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LEGAL APPLICATIONS IN TECHNOLOGY

MSc IT Assignment 2013 Analyze the legal and professional impact of

Transfer of Patent license within a typical commercial setting

Hansa K. Edirisinghe BSc (Hons) University of Portsmouth, UK

MSc IT - Cardiff Metropolitan University, UK

10th February 2013

The preliminary objective of this research is to analyze the legal and professional impact of patent transfer within a typical commercial setting. In the process the researcher provides a basic understanding about the patent license, the rights belongs to patent owner and how the patent owner can use his/her rights under the legal setting.

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Abstract

The preliminary objective of this research is to analyze the legal and professional impact of

patent transfer within a typical commercial setting. In the process the researcher provides a

basic understanding about the patent license, the rights belongs to patent owner and how the

patent owner can use his/her rights under the legal setting. This is followed by the financial

benefits which could gain by the patent owner and transferee. Apart from that, the law of the

patent transfer and analysis of how the law protects the invention and inventor was discussed.

The report also focuses on to the analysis of the limitation of law and terms and conditions of

the transfer agreements.

The acquisition of Patent License in Sri Lanka is discussed while providing examples in the

local context. The concept of typical commercial setting; Patent ownership; The impact of

patients on the country’s typical commercial setting; Patent acquisition among residents and

nonresidents of Sri Lanka; The law of patent transfer; The potential of legal and professional

impacts; Law behind transfer of Patent ownership; Patent transfer types for commercial

purposes; Royalty basis; Lump-sum sales price; Startup Companies; and Work-for-Hire were

also covered in the report.

The overall report analyzes/evaluates the above key points of legal and professional impact

of patent transfer while providing evidence to how it could impact within a typical

commercial setting.

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Table of Contents

1.0 Introduction .................................................................................................................... 1

2.0 Literature review ............................................................................................................ 2

2.1 Patent ownership ........................................................................................................ 3

2.2 The concept of typical commercial setting ................................................................ 3

2.2.1 The impact of patients on the country’s typical commercial setting .................. 4

2.3 Formulating the research problem.............................................................................. 4

2.4 Objectives ................................................................................................................... 4

2.5 Research methodology ............................................................................................... 5

2.6 Scope and limitations ................................................................................................. 5

2.7 Significance of the study ............................................................................................ 5

3.0 The potential of legal and professional impacts ............................................................ 6

4.0 Analysis of the legal and professional impact ............................................................... 7

4.1 Law behind transfer Patent ownership transfer .......................................................... 7

4.2 Patent transfer types for commercial purposes .......................................................... 7

4.2.1 Patent Licensing .................................................................................................. 8

4.2.1.1 Royalty basis ................................................................................................... 8

4.2.2 Patent Assignment .............................................................................................. 8

4.2.2.1 Lump-sum sales price...................................................................................... 8

4.2.2.2 Startup Companies .......................................................................................... 9

4.2.2.3 Work-for-Hire ................................................................................................. 9

5.0 Conclusion ................................................................................................................... 11

6.0 Bibliography ................................................................................................................ 12

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1.0 Introduction

Emerging technology is changing the typical life style of the people. The world is in a hunger

of new inventions. Although the invention has its scientific value a Patent License can give it

a higher and stable commercial value. This is due to the fact that a patent license can make a

product or technology unique to a particular person. It gives a monopoly of making, using,

selling or distributing the product or technology to the patent owner. The owner can take

legal actions if someone goes against the rules pertaining to intellectual property rights.

Patents are the intellectual property rights granted by the state for inventions. An invention

means a creation of a new product or a process that has not been known to the public or has

not been in existence in nature. (Sandirigama, 2008)

The changing of ownership of the patent is known as Patent license transferring. According

to the records of United States Patent and Trademark Office there are different types of

patent conveyance are recorded for both commercial purposes and trust factor. The types

such as “Licensing” and “Assignment” are more important when it comes to commercial

purposes.

