An expanded version of this issue of IP Bits was published as

The Licensing Journal, Volume 35, Number 2, pages 4–11, February 2015

IP Bits

Joint Ownership of Patents Does Not Result in Joint Benefits 


Introduction

When organizations collaborate to generate patentable intellectual property they sometimes share the expectation that they should jointly own the intellectual property that arises from their collaboration. After all, they jointly contribute to the collaboration, and they anticipate that they will jointly make inventive contributions to the intellectual property that arises. Jointly sharing undertaking the collaboration, the expectation that they should jointly share the benefits is not an unnatural one. The symmetry of joint ownership appears to confer an even and fair result, and so it is not unexpected that collaborators are drawn to joint ownership.


Critical questions unanswered

Sometimes, agreeing upon joint ownership is as far as the collaborators may go, assuming that being a joint owner confers all the benefits that each collaborator needs. The collaborators therefore neglect addressing two critical questions. To the extent that they fail to address these two critical questions, the law will step in and regulate their joint ownership relationship in ways that may surprise the joint owners.

The two critical questions are:

  1. Can a joint owner exploit the patent and retain all the profits, without sharing those profits with the other joint owner?
  2. Can a joint owner grant an exclusive license of the patent without the consent of the other joint owner?
The laws of different countries answer these questions in different ways. 

 

Do joint owners need to be concerned about laws of countries other than their own?

Yes they do. A patent exists in the country in which it is granted, and is governed by the law of that country. If a patent is granted in 20 countries, the separate laws of each of the 20 countries will govern each of the 20 granted patents.

In assessing the implications of the joint ownership of a patent, there is therefore a need to consider not just the laws of the country governing an agreement, or the laws operating in the country or countries where the joint owners are located, but as well the laws of all other countries where a jointly owned patent has been granted.

 

The law on jointly owned patents

The table below indicates, in relation to these two critical questions, in the selected countries indicated, how the domestic law of each respective country regulates the question, to the extent that the joint owners have not themselves regulated the question in a written contract.


Implications where both joint owners have capacity to exploit

Where the joint owners each have the independent capacity to exploit the jointly owned patent, separately having all the necessary plant and equipment, manufacturing facilities, technical skills, and marketing and distribution capability, they may not necessarily be disadvantaged by their joint ownership. Each having that capacity to exploit, each can economically benefit from its joint ownership.

The way they benefit however may be unequal. One may have the capacity and resources to exploit throughout the country, while the other might have a limited capacity and only be able to exploit in a region. Or, one may have the capacity and resources to exploit internationally, while the other might only have the capacity to exploit in its own country.

 

Implications where one joint owner has capacity to exploit, and other lacks capacity

Where:

  1. one joint owner has the capacity and resources to exploit the jointly owned patent, such as a large SME, large company, or multinational company, and
  2. the other joint owner lacks that capacity, such as a small SME, a start-up company, or a university or other research organisation,
the implications of joint ownership will be quite different.

Now:

  1. One joint owner, having the capacity to do so, can exploit the patent without the consent of the other, and without paying a royalty to the other, or sharing profits. The joint owner with the capacity to exploit can therefore enjoy the economic benefits of ownership. The joint owner without that capacity to itself exploit, cannot enjoy this benefit of ownership.
  2. Neither joint owner may grant an exclusive license of patents (other than in relation to a US patent). The joint owner without that capacity to exploit may wish to grant licenses, as the only way that it might accrue any economic benefits, but may only do so with the consent of the other joint owner. Given that the joint owner whose consent is sought would be equipping a competitor if it granted that consent, it is likely that it will decline to give that consent.
  3. A joint owner may grant an exclusive license of its own rights under the United States patent, without the consent of the other joint owner. But pragmatically, this is unlikely to occur. A licensee from one joint owner will have to compete with the other joint owner in the United States, and would prefer therefore to obtain a license that is exclusive of both joint owners. Or, a potential licensee will prefer a worldwide license, and that cannot be obtained without both joint owners granting, or consenting to the license.
As a result:
  1. the joint owner with the capacity to exploit will benefit economically from its joint ownership, by exploiting the jointly owned patent, and
  2. the joint owner without the capacity to exploit may not receive any of the economic benefits of joint ownership, since it cannot exploit the patent, lacking the capacity to do so, and being unable to grant licenses in respect of the jointly owned patent without consent, where that consent will be unlikely to be given.

The collaborators may well have intended, by their joint ownership, to jointly benefit by their joint ownership. In fact, all the connotations of joint ownership suggest that the relationship between the joint owners will be one of mutuality, with each benefitting from the joint ownership in a mutual and equal way. But contrary to those expectations, only one joint owner benefits economically, namely the joint owner with the capacity to exploit, while the joint owner without that capacity realizes none of the economic benefits of ownership.

