99
REPORTS OF PATENT, DESIGN AND TRAD'E MARK CASES
[1967]
2ND MARCH,
IN THE
1967
[No.4]
HOUSE OF LORDS
. Before
LORD REID
LORD MORRIS OF BORTH-Y-GEST
LORD GUEST
5
LORD lTpJOHN
LORD WILBERFORCE
18th, 19th and 20th October, and 24th November, 1966.
NATIONAL BROACH
&
MACHINE COMPANY V. CHURCHILL GEAR MACHINES LIMITED
Patent-Licence--Construction of agreement-Obligation on licensee to disclose
10 to licensor "improvements developed" by licensee-When obligation aroseLicensor's right to patent licensee's developments-Duration of licensee's licence
under patents for licensee's developments.
15
20
25
30
Under a licence agreement made in 1947, C.R. manufactured gear shaving
machines to the design of National in return for a royalty. This agreement granted
to C.R. a non-exclusive licence in respect of three patents belonging to National,
and provided that National would supply C.R. witli a wide range of technical
information. In addition, it lvas provided by clause 9 of the agreement that
National would [orthwitn communicate to C.R. improvements and any further
inventions witn respect to the machines. Clause 10 was a grant back of somewhat
similar rights by C.R. to National, but it was expressed differently. It provided
that C.R. would communicate to National all details of any improvements in gear
shaving machines developed by C.R. during the subsistence of the agreement,
and if National so required, C.R. should apply for patents to belong to National in
respect of these inventions, C.R. to have a licence under such patents. If National
did not want a patent in respect of C.R.'s improvements, C.R. were then free to
patent them for themselves. The parties worked under the agreement until it was
terminated by C.R. by giving six months notice effective to end the agreement on
27th January 1960. During the six montli period of notice of termination, C.R.
decided to manuiacture a gear shaving machine of their own design to replace
the machines they had hitherto been producing. A few days after the expiration
of the agreement they applied for patents covering certain improvements embodied
in their newly designed machines.
National brought an action against C.R. claiming that as the improvements had
been made during the currency of the agreement, they had a right under clause
35 ] 0 to an assignment of the patents obtained by C.R. for these improvements. C.R.
denied that National lvere entitled to the patents, contending that on the proper
construction of clause 10 they were not obliged to communicate a development
to National, and thereby to give National an opportunity to decide whether or not
to patent it, until it had reached a relatively advanced stage of development, and
100
[No.4]
REPORTS OF PATENT, DESIGN AND TRADE MARK CASES
[1967]
National Broach & Machine Co. v. Churchill Gear Machines Ltd.
(Patent licence, construction H.L.)
they asserted that in fact this stage had not been reached before the expiration of
the agreement. They further contended that even it National ~vere entitled to the
patents, under the terms of the clause, they, C.R., were entitled to an exclusive
licence thereunder for the term of the patents, whereas National contended that
any right to a licence under clause 10 was for the term of the agreement only. Cross, 5
J. held that the obligation under clause 10 to communicate a development arose when
C.R. lvere satisfied in their own minds that they had an improvement which would
work, that this stage had been reached before the termination of the agreement,
and that National lvere consequently entitled to the patents. He also held that
C.R.'s right to a licence under the patents lvas only for the term of the agreement, ]0
not the term of the patents. The Court of Appeal, Willmer, Harman and Salmon,
L.II., affirmed the judgment of Cross, J., save that they took the vievv' that the
obligation to communicate a development under clause 10 arose when it reached
the stage of being patentable. On appeal to the House of Lords:
Held, dismissing the appeal, (1) that the language of clause 10 lvas perfectly
ordinary English language incapable of any further judicial interpretation or
exposition such as had been advanced in the High Court and the Court of Appeal.
All that could be said lvas that the court had to take into account all the diverse
circumstances of any particular case, and answer the double question, at what
time did the obligation to communicate something which had been developed
arise? The answer to this question could vary. It would be early in the case
of a major advance, for which National might want to secure the earliest possible
patent priority; later in the case of a minor workshop improvement which might
require extensive trial to establish whether it vvas an improvement at all. Here it
lvas conceded that C.R. lvere in a position to file complete specifications in respect
of their improvements before the expiration of the agreement, and therefore they
had failed to comply with their obligation under clause 10 to communicate an
improvement.
