United Kingdom House of Lords Decisions

OPINIONS

OF THE LORDS OF APPEAL

FOR JUDGMENT IN THE CAUSE

Buchanan (Appellant) v. Alba Diagnostics Limited (Respondents) (Scotland)

ON

THURSDAY 5 FEBRUARY 2004

The Appellate Committee comprised:

Lord Nicholls of Birkenhead

Lord Hoffmann

Lord Hope of Craighead

Lord Walker of Gestingthorpe

Lord Brown of Eaton-under-Heywood

HOUSE OF LORDS

OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT

IN THE CAUSE

Buchanan (Appellant) v. Alba Diagnostics Limited (Respondents) (Scotland)

[2004] UKHL 5

My Lords,

1.   I have had the advantage of reading in draft the speech of my noble and learned friend Lord Hoffmann. For the reasons he gives, with which I agree, I would dismiss this appeal.

LORD HOFFMANN

My Lords,

2.   This appeal arises out of an action raised by Mr Nigel Buchanan, the registered proprietor of UK Patent GB 2 287 321 ("for a fluid boiling point measuring device"), against Alba Diagnostics Ltd ("Alba") alleging infringement by the manufacture and sale of an implement called the Brake Fluid Tester. Alba denies infringement but takes the preliminary point that Mr Buchanan has no title to sue, having assigned his rights in the patent in suit ("the 321 patent") to a Mr Mills, who in turn assigned them to Alba. The Lord Ordinary (Lord Hamilton) and the Inner House (the Lord President (Rodger) and Lords Marnoch and Clarke) were unanimously of the opinion that the preliminary point was well founded and although they went on to find that Alba's device did not in any event infringe, it was not necessary for them to do so.
3.   Mr Buchanan is an inventor and was in 1992 the managing director and majority shareholder in a company called Liquid Levers (Innovations) Ltd ("Innovations"). He was put in touch with Mr Mills, who had recently sold his engineering company and was looking for another in which to invest. Innovations was marketing a device called the Brake Fluid Safety Meter which Mr Buchanan had invented for measuring the boiling point of brake fluid. This is a necessary part of vehicle maintenance because a reduction in boiling point (which may occur on account of the hygroscopic nature of the alcohols used in brake fluid) impairs its efficiency. Mr Mills decided that Innovations was a suitable company in which to invest.
4.   The arrangements between Mr Buchanan and Mr Mills were not at first attended with a great deal of formality. Mr Mills simply wrote Mr Buchanan a cheque for £500,000. Afterwards Mr Mills sought legal advice; he asked for the return of his money, which was refused; thereafter the parties dealt with each other more warily. Documents were executed. The first of these was a Minute of Agreement dated 20 August 1992 made between Mr Buchanan, Innovations (called "the Company") and Mr Mills by which it was agreed that £100,000 would be repaid to Mr Mills and the remaining £400,000 treated as an interest-free loan to Innovations repayable on demand on six months' notice on or after 31 December 1995. Mr Mills was granted an option exercisable on the same notice to exchange the debt for interests in Innovations, another company controlled by Mr Buchanan and certain intellectual property rights vested in Mr Buchanan personally. Clause 8 of the Minute provided:
"As security for the said loan of £400,000 the Company and Mr Buchanan shall assign to Mr Mills their respective interests in the Patent rights to the Brake Fluid Safety Meter details of which are annexed and signed as relative hereto."

5.   The Schedule listed two national patents and an International Application published under the Patent Co-operation Treaty numbered WO90/12311 with a priority date of 8 April 1989 and a filing date of 30 March 1990. It is only this application ("the 311 patent") with which this appeal is concerned. It led eventually to the granting of a European patent to Alba on 15 July 1998.
6.   In order to assign the security agreed by the Minute, Mr Buchanan and Innovations of the one part and Mr Mills of the other part entered into a deed of assignation which was last executed on 29 January 1993. It described Mr Buchanan and Mr Mills as "the Assignors" and recited that they were the proprietors of various patents and patent applications relating to Brake Fluid Analysers, including (by reference to a schedule) the application for the 311 patent. The operative clause (1.1) declared that—
"(1)  In security of the sum of £400,000 owing by [Innovations] to [Mr Mills] … the Assignors hereby:- (1.1) assign to [Mr Mills] …their whole right, title and interest past present and future in and to the Patents and the Applications…and all improvements , prolongations and extensions…relating therein and thereto…(hereinafter referred to as "the Charged Assets")…Provided always that there is excluded from the assignation under this clause the Assignors' reversionary interest and rights to have the Charged Assets reassigned to them in terms of this Assignation."