 

Jointly owned patent – preferred course

In each case, the joint owners may well have preferred to specifically address in their collaboration agreement whether they could:

  1. exploit with or without consent, and with or without a royalty payable to the other
  2. grant licenses with or without consent, and with or without an obligation to share royalties.

By doing so, they would have agreed upon a set of rules governing their use and enjoyment of their jointly owned patent, including the economic benefits, instead of being subject to the unharmonised, and sometimes unexpected laws that by default, will govern joint ownership in the absence of agreement.

 

Jointly owned patent: effect on the bargaining positions of the joint owners

The joint ownership of a patent may also impact upon the joint owners’ respective bargaining positions. 

Suppose:

  1. a large company with the capacity to exploit collaborates with an organization that does not have the capacity to exploit, such as a small SME, a start-up company, or a university or research organization
  2. the company provides research funding
  3. the collaborator without capacity to exploit makes all the inventive contributions
  4. nevertheless, in the spirit of the collaboration, the collaborators have agreed that the patentable intellectual property arising from their collaboration will be jointly owned by them.
The result is:
  1. the large company joint owner with capacity to exploit can exploit the patent, without the consent of the other joint owner, and without having to pay a royalty, and therefore enjoys economic benefits from the jointly owned patent, and
  2. the joint owner without the capacity to exploit cannot exploit, lacking the capacity to do so, and cannot grant a license without the consent of the other joint owner, which not wishing to consent to a competitor being licensed, will decline to give consent, with the result that this joint owner does not enjoy any of the economic benefits of the patent.
Postulating further:
  1. the large company joint owner would prefer to have the ability to grant licenses, and would prefer not to have to seek the consent of the other joint owner to do so
  2. the large company joint owner therefore requests the other joint owner to grant to it an exclusive license of the latter’s share of the jointly owned patent.
There are two matters impacting upon the bargaining position of the joint owner that lacks the capacity to exploit.

Firstly, the impact of presumed equal joint ownership: whatever the commercial rate may be for the package of financial terms (royalties, up front payments, milestone payments), the joint owner without capacity to exploit can only expect to receive half that commercial rate. This is because joint ownership, in the absence of agreement, will be presumed to be equal, so that it is only a half interest in the patent that is being licensed by the joint owner. This may not be an unfair result, if the respective contributions of the joint owners during the research phase of their collaboration were equal. If their respective contributions were unequal, this would be an unfair result.

Secondly, the bargaining position of the joint owner without the capacity is diminished. As a result of the joint ownership relationship:

  1. the large company joint owner can already realize economic benefits by exploiting the jointly owned patent, because it has the capacity to do so, while the other joint owner, without capacity, cannot exploit, and so realizes no economic benefits at all
  2. the joint owner without that capacity can only realize economic benefits by granting a license, which will require the prior consent of the large company joint owner, which it presumably will decline to give.

In these circumstances, the joint owner without capacity to exploit has a weak bargaining position. It cannot realize any economic benefits from its ownership interest in the patent. It lacks capacity to exploit, and any intention to license may be prevented by the large company joint owner. The large company joint owner, not being burdened in these ways, has a superior bargaining strength in that negotiation. The diminished bargaining strength of the joint owner without capacity may well be that it is unable to negotiate more than the bottom end of the commercial range of royalties and other financial terms, or perhaps even less than that.

 

Conclusion

The main driver that motivates collaborators to agree upon joint ownership of patentable intellectual property is the underlying assumptions that joint ownership:

  1. confers mutual and equal rights
  2. is fair, and
  3. confers the necessary commercial rights.

But none of those assumptions is warranted. Where collaborators have an unequal capacity to exploit, joint ownership between them will be likely to disadvantage one or both of them.

Where joint ownership is agreed upon between collaborators in the expectation that the joint ownership relationship will result in equal economic benefits accruing to the joint owners, they will often be surprised and alarmed to discover that joint ownership in fact may result in one joint owner realizing economic benefits, while the other joint owner realizes no economic benefits. The presumption that joint ownership necessarily means joint economic benefits, is therefore not warranted.

In each case, collaborators should specifically focus on, and record agreement about:

  1. exploitation, and whether that will be with or without a royalty to the other joint owner
  2. granting licenses, whether that will be with or without consent, and with or without an obligation to share royalties

By doing so, the joint owners will regulate their joint ownership relationship by contract, in a manner in which they have agreed, and in a manner that will take priority over and apply in lieu of unharmonised joint ownership laws in countries where they have chosen to patent.