Permavent Ltd v Makin

This is an application for an interim injunction in a dispute concerning entitlement to a number of patents the numbers and details of which are set out in paragraph 8 of the particulars of claim. They all relate to roofing products of various kinds and have a range of priority dates from 2008 to 2014.

The claimant is a company involved in the building products industry, particularly roofing products. According to the claimant’s evidence, the defendant, Mr. Makin, was a founding director of the claimant from the 21^st February 2003 until 5^th June 2017 and was an employee from 1^st February 2008 until 5^th June 2017. The defendant is also an owner of a third of the shares in the claimant’s parent company.

The claimant is now largely run by Mr. Yeremeyev, who has submitted evidence on this application by way of a witness statement, dated 17^th July 2017. Mr. Makin has also submitted evidence in response to that, dated 20^th July 2017, and I have considered both statements with some care and will refer to such parts as are necessary in what follows.

In substance, the claim alleges that the defendant owed fiduciary duties to the claimant as set out in paragraph 6 of the particulars of claim and a duty of good faith and fidelity as set out in paragraph 7 of those particulars. The claimant claims on the basis of those duties and the fact that the defendant was an employee and made the inventions essentially for the purposes of the claimant, the whole of the property in the patents, because the defendant was the devisor of those inventions at the relevant times. There is also a plea of entitlement on the basis of a constructive trust.

The claimant relies, in particular, on an email which was described as the “ownership email” which purports to have been sent by the defendant to Messrs. Witt, Govier, and Munson, on 23^rd November 2012 in which the following was said:

“The patent applications that I filed were done whilst I was a Director of Permavent and it was my understanding that because of this and because Permavent has paid for these applications then they automatically belong to Permavent. As you explained it is not the case and I would like to correct that error in filing. Ownership of these patents should be placed into the name of Permavent Limited should they be granted. I would like to make clear that at this time no patents have been granted or licensed to Permavent or myself so these applications are prospective and cannot be considered as having any net worth and therefore cannot be considered to be an asset.”

There is, however, one complicating factor in this case in that, in 2014, albeit apparently backdated to 2009, the claimant and the defendant entered into an exclusive patent licence agreement relating to certain patents which were defined in clause 1.1 as patents and applications relating to elements of the licensed products (which were in turn defined as the licensor’s product known as “Easy Group System”) and grant of any patents issuing from such applications as may be notified in writing by the licensor to the licensee from time to time.

This licence agreement appears, implicitly at least, to acknowledge that the defendant and not the claimant was the owner of the patents but it is said in the claimant’s evidence that the licence agreement was only entered into in 2014 in a specific context of seeking to obtain tax relief, pursuant to the Government’s Patent Box scheme, contrary to what appears on its face.

It is not wholly clear at the moment whether all of the patents that are the subject of these proceedings fall within the scope of in that agreement but I assume for present purposes that they would do. That licence agreement provided for a 2% royalty to be paid but with a five-year grace period. That grace period appears to have been the period prior to making of the licence agreement and, under that agreement, royalties should have started to have been paid after 1^st August 2014.

One further slightly puzzling feature about this case is that no such royalties have been paid, or apparently sought, and the evidence and the submissions on this application on behalf of the claimant were that not too much reliance should be placed on the licence agreement because of the particular context in which it was made and the purpose for which it was executed.

The origin of this dispute is as follows. When Mr. Yeremeyev became involved in the company, he focused largely on finance with the defendant continuing to focus on sales and technical matters, including product design.

According to the defendant’s evidence, during the course of 2016, he discovered that some of the products the subject of the patents were being sold at a lower quality than was, in his view, appropriate. He also says that he had been paid low wages by the company for a considerable period. He requested a dividend as a result of his shareholding in the company and says that both an increase in wages and a dividend payment were refused. As he has said in his evidence and submitted again before me, that is the “crux” of his argument.