7.   By clause 1.2, the Assignors undertook various obligations in respect of the rights forming part of the Charged Assets: to maintain the patents in force, pay the necessary fees, take reasonable steps to sue infringers and so on.
8.   Clause 5.1 provided that if, among other things, Innovations went into receivership—
"[Mr Mills] may, without further intimation or procedure, sell the Charged Assets either by public auction or by private bargain…or may retain the Charged Assets for his own benefit."

9.   Clause 5.3 provided that if a sale of the Charged Assets by Mr Mills should not realise enough to repay the debt, he would—
"have no further or continuing claim against the Assignors in respect thereof, nor in respect of the Assignors' obligations hereunder, and will, within seven days of being requested to do so by the Assignors, grant an unconditional discharge in respect of the obligations of the Assignors under these presents and the said Minute of Agreement."

10.   Clause 5.4 provided that if Mr Mills elected to retain the Charged Assets for his own benefit?
"he will have no further or continuing claim against the Assignors in respect of the said sum of £400,000 due under the said Minute of Agreement, nor in respect of the Assignors' obligations hereunder and will, within seven days of being requested to do so by the Assignors, grant an unconditional discharge in respect of the obligations of the Assignors under these presents and the said Minute of Agreement."

11.   By clause 6, Mr Mills granted Mr Buchanan and Innovations an exclusive licence to use the Charged Assets to manufacture and sell products derived from them during the currency of the agreement.
12.   The collaboration between Mr Buchanan and Mr Mills was not a success. On 1 December 1993, less than a year after the execution of the assignation, Innovations went into receivership. Mr Mills left to join another venture which is now incorporated as Alba. Pursuant to clause 5.1 of the 1993 assignation, Mr Mills sold the whole of the Charged Assets to Alba for £5,000. The sale was completed by a deed of assignation dated 9 May 1994 which purported to assign to Alba the whole of the Charged Assets which had been the subject of the 1993 assignation to Mr Mills. There is no challenge to the validity of this sale; the dispute is over the extent of the rights which were included.
13.   It is necessary at this point to explain the nature of the invention disclosed by the specification in the application for the 311 patent. It said that the disadvantages of existing devices for measuring the boiling point of brake fluids and the like were, first, that they were not particularly accurate and secondly, that they formed noxious vapours when they brought the fluid to boiling point for the purposes of measurement. It then described the invention, reciting, as is customary, the prior art before the consistory ("characterised in that") clause which describes the inventive step:
"According to the present invention there is provided an indicating device for indicating the boiling point of fluid especially a hygroscopic fluid such as hydraulic fluid comprising a meter preferably of the portable hand-held type including a probe portion for insertion into fluid in a fluid reservoir, heating means being provided in the probe portion for heating fluid in which the probe portion is immersed, said meter additionally including monitoring means for monitoring the temperature rise of fluid heated by the said heating means so as to indicate the boiling point temperature of the fluid, characterised in that said probe includes a casing defining a housing wherein a portion of the fluid to be tested is semi-encapsulated, the temperature monitoring means sensing the temperature of fluid in the housing heated by the heating means, and in that fluid inlet means are provided permitting fluid flows to and from the housing."

14.   It is clear from this description that the inventive step claimed in the application (and reproduced in the first claim) is the semi-encapsulation of some of the liquid within a housing which contains the heating means and the temperature monitoring means, only limited fluid flows to and from the housing through the inlet means being allowed.
15.   It appears, however, that the embodiment marketed by Innovations had the defect that maintenance of the correct flows of liquid and vapour into and out of the housing was heavily dependent upon the probe not being plunged too deeply into the liquid. In early 1994, after Innovations had gone into receivership and Mr Buchanan's functions as a director and employee had ceased, he applied his mind to solving this problem. The solution which he devised was to arrange the inlet means in the housing in such a way that air would be trapped in the upper part and thereby prevent the liquid from rising above a certain level, however deeply the probe was inserted. He applied for a patent for this invention which was granted on 27 March 1996. This is the 321 patent, the patent in suit.
16.   The specification for the 321 patent said that 311 "relies very much on correct depth immersion" and that the object of the present invention was to provide a device "which can be used in a more convenient manner". The description and first claim were substantially the same as in 311 except that the housing within which the fluid was to be semi-encapsulated was to provide—
"a lower or first housing portion wherein fluid to be tested is retained and an upper or second housing portion above the said lower portion wherein air is retained, said upper portion being in fluid communication with the lower portion, first aperture means on the casing adjacent to the boundary of said upper and lower housing portions, said temperature monitoring means sensing the temperature of fluid in the said lower housing portion heated by the heating means"

