Demand for patent ownership rejected due to equivocal contract terms

Tsai licensed the patented technology for a particular mechanical sleeve as per patent no. I366501 (“‘501 patent”) to Hi-Five Products Developing Co., Ltd (“Hi-Five”) in a joint development memorandum (“contract”) in 2012. According to the contract, Tsai promised to transfer the know-how for manufacturing the sleeves, while Hi-Five acquired the sales exclusivity for the sleeves by returning a share of the profits back to Tsai periodically.

Article 1 of the contract reads “any patent modifications and alternatives derived from the ‘501 patent fall within the patent scope of this contract; any new patent models derived from the ‘501 patent also fall within the patent extent of the contract. (“clause in dispute”)”

Later on, Hu, the principal of Hi-Five, filed for and was granted two patents relating to enhanced sleeves in the name of Hi-Five’s employee Sung (“two disputed patents”). Going forward, the contract terminated in 2015. In 2017, Sung assigned the two disputed patents to Hu.

Tsai sued Hu and Sung in pursuit of a declaratory judgment for the ownership of the two disputed patents, alleging that Tsai himself was the true owner and demanding a transfer of the two patents at issue. The Intellectual Property and Commercial Court (the court of first instance) dismissed the case. Tsai appealed.

The court of appeal firstly analyzed the procedural legality of the lawsuit. Article 247(I) of the Code of Civil Procedures prescribes that “an action for a declaratory judgment confirming a legal relationship may not be initiated unless the plaintiff has immediate legal interests in demanding such a judgment.” A plaintiff has immediate legal interests if a judgment would terminate controversy relating to the existence or non-existence of a right, privilege, duty or liability. A declaratory judgment action is appropriate if it is effective in removing the plaintiff’s potential risk from a tort act arising from a controversial legal relationship. Tsai argued that he himself was the rightful owner of the two disputed patents, which both Hu and Sung denied. As the ownership dispute was able to be resolved by way of a declaratory judgement, the court of appeal found Tsai’s case to have an interest of action. The procedural requirement for instituting a declaratory judgment was met.

Next, the court of appeal carefully investigated to which party the two disputed patents belonged by interpreting the definition of the clause in dispute. The court emphasized that the literal meaning of the clause in dispute failed to manifestly reveal the ownership of derivative patent rights. It stipulated that any patent modifications and alternatives derived from the contract’s Appendix A, as well as Hi-Five’s new patent model(s) derived from the contract’s Appendix A, were subject to the patent scope of the contract. That is, the clause in dispute only governed the metes and bounds of the objective, namely the patents or know-how in this very context in the contract. By examining the rest of the terms and conditions in the contract, there is no agreement either on the ownership of rights for a patent derived from the ‘501 patent.

Furthermore, the court pointed out that the parties entering into the contract were Tsai and Hi-Five, therefore they are the contracting parties. As per the doctrine of privity (or the principle of relativity of a contract), a contract can only generate rights and obligations in favor of, or regarding the obligation of, the contracting parties. This contract did not bind any individuals or entities other than Tsai and Hi-Five. Tsai therefore did not have a standing to name Hu and Sung as defendants in this contract dispute.

As for Tsai’s claim of naming himself as an inventor in the two disputed patents, the court found him not to be an inventor. For one thing, the technical features of the two disputed patents were in fact different from those of the ‘501 patent, and for another, Hu’s inventorship was confirmed in another criminal judgment. Hence, Tsai’s inventorship claim was groundless.

Tsai lastly put forward an argument that the result of the dispute over the two patents constituted unjust enrichment and infringement of the ‘501 patent. Again however, this attempt was futile. The ‘501 patent was published in 2011 and granted in 2012. It became publicly available in 2011, so that any third party would have access to it. Even if Hu underwent necessary research and development activities based on the technical disclosure of the ‘501 patent, this did not amount to any malicious deprivation or misappropriation of know-how whatsoever. Thus, neither Hu nor Sung gained from unjust enrichment, not to mention that the objective of this case was to confirm ownership, and in no way related to an infringement of an existing patent.

To conclude, the findings of the trial court were deemed correct. The case ruling was affirmed.

An important lesson to learn from this case is the avoidance of ambiguity when drafting a contract. In order to determine ownership of possible new patent right(s) derivable from the background technology, the text of ownership terms must express in clear, explicit and precise wording exactly who will be entitled to said new patent(s). Wherever possible, the contract governing ownership of derivative rights should also, as broadly as possible, bind any team members who have ever had involvement in the research and development tasks for the new know-how.

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