Internal Technology Transfer Gone Wrong: Composite Technologies Inc. v. Shawcor Ltd., 2017 ABCA 160
Intellectual property is transferrable. And you should be careful with how you transfer your IP among your corporate family, especially if it constitutes the principal value in your business – and in your life’s work!
One IP owner in Alberta had the misfortune of making a transfer to a subsidiary which he eventually allowed to be dissolved. When it came time to assert his ownership rights in the technology in a court, his suit was summarily dismissed as meritless.
Recently, the Alberta Court of Appeal ruled that this outcome was correct.
The technology was flexible composite pipe technology, which has superior chemical resistance and structural flexibility than traditional steel or rigid fiberglass pipe. It can also be installed less expensively.
The inventor’s company was Composite Technologies Inc. (“Composite”). Composite had filed patents as early as 1992 in Canada (and been assigned US patents as early as 1993). In 1999, Composite entered into a technology transfer agreement, conveying its patents to a subsidiary, Proflex Pipe Corporation (“Proflex”), of which it owned 90% of the shares (the remaining were held by fifty other shareholders).
The language of the technology transfer agreement was typical and unequivocal. A recital explained the purpose of the agreement:
And whereas Proflex [Proflex Pipe] desires to acquire and CTI [Composite Technologies] is prepared to assign all right, title and interest in and to the patents, patents pending and patent applications set out in Schedule A along with CTI’s proprietary technical information in connection therewith…
And along with memorializing the parties’ intent, the agreement ultimately stated:
CTI hereby sells, assigns, transfer and sets over to Proflex its entire right, title and interest in and to:
(a) the inventions disclosed in the Assigned Patents;
(b) the Assigned Patents; and
(c) all issued patents and patent applications assigned in the future to CTI relating to the Products; … (Emphasis added by the Court.)
However, in July 2006, the Registrar of Corporations dissolved Proflex. The judgment does not indicate why this occurred, but neither Composite nor any of the other Proflex shareholders took any action to revive the corporation.
In December 2006, Composite had been in talks with Shawcor to license its technology, but those talks fell through. Shawcor had signed a confidentiality agreement. When Shawcor purchased a competitor, Composite started litigation to enforce ownership rights in the technology and the confidentiality agreement.
The suit was dismissed by a master, then a judge, and ultimately by the Alberta Court of Appeal. Composite did not own the IP and Proflex had no legal standing, because it no longer existed.
On appeal, the plaintiffs argued they should have been given an opportunity to rectify their technology transfer agreement, but this was rejected. Although Composite claimed it was always its “intention” to hold onto the IP in the technology, it offered no evidence of any agreement to that effect. Furthermore, Composite had never actually filed a rectification application.
It was also unable to make use of certain technical safety nets provided by Alberta’s Unclaimed Personal Property and Vested Property Act, in part because the time limit for a claim under that Act had lapsed.
Composite may have had a legitimate claim to enforce ownership rights had it not transferred the property. Proflex, too, may have had a legitimate claim had it not been struck off the corporate registry. Unfortunately, this IP owner failed on technicalities that could well have been avoided with more conscientious planning.
One key lesson from this episode is that management of IP does not end with registration. Large corporate IP owners, in particular, must take care in how they allocate their IP rights within a corporate group. Internal technology transfer agreements and IP ownership structures may be created for tax purposes or other business reasons, but it is critical to ensure that these structures do not undermine the enforceability of the IP rights themselves.
As Composite’s example shows, careless management can have extreme consequences.
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