Inventors Friend Ltd v Leathes Prior (A Firm)

JurisdictionEngland & Wales
JudgeMR JUSTICE CRANSTON,Mr Justice Cranston
Judgment Date25 March 2011
Neutral Citation[2011] EWHC 711 (QB)
Date25 March 2011
CourtQueen's Bench Division
Docket NumberCase No: TLQ/10/0670

[2011] EWHC 711 (QB)

IN THE HIGH COURT OF JUSTICE

QUEEN'S BENCH DIVISION

Royal Courts of Justice

Strand, London, WC2A 2LL

Before:

Mr Justice Cranston

Case No: TLQ/10/0670

Between:
Inventors Friend Ltd
Claimant
and
Leathes Prior (a Firm)
Defendant

Graham Cunningham (instructed by Howell Jones) for the Claimant

Michael Taylor (instructed by Beale & Co) for the Defendant

Hearing dates: 19–26 January 2011

Approved Judgment

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.

MR JUSTICE CRANSTON Mr Justice Cranston

Mr Justice Cranston:

INTRODUCTION

1

This is a claim for professional negligence. It arises from legal assistance given by the defendant solicitors in 2003, which related to the terms of a distribution agreement by which the claimant proposed to market and sell a newly invented device for applying adhesive. The claimant alleges that the defendant did not act correctly. Specifically, as regards what has been called the "loss of profits" issue, the claimant alleges that the defendant failed to advise that last minute amendments made to the agreement in draft by the inventors' company rendered impossible its chances of obtaining loss of profits if the claimant lost the distributorship. It is alleged that the defendant also failed to notice that the terms of the draft distribution agreement excluded it from obtaining any loss of profits should damages be found to be at large. As regards the so-called "intellectual property rights" issue, it is said that in working on the draft agreement the defendant did not contemplate the possibility that these rights might be disposed of by licence, rather than sale, and did not recognise that the principal part of the rights was not owned by the inventors' company, but by one of the inventors.

FACTUAL BACKGROUND

2

The claimant, Inventors Friend Ltd ("Inventors Friend") is a company involved in bringing new inventions to market. The company was incorporated by Mr Stuart Saunders on 28 March 2003. The first accounts for the company, for year ended 31 March 2004, showed a turnover of £10,845, but losses overall. Mr Saunders' principal occupation is as an oil and gas engineer. He is the sole director and shareholder of the company. He gave evidence at the hearing. In the judgment Mr Saunders and his company are treated as being equivalent, except when it is necessary to distinguish between them.

3

The defendant, Leathes Prior ("the firm"), is a long established firm of solicitors in Norwich. Mr Chadd is head of the commercial department at the firm. He has been a solicitor since 1980 and a specialist in intellectual property law since 1986. Most of his intellectual property practice is conducted in the context of franchising and involves the licensing of trade marks. Mr Chadd gave evidence before me.

4

Six months after starting Inventors Friend, in mid June 2003, Mr Saunders was contacted by two persons who had invented the span applicator, Alan Spencer and Shaun Wainford ("the inventors"). They had an incorporated company, So and So Innovations Ltd ("SSIL"). Neither gave evidence. The span applicator is a plastic device which fits on the end of a cartridge of cement or adhesive and allows the even distribution of that without mess and waste. Large areas can be covered at speed by the amateur DIY enthusiast. Tiling is an obvious example of its use, but so too is the "grab adhesive" market. The intellectual property in the span applicator consisted of four design rights, registered in the name of SSIL. There was also a UK patent application, which was ultimately granted as a European patent. This was registered to Mr Spencer.

5

Mr Saunders was enthusiastic about the span applicator and saw its potential to revolutionise the tiling market. In June 2003 he decided to relinquish his position in the oil and gas industry to promote it. At the time his annual remuneration was £70,000 per annum, and he knew it would be difficult to re-enter that industry. In the following months he lived off his savings. He made progress in obtaining leads for the potential sale of the span applicator.