17.   The specification described how this arrangement would work and why it was better than a housing which did not retain air in its upper portion.
18.   Meanwhile, Alba was developing its own brake fluid meter which addressed what it saw as the problem of overheating liquid which was already boiling. It provided a casing with an inner insulated chamber in which air was retained and the liquid remained below the air while being heated to boiling. At that point, however, the boiling liquid expelled the air and itself escaped in a steady flow, being replaced by cooler liquid from the brake fluid reservoir. The entry of cooler liquid would prevent the temperature from rising significantly above boiling point while it was measured. Alba obtained a patent for this device, with priority date 10 May 1994 and naming Mr Mills as the inventor. Alba markets an embodiment of this invention, which Mr Buchanan alleges to be an infringement of the 321 patent.
19.   Alba's preliminary point is that the 321 patent was an improvement on the invention described in the 311 application and therefore passed to Mr Mills (and through him to Alba) under the 1993 and 1994 assignations immediately it was granted. Mr Davidson QC, who appeared for Mr Buchanan, did not deny that under Scots law, an assignation of future incorporeal property could vest that property in the assignee immediately upon its coming into existence, without the need for any further act on the part of the assignor. This is called the doctrine of accretion, which is discussed in paragraph 677 of Volume 18 of the Stair Memorial Encyclopaedia. But, he said, the basis of the doctrine was that the law gave effect to the assignor's continuing obligation to vest the property in the assignee. As was stated in Bell's Principles (10th edn 1899) paragraph 881, "It is held to depend on the principle of warrandice express or implied; the law doing what the granter is bound to do."
20.   In the present case, said Mr Davidson, the effect of clauses 5.3 and 5.4 of the 1993 assignation was to discharge all the "Assignors' obligations hereunder" upon the termination of the agreement by the appointment of the receiver and the assignee's election to retain or sell the Charged Assets. It followed that when the 321 patent was granted, there were no continuing obligations on the part of the Assignors and so no basis for giving effect to the doctrine of accretion existed.
21.   The flaw in this elegant argument is that in my opinion it gives an unnatural and impermissible construction to the term "obligations" in clauses 5.3 and 5.4. The purposes of those clauses is clear: the security provided to Mr Mills by the Charged Assets is to be his sole recourse for recovery of the loan and any other claims he may have against the assignors under the Minute of Agreement and the assignation. The clause thus distinguishes between the property charged by way of security (conferring real rights on the assignees) and the personal obligations thereby secured; in particular, the obligation to repay the loan and to make the payments and do the acts specified in clause 1.2. Future improvements are part of the Charged Assets upon which the assignee was solely to rely. The discharge of personal obligations was not intended to cut down that security and the notional obligation which underlies the doctrine of accretion is therefore not in my opinion within the category of obligations to which clauses 5.3 and 5.4 refer.
22.   As it seems to me that the question can be resolved by reference to the construction of clauses 5.3 and 5.4, it is unnecessary to express a view upon the more general implications of Mr Davidson's argument. But I do not wish to be taken to accept that the obligation alluded to by Bell is anything more than a fiction. The assignation of future improvements is expressed as a dispositive act and it seems to me arguable that it creates no personal obligation but operates entirely in the realm of proprietary rights. If it were otherwise, no effective security could be created over future property because the continuing obligation giving rise to the necessary accretion would not itself be secured and, in the event of the bankruptcy of the assignor, could only be the subject of ranking.
23.   Mr Davidson next submitted that, assuming the 321 patent to be an improvement on the invention described in the application for the 311 patent and therefore within the terms of the 1993 assignation, it was to that extent void as an unreasonable restraint of trade. He said that it was unreasonable between the parties and contrary to the public interest that for the rest of his life Mr Buchanan should be deprived of any incentive to make improvements in the Brake Fluid Meter.
24.   It has long been recognised that a purchaser of patent rights is reasonably entitled to protect the commercial value of his purchase by stipulating for the right to any improvements. Sir George Jessel MR put the matter in his usual forthright fashion in Printing and Numerical Registering Company v Sampson (1875) 19 Eq. 462, 464:
"Now nothing is better known than this, that when persons have turned their attention to a particular class of invention they are likely to go on and invent, and likely to continuously improve the nature of their invention, and continuously to discover new modes of attaining the end desired. Persons, therefore, who buy patents of inventors are in the habit of protecting themselves from the utter destruction of the value of the thing purchased by bargaining with the seller that he shall not use any new invention of his for producing that product in which they are about to deal at a cheaper rate, because if he were allowed to do so he might, the day after he had sold his patent, produce something which, without being technically an infringement, and without being technically an improvement, might accomplish the desired object in some other way, and utterly destroy the value of that which they had purchased."

