Patent

Darius Kavsmaneck v. Ghadra Chemicals: A Derivative Action Patent Suit


The Bombay High Court on 12th December, 2014 came out with an interesting decision that was a confluence of company law and patent law. Using the principles of company law, the Court decided that the plaintiff in this case cannot bring a derivative action suit to restrain the defendant from alienating a patent that is held in his name.

The plaintiff was a shareholder of company ‘A’, which is the first defendant. The suit was against the Chairman of the Company A, who was the second defendant in the suit. The plaintiff alleged that that Defendant No. 2 had applied for and obtained several patents in his own name, when the patents should actually be held in Company A’s name.  Company A spent substantial money on developing an R&D facility, and the plaintiff claimed that Defendant No. 2 had exploited the same and applied for the patents in his own name.  This, according to the plaintiff was against the fiduciary duties of the defendant as a director of the company. The plaintiff therefore filed a Notice of Motion to restrain the defendant “from selling or transferring or assigning or licensing or exploiting or encumbering or creating any third party rights or interest or otherwise dealing with the patents”.

Defendant Number 2 contended that regardless of usage of the company’s resources, he remains an inventor within the meaning of the Patent Act and therefore the patent is rightly registered in his name. Further, he has entered into an agreement with the company to the effect that it may use the patent without paying royalties to him. The Defendant also raised several arguments showing that the plaintiff did not come with clean hands- the plaintiff had secretly been selling some of his shares to a rival company; he owns the controlling interest in another rival company; and he had previously filed suits in front of the Company Law Board claiming oppression and mismanagement, which had been rejected by the Board.

A derivative action suit is a suit brought by a shareholder on behalf of the company. This is an exception created in company law, as company law theory dictates that shareholders, as owners, delegate the functioning of the company to the management, and therefore do not have the locus to represent the corporation against the management. However, in cases where the management is not acting in favour of the company, a minority shareholder may bring such a suit.

The Court held that the plaintiff was not entitled to a suit of derivative action for the following reasons:

  • The Smith v. Croft test was not passed in this case

In the case Smith v. Croft, it was held that for a derivative action to succeed, one must look at whether the majority of the minority shareholders were in favour of the suit.  The plaintiff owned 12% of the shares. However, none of the other minority shareholders who held about 13% of the shares were in favour of the suit.

  • The suit was not brought bonafide in the best interest of the company.

Here, the Court considered the effect of the decision on the Patents Act. According to S.64(1)(b) of the Patents Act, it is a ground for revocation of the patent if the patent has been granted to a person not entitled to it under the provisions of the Act. Hence, if the Court were to hold the suit in the Plaintiff’s favour, it could lead to a successful application of revocation by competitors. As the company was using the patent royalty-free, this would adversely affect the company.

  • The plaintiff did not come with clean hands

For the equitable remedy of derivative action to apply, the plaintiff must have clean hands. The Court held that the plaintiff did not come with clean hands as he was colluding with a competitor and in fact held the controlling interest in another competing company.

It must be noted that while registering a patent in the name of the company costs more, it is usually done because doing so is more secure in the eyes of the investors. In other words, it is purely a business decision.  This is different from, for example, US Law, where a distinction is made between inventorship and ownership, and the inventor must always be a natural person mentioned in the patent application [source].  In India, however, the Patent Office categorises applicants as ‘Natural Persons’ and ‘Other than Natural Persons’. Therefore, this decision was a straightforward application of company law principles.

The decision is available here.

Spadika Jayaraj

Spadika Jayaraj

Spadika is a student of the National Law School of India University, Bangalore. Apart from Intellectual Property Law, she is also interested in Law and Technology issues.

4 comments.

  1. AvatarShashank Mangal

    Another distinctive feature of the case at hand is the exemplary cost of Rs. 10,00,000/-levied on the plaintiff.

    Reply
  2. AvatarShashank Mangal

    Please elaborate on-‘suit not being brought in the bona fide interest of the company’.

    The Court says that if the plaintiff’s argument is accepted, then the patent would become revocable which would be in turn be adverse to D1’s (company’s) interest.

    Does this mean that the company law’s requirement of bonafide intention on the part of minority shareholder while initiating such suits, is so significant that it precludes courts from going into the merits as to the validity of the patent?

    Reply
    1. Spadika JayarajSpadika Jayaraj Post author

      Hi Shashank,
      Yes, that would be the case. This is because derivative action suits are an exception to the ordinary company law principles of shareholder-management separation and the separate legal personality of a company. In other words, if a wrong is done to a company, the proper claimant is the company itself and not any shareholder. You may read the landmark common law decision Foss v. Harbottle on this point.

      Besides, the plaintiff had other, more straightforward options under the Patents Act itself, such as pre and post-grant oppositions, and applying for rectification of the Patent in the Register. The Court was therefore justified in dismissing the suit.

      Reply
      1. AvatarShashank Mangal

        Thanks for the reply, Spadika.

        So, far as Foss v. Harbottle and the subsequent jurisprudence on the point is concerned, its a perfect case where exceptions have outgrown the rule.

        Notwithstanding that the second para of your reply clarifies everything and also reminds me that its the obvious which eludes us the most as my query would have been resolved had I just gone back to the basics.

        Reply

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