When is an improvement not an improvement?
Fermiscan Pty Ltd v James  NSWSC 546
In Fermiscan Pty Ltd v James  NSWSC 546 the applicants claimed that the respondent inventor was obliged to assign her rights in an invention as a result of an agreement between the parties which included an obligation to assign all ”Improvements” in an earlier invention. The Court held that as there was a fundamental difference in the processes disclosed by each invention, the second invention was not an ”Improvement” of the first under the terms of the agreement. This decision highlights the need to carefully consider the drafting of clauses claiming rights to improvements.
Facts of the case
Dr James was a scientist in the field of x-ray diffraction of biological samples. She developed a process using x-ray diffraction of human hair samples to screen for breast cancer and other diseases (the ”first invention”) and obtained an Australian patent (the ”Australian patent”) to protect her invention. Dr James assigned the Australian patent to the third plaintiff, Fibrescan, a company controlled by her at the time. On 11 November 2004, Dr James and Fibrescan entered into two agreements with the first and second plaintiffs, Fermiscan and Fermiscan Australia. One agreement (the ”Assignment Agreement”) assigned the first invention and the Australian patent to Fermiscan Australia, together with all ”Registered Rights” and ”Improvements”. Under the other agreement Dr James agreed to act as a consultant to Fermiscan Australia (the “Consultancy Agreement”).
Dr James continued her research and discovered that changes in the diffraction patterns of nail and skin corresponded to the presence of other diseases, such as cancer and Alzheimer’s (the ”second invention”). She filed an international patent application (the ”PCT application”) to protect the second invention. The plaintiffs claimed that the second invention was an ”Improvement” of the first invention for the purposes of the Assignment Agreement, and therefore Dr James was obliged to assign all her rights in the second invention and PCT application to them.
In September 2006, the plaintiffs commenced a proceeding against Dr James in the Federal Court. The parties entered into a ”Deed of Release and Settlement” (the ”Deed”) on 8 December 2006, whereby it was agreed to compromise the proceeding. Under clause 2.3 of the Deed Dr James agreed to pay Fermiscan and Fermiscan Australia jointly the sum of $700,000, with $500,000 to be paid by deduction from fees or royalties otherwise payable to Dr James and $200,000 only to become payable if Dr James breached clause 2.2 or 5 of the Deed. Clause 5 provided that Dr James would not disparage or make statements that might tend to injure or damage the plaintiffs. The plaintiffs alleged that Dr James breached clause 5 of the Deed by writing and submitting an article for publication, by discussing (or providing drafts of) the article with other colleagues prior to submitting it and by the content of the PCT application.
The Court considered three issues in this case:
- Whether Dr James was obliged to assign the second invention and the PCT application;
- Whether, in breach of the Deed, certain statements made by Dr James ”disparaged” or tended to injure the plaintiffs, their businesses or their employees; and
- Assuming the answer to question (2) was ”yes”, whether the measure of damages stipulated to become payable upon breach was a penalty and therefore unenforceable.
1. Was the second invention an ”Improvement” of the first?
”Improvement” was relevantly defined in the Assignment Agreement as follows: ”means any invention, discovery, modification, adaptation or improvement, whether patentable or not, which can be used to reduce manufacturing or assembly costs of the products of the exercise of the Invention or improve the performance of any product or process, increase the service or shelf life of any product, broaden the applicability of any process employed in or toward the Invention or range of uses of any product thereof or create a wholly new product or component or process which replaces or is an enhancement of the subject matter of the Invention, devised by or for the Assignor and/or the Inventor, …”
It was common ground between the parties that the second invention was an ”invention” for the purposes of the definition of ”Improvement”. The question was whether it was an invention of a kind that fell within that definition. The plaintiffs relied on the bold sections highlighted above to argue that the use of different biological materials, that is skin and nails instead of hair, did not give rise to new invention of a kind outside the definition of ”Improvement”.
McDougall J held that, on the proper construction of the Australian patent and the PCT application, there was a ”fundamental difference in the processes that they disclose”. This was because the Australian patent related to the exposure of one class of biological material, hair, to x-ray diffraction; whereas the PCT application related to exposure of two different classes of biological material, skin and nails, to x-ray diffraction. His Honour was of the view that they could only be the same process, or the second invention could only be something designed to ”improve the performance of”, or ”broaden the applicability of”, the first, if the first was construed as extending to all biological material. This construction could not be supported because the specification made it clear that the first invention was limited to analysis of hair alone.
