University spin-outs, students as consumers and fair terms – what can we learn from the Oxford Nanoimaging case?

Universities should assess their ownership of intellectual property (IP) and the contracts they enter into with students, particularly those studying in highly creative and inventive fields, such as life sciences and technology. Similarly, university spin-out companies, especially those set up by former students commercialising IP developed whilst studying, should review their contractual terms with universities. This call to action has arisen due to the case of Oxford University Innovations (OUI) v Oxford Nanoimaging (ONI), heard in the Patents Court in late 2022.

Spinning out

The dispute between OUI and ONI primarily concerned valuable IP in a microscope co-invented by Mr Bo Jing during his time both as a paid intern, and later a doctoral student, at the University of Oxford.  The IP was sufficiently valuable to merit commercialisation, and so OUI, (the technology transfer arm of the University), applied for numerous patents, listing Mr Jing as an inventor. Mr Jing then left the University, prior to completing his doctoral studies, to set up ONI (a spin-out company) to commercialise the microscope. ONI entered into an IP licence agreement with OUI.

ONI became successful but trouble arose when ONI stopped paying royalties due under the IP licence, leading to a claim by OUI for the missing payments. In turn ONI disputed that the payments were due . It argued Mr Jing owned the IP from the outset and not OUI. Therefore the IP licence was void under the legal principle of common mistake. The dispute led to the court considering, ostensibly for the first time, ownership of IP developed by students in their studies, and whether students could be classed as consumers.

Under English law (s39(1)(a) Patents Act 1977), the IP created by Mr Jing during his time as a paid intern was owned by the University as his employer. However, the position in relation to the IP he developed as a doctoral student required more in-depth analysis.

OUI maintained that the University owned the IP because it fell outside of the general IP provision in Mr Jing’s doctoral contract, being that the University does not claim student’s IP because it resulted from research. ONI’s key contention was that the doctoral contract was unfair under consumer law (the Unfair Terms in Consumer Contracts Regulations, or UTCCRs) and was therefore unenforceable.  

Are students consumers?

In considering ONI’s argument and deciding whether the UTCCRs would apply, the court had to initially determine whether Mr Jing was a consumer when he entered into the doctoral contract. The UTCCRs define a consumer as “any natural person who is acting for purposes which are outside his trade, business or profession”. The interpretation of this definition in the context of a doctoral student and university was complex. Not only was there a lack of legal precedent, but also some aspects of the arrangement were “consumer-like” and others, more analogous to an employment relationship.

The court relied upon non-statutory guidance in its careful consideration of all student/university-type arrangements, eg with undergraduates, post-doctoral researchers, and doctoral students, and commented generally upon consumer status, as follows:  

• Post-doctoral researchers. As employees with employment contracts in place, post-doctoral researchers would not be protected by consumer law. A university would (generally) own any IP created in the course of employment, and employment law would govern a post-doctoral researcher’s rights.
• Undergraduates. Typically, undergraduate students are paying (usually hefty fees) for receiving educational services from a university, with scant negotiating power in relation to their contract. Generally undergraduates would be studying for purposes outside of their trade or profession and therefore wouldn't be employees with employment rights. Consumer law should (generally speaking) protect them instead.
• Doctoral students. As with undergraduates, doctoral students pay to undertake their studies. Sometimes doctoral students are sponsored, and their fees paid for by a third party, but the court decided it was inappropriate to distinguish between undergraduates/doctoral students based upon funding method. The court further decided that, as with undergraduates, doctoral students were generally studying for purposes outside of their trade, business or profession. It was unimportant that the student may use this education professionally in the future.

Ultimately, the court determined that the doctoral contract was a contract for educational services, and Mr Jing was a consumer. It is important to note that although the court gave general commentary, each arrangement should be examined on a case-by-case basis.

Was the doctoral contract unfair?

The court subsequently examined whether the doctoral contract (as a whole, and not just in relation to the IP terms) was unfair under the UTCCRs. Was the contract “contrary to the requirement of good faith, [causing] a significant imbalance in the parties' rights and obligations arising under the contract, to the detriment of the consumer”? The court scrutinised many aspects of the relationship, including:

• The usual position under patent law, being that, because Mr Jing was not a University employee, he would be entitled to rights in any inventions he created.
• OUI’s argument that, akin to an employee, Mr Jing created the IP while undertaking work for the University which he was primarily there to do, using University facilities, under the supervision of a University professor, and using University equipment. 
• Whether there was a significant imbalance in the terms. This involved analysing the approach taken by other higher education institutions to IP ownership. The University’s revenue-sharing provisions (which formed part of the IP terms in the doctoral contract) were substantially more beneficial to Mr Jing than those typically provided to employee inventors by most private companies and similar institutions. Mr Jing therefore enjoyed the benefit of more generous rights as a doctoral student at the University than he would have done as an employee of a private company.
• Generally, the terms had not proved disadvantageous to students at the University. The University only made approximately 100 patent applications annually, and in doing so, the University was not found to have claimed rights from students.
• The court noted a minor imbalance in the IP terms, due to the ownership provisions being applied to IP created “incidentally to [the student’s] studies”. However, under the definition of “unfair”, imbalance had to be significant rather than minor.
• The court decided the terms were entered into in good faith by the parties. OUI didn't seek to exploit Mr Jing in his capacity as a student. Overall, the terms were generous to Mr Jing, as opposed to taking advantage of him.

Following a comprehensive assessment, the court decided that the doctoral contract was not unfair, and the patents were validly owned by OUI. As a result, the IP licence was not void for common mistake, and ONI should pay the royalties due.

Recommendations for universities and spin outs

As a result of both the analysis and decision in this case, we would encourage universities to:

• Review agreements with your students, in particular doctoral students, keeping in mind that such students are more likely to be treated as consumers.
• Be aware that this ruling may encourage spin-out companies to revisit their contract terms in relation to valuable IP,  you should be prepared to deal with such requests.
• Enter into new agreements when students continue their studies but change role (eg from intern to doctoral student).  Clarify IP ownership in each agreement.
• Consider your terms and policies, particularly whether terms are fair and balanced as a whole.

We would encourage university spin-outs to:

• Ensure there is clarity on IP ownership and the roles of individuals from the beginning of a relationship.
• Ensure that you are tracking IP rights from the inception of your product or invention through to its exploitation. This will be time well spent compared to unravelling potential disputes later.
• Negotiate balanced terms with universities before the spin-out, an unfair contract may not be enforceable.
• Manage the expectations of owner-investors, factor royalty or licence payments into any long-term revenue forecasts.