Oxford University Innovation v Oxford Nanoimaging (23 December 2022, [2022] EWHC 3200 (Pat)) involved a dispute between the University of Oxford's technology transfer office (OUI) and one of its spin-out companies, Oxford Nanoimaging (ONI) regarding unpaid royalties under ONI's spin-out licence. Shortly before trial in June 2021 the outstanding royalties stood at over £700,000 and have increased since then. ONI argued that the University of Oxford (Oxford) did not validly own the patents it purported to license to ONI, and so the licence agreement (and the obligation to pay royalties contained in it) was void.
Background
The brief facts were as follows:
- OUI spun out ONI in April 2016, licensing to the spin-out certain intellectual property (IP) rights in a compact, super-resolution imaging device which was a type of specialised microscope developed at Oxford, and which had been commercialised by ONI as the 'Nanoimager'.
- The research project which led to the Nanoimager was conceived by Professor Achillefs Kapanidis. An early prototype was built in his lab. However, the detailed development work which resulted specifically in the licensed patents was undertaken by Mr Bo Jing who was initially an employed research intern (February – October 2013) whilst waiting to start his DPhil in Prof Kapanidis' group, and later as a DPhil researcher (October 2013 - May 2016). The parties agreed that the court should decide the case on the basis that Mr Jing was the sole inventor of the licensed patents.
- Oxford requires all DPhil students to enter into a contract which incorporates the Oxford IP policy. At the time of Mr Jing's DPhil, this provided that Oxford could claim patents rights in respect of any inventions made by a postgraduate student 'in the course of or incidental to' their studies.
- Oxford, Professor Kapanidis and Mr Jing were the three founding shareholders of ONI, holding 50%, 25% and 25% of the equityrespectively. Professor Kapanidis and Mr Jing also each received payments of £7,000 under the Oxford IP policy as their share of royalties received by OUI from ONI prior to ONI's decision (in February 2019) to stop paying royalties. They would be entitled to further payments of £124,000 each for the period up to June 2021 if OUI was successful in recovering the unpaid royalties, and to future payments too.
The decision
The court's judgment is long and complex. This note focuses only on one key issue.
ONI argued that Mr Jing was a consumer and hence was entitled to the protection of UK consumer protection legislation, specifically the Unfair Terms in Consumer Contracts Regulations 1999/2083 (UTCCR).
This legislation provides that:
- a person enters into a contract as a 'consumer' if acting for purposes outside their trade, business or profession
- a contract term which has not been individually negotiated is 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
- unfair terms are void.
Are post-graduate students consumers as against their university?
ONI's position was that the terms of Oxford's DPhil contract were 'unfair', contrary to the requirements of UTCCR, and hence were not binding on Mr Jing. As a result, they were ineffective in transferring from Mr Jing to Oxford the rights in the inventions and other IP generated in the course of his DPhil. This meant that Mr Jing remained the owner of that IP, and the spin-out licence served no purpose and was void.
The court held first that a DPhil student is 'normally entitled' to be treated as a 'consumer' as against its university. It commented that 'it does not matter for this purpose whether the student is undertaking that educational qualification with a view to her career, profession and/or professional advancement'. It also considered whether there were any particular circumstances in Mr Jing's case which meant that he should not be treated as a consumer, but found that there were not.
Was the Oxford DPhil contract/Oxford IP policy 'unfair' to students?
ONI argued that the blanket claim by Oxford to ownership of all IP rights made by a graduate student 'in the course of or incidental to' their studies was too broad to be fair. ONI also argued that even if that breadth of claim was fair, the terms on which equity was allocated in the spin-out company, and royalty income was shared, were unfairly weighted in favour of Oxford and the Principal Investigator (PI) (who had not contributed to the spin-out patents) and away from the postgraduate student. Mr Jing commented that Prof Kapanidis had been "massively over-rewarded".
In order to assess whether there was a 'significant imbalance', the court considered three comparators:
- the position a DPhil student would have been in, in the absence of the contractual term in question, ie under the general law
- the position the DPhil student would have been in had they been an employed post-doctoral research worker in the same lab
- under the IP policies of other universities.
The court concluded that the Oxford IP policy was capable of applying in a way that would be unfair, as it would deprive DPhil students of their IP even where the contribution of the university was negligible. It also went significantly beyond the IP policy of other leading UK research universities.
However, the court ruled that it had to go on to consider whether there had been any actual unfairness in the specific circumstances of Mr Jing. It concluded that there had not. So ONI's defence failed, and it was ordered to pay the outstanding royalties (together with OUI's legal costs of the proceedings of circa GBP1 million).
In reaching its decision, the court placed considerable weight on its findings that Mr Jing was entitled to various benefits under the Oxford IP policy:
- to be remunerated fairly and potentially very generously through a royalty share under the Oxford IP policy and, potentially to receive an equity stake in the spin-out company
- to receive significant financial, commercial and advisory assistance in protecting and commercialising the IP
- to be protected against product liability claims arising from the exploitation of the IP (by virtue of Oxford's insurance arrangements).
It also considered that the package of IP provisions in the Oxford IP policy was as favourable to Mr Jing as to a post-doctoral employee of the university working in the same department on the same or similar project; and more favourable to him than the terms which would typically apply to an equipment designer employed by a commercial undertaking.
So what does this mean?
Consumer law protection in the education sector
Whether students are entitled to the protection of consumer law against their university has been long discussed in the education sector. This is the first time that the issue has been considered by the English Court. The judge was clearly aware of the potential ramifications of his finding outside the field of IP, and considered the relevant case law in great detail.