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2.0 Literature review

According to the Sri Lankan law the duration of the patent is twenty years from the filing

date of application. The patent law comes under Intellectual Property Act NO.36 of 2003.

According to the statistics of National Intellectual property office (NIPO) of Sri Lanka the

number of patents granted within the country reflect an increasing trend.

Figure 2.1 Acquisition of Patent License in Sri Lanka

0

100

200

300

400

500

1995 1997 1999 2001 2003 2005 2007 2009 2011

PATENTS

Source: (National Intellectual Property Office of Sri Lanka, 2012)

Figure 2.1 shows the total number of patent license granted for both residence and non-

residence.

Although there is a parliament act passed in Sri Lanka for intellectual property general public

is not very much aware of these rules. Therefore frequent losses have been recorded in the

history. As a moderately self sufficient country, Sri Lanka has many natural resources than

other countries. But due to the unawareness the importance of patent ownerships certain rare

plants unique to Sri Lanka used to produce medicines goes to foreign companies without any

benefit to the country. Those foreign companies earn billions of dollars by using the plants

unique to Sri Lanka while Sri Lanka is deprived of any commercial advantage.

Acceding to a newspaper article in Daily News on 21 May 2010 the patent ownership of a Sri

Lankan plant which is known as “Kotala Himbutu” was obtained by a Japanese company

“Fuji Films”. This plant is unique to Sri Lanka and the Sri Lankan Ayurvedic doctors have

been using this item for their medicines from the ancient times.

On the other extreme, Dr. Sena Yaddehige owns the patient worldwide for the automotive

sensor business developed by him. It sets an example for any entrepreneur in Sri Lanka the

value of the patient ownership.

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2.1 Patent ownership

Patent ownership could be granted as an individual or as a group. If it is a join invention, the

ownership goes to all the joining parties and the all the decisions should be taken with the

agreement of all group members. Even in join research the ownership could be transfer to

any external party or an internal member under certain conditions.

When transferring the patent ownership, the person who obtains the patent is called the

assignor and the person who receives the assignment is called the assignee.

2.2 The concept of typical commercial setting

Commerce is the entire system of an economy that constitutes an environment for business.

There are few critical external environmental factors in any commercial setting that influence

the existence of the firm. This includes Political, Environmental, Social, Technological,

Ecological, and Legal influences. The needs and wants of people have been changed

drastically during the recent past primarily due to the impact of rapidly changing technology.

Therefore market has become very volatile though everyone is looking for sustainability and

a sound financial stability. The country’s commercial background is depending on the

sustainability of the firms and financials of people.

The term “commercial organization” commonly refers to a group or groups that constitute

specific set of skills, priorities, strategies, and resources. The obvious and ultimate objective

of a commercial organization is usually to make a profit for the owners and its shareholders.

The concept of “Marketing” plays a role in making profits. Marketing may lead consumers to

realize a need that might have previously gone unidentified. On the other hand a need or

want wouldn’t have realized until that product or service come to existence. When a product

is imported from another country, consumers spend money to buy them while a country may

earn foreign exchange if a product is being manufactured within the country and exported.

The ultimate international trade results the exchange of capital, goods, and services across

international borders or territories. Usually, such trade represents a significant share of gross

domestic product (GDP) of a country.

In a nutshell, commerce is a system or an environment that affects the business prospects of

an economy or a nation-state. Therefore, it supplements a complex system of companies that

try to maximize their profits by offering products and services to the market at the lowest

production cost. A system of international trade has helped to develop the world economy

while helping the countries and respective companies to be financially stabilized. In such

commercial setting more inventions would lead to more money to the country.

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2.2.1 The impact of patients on the country’s typical commercial setting

According to the NIPO of Sri Lanka below statistics shows the patent acquisition among

Residents and Nonresidents of Sri Lanka.