25.   At the proof, Mr Mills gave much the same reason for requiring an assignment of improvements. He said (Appendix Part I, Volume 4, p. 1153) that he had been shown a letter which valued the 311 patent at £800,000. Nevertheless?
"my solicitor was very keen to make sure that the patent couldn't be devalued by Mr Buchanan, because obviously at the time this negotiation was taking place we were no longer very friendly. We were somewhat antagonistic towards each other, and so we did not trust that he would give us any more than he absolutely had to. So we were very keen to make sure that the agreement covered not just the patent but know-how, any improvements and so on and so forth. Bear in mind that at the time I knew nothing about brake fluid meters…"

26.   Putting aside the specifics of the relationship between Mr Buchanan and Mr Mills, the position of Mr Buchanan and Innovations was not unusual. It wished to borrow money to pay off creditors and enable the business to develop. The only security it had to offer was the intellectual property rights to the brake fluid meter. The value of these was bound in any event to be somewhat speculative but, for the reasons given by Sir George Jessel, they were likely to be extremely unattractive to any lender or purchaser unless accompanied by some assurance that their value could not be destroyed by a subsequent patented improvement. To say that Mr Buchanan and his company could not offer such security is to say that they should in practice be debarred from using their intellectual property rights as security for borrowing funds to develop the company. This does not seem to me to be either in their interest or the public interest.
27.   In the Printing and Numerical Registering Company case, the covenant upheld by the court was also unlimited as to time but much wider in extent than the assignation of improvements in this case. It was to assign "all future patent rights…with respect to the aforesaid inventions…or any of a like nature." In the present case, we are concerned only with improvements to a particular invention. Furthermore, we are not dealing with an out and out sale. The assignation was only by way of security and, if the company had prospered, it could have paid off the £400,000 and recovered all of the Charged Assets. It was not therefore inevitable that Mr Buchanan would have no further incentive to improve the Brake Safety Meter. If things had gone as the parties no doubt hoped, he would.
28.   This was not a case of a restraint imposed upon an employee, such as in Electric Transmission Ltd v Dannenberg (1949) 66 RPC 183. It was a bargain at arms length between experienced businessmen, one of whom wanted to borrow money and the other of whom wanted security for his loan. As Lord Reid said in Esso Petroleum Co Ltd v Harper's Garage (Stourport) Ltd [1968] AC 269, 300:
"Where two experienced traders are bargaining on equal terms and one has agreed to a restraint for reasons which seem good to him the court is in grave danger of stultifying itself if it says that it knows that trader's interest better than he does himself."

29.   As for the public interest, I think that it is important that inventors wishing to develop their inventions should, provided there is no unfairness or overreaching, be allowed to borrow money on the security of future rights. I therefore agree with the Lord Ordinary and the Inner House that the assignation was not an unreasonable restraint of trade.
30.   Finally, Mr Davidson submitted that the 321 patent was not an improvement on the invention disclosed by the application for the 311 patent. It was an entirely different invention. "Improvement" is not a term of art and can have wider or narrower meanings according to context. The context in this case was a provision intended to preserve the commercial value of the rights forming the principal security, namely the application for the 311 patent. I agree with the Lord Ordinary and the Inner House that in this context the word should be given a broad and commercial rather than a narrow and technical meaning. The words of Lord Loreburn LC in Linotype and Machinery Ltd v Hopkins (1910) 27 RPC 109, 113 seem to me to convey the right flavour. He said that, in the context of a licensing agreement, a part for a machine was an improvement —
"if it can be adapted to this machine and it would make it cheaper and more effective or in any way easier or more useful or valuable or in any other way make it a preferable article in commerce."

31.   The Lord Ordinary applied this test and came to the clear view that the 321 patent was an improvement. As the question is one of degree, I agree with the observation of Lord Clarke that an appellate tribunal should not substitute its opinion for that of the judge of first instance unless it considers that he has made some error of principle. The question is in this respect similar to that as to whether an invention is obvious (Biogen Inc v Medeva plc [1997] RPC 1, 45) or whether a substantial part of a copyright work has been copied (Designers Guild Ltd v Russell Williams (Textiles) Ltd [2000] 1 WLR 2416.)
32.   In any case, like the members of the Inner House, I would unhesitatingly come to the same conclusion as the Lord Ordinary. Indeed it seems to me that even in the most technical sense, namely of being an invention which comes within the claims of an earlier patent but contains a further inventive step, this was an improvement. The essence of the invention disclosed by the 311 patent is the semi-encapsulation of part of the liquid in a housing for the purpose of measuring its boiling temperature. Semi-encapsulation for the purpose of measuring the temperature is likewise a feature of the 321 patent and an embodiment of that invention would in my opinion fall within the claims of the 311 patent. The additional feature is a rearrangement of the inlet means so as to produce retention of air in the upper housing and liquid in the lower housing. That is an improvement in anyone's money. But I also agree that without any close analysis of the claims, it was an improvement on the uncomplicated ground that it enabled the manufacture of a more effective and convenient brake fluid meter than the invention disclosed in patent 311.
33.   It follows that the question of whether Alba's device infringed does not arise and your Lordships did not call for argument on the point. I would dismiss the appeal.