(2) That the agreement as a whole lvas an agreement intended to facilitate manufacture of machines by C.R. for the period of the agreement and no longer, and
therefore it would be strange if it were to include a provision that although an
invention of C.R. lvas to become the property of National, nevertheless on the
termination of the agreement C.R. would be able to exclude National from marketing in the United Kingdom machines embodying the invention. Clause 10 had the
efject that in the events which had happened, C.R. would obtain no benefit from
its own invention, but though this seemed harsh, it lvas probable that the draftsman of the agreement directed his mind to the currency of the agreement rather
than to the effects of the clause at the expiration of the agreement, In the light of
the remaining clauses it was clear that C.R.' s rights under the agreement lvere to
end with its termination, and therefore their right to an exclusive licence lvas for
the period of the agreement only.
15
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35
40
This was an appeal to the House of Lords in an action in which breach of
contract and misuse of confidential information were alleged. The plaintiffs,
National Broach and Machine Company of Michigan U.S.A., succeeded on both
issues in a trial before Cross, J. which is reported at [1965] R.P.C. 61. The defen- 45
dants, Churchill Gear Machines Limited, who were the successors to ChurchillRedman Limited (C.R.) appealed unsuccessfully to the Court of Appeal ([ 1965]
R.P.C. 516) solely on the issue of the interpretation of the contract of which
breach had been alleged. The facts of the case are fully set out in the judgment
of Cross, J., although they appear sufficiently for the purposes of the present 50
report from the arguments of counsel and the judgment.
101
[1967]
REPORTS OF PATENT, DESIGN AND TRADE MARK CASES
[No.4]
National Broach & Machine Co. v. Churchill Gear Machines Ltd.
(Patent licence, construction H.L.)
Peter Bristow, Q.C., P. Stuart Bevan, and J. N. B. Penny, instructed by
Walmsley & Stansbury, appeared for Churchill Gear Machines Limited. Guy
Aldous, Q.C., Douglas Falconer and William Aldous, instructed by Woodham
Smith, Borradaile & Martin, appeared for National Broach and Machine Company.
Bristow, Q.C.-The only issue left on this appeal is whether C.R. were in breach
of the agreement with National. The appellants submit that there has been no
breach of their obligations because on 27th January 1960, when the agreement
terminated, the items had not reached the stage at which the obligation to communicate attached. The questions that arise are: first, at what stage did the
10 obligation to communicate attach? Secondly, if had attached by 27th January
1960, what was the term for which the compulsory licence was to attach? The
answers turn on the terms of the agreement. Both Cross, J. and the Court of
Appeal construed the agreement in favour of National.
5
The particular machine in question was evolved by an American company in
15 the 1930's. It is a well-known process, and the problems in the present case arise
from the efforts of C.R. to get round the patents for the table and crowning
attachments and also the knee attachment.
The evolutions of a machine tool is as follows: (1) The idea is seen in the mind's eye of the inventor either spontaneously or
20 to order; (2) it is reduced to paper in sketch form or turned into three dimensions
in model form or both; (3) if it looks promising it is turned into design form on
paper by the design department; (4) if a decision is taken to proceed, the design
is handed to production engineers for detailed individual drawings. The process
is called "detailing" and the individual drawings "details." There would be a
25 drawing putting them together and a stock list for the manufacturer. (5) Parts
manufactured from detailed drawings are then assembled into prototypes. During
this process errors are found and corrected and improvements made. This stage
is the beginning of what the people in the: industry call" development." (6) When
the prototype has been made, one then decides whether to put it into production,
30 bearing in mind the following considerations: - (a) Does it work at all? (b) Does
it work better than what went before? (c) Does it meet market requirements?
(d) Are customers likely to buy it? (e) Can it be produced at a cost at which you
are likely.to make a profit ?
It matters not when one says "development" starts. It may be at the beginning
35 of stage 3 or the beginning of stage 4. To show that development follows invention
one only has to look at the Development of Inventions Act, 1948.
Turning to the agreement, the vital clauses are clauses 9 and 10. National has to
communicate "forthwith" to C.R. any improvement whether patented or not.
C.R.'s obligation contains no "forthwith" and is to disclose all details of any
40 improvements, so that if patentable, National can patent them. Therefore the
meaning of the words improvement, details and development are important.
The main issue is the precise meaning to be attached to the first four lines of
clause 10. At what stage does C.R.'s obligation under clause 10 attach? There
is a subsidiary issue which arises if Cross, J., and the Court of Appeal are right,
45 as to whether C.R.'s free exclusive licence under clause 10 should be for the
duration of the agreement only, or for the duration of the patent.
