Federal Court of Australia holds that right or licence to use confidential information not capable o

Federal Court of Australia holds that right or licence to use confidential information not capable o

Federal Court of Australia holds that right or licence to use confidential information not capable o

Neobev Pty Ltd v Bacchus Distillery Pty Ltd (Administrators Appointed) (No 3) [2014] FCA 4

In a decision handed down on 16 February 2014, the Federal Court has held that a right or licence to use confidential information is not capable of assignment, where the proposed assignor is the person who owes the duty of confidence (as opposed to the person who is owed the duty of confidence).  Justice Besanko also ordered that the ownership and inventorship details of the patent which related to the confidential information be modified.

Background to the invention and relationship between Neobev and Bacchus

A summary of the rather complicated facts is as follows:

  • Max Scott worked with distilleries that produce cream liqueur products and was involved in developing and improving cream liqueur products.  He moved to Australia in 1998 and in 2002, he was introduced to Damien Hajdinjak, the executive director and CEO of Bacchus.
  • After discussions, Scott and Hajdinjak agreed that Scott would design and install a cream liqueur plant in Bacchus’ factory.  Scott also provided recipes for products and manufacturing and testing procedures to Bacchus.  These recipes and procedures were contained in 77 documents which were confidential in nature.
  • During this time, Bacchus was using a spirit and ethanol base for the cream liqueur products which was considered to be too expensive.  Both Scott and Hajdinjak recognised that using a wine base would be less costly.  However impurities in a wine base meant that the taste of a cream liqueur product could change over time. 
  • In 2004, Hajdinjak asked Scott to investigate the possibility of developing a less costly base for making cream liqueur products.  Scott came up with a staged filtration process for producing an improved clean wine spirit (the clean wine spirit (“CWS”) invention which was the subject of a patent for a clean wine spirit)1.  The patent was applied for in the name of Bacchus alone and the inventors were listed as Scott and Hajdinjak.  Scott said that he believed Bacchus was listed as the sole patentee as Bacchus needed to be the sole owner for the purposes of obtaining government grants.
  • On 9 September 2013, Bacchus went into administration.  Bacchus’ administrators then expressed an intention to sell the Bacchus business; including the confidential information referred to above.
  • In 2013, Scott assigned to Neobev Pty Ltd (of which he is a director) his rights in any intellectual property that had been developed for Bacchus and his rights under a royalty agreement regarding the CWS patent.

Upon learning of the intention of Bacchus’ administrators to sell, Neobev commenced proceedings against Bacchus for resolution of the ownership of the CWS patent, clarification as to whether Bacchus could transfer the right to use the confidential information and copyright material contained in the 77 documents and confirmation that Bacchus should obtain from a third party purchaser a contractual promise to pay any royalties due to Neobev under the royalty agreement referred to above.

Findings regarding inventorship, ownership and the deeds of assignment

Justice Besanko found that:

  • Scott was the sole inventor of the CWS invention.  His Honour held that the key question was whether Hajdinjak’s role had a material effect on the final concept of the invention.  His Honour concluded that  Hajdinjak was aware (prior to the CWS invention) that using a wine spirit as a base for a cream liqueur produced a wine aftertaste, and he had discussed this problem with Scott. However, Scott and most manufacturers in 2004 were well aware of this problem, rendering Hajdinjak’s identification of the problem insignificant.

    Hajdinjak did not work jointly or in collaboration with Scott on the various filtration methods leading up to the CWS invention.  In addition, he did not do anything which could properly be described as having a material effect on the final concept of the invention and which would entitle him to be called a co-inventor.

  • Bacchus owned the patent on trust for Bacchus and Scott in equal shares.  Justice Besanko noted that unlike the assignment of a patent, an assignment of the rights to the CWS invention did not need to be in writing and signed by or on behalf of Scott and Bacchus.  According to his Honour, a verbal agreement existed between Hajdinjak and Scott (though this was denied by Hajdinjak) that the patent would be in the name of Bacchus but that Bacchus and Scott (or Max Scott Consulting) would jointly own the patent and the effect of this was “to give rise to an express trust over the CWS patent in favour of Bacchus and Max Scott Consulting in equal shares”.
  • Bacchus could not assign its rights to use the confidential information to a third party.  The problem in allowing a party who is the confidee of confidential information to assign that right is that contractual burdens or obligations are not assignable.  As his Honour said:

Bacchus emphasises the right to use the information, but one of the features of the confidential information is that it was received by Bacchus in such circumstances as to import duty of confidence.  It seems fundamentally inconsistent with that feature to allow assignment by the person who owes the obligation of confidence.  That might be possible where there is an express provision allowing assignment… but there is no express provision allowing assignment in this case.  There is no basis upon which to imply such a provision.  One cannot transfer the right to use without the obligation and the obligation is incapable of assignment.

  • The royalty agreement was so vague and uncertain that it was void.

The risks of joint ownership and confidential information

This case serves as a reminder that joint ownership can create problems; particularly when the rights and obligations of the owners are not properly spelled out in formal agreements.  The case also reinforces the rule that some contractual obligations are not assignable without express provision.  Accordingly, particular care has to be taken in providing for rights of the use and disposal of confidential information where that information is or becomes integral to a business.

Endnotes

  1. Australian Patent No. 2006201593