The defendant has also given evidence, which it is not necessary to go into for the purposes of this application, relating to a relatively recent shareholders meeting at which, in his view, his interests were unfairly prejudiced by the decisions taken. It is right at this juncture to mention that, on Friday, the defendant provided the court with a draft order, albeit not accompanied with an application notice, which largely seeks disclosure of financial matters relating to the conduct of the company and another related company and seeks certain relief relating to that. No application is properly before me relating to that mater and the nature of the relief sought in the defendant’s draft order would not ordinarily be granted by the Patents Court, since it relates substantially to issues of corporate management or alleged mismanagement which would more ordinarily be an issue addressed in the Companies Court. If those matters are to be pursued, it will be necessary for those to be made either the subject of a counterclaim or a separate claim.

However, it is clear and both parties are agreed that this patent entitlement dispute is part of a series of disputes between the parties arising out of the breakdown of the relationship, including financial disputes relating to shareholdings and other disputes. Before me there is only the application relating to the patent matters and it is on that that I focus.

Turning back to those, following the falling out between the claimant and the defendant, the defendant terminated or purported to terminate the exclusive licence to which I have referred. On 14^th June 2017, the defendant also sent a series of emails to a company called Profile Techniques, a third party manufacturer of products which are said to be subject of the patents, essentially saying that the entitlement to manufacture those products was at an end and that they should no longer do so. On 3^rd and 4^th July, similar emails were sent to a company called P&L Group, again another manufacturer of relevant products for the claimant, stating that there was no entitlement to manufacture products covered by the patents. There was apparently another contention of a similar kind made to EWC Group, all of which are claimed as part of this action to constitute unjustified threats of patent infringement. During the application before me, the defendant also indicated that certain attempts had been made to interest other third parties in the patents and patent applications but those had not hitherto been successful. Those communications are the principal origin of the current claim for an injunction.

I am satisfied on the evidence that there is, at the moment, a real potential threat to either dispose of or license the patents, if the relief sought is not granted.

The claimant seeks an order that the defendant be restrained from transferring or licensing various patents and patent applications pending the resolution of the entitlement dispute.

The legal principles are not in dispute and are, essentially, those in American Cyanamid and I propose to deal with those in the conventional order. These principles have been applied many times and, in referring to it, courts frequently have said that the course should be adopted which appears least likely to lead to injustice.

First, as to whether there is an arguable case or a “serious issue to be tried”, in my judgment there is a serious issue as to whether the patents are properly to be regarded as the claimant’s property or the defendant’s property. It is not possible for the court to tell at this stage of the proceedings which side is right. I have noted earlier that there are some difficulties in the claimant’s argument, given the presence of the licence agreement dated 2009 but made in 2014, which acknowledges that the defendant was the owner of the patents and, indeed, in contemporary correspondence relating to that licence agreement which was submitted to HMRC at that time stating that the defendant held the principal rights to the patent.

On the other hand, there are also difficulties in the defendant’s case, since he too appears to have acknowledged that the patents should rightly belong to the claimant in the email that I have quoted, together with other matters such as the nature of the inventions which seem to fall quite closely into the claimant’s general business and technical field, and the fact that the claimant paid the relevant prosecution fees.

All of these matters are likely to require some investigation at the trial. It is possible also that the position may not be the same for each of the patents or patent applications, partly because there is a contention, at least in the case of one of the patents, that the invention in question was made prior to the establishment of the claimant. However, as counsel for the claimant submits, unless a case is very clear or there is some other good reason to conduct an evaluation of the merits at this stage, the court is precluded from making a preliminary assessment of the respective strengths of the parties’ cases in situations of this kind. It therefore suffices for me to say that I am satisfied there is a serious issue to be tried.

I then come on to the next Cyanamid factor, namely whether there is likely to be irreparable damage to the claimant if an injunction is not granted.

Products subject to these patents comprise approximately 40% of the claimant’s gross profits in the 2015/2016 financial year, with a turnover of over £500,000 on those products. The claimant contends, therefore, that if the defendant is permitted to sell or dispose of the patents, particularly to a competitor, the claimant is likely to suffer a degree of irreparable loss and damage, and that it may be impossible to recover that loss or may be much harder to do so.