102
[No.4]
REPORTS OF PATENT, DESIGN AND TRADE MARK CASES
[1967]
National Broach & Machine Co. v. Churchill Gear Machines Ltd.
(Patent licence, construction H.L.)
The factual history of the events leading up to the dispute are set out in
Cross, J.'s judgment. The evolution of the new machines did not follow precisely
the analysis set out above. But when construing the agreement one must consider
the position as it was in 1950, disregarding the subsequent history of the matter,
and what happened in 1960. Having construed the clause, one must have regard 5
to the history to decide where the axe drops.
Of the three improvements in question in the present case, the knee is separate
and distinct because it was thought of before the break as a possible improvement
to be added originally to the National machine. The crowning and table attachments were developed to get round the National patents. The case below was
argued on the basis that C.R. should have made one disclosure in respect of each
item, and not a series of disclosures. The appellants make the following submissions. 1. In this agreement, improvement means an improved machine, or an
improved component of a machine, and not an improved design. 2. To be an
improvement this must either work better than the old machine or component,
or work equally well but be more economical to make. 3. One cannot be sure of
either of these things at the design stage: see stage (3) above. One must have an
object rather than a drawing, a prototype or part of one. 4. "All details of any
improvements " means the details of any engineering drawings from which alone
the thing can be made. 5. Alternatively if "details" is not used in that sense,
" all details of any improvements ... which may be developed" presupposes that
development has gone far enough for you to see that it will be an improvement.
6. An improvement is something distinct from a further invention. 7. If by patentability is meant the earliest stage at which a patent can be applied for, that is
inconsistent with clause 10. If it does not mean the earliest stage, it is much too
indefinite to impose a contractional obligation. 8. This agreement is not primarily
a patent licensing agreement but an agreement licensing C.R. to manufacture
using National's "details" and know-how, 9. Improvement is not understood in
patent law in any special sense.
On the first submission, improvement does not mean an improved idea; it does
not mean an invention: see clause 9 and clause 14(5). On the second submission,
improvement would not include something which although it bears the label of
" improvement" is so obviously not going to be one, that no development work
is done and the plans are thrown away. Considering the relative position of the
parties in 1950, it was unlikely that National would want to impose on C.R. the
obligation to disclose something which was still in embryo, and which might not
be worth developing. On the third submission, the idea was conceived in March
1959 when it could have been patented. In July 1959, after the design work had
been done, it was subcontracted out for a prototype. In November the prototype
was delivered and put on test. It was in the middle of being tested in January
1960 and did not complete tests until April. Being confident it was going to work,
the designer (Mr. Mills) adapted it to fit the machine which C.R. developed after
the break with National, His confidence was misplaced because it did not work
properly until much later, and after being subjected to considerable redesign.
One may encounter an unforseen disaster, such as in the classic case of the
De Havilland Comet which after three years proved to be unsafe and had to be
redesigned. A certain confusion arises in the present case because the knee that
was tested was the knee for the old machine, whereas the one developed was for
the new machine. The prototypes for the new one were ordered in January before
the end of the agreement. The obligation to communicate arose in April 1960
when the tests were completed.
10
15
20
25
30
35
40
45
50
103
[1967]
REPORTS OF PATENT, DESIGN AND TRADE MARK CASES
[No.4]
National Broach & Machine Co. v. Churchill Gear Machines Ltd.
(Patent licence, construction B.L.)
On the fourth submission, according to the ordinary rules of construction, if one
can give a sensible meaning to the differences between clauses 9 and 10, one must
do so and not dismiss them as infelicitous drafting as Salmon, L.J. did. "Details"
is a term of art meaning manufacturing drawings, which is the stage of evolution
5 at which one would expect National to be interested. It may be that there was a
duty to communicate when all the details were complete and if that were right it
might be that there was an obligation to communicate in respect of the knee but
not in respect of the table and crowning attachment.
