The Quebec Court of Appeal recently released its decision in Université de Sherbrooke v. Beaudoin et al.[i] which discusses the rights and obligations of a university when dealing with inventions made by its employees.

Adrien Beaudoin, a professor at the Université of Sherbrooke, and his assistant performed research that resulted in an invention. This research was performed under a research agreement between the University and Groupe Conseil Harland. The research agreement gave Harland the right to acquire the invention. The purchase price was to be determined based on the value of Harland's contribution to the invention vis-à-vis the inventors' contribution, and the invention's fair market value. The difficulty of calculating the purchase price would later become an important issue.

In order to deal with the invention, the University entered into a management agreement with the inventors. The management agreement provided that the University would own the invention and have the exclusive right to manage it. In return, the University would give the inventors half of the revenues from the invention. The University's right to manage the invention included seeking protection of the invention, exploiting the invention and granting rights to third parties to commercialize the invention. The University had two other important obligations under the management agreement: (i) to consult the inventors with regard to management of the invention; and (ii) to make every reasonable effort to protect the invention and maximize its value.

As part of its management of the invention, the University entered into a licence agreement with Harland. The inventors were consulted on this agreement.

Later, the University agreed with Harland and its affiliate Neptune Technologies & Bioressources Inc. on an amendment to the research agreement to (i) transfer Harland's rights to Neptune; and (ii) modify the purchase price to a fixed amount of $275,000. It appears that a fixed purchase price was important to give comfort to potential investors concerning the cost of the technology.

This amendment prompted the inventors to sue the University, as well as Harland and Neptune. The inventors complained that the University had failed to consult them on the amendment. The inventors also complained that the modification to the purchase price breached the University's obligation to maximize the value of the invention. The inventors' claims against Harland and Neptune were related to the same alleged breaches.

At trial, Justice Jacques Léger found for the inventors, agreeing that indeed (i) the University had failed to consult them before agreeing to the amendment, and (ii) the change to a fixed purchase price undervalued the invention in breach of the University's obligation.

However, the Quebec Court of Appeal reversed this decision. The Court of Appeal reviewed the evidence and concluded that the University had complied with its obligation to consult. The appeal court found that, though the inventors had not been consulted at the time of the amendment, the inventor Prof. Beaudoin had previously been advised of the proposal to set a fixed purchase price and had opposed the idea.[ii] The Court of Appeal ruled that this was sufficient to satisfy the obligation to consult, and that it was not necessary to obtain the inventors' consent or to give them another opportunity to voice their opposition.

With regard to the University's obligation to aim to maximize the value of the invention, the Court of Appeal focused on the information that was available to the University at the time of the amendment, not later. The appeal court stated that the big unknown at that time was whether commercial development of the invention would succeed. The trial judge had faulted the University for not having taken reasonable steps to value the invention when setting the new purchase price. However, the Court of Appeal held that efforts made at the time, by all of the parties to the action, to calculate the value of the invention produced figures that showed that the amount provided for in the amendment ($275,000) was reasonable. The appeal court thus concluded that the University had not breached its duty to maximize the value of the invention. The appeal court also noted that, but for the amendment to fix the purchase price for the invention, Harland and Neptune might not have been able to attract investors. In that event, the invention might never have been developed. Naturally, this would have greatly reduced the value of the invention.

Comment

Reading the decisions at the trial and appeal levels, one gets a sense that the University, as well as Harland and Neptune, dodged a bullet in this case. The University's obligations to consult with the inventors and to maximize the value of the invention were imprecisely defined. Further, the evidence of the University's compliance with these obligations was limited. In light of this, it is not surprising that different judges reached different conclusions.

Because it is not unusual for a university to manage intellectual property rights and share revenues with inventors, there are lessons to be learned from this case. One lesson is that the obligations of the university should be defined as clearly as possible. For example, what action by the university is required to comply with a duty to consult? At a minimum, it should be clear whether or not the inventors' consent is necessary.

Another lesson concerns research agreements. The provisions of these agreements may have an important effect on the rights in any invention that may be conceived, even though they are typically drafted before any inventive work begins. The dispute in this case might have been avoided if the parties had chosen a formula for the acquisition of rights in the invention that was more definite, so that a potential investor might have a better idea of the cost of the invention. Of course, this might be easier said than done since the invention has not yet been conceived when the formula is chosen.

The Université de Sherbrooke decision is just the latest in a series of recent decisions (mostly from outside Canada) in which universities' rights in inventions made by their academic staff have been questioned. Other examples are (i) a September 2009 decision of the Full Court of the Federal Court of Australia in University of Western Australia v. Gray;[iii] (ii) an October 2009 decision of the US Court of Appeals for the Federal Circuit in Board of Trustees of the Leland Stanford Junior University v. Roche Molecular Systems, Inc.;[iv] and (iii) a December 2009 decision of the Court of Chancery of Delaware in Cephalon Inc. v. Johns Hopkins University.[v] Each of these decisions highlights risks that are particular to universities and their rights in inventions. Not all of these risks are easily avoided. The best advice for universities and their counsel is to remain vigilant concerning (i) the agreements that are entered into, either by the university or the inventors, that grant rights in their inventions; and (ii) the rights and obligations of the university when dealing with such inventions.