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.