On the fifth submission, a patent may be taken out so early that one won't
10 know whether it will bear any fruit commercially. On the sixth submission, that
must follow from the use of both words in juxtaposition in clause 9. "Further
invention" means something just before the stage at which it is capable of being
got into three dimensions. The draftsman was there drawing a distinction between
that stage at which National's obligation to communicate was made to attach,
15 and the improvement stage. [Lord Reid-Can you have provisional patent protection without the thing having reached the stage which, on any view, you could call it
an improvement, and if you had applied for a provisional specification would you
have had a duty to disclose?] The Court of Appeal did not say whether patentability meant the provisional or final application, so that one cannot say whether
20 the duty attaches at one stage or the other. That shows that there must be something wrong with patentability as a test. It must mean that one must communicate
what one has before one communicates it to the world. It is conceded, and the
judge so found, that C.R. had reached the stage at which a .final specification
could be put in for all three items before the end of the agreement. So fClr as the
25 knee was concerned, a provisional specification could have been put in in March
or April 1959. The obligation cannot be earlier than the completion of stage (4)
above because of the word" details." The clause suggests that one has to present
National with a complete article which must not be put into the machines until
National have decided whether they are going to patent, and whether they will
30 allow C.R. to incorporate it in their machines. Clause 10 points to a late stage,
and clause 9 to an early stage. That is due to the relative situations of the two
companies.
On the seventh submission, as Cross, J. held, the test of patentability would
exclude communication for things which were not patentable. The Act itself
35 envisages that before protecting oneself one may want to go as far as making a
prototype: section 32(1). On the eighth submission, one of the things which
tempted the Court of Appeal to use patentability as a criterion was that they
wrongly put the emphasis on the patent licensing aspects of the agreement. On the
ninth submission, section 26 is the only section which refers to "improvement";
40 c.f. section 26 and clause 10. Linotype and Machinery Ltd. v. Hopkins (1908) 25
R.P.C. 665 at 670, which was cited to the Court of Appeal does not help one
way or the other. It was a fallacy for the Court of Appeal to suppose that the
draftsman was using "improvement" in the sense in which it is used in a patent
specification only. Any doubt is resolved by clause 9 which clearly envisages that
45 improvements mayor may not be patentable. If improvement in clause 10 can be
either patentable or non-patentable, the obligation to communicate cannot depend
on patentability.
If C.R. are under a duty to communicate at an early stage, National would have
to evaluate (i) the utility of the patent, and decide (ii) whether it was of commercial
50 use, (iii) they would have to do the dovetailing and development to see if their
104
[No.4]
REPORTS OF PATENT, D'ESIGN AND TRADE MARK CASES
[1967]
National Broach & Machine Co. v. Churchill Gear Machines Ltd.
(Patent licence, construction H.L.)
evaluation was right, and (iv) they would have to supply C.R. with detailed manufacturing drawings which they had made in the process of stage 3. The alternative
is that C.R.'s obligation is to supply National with manufacturing drawings of
something which they have tested on a prototype and are sure will be an improvement, and inquire whether National wishes to patent it. National would then have 5
to decide the first two questions, without getting involved in (iii) and (iv).
A concession made earlier that C.R. were ready to file final specifications in
respect of all three items was wrong; C.R. were only ready to file a final specification in respect of the knee before the end of the agreement. It must be inferred
that the Court of Appeal meant the provisional date. The earliest date for which 10
I would contend is when all the details for manufacture were completed.
It is dangerous to draw on what the parties in fact did under the agreement for
the purposes of construing it, because what National did bore no relation to their
obligation under clause 9. They communicated nothing until it was ready for
manufacture.
15
Bevan following-An inventor who wished to obtain the longest period of protection for his invention would wait as long as possible before filing a provisional
specification, because one has to file a final specification within one year: section
22. If more than one provisional specification is filed, the year dates from the
material provisional specification.
20
Section 32 was referred to as showing that one might do some work on a prototype without anticipating. Section 51 carries it even further because in certain
circumstances even public working of a prototype need not be considered as
anticipation.
The words "but so that" in clause 10 are a clear indication that there is a 25
reservation not from licensed rights but from the rights which are to be accorded
to National in respect of any patents applied for by C.R. That applies not only
to the ambit of the monopoly but to its duration. Had it been intended to restrict
either the ambit or the duration, the wording was at hand in clause 9. On the
reasonable and unambiguous construction of clause 10, the licence to be granted 30
is for the full ambit and full term of any patents of which National became the
owner under clause 10. If that is right one need not look to other parts of the
agreement to see whether they throw any light on it.
Aldous, Q.C.-The agreement of 1950 is in similar terms to an agreement entered
into in 1947. It is common ground that in the early years C.R. had not the 35
capability or the facilities to do experimental work. One must look at the position
at the time when agreement was made, and to suggest that at that stage C.R.
were bound to do development work for which they had no facilities would make
nonsense of the agreement.
