Commercialisation success stories are the perfect marriage of innovation and business. However, good relationships can ‘go bad’. The University of Sydney’s unsuccessful commercialisation venture with ObjectiVision Pty Ltd, and decade long dispute culminating in six years of Federal Court litigation gives a sound of warning to universities, their commercialisation partners and other would-be licensors and licensees seeking to commercialise technology.
Louise Brunero and Jeff Bergmann from Solubility discuss University of Sydney v ObjectiVision Pty Limited  FCA 1625 and what it means for you and your business
Who should take notice?
- Universities, their commercialisation partners, and other licensors and licensees seeking to commercialise technology.
- Employers seeking to appoint their employees on another company board as a director should take note of the obligations on those directors.
What you need to know
- The University of Sydney has succeeded in its long running contract and copyright dispute with commercialisation partner ObjectiVision.
- In a 209 page judgment, Justice Burley upheld the University’s termination of its exclusive licence with ObjectiVision following ObjectiVision’s failure to meet certain conditions.
- Justice Burley rejected each of the following claims made by ObjectiVision:
- ObjectiVision’s cross-claims seeking $25 million in damages. He held the University’s subsequent development of the technology with a new partner, Biogen Idec and their joint commercialisation start-up, Visionsearch Pty Ltd did not breach the best endeavours and good faith provisions in the Shareholders’ Agreement.
- ObjectiVision’s claim that the University could not rely on its rights under the Licensing Agreements.
- ObjectiVision’s claims of copyright infringement and breach of confidence by the University and Visionsearch, despite movement of a key software developer from ObjectiVision to the University and then to Visionsearch and the subsequent development of a new software product which contained some identical code.
- The University’s patent infringement claim was separated from the subject matter of this proceeding and accordingly not considered in this decision.
Key take aways – 2 mins read
- Licence agreements, and particularly exclusive licence agreements, should have clear and meaningful minimum performance criteria and clear triggers for termination on default.
- Where minimum performance criteria have not been met, licensors should be prepared to take action, and should do so promptly and unequivocally.
- As discussed in our previous note on Sealed Air Australia Pty Limited v Aus-Lid Enterprises Pty Ltd  FCA 29 24 January 2020, a breach of an exclusive licence does not automatically convert the grant to non-exclusive licence, unless the terms provide otherwise. A licensor would only be free to grant a new licence after the earlier exclusive licence has been discharged (eg for breach or repudiation) or, as in this case, the terms expressly provided that a failure to meet the minimum performance criteria enabled the University at its sole discretion and with written notice, to convert the licence to non-exclusive.
- Parties should consider the best structure for licensing agreements to ensure all parties are sufficiently invested in the success of the commercialisation. Commercialisation of research by licensing agreements and royalty streams may achieve the level of buy-in needed by the parties for successful launch of a product in some instances. In other instances, commercialisation by way of meaningful equity stakes in spinoff commercialisation companies may be more appropriate.
Shareholders’ Agreements and “best endeavours” clauses
- Licensors and Licensees should be aware of their obligations under other agreements which govern their relationship, such as Shareholders’ Agreements.
- At the time of drafting regard should be had as to how licensing or other commercialisation agreements and Shareholders’ Agreements interact.
- The scope of a “best endeavours” clause is to be construed having regard to what is reasonable in the circumstances, having regard to the nature, capacity, qualifications and responsibilities of the licensee viewed in the light of the particular contract. It does not extend to oblige the licensor to notify the Licensee of opportunities to sell the technology to a third party, nor to cede to the Licensee all opportunities in relation to that technology. That in effect would create an obligation on the licensor not to compete with the Licensee. Such an outcome is not commercially realistic and is at odds with licensing agreements which entitle the licensor to conversion of an exclusive license to a non-exclusive license.
Obligations on directors appointed to another company board by their employer
- A director installed on the board of another company by his or her employer is not acting as an agent of the employer, but rather as an officer of the company. This means the director, in that role, is to ignore the interests of the employer.
- Such director is in general presumed not to be subject to the employer’s direction when performing functions as a director. In general, the duty of a director is personal, and he or she will be presumed to perform that duty irrespective of the reason for appointment.
- The knowledge and actions of the director installed on the board of another company by his or her employer cannot be imputed to his or her employer.
Copyright – IP ownership
- Where there is joint authorship, each author’s contribution should be clearly and contemporaneously identified.
- Where an agreement provides for an assignment of IP, parties should ensure that all joint authors validly assign their copyright. It follows that Universities and those contracting with Universities should be mindful that in addition to employee researching academics, visiting fellows and also students can be sources of IP. Assignments should be sought from each of these contributors.
- Although not in dispute in this case, similar principles apply regarding joint owners and assignment in the case of other IP rights such as Patents.
- Where employees pass between employers, both the new employer and employee should take care to avoid passing copyrighted material or confidential information belonging to a previous employer.