6

At a meeting with the inventors in mid June 2003, Mr Saunders placed before them two proposals. One was a proposal if they wanted to manufacture the span applicator "in house"; the other was to use Inventors Friend in securing a licence agreement with another company, such as a satellite television shopping channel, to distribute it. The first proposal estimated the cost of a worldwide launch of the span applicator as £2million, which in Mr Saunders' experience was unlikely to be raised from venture capitalists, who wanted a proven track record. Mr Saunders told the inventors that he had 150 venture capitalists subscribed to his website. The licensing proposal contemplated sales of at least £200 million. That, in Mr Saunders' opinion would double, and possibly treble, with the United States market. Pricing the product on the shelf for £4.00, with Mr Saunders' guesstimation of a cost at 50p, meant an overall profit of £600 million annually. On a 3% royalty that would be a profit for the inventors of £18 million a year. For the purpose of a license agreement, therefore, he thought the inventors should insist on a one off payment of £18 million, depending on price, with further annual payments. The inventors should retain the patent in their name.

7

In anticipation of a further meeting, on 25 June 2003, Mr Saunders obtained a copy of a sales licence agreement. On the basis of that precedent he drafted a sales license agreement between Alan Spencer and Inventors Friend. It conferred on his company a distribution agency for the span applicator for a 7 month period, with a view to establishing it as the sole distributing agent worldwide. Clause 10 of the draft provided:

"At the end of the 7 months this contract is to be reviewed and possibly renegotiated so that both parties are happy with the way forward. If for whatever reason Inventors Friend ceases to be a distributor of the product or Alan Spencer decides to enter into new agreements with other third parties or sell the patent rights outright or under license to another person or company while this agreement is in force or at any time in the future when this agreement has lapsed then Alan Spencer agrees to pay Inventors Friend 5% commission of all net profits after tax arising from these circumstances on an annual basis for the whole life span of the product."

The draft agreement was rejected by the inventors, who did not want to sign anything at that point. The draft agreement was never seen by anyone at Leathes Prior.

8

In the early stages the inventors verbally agreed to allow Mr Saunders to market the product exclusively for 5 years and worldwide. After further negotiation a 7 month trial period was agreed, under which he would have exclusive rights to market it in the south of England. The 7 month period was so that Mr Saunders could prove himself. In August 2003 Mr Saunders began designing the packaging and part of the sales equipment such as floor stands and counter displays. He also contacted large retail outlets of DIY products.

Mr Saunders' instruction of Leathes Prior

9

On Tuesday, 9 September 2003, Mr Saunders telephoned Leathes Prior, which he had used 10 years previously. He spoke to Mr Chadd's secretary. He told her that his company, Inventors Friend, conducted a business in assisting inventors in getting their new products to market. He required a firm of solicitors to act for it generally on a long term basis. In particular he required immediate advice on what he described as a "license agreement" and requested an estimate of costs.

10

That same day Mr Saunders emailed Mr Chadd. The subject of the email was a "dispensing nozzle". In the email he recalled the assistance Mr Chadd had given him previously over his invention of the "Frog Ride". Mr Saunders then explained that there were two agreements he would send. The first was what he described as a license agreement:

"Basically it is intended that I will act as the distributor for the product in south of England (border from the Mersey to The Wash) for a period of 7 months. After this period of 7 months if I hit a sales target of selling 80,000 units (one nozzle) per month then I will be signing a contract to the sole distributor for 5 years in the UK."

The second was a sub-agreement, which was still being drafted,

"… regarding the potential payment from sale of the inventors intellectual property rights, The 2 nd sub-agreement will confirm that I would receive 5% of the proceeds of sale of the intellectual property rights and a further 2.5% of the proceeds of sale should I introduce the purchaser (these percentages will be based on the net profit after tax of the payment)."

In the email Mr Saunders added that his "own concern", what has become known as the "loss of profits" issue, which he was not sure was covered in the agreement, was that

"I could spend a lot of time and money in 7 months establishing contacts and building up a sales base for the licence to be revoked for any reason after the 7 months and I am left "high and dry" with almost nothing for my efforts other than the 5% as discussed in the sub-agreement to follow."

11

After reference to the website for Inventors Friend, and the interest the product was generating, Mr Saunders explained that he had limited funds because of the cost of developing his company. He had a budget of £150 for Mr Chadd to "look over" the 2 contracts and to discuss "certain key areas". Otherwise he could give Leathes Prior an exclusive banner on the Inventors Friend homepage. He really needed to have the matter dealt with by Monday or Tuesday of the following week if possible, although given the firm's...

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