Figure 2.2 Patent acquisition among Residents and Nonresidents of Sri Lanka

0

50

100

150

200

250

300

19951996

19971998

19992000

20012002

20032004

20052006

20072008

20092010

2011

ResidentPatents

Non-residentPatents

Source: (National Intellectual Property Office of Sri Lanka, 2012)

According to graph the Nonresidents have obtained patent in the country more than the

residence. Since the majority of Sri Lankan patent obtained for Sri Lankan products, most of

these Nonresidents obtain their patents for the inventions done by using local raw materials.

Those inventions could be considers as the commercial assets which we couldn’t acquired for

the betterment of the country’s financial setting. Therefore Patent License as an intellectual

property that could impact on the country’s typical commercial setting.

2.3 Formulating the research problem

There is legal and professional impact of transfer of patient license within a typical

commercial setting that should be researched and analyzed.

2.4 Objectives

The primary objective of the research is to study and analyze the legal and professional

impact of transfer of patient license within a typical commercial setting. Hence the overall

objectives are shown as below.

Identify the law of patent transfer

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Identify the typical commercial setting

Research/Fact finding of legal and professional impact of Transfer of Patent license

Identify the legal and professional impact of Transfer of Patent license within a

typical commercial setting

2.5 Research methodology

The research is basically conducted as a desk-based research. It is a combination of both

qualitative and quantitative analysis based on secondary data.

These evidences were found from both online and offline sources such as World Intellectual

Property Organization (WIPO), journal articles, search engines, News paper articles and

Government publications. The information published by parliament, certain ministries or

central bank, and statistics available on WIPO were used. The statistical data from several

databases was used in the form of quantitative analysis such as graphs.

2.6 Scope and limitations

Under the Intellectual Property (IP) Act NO.36 of 2003, it covers the law of Patent,

Copyrights, Trademark and Industrial design. The different applications of those topics and

the law of obtaining, using, cancelation, transferring and outcome infringing them are

illustrated on the act. However, the research was only limited to a specific area in patenting.

It only analyzes the legal and professional impact of Transfer of Patent license with a least

focus on the law of application, obtaining or cancelation of patent.

2.7 Significance of the study

Patent license has a very high commercial value and its commercial asset which gives a lot of

financial benefits. Therefore the patent owner can earn huge amount of money by producing

the product since the owner has the monopoly. Not only manufacturing or distributing but

also the owner can sell or transfer the ownership of the patent for the financial benefits

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3.0 The potential of legal and professional impacts

Transfer the ownership of patent license is legally acceptable. But every transfer agreement

should have its own conditions among both parties. Then it becomes both legal and

professional.

As discussed in above section there are several types to transfer patent for financial

acquisitions. It could be a transfer to anyone without any prerequisites. According to the law

it’s not a matter whether the assignee has any background knowledge or any other criteria to

prove that he/she is fit to make use of it properly. In some situations the assignee may not

know the actual scientific value of the invention. If so the assignee can misuse the product

only on the basis of financial benefits.

It is the patentee’s duty to provide certain conditions on the transfer agreement. But even if

the agreement is unconditional, it is valid according to the law. A patented product is an

important asset to a country. Therefore everyone is responsible to protect the value of the

product. For the purpose of protecting the value of the invention as well as inventor the

conditions that cover all sensitive areas should be enclosed to with the transfer agreement.

In case of breach of contract the patentee can take legal actions or can claim damages from

the other parties. Due to some involvement and physical and mental harassments people may

hesitate to take actions against some parties. But it encourages the people to do more and

more illicit acts just to earn money. It could damage the value of the patent as well.

With the patent transfer types such as Work-for-Hire there are no conditions in the act to

specify the salary of the employee. The salary of the employee decided according to the

company policies. Therefore whatever amount the company pay is considered legal. But an

individual or a group who does and invention is different from other employees. Therefore

the management has a duty to look after the employee and treat the employee properly.

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4.0 Analysis of the legal and professional impact

4.1 Law behind transfer Patent ownership transfer

A patent application or patent may be assigned or transmitted and such assignment or

transmission shall be in writing signed by or on behalf of the contracting parties. (Intellectual

Property Act, 2003)

The patent owner is free to assign the patent ownership to anyone under the agreed

conditions. According to the law the transfer agreement should be kept in writing and all the

teams and conditions which they agreed should be enclosed in the agreement.