The question raised by the appeal is whether the three improvement of which the 40
most important is the knee, were improvements within clause 10. One must bear
in mind that by January 1960, C.R. were ready to file their specifications, and had
had sufficient material to file provisional or final specifications before the end
of the agreement. One can of course improve an improvement and one can get
a patent for that. C.R. improved the invention and can claim patents for the 45
improvements. National only claim the patents for the ideas which materialised
during the subsistence of the agreement.
105
[1967]
REPORTS OF PATENT, DESIGN AND TRADE MARK CASES
[No.4]
National Broach & Machine Co. v. Churchill Gear Machines Ltd.
(Patent licence, construction H.L.)
If the improvements are improvements within clause 10, and therefore the
property of National, are C.R. entitled to an exclusive licence after the expiration
of the agreement? Originally C.R. conceded before the House that they had all
the details enabling them to file specifications before the end of the agreement,
5 but they subsequently withdrew that in respect of the table and crowning attachment. C.R. had not sought to draw any distinction between the three improvements
in the courts below. Accordingly, so far as any consideration of the facts are
concerned, it is sufficient to consider the matter in relation to the knee, because
until now they have all been considered on the same footing.
10
The argument is put under four heads: (i) the background under which the
agreement was made, and the surrounding circumstances; it has already been
pointed out that C.R. were in no position to undertake any development in 1950.
(2) The facts relating to the knee (now covered by patent No. 952,601) in respect
of which there is no dispute. (3) The meaning of improvement in patent law.
15 Before one can say one has an improvement, one must develop it to the stage
when it can be described in a specification, and it must be something which one
believes will work. One must give words their established meaning unless their
context drives one to a different conclusion. (4) The agreement as a whole. On
the first submission, before the war C.R. imported machines from National, but
20 due to import restrictions in 1947 they wanted to make them themselves. In the
early days they relied entirely on National, and did not have any facilities for.
development. In considering the obligation on C.R. to make prototypes, it must
be remembered that they did not have the competence to do it in the early days.
On the second submission, the invention of the knee was made for the purpose
25 of improving National's machine. It was deliberately kept from National on the
instructions of C.R.'s group director. There was an obligation to disclose in 1959
when the prototype was ordered by C.R. While National do not want to say that
there was a breach of contract at that stage, when concealment was ordered, they
would do so if-necessary.
30
There has been some measure of agreement in that C.R. accept that at the date
of the expiry of the agreement, they were in a position to file complete specifications if they wished to do so. Before the expiry date some manufacturing
drawings were sent out both in relation to the table and crowning attachment and
the knee, but some went out after that date. If the test is that there need not be
35 disclosure until commercial viability is proved, then there would be no liability
to disclose until after the machine had been published to the world, when it was
put on exhibition in June 1960. On one view it was not commercially viable until
the end of 1960, and on another view until 1963.
So far as the legal position is concerned, a patent is invalidated if its invention
40 is disclosed before the patent date: Humpherson v. Syer (1887) 4 R.P.C. 407 at
413. Therefore any patent would be invalidated before they were bound to disclose
it. It follows that the priority date is a vital matter. On the third submission, as
to the meaning of "improvement," it is a well-known word in patent law: It is
"a development of that which is old" in contradistinction to that which is al45 together new: Hill v. Thompson (1836) 1 Web.P.C. 232, at 244. Non-Drip Measure
Co. Ltd. v. Stranger's Ltd. (1943) 60 R.P.C. 135 at 142, line 50 to 143
[Lord Reid-Is a workshop' improvement which is not patentable an improvement
within clause 10?] Yes, because it is for National with their knowledge to decide
whether it is patentable or not. Something that is obviously not patentable might
50 not be included. But often only a firm in the position of National would be able
106
[No.4]
REPORTS OF PATENT, DESIGN AND TRADE MARK CASES
[1967]
National Broach & Machine Co. v. Churchill Gear Machines Ltd.
(Patent licence, construction H.L.)
to say definitely whether a thing was inventive or not. There is a long history of
what improvement means in patent law: see the Precedent Books, Morris 1887
ed. and Patents Conveyancing by J. Q. Henriques, 1927 ed., but it has never been
suggested before that it has to be three dimensional. Linotype and Machinery
Ltd. v. Hopkins (1910) 27 R.P.C. 109, at 112, 113. Reference was also made to 5
Reynolds v. Herbert Smith & Co. Ltd. (1903) 20 R.P.C. 123 at 126, Hickton's
Patent Syndicate (1909) 26 R.P.C. 339 at 348.