Background – 3 mins read
In the late 1990s two employees of University of Sydney (University) developed technology to detect partial and complete blind spots associated with glaucoma and other diseases of the eye or the brain. In 1999, the University filed a patent application in respect of the technology, entitled “Electrophysiological Visual Field Measurement”.
In September 2000 the University entered into an exclusive licensing agreement with ObjectiVision Pty Ltd (ObjectiVision) for the commercialisation of a product, ultimately called the AccuMap, which utilised the patented technology. AccuMap was run on computer software called OPERA. The 2000 Licensing Agreement contained minimum performance requirements and upon failure for any reason to meet those performance requirements, provided that:
“…the University may at its sole discretion by giving the Licensee three (3) months’ notice in writing make the licence hereby granted non-exclusive or otherwise review the licence…” (clause 7.3)
On the same day ObjectiVision, the University and several others entered into a Shareholders’ Agreement. Clauses 5.1 (a) and (e) provided:
Each Shareholder agrees:
(a) to co-operate and use its best endeavours to ensure that the Company successfully carries on the Business;
(e) to be just and faithful in the Shareholder’s activities and dealings with the company, the business and the other Shareholders.
Clause 20.15 provided:
The parties agree that this Agreement and the Sydney University Licensing Agreement are separate and distinct agreements relating to separate and distinct subject matters.
In October 2001 the parties entered into a second licensing agreement extending the scope of the technology licensed (2001 Licensing Agreement) and in May 2004 they agreed to alter the minimum performance obligations under the 2000 Licensing Agreement (Variation Agreement). Collectively we refer to these agreements as the Licensing Agreements.
The development of AccuMap and OPERA did not go well, and by 2008 ObjectiVision had failed to meet the minimum performance requirements. By letter dated 27 August 2008 the University terminated the exclusivity of the licence and began to develop its own software called TERRA using a software programmer Mr Vadim Alkhimov, who had begun working for ObjectiVision in 2007 and moved across to work for the University in 2008.
ObjectiVision disputed that the licence had been validly rendered non-exclusive, and between 2008 and 2010 the parties were in dispute. A mediation in January 2010 resulted in a Heads of Agreement which reinstated the exclusive licence for a limited period, to allow ObjectiVision to find third party funding to continue the commercialisation of the technology. If it failed to achieve the third party funding within an agreed period of time, the Licensing Agreements could be terminated.
At the beginning of 2011 the University gave notice of termination of the Licensing Agreements. The University then partnered with another company Biogen Idec, and together they incorporated a new start-up company, Visionsearch Pty Ltd (Visionsearch). The University provided Visionsearch with its TERRA software developed by Mr Alkhimov and from then on Mr Alkhimov worked at Visionsearch in the development of a machine which included further development of the TERRA software using the patented technology.
Parties go to Court – 1 min read
In 2014 the University commenced proceedings alleging:
- the Licensing Agreements had been validly terminated; and
- that ObjectiVision had infringed certain of its patents.
The University sought a declaration that the Licensing Agreements terminated in January 2011.
ObjectiVision cross-claimed on a number of grounds, including that:
- the licences between it and the University were not validly terminated;
- the University breached the Licensing Agreements and Shareholders’ Agreement by commercialising the technology with third parties;
- the University was estopped from relying on its rights under the Licensing Agreements; and
- in seeking to commercialise the technology, each of the University and Visionsearch infringed ObjectiVision’s copyright in OPERA, the software for AccuMap.
ObjectiVision sought $25 million in damages.
Decision – 6 mins read
ObjectiVision’s licence validly terminated
Justice Burley found that the Licensing Agreements terminated on 19 January 2011.
The Heads of Agreement entered into by the parties following mediation in January 2010 reinstated the exclusive licence under the Licensing Agreements for a limited period to allow ObjectiVision to find third party funding. If it failed to achieve the third party funding within an agreed period of time, the Licensing Agreement terminated. ObjectiVision failed to obtain third party funding and the licence automatically terminated.
In the alternative, Justice Burley held that had the Licensing Agreements not been terminated on 19 January 2011, then they were in any event validly terminated for breach by ObjectiVision on 20 January 2011 and again on 10 October 2014 for its failure to pay monies due to the University.
He awarded judgment to the University in the amount of $19,219.74 plus interest for failure on the part of ObjectiVision to pay outstanding patent costs.
No breach of Shareholders’ Agreement
ObjectiVision’s cross-claim for breach of the best endeavours and good faith requirements of the Shareholders’ Agreement failed. His Honour held that the scope of a “best endeavours” clause is to be construed having regard to what is reasonable in the circumstances, having regard to the nature, capacity, qualifications and responsibilities of the licensee viewed in the light of the particular contract.