It is also said that the patents may be asserted by a third party transferee against the claimant, although whether such an assertion would result in any interim relief being granted must, of course, be open to question. A further point that is made is that the claimant may, in certain circumstances, find itself bound by licences entered into in the interim period which it could not unravel, and it would therefore be prejudiced in that respect.

The claimant finally submits under this head that the defendant has admitted that he lacks sufficient resources to pay damages of the likely level should such be awarded, bearing in mind the turnover and profits in relation to the products. There is no detailed evidence as to the defendant’s means but I am satisfied on the basis of his submissions to me that it would be unlikely that the defendant could satisfy the kind of claim that may be advanced, were there to be any disposal of these patents or licensing of them in the interim. I am also satisfied that there is at least a prospect of some of the losses that the claimant has identified coming to fruition.

There is a real prospect of irreparable harm to the claimant if the relief sought is not granted.

I then turn to the question of irreparable harm to the defendant. The defendant contends that he too would suffer irreparable harm and that, in particular, it would be difficult to quantify the financial loss that he would suffer as a result of the patents effectively being sterilised in his hands pending trial.

Moreover, he submits that he may lose a potentially valuable opportunity to sell the patents or to license them during the period between now and trial, which is likely to take place in about a year. The same is true of loss of other commercial opportunities and it sounds as though those are not completely unrealistic in this case.

In my judgment, the defendant, who appeared before me in person and made moderate and effective submissions, is justified in saying that he too would suffer an element of irreparable harm were there to be the order that the claimant seeks. However, it is likely that the claimant’s irreparable or unquantifiable harm is likely to exceed the defendant’s irreparable or unquantifiable harm, both in terms of absolute value and in terms of the degree of unquantifiability of the harm in question. I say that particularly because, although it is right to say that the impact of an injunction would be to sterilise these patents in the defendant’s hands pending trial, one of the difficulties in cases of this kind is that, ordinarily, what is doing a large measure of the sterilisation is the presence of proceedings themselves. The incremental impact of the injunction being granted in circumstances where there is a potential blight over proprietary entitlements can be, and in my judgment in this case is, relatively modest.

It seems to me also that the claimant would be in a much better financial position to compensate the defendant for any loss that he may have suffered as a result of this injunction were it to be the case that it turned out that this injunction was unjustified, on the basis that the claim for entitlement had failed.

I then turn to other factors relevant to the balance of convenience or balance of justice, as to which one important factor is whether the status quo should be preserved pending trial.

The current position is that the products subject to the patents are continuing to be sold by the claimant. The defendant has indicated in his evidence that there is no fundamental objection to that continuing to be the case. The real issue, as he sees it, is that he is not being properly paid for the technical contribution that he made by way of the patents and, indeed, the contribution that he made to the company before he and the company parted ways.

That, it seems to me, is a powerful factor in favour of preserving the status quo, which is that these patents remain effectively where they are and the products that are made and sold pursuant to them continue to be made and sold in the interim. However, as I indicated to counsel for the claimant, Mr. Reed, who also made moderate and effective submissions on this application, I was concerned that, if an injunction was granted without a degree of protection for the defendant, that would lead to an unbalanced situation in that the claimant would be entitled to continue making money out of these products if they fall within the scope of these patents and thereby benefiting from the work undertaken by the defendant whereas the defendant would, if he is right, have been left out completely from benefit in the period between now and trial and would be unable to raise any money on the basis of those patents.

There is, however, a way through this, which I debated with counsel for the claimant in argument.

It is well-established that refusal of an interim injunction may be made conditional upon a defendant paying a certain amount of money on a running basis if it wishes to continue to sell the products that would otherwise be subject to the injunction. I see no reason, in principle, why the position should not operate the other way round in the context of a bona fide entitlement dispute of this kind.

In such a case, a claimant seeking an injunction should, in an appropriate case, be required to compensate the defendant to a modest but realistic degree on a running basis in the interim (on the footing that such sums would be, in principle, repayable) as a condition of the grant of an injunction. In this case, doing so would take account of the fact that the rights in question were formally registered in the hands of the defendant, sterilised in the defendant’s hands pending trial but being used by the claimant in the interim.

