Last year, small businesses founded at Scottish universities accounted for the highest number of investment equity deals into spin outs in the UK.

However, higher education institutions must take care that their IP policies are clear and students understand their rights to any resulting technology following a recent landmark legal challenge.

The case – the first of its kind in the UK – was brought by Oxford University Innovation Ltd (Oxford), Oxford’s technology transfer company, against Oxford Nanoimaging Ltd (ONI), its spin-out company.

Kirsty Stewart is Legal Director in the Intellectual Property, Technology and Media team,Thorntons.

Oxford, claimed for £700,000 in unpaid royalties under a licence agreement relating to an imaging device which was developed at Oxford University and commercialised by the spin-out.

ONI claimed in its defence, that the IP belonged to ONI’s CEO, Mr Bo Jing. Mr Jing was employed by Oxford as a research intern and then became a DPhil student. He completed much of the detailed development work on the imaging device before he left to become the CEO of the licensee.

ONI further claimed that the university’s IP policy was unlawful as the terms were unfair under consumer protection legislation.

The Unfair Terms in Consumer Contracts Regulations 1999 in section 3(1) defines a consumer as, “any natural person who, in contracts covered by these Regulations, is acting for purposes which are outside his trade, business or profession”.

ONI argued the DPhil contract was for the purpose of Mr Jing’s personal and private education and therefore he was not acting in the course of his trade, business or profession when making the contract. OUI argued the opposite but following guidance provided by the UK Competition and Markets Authority (CMA) it was concluded that DPhil students are normally entitled to be treated as consumers and that Oxford failed to show it would be wrong to treat Mr Jing as such.

ONI claimed that the university’s IP provisions, which stated that it could claim patent rights in respect of inventions by DPhil students if created “in the course of or incidentally to” their studies was too broad and unfair and didn’t take account of the contributions of those responsible for the invention.

While Oxford stated that their terms were not unfair, the judge expressed concern over the wording of “in the course of or incidentally to their studies”, noting that it did have the potential to be unfair and was out of line with typical university policies. Oxford later updated this wording but despite the judge finding the original description was potentially too broad, in reality Oxford did not apply the wording as broadly as permitted and ultimately it did not make Mr Jing’s treatment by Oxford unfair.

It was heard that Oxford supported DPhil students in their research, assisted in paying for IP protection, formed a spin-out company to share profits from inventions, allocated equity in that company and assisted in obtaining further rounds of investment helping to increase the value of the shareholdings.

Oxford argued that without the term that transferred the IP, Mr Jing would have owned the IP, but would not have been in a position to exploit it without the assistance of another commercial partner who would have asked for a transfer of rights in exchange for an equity stake and Mr Jing’s position would have been no different.

The judge concluded that, with the exception of the overly broad term, Oxford’s IP provisions were in line with the law, other institutions and were not unfair. None of the IP provisions created an imbalance to the disadvantage of a student and the imbalance created by the over broad term was not significant.

Moreover, Oxford reasonably believed that Mr Jing was being offered a good deal when it came to IP rights, pointing to Mr Jing becoming a significant shareholder and CEO of a potentially successful multi-million-pound turnover start-up who is also entitled to benefit from ongoing royalties. The judge concluded that Oxford operated in good faith.

This decision serves as a reminder that universities should take care to regularly review and update their IP policies. Blanket policies covering multiple categories of student are at risk from being challenged due to potential unfairness.

Kirsty Stewart is Legal Director in the Intellectual Property, Technology and Media team,Thorntons.

Universities should take care to review and update their IP policies regularly - Kirsty Stewart