Intellectual Property

08 Sep 2010

Honey, I Over-Valued the IP! – WaikatoLink Ltd v Comvita New Zealand Ltd

In arguably the most important case about honey this year, the High Court considered the issues arising from a failed Intellectual Property (IP) agreement between the University of Waikato's commercialisation and technology transfer company, WaikatoLink, and honey-based healthcare product manufacturer, Comvita. Specifically, the Court considered whether false representations about its researchers' proximity to the 'holy grail' of honey research meant that WaikatoLink was not entitled to payment under the IP agreement.

Facts

The dispute arose from claims by one of WaikatoLink's researchers (subsequently passed on to Comvita during negotiations) that he was on the brink of discovering the compound or molecule found in manuka honey that is the source of its well-known antibacterial properties - known in the field as the Unique Manuka Factor (UMF). The potential value of UMF, and the technology used to isolate and extract it, was thought to be significant. Claims of its imminent discovery were alleged to have falsely enticed Comvita into an overly-expensive IP agreement.

In the end it emerged that an Italian scientist had already discovered the compound (which turned out to be potentially carcinogenic and therefore less valuable) around the time the claim was made, and WaikatoLink's researchers were still not close to discovering it a year later. As a result, the subject IP, including provisional patents, was far less valuable than claimed during negotiations.

Issues

The case dealt with the interesting intersection between the Contractual Remedies Act 1979 (CRA) and the Fair Trading Act 1986 (FTA) in relation to false representations about the substance of a contract.

The key issues were:

1. Did WaikatoLink make false representations or statements of a misleading or deceptive character?
2. If so, did Comvita rely on those representations or statements in deciding to enter the agreement?
3. Was it fair and reasonable to uphold an "entire agreement" provision (confirming that the parties were not relying on any representation made outside of the agreement)?

False Representations

At the outset, the Court stated that the FTA test for misleading or deceptive statements was broader than the test for misrepresentation inducing entry into a contract, as the former avoided distinctions about duties of disclosure and whether the statement was one of fact or opinion. Despite the different tests, the facts of the case led to a finding that WaikatoLink's statements were both misleading/deceptive and amounted to misrepresentations.

The Court found that:

1. The claim that researchers were close to identifying the UMF was objectively wrong, based on subsequent admissions by the principal researcher and the fact that another scientist had identified a different compound as the UMF.
2. While a statement of opinion itself, WaikatoLink's paper regarding the potential value of the resulting compound/technology was underpinned by an implied representation that the discovery was imminent. This was generally misleading.
3. From the point that the researcher in question (and his colleagues) began to doubt the accuracy of the initial claim, WaikatoLink had an obligation to disclose this to Comvita. Its failure to do so was both deceptive and conduct that rendered the original representation false.
4. An intention to mislead or deceive is not required under either test.

Reliance

One of the essential criteria determined by the Court was reliance by Comvita on the representations made by WaikatoLink. Despite complex findings of fact regarding actual reliance, this element of the claim hinged on the impact of the entire agreement clause (EAC).

Contract

Under the CRA, a contractual term stating that a party did not rely on certain representations must be upheld if the Court considers it "fair and reasonable" in the circumstances. In this case, Comvita was well represented and had numerous opportunities to exclude the UMF claim from the representations not relied upon. (In fact, Comvita's solicitors had replaced the original EAC with a more onerous one.) The court therefore upheld the EAC.

Fair Trading

The impact of an EAC on a FTA assessment was found to be far less dramatic. Simply, the Court held that the EAC did not negate the fact that Comvita was "overwhelmed by the weight and effect of WaikatoLink's assurances". Under the FTA test, Comvita's contribution to the EAC is considered to be part of the assessment of relief, rather than reliance.

Relief

As the contractual claim (and the resulting remedies of cancellation and damages) failed at the reliance hurdle, Comvita was confined to what the Judge described as the FTA's "discretionary and thus problematic compensatory regime".

Valuation Factors

In its assessment, the Court considered the overall value of the IP under the agreement as well as the benefit derived by Comvita despite WaikatoLink's inaccurate claims. In addition to patents relating to the UMF discovery, the agreement assigned ownership of certain other patents (eg for a "honey gel") which were also the subject of negotiations. Since settlement, Comvita had licensed these patents to a third party, asserted rights to the IP, and enjoyed related tax benefits.

The connection between the benefit already derived by Comvita and the false or misleading statements made by WaikatoLink was seen to be minimal. Despite the nominal $1 formally ascribed to the patents, Comvita was held to have received adequate value for the $1.5m already paid under the agreement. However, the further $2m WaikatoLink claimed to be owed was seen as sufficiently linked to the misleading/deceptive statements to be the subject of a relief assessment. Under the FTA, the portion of the remaining $2m that Comvita would be required to pay depended on a number of discretionary factors.

Discretionary Factors

The discretion allowed in the relief assessment enabled the Court to take into account that the UMF compound, as discovered by a third-party, was actually less valuable by its very nature. As well as potentially being capable of causing cancer and diabetes, the compound was not patentable. Comvita was aware of these risks. It followed that the true value of the IP agreement was not necessarily tied to the claimed breakthrough.

The Court then considered the material objectives of the arrangement, including: to prevent competitors from obtaining the potential benefit; and to secure an ongoing relationship with the researcher in question. Neither of these were affected by the false claim.

Finally, Comvita's contribution to its loss was considered. As well as failing to heed the advice of its own sceptical scientist, Comvita also failed to limit the EAC. This undermined the reasonableness of Comvita's reliance.

Result

The Court held that, while the misleading statements assisted in inducing Comvita to enter into the IP agreement, Comvita's own conduct contributed materially to its loss. Therefore, Comvita was held liable for 50% of the $2m still payable under the agreement.

Comment

Valuation of intellectual property is both difficult to quantify and absolutely fundamental to any agreement for its ownership or exploitation. These factors can be critical in the fields of science and technology. The tricky combination means that IP owners must be careful not to overstate the nature or value of IP. Even if not intending to mislead, owners must consider whether their representations may cause the other party to over-value the IP.

As this case shows, while an EAC can, in certain circumstances, limit liability for false or misleading statements about your IP, the FTA operates under a different test and can provide alternative relief to a party that has taken an interest in over-valued IP.

Comvita and WaikatoLink will have to bear the significant costs of this litigation. However, perhaps Comvita could consider itself lucky to escape some of its own contractual commitments.

In this case, the combination of WaikatoLink's misleading statements and Comvita's contribution to its own loss led to a resolution a lot like Manuka honey itself - a relatively sweet end to a sticky situation for both parties, but a remedy that was less therapeutic than the parties had hoped for.

Authors

Earl Gray

Partner - Intellectual Property

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John Shackleton

Partner - Dispute Resolution

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Tracey Walker

Partner - Dispute Resolution

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Richard Watts

Partner - Intellectual Property

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Claire Foggo

Senior Associate - Intellectual Property

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Sonya Hill

Senior Associate - Corporate & Commercial

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