Needs must

Stuart Saunders is a man with an entrepreneurial streak. He wanted to assist inventors to bring their products to market. He understood the yawning gap between the creation of a potentially world-beating product and its successful arrival in the marketplace. He realised that inventors were often ill-equipped to fill that gap. Their expertise stopped at the prototype product; it did not necessarily extend to development, marketing and sales, finance and intellectual property protection.

Pursuit of his ambition led him to create Inventors Friend Limited (IFL) in 2003. He was the sole director and shareholder. He created a website to support its activities. It was not long before two inventors approached him. The product they had was simple; it was a plastic device which fitted on the end of a cartridge of cement or adhesive and allowed the even distribution of these without mess or waste. As the judgment in the case suggests (see Inventors Friend v Leathes Prior [2011] EWHC 711QB), enormous sums of money were being talked about if this product had been a success.

Two agreements were envisaged: a short-term distribution agreement with a limited geographical scope, allowing Mr Saunders to prove his abilities, and a sub-agreement. Mr Saunders was concerned that he would be left 'high and dry' at the end of the initial term if the inventors decided to capitalise on his success and appoint another distributor. He thus sought three years' loss of profits on termination '“ which became another issue in this case.

When drafted, the sub-agreement covered the situation if the inventors decided to sell their intellectual property rights. Inventors Friend was to receive five per cent of the sale proceeds and a further 2.5 per cent if Mr Saunders introduced the purchaser. It was the latter agreement that caused the main problem in this case.

In September 2003, Mr Saunders sought the assistance of a firm of solicitors to review and advise on the overall arrangements. He wanted the firm to 'look over' the two agreements and discuss 'certain key areas'. The 'key areas' might be said to relate to the financial rewards Mr Saunders and Inventors Friend were to receive. He chose the firm both from previous experience and the fact that the partner concerned had experience in commercial and intellectual property issues.

What went wrong

So, what went wrong and what lessons can be learned? There are several important points:

1. The budget. In his initial contact with the firm, Mr Saunders explained that, as he was starting his company, he had a very limited budget for the review of the agreements '“ £150. Unsurprisingly, even in 2004, the firm considered this as rather low and set a minimum fee of £500. However, the advising partner had not seen either of the two agreements when deciding on £500. The Solicitors Rules of Practice provide that any work has to be completed to a professional standard even if it has become un-remunerative as inevitably became the case here with the complexities of IPR.

2. The retainer. What precisely was the retainer? Good practice as set out in the Solicitors Rules of Practice is for the solicitor to send a retainer letter defining the limits of his obligations to the client. The firm did not send a retainer letter, either at this point or in the following year when IFL ran into difficulties with the inventors and SSIL. The firm attempted valiantly in its witness statement to ring fence its responsibilities into relatively narrow grounds, claiming that it had only been asked to look over agreements and nothing more. In particular it had been excluded from any negotiations which were conducted by Mr Saunders alone. As the judge remarked: 'It is necessary to construct the terms of the retainer from the circumstances of Mr Saunders' dealings with the firm.' This case is another lesson in clearly establishing the scope of what the client actually wants and expects, especially if key elements are left in the hands of the client.

3. The IPR issue. It is likely that the two issues outlined above are now standard practice in all firms. The most challenging facet of this case was how the firm should have dealt with the IPR issue. The test is whether it devoted to Mr Saunders' affairs that reasonable skill and care to be expected from a normally competent and careful practitioner.

It is clear that the IPR 'sub-agreement' when tendered by the inventors was a very short document. It specifically discussed 'sale' of the IPRs and contained no limit of time as to when such sale might take place. Mr Saunders subsequently emailed the firm to say that the sub-agreement should mean 'sale or use' of the IPRs. However, this was the only occasion when the words 'or use' was used by Mr Saunders.

Falling short

What should the firm have done? In the first instance, in the light of Mr Saunders' requirement that the firm should 'look over' and 'comment' on the sub-agreement, should the firm have ascertained who actually owned the IPRs? In this case, the agreement was between IFL and SSIL. But SSIL owned only the design rights. One of the inventors owned the patent which was generally believed to be the more valuable IPR. If that was the case, either the patent would have had to be assigned to SSIL or the inventor made a party to the agreement.

Cranston J's view was that the firm had not fallen short in its duty in this respect. I disagree with the judge's reasoning. A simple question put to Mr Saunders would have saved the embarrassment of ending up with an agreement where the principal IPR lay with a non-party to the distribution agreement.

The judge was firmer on the question of whether the firm should have considered the possible licensing of IPR, rather than merely sale: 'This was not a matter on which [the firm] needed instructions; the antennae of any commercial lawyer, especially one claiming expertise in the area of intellectual property law, should have been alert to the issue, almost without thought'¦ however narrow the retainer with Mr Saunders, in my view [the firm] in 'looking over' the agreements should have seen the limitations in the use of the word 'sale' and should have inserted in the relevant clause, language covering licensing'¦ the fact is that there was a breach of duty in this regard.'

Cranston J went on to give constructive advice, suggesting that the firm should have identified to Mr Saunders on receipt of the draft agreements that dealing with IPRs was complex and required a revision to the initial budget. Indeed it is complex. However, it is not merely a case of inserting appropriate language in a clause. It requires a separate agreement. This needed to deal with, for example, IPR ownership rights, the duty to pay renewal fees for IPRs, the need to account for royalties, and the obligation to find alternative licensees should (as was the case) one licensee drop out of the picture.

There is a need to establish clearly what the client wants, precisely what the solicitor is to accomplish, how much control the client wishes to retain, and, especially where complex issues like IPR are concerned, to ensure that the right budget for the job is established.