Justice Burley also found that “best endeavours” does not require the licensor to notify the licensee of opportunities to sell the technology to a third party and to cede to the licensee all opportunities in relation to that technology. That in effect would create an obligation on the licensor not to compete with the licensee which he found was not commercially realistic in the circumstances, as such a construction ignored the fact that that the Licensing Agreements provided for termination of ObjectiVision’s exclusivity.
As to the interaction between the Licensing Agreements and the Shareholders’ Agreement, Justice Burley observed that the Licensing Agreements terms governed the provision by the University to ObjectiVision of a licence to use the technology, whereas the Shareholders’ Agreement governed the behaviour of the shareholders as between shareholders and its were confined to behaviour of the parties between each other as shareholders and may concern matters such as governance, sale of shares and the like. He also found support for this distinction in Clause 20.15 of the Shareholders’ Agreement which provided expressly that the Shareholders’ Agreement and the Licensing Agreement were “separate and distinct agreements relating to separate and distinct subject matters”. The Licensing Agreements contained a similar provision plus went further to say that in the event of inconsistency, the provision in the Licensing Agreements prevailed.
No finding of estoppel against the University
ObjectiVision contended that the conduct of a University employee director estopped (prevented) the University from relying on ObjectiVision’s failure to meet the minimum performance requirements when terminating the exclusivity of the Licensing Agreements in August 2008. Mr Fernance was the Head of the Investment and Capital Management Office at the University, but was also a director of ObjectiVision from August 2004 to September 2007.
An estoppel prevents a person from adopting a new position that contradicts a previous position maintained by words, silence, or actions if allowing the new position to be adopted would unfairly harm another person who has relied on the previous position to his or her loss.
Justice Burley did not consider it necessary to decide the estoppel point as he had already found the Licensing Agreements were not wrongfully terminated by the University and that ObjectiVision had failed to establish an entitlement to any damage. Nevertheless, as it was argued in full, Justice Burley addressed the claim in his judgment.
In finding that ObjectiVision had not established the requirements for an equitable estoppel to apply, Justice Burley noted that a representation must be clear and unambiguous before it can found an estoppel. It is essential to show that the statement was of such a nature that it would have misled any reasonable person and that the plaintiff was in fact misled by it. By contrast, ObjectiVision did not rely on any express representation in support of its contention. It contended that a representation was to be inferred from the conduct of Mr Fernance.
For these reasons alone, His Honour held that the estoppel claim must fail.
Observations on “employee” director obligations
In rejecting ObjectiVision’s estoppel claim, Justice Burley made some observations around the obligations of a director installed by his or her employer on the board of another company. His honour held that:
- the role of Mr Fernance as a director of ObjectiVision was not such that his knowledge and actions could be imputed to his employer, the University;
- Mr Fernance was not acting as an agent of the University, but rather as an officer of ObjectiVision. This meant that he was obliged, in that role, to ignore the interests of the University; and
- a director installed by his or her employer on the board of another company is in general presumed not to be subject to the employer’s direction when performing functions as a director. In general, the duty of a director is personal, and he or she will be presumed to perform that duty irrespective of the reason for appointment.
No Copyright ownership
Justice Burley held that OPERA was a work of joint authorship with contributions from at least nine authors. However, His Honour found there was insufficient evidence that seven of the nine authors had assigned their copyright to ObjectiVision. Accordingly, ObjectiVision’s claim of copyright ownership in OPERA failed as it was not able to establish ownership of the contributions from all the authors.
ObjectiVision argued that as a fractional owner of the copyright in OPERA it was still entitled to injunctive relief and nominal damages. Justice Burley did not consider it necessary to resolve this issue because of his conclusion that copyright had not been infringed.
No Copyright infringement
ObjectiVision claimed that:
- the University breached its copyright by reproducing its software OPERA in the AccuMap devices without licence to do so; and
- the University and Visionsearch infringed its copyright by reproducing OPERA in a material form in various versions of the TERRA software.
Both claims failed, with Justice Burley finding that:
- the University had an implied licence to use and modify OPERA for research and make any reproduction of it for that purpose. His Honour cited an email from the CEO of ObjectiVision to the University as evidence that ObjectiVision knew of, and agreed to the University modifying the OPERA software for research; and
- despite movement of a key software developer, Mr Alkhimov, from ObjectiVision to the University and then to Visionsearch and the subsequent development of the TERRA software product which contained some identical code,
- the evidence was that 100-120 lines (in a total of 993,582 lines of code) were in common between the two, equating to approximately 0.01%;
- His Honour accepted the evidence of Mr Alkhimov that he developed the TERRA files “from scratch”; and
- having regard to the function, degree of originality, size and role of the copied parts of OPERA established to be within TERRA, Justice Burley concluded that ObjectiVision had not established that TERRA reproduced OPERA in a material form.
No breach of confidence
The breach of confidence case pleaded by ObjectiVision against the University followed closely on its copyright case, and for the reasons given above in relation to the copyright infringement claim, likewise failed.