Any person becoming entitled by assignment or transmission to a patent application or patent

may apply to the Director-General in the prescribed manner to have such assignment or

transmission recorded in the register. (Intellectual Property Act, 2003)

The legal aspect of patent transfer is the legal acceptability and the strength of law in

transferring. It has a direct impact on the county’s commercial setting. Since the patent has

no fixed value, the assignee decides the value considering the factors such as scientific and

market value, market potential personal and financial background.

In some cases people do inventions just for the purpose of transferring the ownership to

foreign companies. It may be more profitable than manufacturing. As an example a Sri

Lankan inventor could invent a new feature for a vehicle and license the technology to a

pioneer car manufacturing company in Japan or Korea. Inventor can earn billions of dollars

by transferring without a gain to the country.

According to the IP Act No 36 of 2003 transfer of patent is a legal right which acquires by

the patent owner. But there is no restriction or minimum qualification which the assignee

should have to acquire the responsibility of the patent license. Therefore the quality the

product that the assignee is intends to maintain cannot be measured prior to the assignment.

The manufacture and sale has an impact on the Commercial and financial setting irrespective

of the way that assignee may use the product.

The assignor legally has authority to declare the terms and conditions on the assigning or

licensing agreement in respect to the act. But it is immeasurable how much does it impact on

protecting the value of patent. These conditions may impact on the commercial setting

directly or indirectly.

4.2 Patent transfer types for commercial purposes

As discussed previously the patent owner can “Licensing” or “Assigning” the patent for

commercial purposes. Then the assignee can enjoy the benefits of the invention directly.

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4.2.1 Patent Licensing

According to the act “licensing” provides limited rights to the assignee to perform certain

activities subject to certain conditions and payments. The licensing process is similar to the

rent or lease property. Therefore it has been described as royalty basis transfer method.

4.2.1.1 Royalty basis

The party who subjected to be assigned (assignee) will receive the patent ownership for an

agreed period or during the validity period of the patent. All the terms and conditions should

be recorded in writing and the terms could be changed subject to the patented product or

technology.

In a patent transfer, usually the royalty is pained yearly. The duration could be differing

according to the transfer agreement. The royalty amount will negotiate against the value or

the importance of the product.

The main advantage of this is while transferring royalty basis the patent owner could be

benefited if the value of the product in the market goes higher. This is a type which the patent

owner could demand for the patent value. Therefore the patentee can increase the

subscription yearly. From the business perspective this could maintain the professional aspect

of the business and earn profits as well.

The disadvantage of this type is once agreed for royalty basis the patentee has no authority to

claim the damages or cancel the ownership in case of failure of payment.

4.2.2 Patent Assignment

Patent “Assignment” is bit different from “Licensing”. The basic idea of “Assignment” is sell

the patent rights to someone else for the lump-sum consideration. If the invention has been

done as a result of the employment, the ownership, assignor, assignee and assign duration

differs according to the company policies and employment contracts as well as country to

country. The main types of patent transfer under “Assignment” are as follows;

4.2.2.1 Lump-sum sales price

According to this type the patentee negotiate for a fixed price to sell the patent ownership to

an external party. The price negotiation is same as above type, but the assignee acquiring

method is different. The assignee can pay the total prince at once and get the full ownership.

If not the assignee can pay the agreed amount in royalty basis subject to agreed conditions.

Unlike above type the royalty amount cannot be increase or decrees in this type. Since both

parties has agreed for a fixed price the assignee could be benefited incase for increment of

market value and vice versa.

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Since this is one time negotiation the patentee can go for the high price and it could be more

benefited then other types.

4.2.2.2 Startup Companies

When staring an invention the money factor becomes a critical issue. Some inventers stop

their inventions due to the difficulty of finding capital.

When investors see a potential of a particular invention, they invest money as an external

party for the invention. In law, this party is known as Venture capitalist. In Startup

companies the inventor is eligible to use recourse under certain negotiable conditions with

the Venture capitalist. This is a massive advantage, the inventor will enjoy under this type.