LORD HOPE OF CRAIGHEAD

My Lords,

34.   I have had the advantage of reading in draft the speech of my noble and learned friend Lord Hoffmann. I agree with it, and for the reasons which he has given I too would dismiss the appeal.
35.   I would add only one point, which relates simply to a matter of procedure. Section 40(1) of the Court of Session Act 1988 provides that that it shall be competent to appeal from the Inner House to the House of Lords:
"(a) without the leave of the Inner House, against a judgment on the whole merits of the cause, or against an interlocutory judgment where there is a difference of opinion among the judges or where the interlocutory judgment is one sustaining a dilatory defence and dismissing the action;

(b) with the leave of the Inner House against any interlocutory judgment other than one falling within paragraph (a)".

    This appeal came before the House without the leave of the Inner House.

36.   In his action Mr Buchanan concluded for interdict against Alba from infringing the 321 patent, for count reckoning and payment for the profits made by the manufacture and sale of their implement and alternatively for damages. Alba lodged defences in which it was averred, among other things, that Mr Buchanan was personally barred from taking proceedings for infringement because he had assigned the benefit of all improvements in the 321 patent to Mr Mills who had assigned them to Alba. Alba also lodged a counterclaim in which it concluded for revocation of the 321 patent. At a later date the counterclaim was amended by adding conclusions for declarator that the 321 patent was truly Alba's property and for damages.
37.   The parties were allowed a proof before answer of their respective averments restricted to questions relating to the ownership of the patent and to infringement. These were the issues that were dealt with and disposed of by the Lord Ordinary and were the subject of the reclaiming motion in the Inner House. The question whether Alba is entitled to damages, and if so in what amount, has not yet been determined. The basis on which damages are being sought has not been made known to the House, as the copy of the Closed Record which was included in the Appendix predates the amendments which added the conclusions for declarator and damages.
38.   Alba lodged an objection to the petition of appeal on the ground that, as the issues in its counterclaim for damages had not yet been disposed of, the appeal required the leave of the Inner House and leave had not been sought. On 16 October 2002 this issue was referred by the House to an appeal committee. On 28 February 2003 Alba informed the Judicial Office that it no longer wished to take the point. It had nevertheless, in view of the reference, to be disposed of by the committee. On 31 July 2003 a hearing took place before an appeal committee at which Alba was represented but Mr Buchanan did not appear. It was decided that the appeal was admissible.
39.   For the avoidance of doubt it may be helpful to add this explanation. The judgment which Lord Hamilton pronounced could not be said to have been an interlocutory judgment. All the issues which were the subject of Mr Buchanan's action against Alba were disposed of by his decision on the assignation issue. On those issues the interlocutor which he pronounced was a final interlocutor. It is possible to imagine cases where the disposal of all the conclusions in a counterclaim is necessary in order to determine the question which was in controversy between the parties. If that is so, and they have not been disposed of by the judgment which is to be appealed, it may be possible to say that the whole merits of the cause have not been disposed of. But in this case the questions which were in controversy were Mr Buchanan's right to pursue Alba for infringement of the 321 patent and, if he was, whether the manufacture and sale of Alba's implement was an infringement of it. The question whether Mr Buchanan is liable in damages to Alba is a separate question. It did not have to be answered in order to dispose of the whole merits of Mr Buchanan's action against Alba. In these circumstances the leave of the Inner House was not required.

LORD WALKER OF GESTINGTHORPE

My Lords,

40.   I have had the advantage of reading in draft the speech of my noble and learned friend Lord Hoffmann. I agree with it and I too would dismiss this appeal.
LORD BROWN OF EATON-UNDER-HEYWOOD

My Lords,

41.   For the reasons given by my noble and learned friend Lord Hoffmann I too would dismiss this appeal. I add only that it seems to me a great misfortune for Mr Buchanan that he was able to bring this appeal before your Lordships House without leave. Had leave been required assuredly it would have been refused and Mr Buchanan thereby saved a very great deal of expense.