In my judgment, this is a case in which the grant of an injunction should therefore be conditional upon not only the provision of the conventional cross-undertaking in damages but also conditional upon the claimant making payment by way of running royalties in the interim at the level they would be paid pursuant to the licence agreement to which I have referred, or at least at approximately that level. Those royalties are 2% on the patented products, which, as I have indicated, have a turnover of approximately £500,000 a year.

It is, however, undesirable to require the parties in this case to engage in undue precision at this stage with respect to these payments conditional upon which an injunction would be granted. In very approximate terms that sum amounts to a royalty of about £10,000 a year so, to avoid further disputes, it seems to me appropriate that a condition of grant of the injunction should be that the claimant pays the defendant the sum of £2,500 every quarter while the injunction continues in effect. That sum would be adjustable both upwards or downwards in due course. I particularly have in mind that, because it was made in a particular context, the licence agreement in question may not accurately reflect the market rate for a patent of this kind. The claimant’s skeleton argument realistically accepts that, in cases of this kind, royalties closer to 5% may be appropriate, and it is not uncommon in these cases for royalties to be agreed or awarded of between approximately 3% and 10% for mechanical inventions of this kind. However, it seems to me that, in very broad terms, requiring a running payment of approximately half the midline figure of such royalties, which was the sum agreed by the parties in the licence agreement, represents a broad-brush but fair way to address this issue in this case.

The final point I canvassed with counsel for the claimant was whether (or to what extent) there should be permission to apply to vary the terms of this injunction.

Ordinarily, in cases of this kind it is undesirable for there to be permission to apply, save where there is a change of circumstance and, in particular, very significantly changed circumstances. That is partly because one does not want the court to be continually faced with applications from parties saying that they want to have the terms of an injunction changed. However, in this case, there are specific reasons for adopting a somewhat different approach, since the shape and direction of the case as a whole is not yet fully defined.

First, this claim is a part of a broader dispute. In those circumstances, working out precisely where interim justice lies in the context of the overall dispute is harder than it would be in the case of a more isolated issue concerned with a single patent and a single product.

Secondly, as I indicated in the course of argument, that dispute would benefit from attempts to mediate it. It is encouraging that the claimant itself in its letter before action proposed mediation. It would be of utility, I suspect, if that were taken up, if the parties are not able to settle the whole dispute without recourse to a third party.

Thirdly, there is a real issue as the correct forum for this case and, in particular, whether it should be transferred to the Intellectual Property Enterprise Court and, if so, what the timescale would be for a trial of those proceedings. This may be somewhat more extended in that court than the ordinary type of trial in the Chancery Division. That may therefore have an impact on the period over which an injunction may operate.

I make no order in relation to transfer at this stage and none is applied for. It may turn out that because the case is of greater compass than merely the patent matters, it would be more suitable for it to remain in the Chancery Division. Equally, it may be that, even if it encompasses broader issues, the fact that it is a dispute between a small or medium-sized enterprise and an individual, which should, in principle, be subject to a stringent costs regime, means that it would be suitable for the Intellectual Property Enterprise Court in any event.

All of those matters, may resolve themselves and, if not, the court may be able to take a broader view when the case comes back for directions and has been properly developed on the defendant’s side and responded to on the claimant’s side.

I will therefore provide an additional liberty to apply on both sides for either a relaxation of the conditions or relaxation of the injunction, or for increased stringency of the injunction on a date not before 1^st November 2017. That will give the parties the benefit of the summer and an early part of the autumn legal term to consider matters and a greater opportunity to see what progress can be made in finally or partially resolving the case and, if not, in shaping it for trial and for the interim position to be adjusted, if appropriate, to take account of that.

In summary, the basis for an injunction has been made out in this case and I consider that, subject to the further indicated additions to the draft order the claimant has provided, I should make an order in substantially the terms sought.