Assessing 'unfairness' in consumer law
Consumer law is a blunt instrument, designed predominantly with simple B2C situations in mind. It is not prescriptive and leaves the judge a wide margin of discretion in assessing 'unfairness'. Conversely, a university spin-out is a complex and nuanced situation, with multiple stakeholders with divergent interests which have to be balanced and policy decisions have to be made. It's therefore not surprising that the judge was unable to conclude that the DPhil contract was 'unfair', and was unwilling to be drawn into the vigorous policy debates relating to university equity stakes and royalty shares.
No attempt to terminate
Interestingly, OUI does not appear to have tried to rely on its right to terminate the spin-out licence for material breach (for non-payment of royalties). TTOs who adopt a licensing-only model sometimes point to the right to terminate a licence for non-payment to justify a refusal to assign the spin-out IP into the spin-out company at any stage of its life cycle. This case indicates that this supposed benefit may be more apparent than real in practice, at least where the spin-out is successful and growing rapidly as in ONI's case.
Court reasoning
There are some curious aspects to the court's reasoning, which are likely to attract lively debate. In particular:
- When assessing unfairness, the court compared the position of a graduate student with an employed post-doc or an employee researcher in industry. However, it compared only the package of IP terms which would apply in each situation, and did not take a holistic approach of looking at all aspects of the employment contract. In particular, the court seems to have given no weight to the large disparities in pay and benefits between those different roles. There is a wide-spread view in academia, particularly in scientific disciplines, that the potential rewards available under a university IP policy go some way to offsetting the significantly lower pay and benefits compared to an industrial role. In this sense, there is a trade-off between pay and benefits on the one hand, and the IP position on the other. Moreover, students do not have any of the protections of employed status which are enjoyed by both employed post-docs and employee researchers. Student advocates argue that this means students should actually have a more favourable position under a university IP policy than employed post-docs or senior academics, to avoid unfairness. This point doesn't seem to have been argued and remains open.
- The judge refers at various points to the substantial equity (25%) allocated to Mr Jing in ONI. He found that this was a benefit under the IP policy, and balanced the requirement under the IP policy of assignment of student IP to the university. However, the spin-out ecosystem does not generally regard founder equity as a reward for creation of the foundational IP. And entitlement to founder equity does not arise under a university IP policy. Instead, it is an incentive/reward for taking on a role at the spin-out company and assuming the associated risk and responsibility. (Some university IP policies do require academic contributors to the foundational IP to receive direct equity in the spin-out as a reward, but these tend to be small equity stakes, not to be confused with substantial equity allocated to a founder on spin-out formation.)
- The court found - helpfully for student founders - that it is not always appropriate or fair for a PI or a department head to have an equal royalty share with a more junior person who has undertaken more of the work. However, the court also found that 'there is nothing inherently inappropriate or unfair in a 50:50 equity split'. If this finding was intended to apply only to the position in 2016, when ONI was spun out, this is fairly uncontroversial. However, recent research into university equity splits has shown that universities revise their equity split policies every five years or so and market practice has evolved significantly since 2016. Current best practice is for university spin-out equity at company formation to be in the range 10-25%. So, if the court's comment was intended to apply more generally, it is highly controversial.
- No weight was placed in the judgment on the value to the student of control over commercialisation of its IP, and the potential detriment to the student of a loss of control. There are increasing numbers of early-stage investors who are willing to back student entrepreneurs without university involvement, and student-focused commercialisation networks which seek to support entrepreneurially-minded students in commercialisation of their IP, outside traditional university channels. This may be a generational difference, causing students to attribute less value to the assistance and support available from the university.
- Even before the dispute with Mr Jing arose, Oxford had amended its IP policy to narrow its claims to student IP. The claim to IP made by students 'incidentally to their studies' was dropped. Under the amended Oxford IP policy, student IP is only claimed by Oxford in certain specific situations, including (i) joint creation with someone whose IP would vest in Oxford; (ii) where the IP is made using university facilities or equipment; (iii) where the IP is subject to obligations owed to a third party (including under a grant or contract); (iv) using funding received from Oxford.
Similar provisions can be found in many other UK university IP policies. The judge readily found that terms (i), (iii) and (iv) are reasonable. Term (ii) received a more equivocal assessment. The judge found it to be prima facie reasonable, but that it was possible to envisage situations in which it would be unfair to claim IP simply because university facilities are being used. This must be correct. The wording of (ii) purports to apply regardless of the extent of use of the facilities or equipment, however trivial. The judgment also does not consider to what extent universities are already remunerated for the use of their facilities and equipment by the tuition and college fees paid by graduate students (though the judge did find that Oxford charged 'significant' fees for Mr Jing's D.Phil, which were paid by UKRI). So this point remains open and is likely to attract further scrutiny.
A test case
As the court recognised, there was a campaigning element to ONI's claim. Mr Jing had a strong sense of injustice, and his perception was that many other postgraduate entrepreneurs, particularly at Oxford, shared his frustrations at their treatment by the university. Mr Jing's motivation for pursuing the case to trial and refusing to settle was, at least in part, to improve the position of postgraduate entrepreneurs. Nevertheless, the court has discouraged ONI from pursuing the case any further, on the basis that the legal costs incurred by the parties now considerably exceed the amount of unpaid royalties. Undaunted, ONI has indicated that it intends to appeal.
What next for student entrepreneurs?
People working in the spin-out ecosystem will recognise that many student entrepreneurs share Mr Jing's views. Universities face an ongoing challenge to explain the fairness of their IP policies, in particular to their graduate students. This case establishes that consumer law will not assist graduate student founders (subject to the outcome of any appeal). So the focus for students, founders and investors is likely to swing back towards lobbying government on policy changes (such as the recent announcement of the formation of a HM Treasury committee to examine the vexed question of university equity stakes). And, ultimately, to entrepreneurially-minded students voting with their feet and factoring in the existence (or otherwise) of student-friendly IP policies when deciding where to pursue their postgraduate studies.
