Do British Universities Treat Students Unfairly Over IP?

In a lengthy 174 page judgment issued two days before Christmas 2022, the High Court of Justice in London ruled on a dispute between Oxford University Innovation Ltd (the technology transfer arm of the world renowned Oxford University) and one of its spin-out companies, Oxford Nanoimaging Ltd.

When Nanoimaging was spun-out, it agreed to terms for a royalty bearing patent/IP licence (at rates between 3.5 to 6%) from the university in relation to a compact, super-resolution imaging device, which is a type of specialised microscope. The dispute started as a claim by the university for unpaid royalties in excess of £700,000. The claim was defended on the basis that the university was not the proper owner of the patents. The key issue was whether the university could validly claim rights to inventions made by a Mr. Jing, who was initially a research intern and later a DPhil student at the university.

It was common ground that the detailed development work which led to the patent was undertaken by Mr. Jing, with both Mr. Jing and his professor being named the inventors. When Nanoimaging was spun-out, Mr. Jing left the university without completing his degree to become Nanoimaging’s CTO and subsequently CEO.  

Two main issues were before the court:

• Does section 39 of the Patents Act 1977 give the university the rights to any invention conceived by Mr. Jing during his employment at the university?
• Were the terms in Mr. Jing’s DPhil contract in contravention of the Unfair Terms in Consumer Contracts Regulations? Which leads to two subsidiary questions: Is the student a consumer or an employee? And were the terms unfair?

Section 39

Section 39 of the Patents Act 1977, which addresses inventions made by employees, provides:

Notwithstanding anything in any rule of law, an invention made by an employee shall, as between him and his employer, be taken to belong to his employer for the purposes of this Act and all other purposes if

(a) it was made in the course of the normal duties of the employee or in the course of duties falling outside his normal duties, but specifically assigned to him, and the circumstances in either case were such that an invention might reasonably be expected to result from the carrying out of his duties …

The judge considered a number of factors (which is beyond the scope of this article to address) in deciding whether section 39a applied. In summary, Mr. Jing was hired to specifically improve a prototype because of his skill and experience and was paid to do so. Therefore, the university had the proper rights to the inventions conceived during Mr. Jing's internship.

Consumer vs. Non-Consumer

Ordinarily, private individuals contracting for their own purposes as opposed to their business purposes are regarded as consumers. The question then arises: Is someone signing up to do a DPhil doing so for their own business purposes? In addressing this question, the judge considered both undergraduate and DPhil students. 

He concluded that in both cases many students will pursue their studies in order to further their careers, and therefore there is a business purpose element. Nevertheless, the judge ultimately concluded that higher education is a commodity market and both undergraduate and DPhil students are consumers vis-à-vis their university. He did add, however, that the closer a DPhil student is to an employed researcher in actual work and status, the less unfair it is to treat the DPhil student in the same as one would treat an employed researcher.

(For those interested, the judgment includes a long and interesting analysis of the economic, cultural and social role universities play in the U.K.) 

Unfair Contract

Having found in Mr. Jing’s favour that he was a consumer, the next step was to assess whether the terms of his contract with the university were unfair. The relevant statute provides that:

A contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer.

In Mr. Jing’s case, the university shared the benefits of its IP policy with him in two respects: (1) by a share of any revenues deriving from the IP; and (2) a starting point of a 50:50 equity split between the university and the academics on any spin-out. (A twist in this case is that the £700,000 in royalties unpaid by the company that triggered this case, if and when paid, would crystallise under the revenue sharing arrangement in payments from the university to Mr. Jing and his professor of £124,000 each.) 

Mr. Jing complained that it was unfair (a) that the IP rights vested in the university, and (b) how the benefits of those IP rights then were shared with inventors. 

It is not the case that all IP generated by a DPhil student vests in the university. Going through the provisions that triggered such vesting, the judge concluded that they were pragmatic, fair and reasonable.

The judgment includes a long analysis of how Oxford University shares the benefit of IP and how that compares with other universities. (Those with an interest in incentive reward mechanisms for IP are recommended to read the analysis.) It concluded that on some measures Oxford University was on the low side, but not massively so, and in any event Oxford University’s policies had benefits others may not. The judge concluded that Oxford University’s revenue sharing arrangement was not substantially out of kilter, and therefore was not unfair.

In regards to the equity split for spin-outs, the judge found that the default 50:50 arrangement during the spinout was not negotiated with great rigour and therefore ruled it was not unfair to Mr. Jing.

This court cannot take this sort of thing for granted, one way or the other, or be confident that, in the long run, for any given spin out, an initially larger share allocation to researchers would end up being more beneficial for them than a relatively larger share allocation to a university. There are situations one can readily envisage in which an individual would be better off with 10% equity in a well-funded/supported fledgling company to which an institutional majority shareholder was committed (and was better plugged into funding networks) than the same individual would be with 90% of the equity in that company (which, because of that share split, the institutional shareholder was less prepared to back).  It would require evidence to show that any particular allocation which appeared out of kilter at the outset was sub-optimal in a given case over time. The court cannot assume without proof even the narrow proposition that, in this case, the 90:10 share allocation which Professor Kapanidis and Mr Jing were seeking would have left them better off today than the 50:50 allocation which they ultimately agreed.

Thus Mr. Jing’s DPhil agreement was not unfair, and accordingly was not void with the consequence that the IP rights in Mr. Jing’s work had properly vested in the university.

Conclusion

In general, the universities in the U.K. are world leaders in generating new ideas, but lag in their commercial exploitation. The approach taken by universities to IP ownership and sharing proceeds with academics sometimes is blamed for some of that malaise. Striking the right balance is an economic issue and not a legal one. As the judge records at the end of his long judgment:

… at one end of the spectrum is the view that an IP policy including the division of royalties and equity share should be structured so as to provide maximum benefits for the individual researchers with a view to incentivising them (student or employee) to devote greater efforts to producing commercialisable research and establishing start up companies. At the other end is the view that this is not what a university should be focussing its attention on and that if anything researchers should not be particularly incentivised to pursue spin out companies and should concentrate more on fundamental research. Both those kinds of policies (and anywhere inbetween) are of a kind which a university … may pursue in good faith.  It is not in my view appropriate for a court … to try to evaluate whether there might be a better way of addressing the complex and multifactorial issues. That is for the University to decide in accordance with its democratic processes in which it is doubtless desirable that all relevant interests are represented.

What the case does, however, demonstrate is that policies which vest the IP generated by students, including DPhil students, in the university will be upheld. Where perhaps Mr. Jing erred was in the negotiations for the 50:50 equity split at the time Oxford Nanoimaging was spun-out, particularly bearing in mind that both his and the university’s equity would be diluted over time as other investors came in. He might say he had no negotiating position at that time, and had to accept the university’s default 50:50 position, but even if correct on the facts of this case, that would not negate the agreement he did sign.