McDougall J also rejected the argument that the second invention was a new process which ”replaces” or is an ”enhancement” of the first invention. In relation to ”enhancement“, his Honour found that the second invention disclosed a wholly new process and it was difficult to understand how such a process could be an ”enhancement” of the subject matter of the first invention, unless that subject matter was defined in very wide terms to include the use of x-ray diffraction on all biological materials. Such a definition was not supported by the language of the Australian patent. Further, a definition of such width would mean that Dr James had, in effect, contracted out of the right to pursue her life’s work and would give Fermiscan Australia monopoly rights in respect of all such applications, which cannot have been intended by the parties since her engagement pursuant to the Consultancy Agreement signed on the same day as the Assignment Agreement was non-exclusive. With respect to ”replacement”, his Honour held that there was no evidentiary material to enable a conclusion that the second invention might replace the first, to the contrary there was evidence that the tests might be used as alternatives, depending on the circumstances.
2. Did Dr James disparage the plaintiffs or their employees?
Under clause 5 of the Deed Dr James covenanted not to ”disparage or make any statements or take any action which would tend to injure or damage the reputation or standing of” the plaintiffs businesses or diagnostic tests, or call into question the abilities of their directors, officers or employees. The plaintiffs complained that clause 5 had been breached as a result of statements in a letter submitted by Dr James to the International Journal of Cancer. The letter enclosed an article relating to the second invention and stated that the second invention was a ”highly accurate early diagnosis” technique which eliminated ”the problems of reproducibility found by other researchers using hair samples“. The letter did not mention any of the Fermiscan Group companies by name. It did, however, ask that two Fermiscan employees/consultants be excluded from the review process ”because of the number of completely incorrect statements published in their paper, which I have addressed in a subtle way in this paper” and because they had a ”known conflict of interest“. Fermiscan also relied on certain statements in the PCT application to the effect that Fermiscan’s diagnostic tests had ”very limited” application and there was an ”advantage” in developing an ”alternative test” to overcome the limitations and disadvantages of the Fermiscan tests.
His Honour held that, in context, none of the documents in question could be regarded as ”disparaging” of the plaintiffs because the statements were not phrased in a slighting or depreciating way, or in a way calculated to bring discredit on the plaintiffs. With respect to the context, McDougall J referred to the limited nature of the disclosure and did not accept that it was necessarily disparaging for one scientist to say that the work of another contains flaws or mistakes or is inaccurate, at least when done in good faith and on the basis of supportive experimental findings. In addition, his Honour found that it is usual practice for scientists to suggest preferred reviewers, or that certain reviewers be excluded.
The Court went on to consider whether the statements made by James in the letter and PCT application could tend to ”injure or damage” the reputation or standing of the plaintiffs, even though they were not disparaging. McDougall J held that even by this lesser standard none of the statements being considered, individually or taken together, had the requisite tendency to cause injury or damage. In particular, his Honour referred to the fact that Fermiscan’s employees had reported that the diagnostic test based on the first invention did suffer problems in relation to reproducibility and disorder, and held that it seemed to follow almost inevitably that it there would be utility in developing a more reliable test. Accordingly, clause 5 of the Deed had not been breached.
3. Was clause 2.3 of the Deed a penalty?
Although it was not strictly necessary to decide this question, McDougall J also held that clause 2.3 did impose a penalty. As outlined above, clause 2.3 of the Deed provided that Dr James would pay Fermiscan and Fermiscan Australia jointly the sum of $700,000, with $500,000 to be paid by deduction from fees or royalties otherwise payable to Dr James and $200,000 only to become payable if Dr James breached clause 2.2 or 5 of the Deed. His Honour held that this clause, read in conjunction with clause 2.4, was a penalty primarily because the nature of Dr James’ rights and obligations in respect of the amount payable under clause 2.3 were changed in significant respects by the operation of clause 2.4, not by reference to matters existing at the time the Deed was made but by reference to future breach of clauses 2.2 and/or 5 in the Deed. In addition, the terms of the Deed did not take into account the fact that the breach could be serious, trivial, or somewhere in between.
Most notably, Fermiscan Pty Ltd v James makes it clear that a party who wants rights to future improvements to an invention should give careful consideration to the drafting of the terms of the assignment agreement with the inventor, to ensure that any such improvements are captured.
This case also highlights the following:
- that context is very important when considering whether a statement is disparaging or would tend to injure or damage a party’s reputation; and
- the risk that a broadly drafted clause in a deed of settlement which only comes into effect by reference to future breach will be construed as a penalty clause and therefore be unenforceable.