In substance there is no difference between the view now expounded on behalf
of National, and that expressed by Cross, J. The time for disclosure is when C.R.
had developed their improvement to the stage that they could put down in writing 10
the way of carrying it out.
On the fourth submission, relating to the interpretation of the agreement,
clause 9 is qualified by clause 2, because National are bound to provide blueprints,
but clause 10 is not so qualified. In 1950 all that one would have expected C.R.
to send to National would have been a sketch which National would have developed.
Clause 10 does require a series of communications, with the qualification that one
would not expect C.R. to go on working on something which had been sent to
National for development.
Turning to clause 10, only National could decide whether an improvement was
workshop modification or subject matter for a patent. The appellants say in their
case that "details" is a term of art, but no such suggestion was made to
National's witnesses. Clearly C.R. had in their possession all the details necessary
because they were sufficient to enable them to decide that they would go into
production by 25th January 1960. "Details" means such details as were known
at any particular time. If the appellants are right, one would impose on them a
duty to develop ideas from all sorts of people to the stage where one had a
prototype that would work. The dictionary meaning of the word "improve" is
"evolve". "Improvements in gear shaving machines," mean improvements in,
and not improved machines. It is a clause primarily to enable National to obtain
patents at their expense in countries of their choice. It is ridiculous to construe
it to enable C.R. to exercise that right without reference to National. To construe
clause 10 so that a patent will never be applied for at the earliest date is ridiculous.
The only sensible construction is that C.R. should disclose any details at any
time when making any improvement. The "free exclusive licence" under clause
]0 shows a further distinction between clause 10 and clause 9 because under the
former they would have to pay a royalty of 1 per cent. C.R. could have been
forced to make patent applications after the end of the agreement, because the right
would be one which had vested during the course of the agreement, but it is
possible that there would only be a right to damages thereafter.
Under the agreement, machines were to be made in England which would be
the same as National machines throughout the world. It was never contemplated
that if the import restrictions were lifted, that National would not be able to
supply their machines to this country. A free exclusive licence under clause 10
would be a licence revocable at will. There is nothing to compel one to assume
that it was anything other than a licence under the contract.
It is conceded that National could stop paying royalties, and could surrender
15
20
25
30
35
40
45
the patents (subject to section 34) but it is implicit in clause 11 that National
shall pay the fees. After the agreement has terminated there is no point in
National paying renewal fees, because there won't be any licences to C.R. If C.R.
could pay the fees, National would be kept out of this country.
50
107
[1967]
REPORTS OF PATENT, DESIGN AND TRADE MARK CASES
[No.4]
National Broach & Machine Co. v. Churchill Gear Machines Ltd.
(Patent licence, construction H.L.)
Falconer following-There is no requirement that the fee should be paid by
the patentee, it could be paid by an exclusive licensee: see section 22(4). Sections
32(2) and 52(3) only protect the inventor in respect of prior use by the inventor
himself. It does not give any protection against someone else moving towards
5 the same invention and getting an early priority date.
Bristow, Q.C. in reply-It is unsafe to draw inferences regarding the wisdom of
patenting early or late. At whatever stage the obligation to disclose attaches, C.R.
would not at any stage be able to patent for themselves without giving National
an option. "Improvement" must be construed in the context of the agreement
I 0 and the authorities do not assist. On the subsidiary point, there is no a priori
reason in this agreement to suppose that the term of the licence is to be the term
of the agreement. As far as clause 10 goes, there may be a patent granted after
the agreement comes to an end, and therefore it must be for the term of the
patent. There is far more involved than the three items in question in the present
15 case. It must have been in the contemplation of the parties that C.R. might gain
the know-how, and want to set up in competition with a machine of their own,
whether the parties had fallen out or not. [Lord Wilberforcec-Suppose National
are right on the main point and you are right on the subsidiary point?] We would
be entitled to a declaration that we should have a licence.
20
Judgment was reserved and delivered on 24th November 1966.
Lord Re~id-My Lords, I have read the speech of my noble and learned friend,
Lord Upjohn. I entirely agree with it. I therefore move that this appeal be
dismissed with costs.
