciary duties as a director to Nature-Control by causing SouthMountain to earn secret profits from Nature-Control. [279] In terms of the patents at issue, the Court determined that one of the patents transferred from Dr. Li to Nature-Control by the implied intention of the parties, while the remaining three patents did not. [257, 260, 263] In coming to this determination, the Court imported the analysis that is undertaken when determining if intellectual property impliedly passes from an employee to an employer, [259] even though Dr. Li was not an employee of Nature-Control, but rather a co-owner.

Factual Background and Patents at Issue

Nature-Control and SouthMountain were in a sort of business relationship, but the scope of the two businesses were in dispute between Dr. Li and Nature-Control’s majority shareholder, Dr. Chow. [18] At the very least, the two were in a marketing relationship, but the boundary between the two businesses was blurred. [101] This blurring is demonstrated by how the following products were developed.

Each of the four patents at for which ownership are at issue were filed in Dr. Li’s name. [151] The patents are listed below, along with key facts regarding their development:

a)      One patent for water treatment compounds known as Compounds A and B (the “Compounds A and B Patent”).

Compounds A and B were developed and patented in China by Dr. Li in 2002. [5] Under Dr. Li’s direction, SouthMountain began selling Compounds A and B to Nature-Control in 2003. [7,9]

b)      Two patents regarding bleaching products, the patent for the T-Bright product, and the patent application for NewsBright M product.

These products were developed by Dr. Li in China. [44, 45] Dr. Li used Nature-Control’s laboratory to demonstrate these products to customers, [139] but otherwise sold the bleaching products only through SouthMountain. [250]

c)       A patent for soil remediation technology, Canadian Patent No. 2,559,331 (the “FAS Patent”). The FAS Patent is the only patent referred to by patent number. [150]

The soil remediation technology in the FAS Patent was developed by Dr. Li after he was asked to develop a solution for a client of Nature-Control. [113]

Ownership of Intellectual Property

The Court determined the T-Bright patent and the NewsBright M application to be owned by Dr. Li’s SouthMountain. [257] The Court’s reasoning was that bleaching products were outside of the scope of Nature-Control’s business, and that even though SouthMountain was using Nature-Control’s facilities during the course of selling the products, it was only doing so under the express agreement that SouthMountain and Nature-Control would promote each other’s business. [250, 257]

There was no such arrangement with respect to Compounds A and B or for the FAS Patent. As such, the Court considered whether there was an implied agreement between Dr. Li and Nature-Control whereby Dr. Li gave up the rights to these patents. Although Dr. Li was not an employee of Nature-Control, the Court imported the factors that apply in an employer-employee relationship to determine whether there was such an implied agreement. [259] These factors are laid out in Comstock Canada v Electec Ltd (1991), 38 CPR (3d) 29.

The Court was presumably comfortable applying the employer-employee analysis since Dr. Li was a fiduciary of Nature-Control, and meeting the employer-employee would necessarily mean that a fiduciary also meets the test. However, the Court justifies applying the employer-employee test only by saying that in its view “the same factors are helpful in assessing the parties’ intentions in this case.” [259]

These factors include whether the conduct of the employee once the invention had been created suggested ownership was held by the employer, and whether the invention was a product of a problem the employee was instructed to solve. [259]

Applying these factors, the Court found that the patent on Compounds A and B did not transfer to Nature-Control for three reasons. [260] Firstly, the technology had already been patented by Dr. Li in China. Secondly, the agreement between Dr. Li and Nature-Control did not instruct Dr. Li to develop the compounds. Thirdly, Dr. Li held the right to terminate the business agreement between Nature-Control and himself if the business did not succeed, which implied that it was intended that Dr. Li would retain beneficial ownership of the Compounds A and B Patent. [260]

On the other hand, the Court found that the FAS Patent did transfer to Nature-Control by the implied intention of the parties. [262] The reasoning was that Mr. Chow had asked Dr. Li to come up with the solution that the FAS Patent addresses, and that correspondence between Mr. Chow and Dr. Li made it clear that the business opportunity for which the FAS technology was developed belonged to Nature-Control. Subsequent conduct of Dr. Li and Nature-Control also supported this conclusion.  [262]

Commentary

This decision highlights the risks that can be involved with the development of intellectual property between closely held business associates when business roles are not clearly delineated. SouthMountain and Nature-Control intentionally blurred the lines between their two businesses to gain a marketing edge, [96] but in doing so laid the groundwork for a dispute regarding the ownership of critically important patents.

This decision also develops the law on how ownership of patent rights can impliedly transfer between two parties. The Court identifies Dr. Li as a fiduciary, but applies the test applicable to an employee. Presumably, a fiduciary is held to a higher standard than an employee, so if the Court were to find an implied agreement between an employer and employee, then the same implied agreement would necessarily be found between a fiduciary and the corporation. However, this is not in the Court’s reasoning. The Court simply says it finds the same factors that are applied in the employer-employee test to be helpful in this case.