Posted: February 28th, 2011
The Swedish Supreme Court Clarifies the Law on Distressed Patents, by Erik Ficks (Roschier)
One area of Swedish patent law that is of significant commercial importance but shows a considerable lack of legislation is that of distressed patents. The relevant provisions of the Swedish Patents Act related to insolvency events are limited to the basic requirements for pledging a patent or a patent application, as well as the standing of direct license agreements.
The principal provision is Section 101:
“The pledging of a patent or patent application is in effect from the date of application for registration […] against anyone subsequently acquiring ownership of or other right to the property.
A licensing agreement is valid against the pledgee if the agreement was concluded prior to the application for registration of the pledge contract.”
In addition, Sections 102 and 103 provide that an older direct license has legal effect against a new owner of the patent both in the original licensor’s bankruptcy and if a pledged patent or patent application is sold upon distraint or bankruptcy. The regulation leaves unresolved the questions of from which point in time a transfer of patent ownership has legal effect against the seller’s creditors and whether the seller of a patent may terminate the transfer or otherwise reclaim ownership to the patent with legal effect against the buyer’s creditors. However, as described below, in two decisions the Swedish Supreme Court has recently clarified the law in this respect.
A Transfer of Ownership Has Legal Effect as from the Transfer Agreement without Taking Any Specific Action
Although it was the prevailing opinion in Swedish legal doctrine for a long time, it was reassuring when the Supreme Court in November 2009 effectively ruled that the legal effect of a transfer of ownership of intellectual property begins when a transfer agreement is entered into (the case, concerning designs rights, can be found here, though only in the Swedish language). There are consequently no requirements for a written contract (even if this of course always is recommended) or that the transfer be registered with the Swedish Patent and Registration Office. This also means that in case of multiple sales of the same property the oldest sale prevails and also that it is impossible to make good faith acquisitions of intellectual property.
A Transfer of Ownership May be Terminated with Legal Effect without Taking Any Specific Action and Irrespective of the Right of Disposition Granted to the Buyer
The above principle on the legal effect of transfer of ownership was also the Supreme Court’s starting point in its judgment in another case, rendered in December 2010 (the case can be found here, again only in the Swedish language). In this dispute, the inventor claimed a better right to a patent than the bankruptcy estate of the company that had acquired the patent some four years earlier. The transfer agreement contained a termination clause, pursuant to which the inventor could immediately terminate the agreement and reclaim the ownership rights without any compensation in the event that the company, inter alia, became bankrupt or otherwise insolvent. Some two months before the company actually went bankrupt (at a time when part of the purchase price remained unsettled); the inventor had issued a termination notice under this clause invoking the company’s insolvency. The bankruptcy estate’s position, however, was that the termination did not give the inventor any better right to the patent than the estate’s other creditors had. In its claim to the courts, the inventor disputed this position and also claimed that the transaction between the parties actually constituted a license.
In its decision, the Supreme Court began by stating that the case would be tried on the assumption that it concerned a transfer of ownership, since it would be obvious that the inventor would have the better right to the patent if the agreement constituted a license. This statement was not further reasoned. Even though this opinion has long prevailed in Swedish legal doctrine, support from the Supreme Court is most welcome.
On the principal issue in the dispute, the Supreme Court stated that while it is established (in the above-described case) that a transfer of patent ownership has legal effect as from the transfer agreement without taking any specific action, some Swedish legal doctrine provides that a termination of a transfer (i) requires the inclusion of an explicit termination clause in the agreement and (ii) that any right to termination would be void if the buyer has been granted a right of free disposition of the property. Unfortunately, the Supreme Court did not clarify the former issue in this case, but was content to conclude that such clause had in fact been included in the relevant agreement. The latter issue was, however, discussed at some length.
The Supreme Court noted that a right for the buyer to assign the property to someone else could mean that a termination would not have legal effect, but only if the termination is made after the buyer has become bankrupt. However, if the termination is made before the buyer becomes bankrupt, the Supreme Court concluded that the termination has legal effect beginning when the termination is made (this being the time corresponding to when a transfer of ownership takes legal effect, i.e., from entering into the transfer agreement). Hence, by repealing the previous decisions by the District Court and the Court of Appeal, the Supreme Court dismissed the objection from the company’s bankruptcy estate and awarded the inventor the better right to the patent.
The Supreme Court cases described above are important for clarifying the law on distressed patents. Even though several issues remain unresolved, such as any legal effect of an automatic termination upon bankruptcy (ipso facto) clause, this development gives hope that the Supreme Court will also take the opportunity to consider such issues in the not too distant future. (One may even hope that they will tackle the unregulated area of the standing of sub-license agreements.) In the meantime, it is recommended that any grounds for termination be defined so as to be triggered before bankruptcy.