Can you assign the right to use confidential information?

Wednesday 2nd April 2014

A recent case in Australia, Neobev Pty Ltd v Bacchus Distillery Pty Limited (Administrators Appointed)(no 3), highlighted the need to properly document commercial relationships, and illustrated the difficulties that can arise where the parties fail to do so, particularly where confidential information is disclosed by one party to the other.

Background

In Neobev, the Federal Court of Australia held that a right or licence to use confidential information is not capable of assignment by the party who owes the duty of confidence, except where there is an express contractual provision allowing for assignment.  The Court also determined issues regarding the ownership rights in the invention around which the case related.

The facts of the case are summarised below:

  • Max Scott agreed verbally with Damian Hajdinjak, the CEO of Bacchus, that Scott would design and install a cream liqueur plant in Bacchus’ factory. 
  • Scott also provided to Bacchus recipes for products and manufacturing and testing procedures which were contained within some 77 documents of a confidential nature. 
  • Bacchus asked Scott to come up with a less costly base for making cream liqueur products than Bacchus’ then current spirit and ethanol base, and Scott devised a staged filtration process for producing an improved clean wine spirit (CWS) invention. 
  • Bacchus then filed a patent application for the CWS invention (CWS patent) in its sole name and listed Scott and Hajdinjak (who wanted his name on the application) as inventors (on the parties’ understanding that Bacchus had to be the sole owner in order to obtain government grants). 
  • In 2013, Scott assigned his rights in the intellectual property developed for Bacchus, including his right to receive royalty payments in respect of the CWS patent, to Neobev Pty Limited (a company of which Scott was a director).
  • In September 2013, Bacchus went into administration and the administrators wished to sell Bacchus’ business (including the right to use the confidential information in the 77 documents).
  • Neobev then brought proceedings to determine the ownership of the CWS patent, and whether Bacchus could, in the absence of any contractual provision allowing for assignment, transfer the right to use the confidential information to a third party.

Ownership rights in the invention

In relation to the ownership of the invention, Justice Berenko found on the facts that Scott was the sole inventor, as Hajdinjak had no “material effect on the final concept of the invention” and did not make any contribution that would entitle him to be called a co-inventor.
Justice Berenko held that Bacchus owned the CWS patent on trust for Bacchus and Scott on the basis that:

  • unlike the assignment of a patent, an assignment of rights to the invention need not be in writing and signed by Scott and Bacchus; and
  • there was a verbal agreement between Scott and Hajdinjak that the CWS patent would be registered in Bacchus’ name but that Bacchus and Scott would jointly own the CWS patent.

Assignment of right to use confidential information

Justice Berenko then considered whether Bacchus could assign its right to use the confidential information in the 77 documents to a third party (as the administrators wished to sell the right to use the confidential information to a possible purchaser).  

Justice Berenko held that contractual burdens or obligations are not assignable and that one of the features of the confidential information is that Bacchus received it in such circumstances as to import a duty of confidence, holding that “one cannot transfer the right to use [the confidential information] without the obligation [of confidence] and the obligation is incapable of assignment”.

In our view, any New Zealand decision in this regard would be similar to the decision of the Federal Court of Australia, since in New Zealand obligations of confidence cannot be assigned. 

Conclusion

This case shows the importance for intellectual property inventors and owners of properly documenting the business relationship between them. 

In addition, since express provision must be made for the assignment of the right to use confidential information, this should be a consideration for parties where the disclosure and use of confidential information is (or may become) an important part of their business relationship.

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