Protection in relation to third parties when acquiring IP rights

On 22nd December 2010 the Supreme Court issued its judgment in Case T 5811-09. The judgment clarified that when acquiring IP rights, protection in relation to third parties is obtained through the acquisition agreement.

In 1999 an inventor entered into an agreement with a Swedish limited liability company under which the inventor transferred all rights pertaining to an invention, including patents, patent applications and know-how, to the company. As consideration for the acquisition, the company agreed to pay a fixed fee and a royalty to the inventor. According to the agreement, either party could terminate if the other party had, among other things, been declared bankrupt or if there was reason to believe that the other party had become insolvent. If the agreement was terminated, all rights would revert to the inventor. 

On 24th September 2002 the inventor terminated the agreement with immediate effect. When the agreement was terminated, the company had not paid the whole of the fixed fee. In late November 2002 the company was declared bankrupt and in May 2003 the receiver sold the assets of the company’s bankruptcy estate, including the patent rights, to a third party. 

The inventor lodged an action against the bankruptcy estate asking the court to declare that he was the rightful owner of the patent rights at the time when the receiver sold the rights to the third party. 

Supreme Court judgment
The Supreme Court said that when ownership in IP rights is transferred, the purchaser is protected against the seller’s creditors through the execution of the purchase agreement (reference was made to Supreme Court Judgment NJA 2009, page 695). No additional steps are required to obtain this protection because:

  • As tangible property, IP rights cannot be handed over to the purchaser.
  • There is no third party which is obliged to perform that must be notified.
  • The law has not established that registration is necessary in order to obtain protection in relation to the seller’s creditors. 

The Supreme Court then highlighted certain questions subject to discussion in the judicial literature, namely:

  • Whether a seller must make a reservation of right to terminate a contract in order to revoke an assignment of IP rights.
  • Whether, if a purchaser has been granted a right to use the IP rights, a seller must make a reservation of right to terminate a contract in order to revoke an assignment of IP rights.
  • Whether a right for a purchaser to use the IP rights or freely dispose of them would mean that a seller no longer had a right to revoke the assignment, or at least that a revocation in the purchaser’s bankruptcy through which the rights return to the seller would not mean that he or she was protected in relation to the purchaser’s creditors.

However, as the agreement between the inventor and the company contained a reservation of right to terminate the contract, the Supreme Court provided no answer to whether such a clause is always required in order for the seller to be able to revoke the assignment.

The court then stated that the fact that a purchaser has been granted a right to use the IP rights does not mean that the seller has lost the right to revoke an assignment of these rights.

If the purchaser is granted a right to dispose of the IP rights freely, this could mean that the rights that revert to the seller after termination of the agreement in case of the purchaser’s bankruptcy are not protected in relation to the purchaser’s creditors. In such cases, the seller will not be in a better position compared to the bankruptcy estate. However, if the termination is made before the purchaser enters into bankruptcy, it will be binding in relation also to the bankruptcy estate. In the latter case it may be that the seller must respect a prior acquisition of the rights by a third party. (Please not that special rules, not included in this analysis, apply in bankruptcies.)

In the case at hand the Supreme Court stated that the fact that the inventor had granted the company a right to pledge the patents and patent applications did not affect whether the termination made before the company’s bankruptcy meant that the reversion of rights was protected in relation to the company’s creditors.

The Supreme Court found that the inventor was the rightful owner of the patent rights, and not the bankruptcy estate.

Through the Supreme Court’s judgments in Cases T 5811-09 and NJA 2009, page 695, it has been established that under Swedish case law, a purchaser of IP rights will obtain protection in relation to the seller’s creditors through the agreement. 

If the seller terminates the agreement, the reversion of IP rights will be protected in relation to the purchaser’s creditors through the termination. The seller should include a right of termination in the agreement with the purchaser in order to be sure that he or she has this right. if the seller has granted a right for the purchaser to dispose of the rights freely and the purchaser has sold the rights to a third party, the seller must likely respect that transfer, provided that it occurred before the termination. In relation to any payments due from that third party to the original purchaser for the acquisition of the IP rights, the seller should inform the third party that the rights have reverted to it and that the remuneration is no longer payable to the original purchaser. 

It is important for a purchaser of IP rights not to rely on information from public registers. Although this was already the case before the recent judgment, it has since become even more evident. To the greatest extent possible, a purchaser should try to ensure that the seller of the rights is in fact the rightful owner. Purchase agreements should contain warranties to this effect and, if the seller has purchased the IP rights from a third party, a warranty under which the seller acknowledges that this third party has not terminated the underlying purchase agreement should be included.

This is an insight article whose content has not been commissioned or written by the IAM editorial team, but which has been proofed and edited to run in accordance with the IAM style guide.

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