The benefit that Venture capitalist get is once the invention got successful the ownership of

the patent license goes under the name of Venture capitalist. According to law Venture

capitalist can keep the ownership up to 8 years maximum, from the patent date. After the

duration of assignment the patent ownership will reassign to inventor.

4.2.2.3 Work-for-Hire

This is usually obtained by the experiment and inventions done by companies. As employees

of the company, individuals and team do certain inventions. In such scenarios the ownership

of the patent license goes under the company name under the Sri Lankan law. Therefore the

employee or group does not get an ownership for the product. This is one of the

disadvantages from the employee perspective, but on the other hand employee can demand

for the salary and other benefits.

Apart from above there are some more points which cause disadvantages for patent owners.

The full description of the invention should be provided in the application and can be

viewed by anyone who applies for a patent from the administration office.

Once finished the exclusive patent period any party can freely use or manufacture the

invention.

Since there is no fixed value to the invention, some parties may misguide inventors

for their financial benefits.

The professional aspect of patent transfer is how the quality maintains and how much the

transfer vulnerable breach of contracts. Sometimes the transfers are legally acceptable but

professionally not. As an example, in a scenario of patent transfer the assignor can decide

whether the teams and conditions are required for the agreement or not. If it is an

unconditional agreement the assignee can misuse the invention. Then it is vulnerable to

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damage the scientific value and market potential. But a conditional agreement can protect the

value of the invention. This scenario will directly impact on the typical commercial setting.

Sometimes the assignee could earn more than the inventor once the paten was transferred due

to the market completion and high supply. This is another occasion which the teams and

conditions become important. In such situation the dislike could guide people to damage the

commercial and scientific value of the invention. These things could be not illegal but not

professional and it could impact on the commercial setting as well.

The public awareness of patent license and ownership transferring is another important factor

when it comes to professional impact. In a country like Sri Lanka, people do not aware about

IP rights and punishment for IP rights violations. The less knowledge and less awareness lead

people to do more infringements of patent rights. It could damage the professionalism of

patent ownership and ownership transfer.

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5.0 Conclusion

As a desk-base research the data were found for the analysis by referring the government

sources, World Wide Web and news paper articles. When critically analyze the Patent

transfer law, it was understood that the assignee gets a big responsibility on maintaining the

professionalism in managing the respective property after the transaction is being made.

Deferent transfer types are available to “Assigning” and “Licensing” that are in favor of the

protection the commercial and legal aspect of the transfer.

When analyzing the statistics published by the government, it can clearly see foreign

involvement of obtaining patent license higher than locals for the resources in Sri Lanka. The

outcome of that is local inventors are deprived of benefits from certain resources where the

country could have gained more financial benefits otherwise. If foreigners obtain the license,

they use local manpower to earn money by licensing the technology to local companies

which is not advantages to Sri Lanka. The professionalism of a transfer usually maintains due

to the conditions which both parties agreed for the sake of protecting the scientific and

commercial value of the inventions.

Analyzing the above factors it could see that there is a substantial impact of transfer of patent

license in a typical commercial setting. In this aspect the public awareness about the concept

of patenting play a vital role thus it should properly guide people when obtaining and

transferring patent.

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6.0 Bibliography

Intellectual Property Act. (2003). Chapter XVI. 88. (1). National Intellectual Property Office

of Sri Lanka.

Intellectual Property Act. (2003). No. 36. Chapter XVI. 88. (2). National Intellectual

Property Office of Sri Lanka.

National Intellectual Property Office of Sri Lanka, 2012. Information and Statistics. [online]

National Intellectual Property Office of Sri Lanka. Available at:

<http://www.nipo.gov.lk/satistic.htm> [Accessed 8 February 2013]

Sandirigama, M. (2008). Intellectual Property : A Quick Guide for Scientists and

Technologists. Peradeniya: Science Education Unit - University of Peradeniya.