Lord Morris of Borth-y-Gest-My Lords, I have had the opportunity of reading
25 the speech of my noble and learned friend, Lord Upjohn. I am in agreement with
it and I would dismiss the appeal.
Lord Guest-My Lords, I concur.
Lord Upjohn-My Lords, This action came before Cross, J. at first instance
when it lasted for 18 days; he decided a large number of issues of fact and law
30 and directed a number of inquiries. The Court of Appeal (Willmer, Harman and
Salmon, L.JJ.) upheld Cross, J. on some issues and reversed him on others.
The parties have wisely accepted the decision of the Court of Appeal on all issues
except upon two quite short points of construction of an agreement made between
them or their predecessors, so I shall not have to refer in any detail to the facts
35 and long history of the relationship between the parties.
The respondent, the National Broach & Machine Company (whom I will refer
to as "National "), is a company incorporated in the state of Michigan, United
States of America, and is the manufacturer of inter alia machine tools known as
rotary gear shaving machines and gear tooth shaving cutters. The appellant is a
40 subsidiary company in a group of companies known as the Churchill Group of which
the parent is Charles Churchill, Limited.
From about 1935 Charles Churchills Limited had been sole selling agents for
National's gear shaving machines in the United Kingdom and Ireland. After the
war it was difficult to obtain import licences into this country, and by an agreement
45 made in 1947 National licensed Charles Churchill, Ltd. to manufacture the
machines in the United Kingdom and Ireland. This agreement was superseded by
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National Broach ,& Machine Co. v. Churchill Gear Machines Ltd.
(Patent licence, construction H.L.)
one in nearly identical terms made on 30th June 1950 between National and
Churchill Redman, Ltd., another subsidiary of Charles Churchill, Ltd. to whom I
will refer as C.R. This agreement was at all material times the operative agreement
between the parties; in 1958, with the consent of National, the benefit and burden
of this agreement was transferred to the appellant, but the case has been argued 5
throughout on the footing that C.R. remained party to the agreement and, for
convenience, I shall do the same.
The main provisions in the 1950 agreement are set out in the judgment of
Cross, J., so that I shall refer briefly only to its general scope and object.
In form the main part of the agreement provided for a grant by National to C.R. 10
of licences under three United Kingdom patents to manufacture gear shaving
machines (but of certain dimensions only) in the United Kingdom and Ireland,
and to use and sell the machines so manufactured in certain other named countries.
The licences were exclusive in respect of two of the patents and non-exclusive in
respect of one, the reason for the difference being that in respect of the one patent 15
National were already under certain obligations in respect thereof to the Michigan
Tool Company which made the grant of an exclusive licence impossible.
All these patents, however, were due to expire on varying dates between 1951
and 1956, and it is clear that the most important part of the agreement was the
provision in clause 2 that National would furnish to C.R. complete drawings or 20
blue prints of all licensed machines, and complete drawings and, blue prints of
all jigs and fixtures for certain components of those machines, and C.R. bound
themselves to use and follow such drawings and blue prints. C.R. contracted to
send a senior engineer to National to be trained in National's technique and
operations in the licensed machines, and National agreed to send one of their 25
qualified employees to C.R.'s plant in England to instruct and advise C.R. and
their employees in the manufacture of the machines C.R. agreed to maintain in
the manufacture of their machines a quality of product that was equal to the
quality of the gear shaving machines previously manufactured by National and
sold by Charles Churchill, Limited.
30
In truth this agreement was, in the main, one for the sale of "know-how" for
the term of the agreement, rather than a mere patent licence agreement, and this
is reflected in the financial provisions in that C.R. were to pay to National "as
an engineering service charge" 14 per cent. (later reduced to 9 per cent.) of the
selling price of each machine and component, and a royalty of only 1 per cent. 35
of such selling price so long as the patents respectively subsisted.
The original agreement of 1947 had provided for a five years agreement from
28th January 1948, and thereafter from year to year until determined by six months
notice on either side to expire at the end of any year, and this was reproduced
verbatim in the 1950 agreement; however, it was plainly contemplated that the 40
agreement would in fact be a reasonably long term agreement.
The vital clause upon which the two questions of construction arise is clause
10, but it is closely bound up with clauses 9, 11 and 12, and I propose therefore
to set them all out.
"9. National shall forthwith communicate to C.R. any improvements and 45
any further inventions they may make with respect to Gear Shaving Machines
licensed herein (whether such improvement or further invention shall be
patented or not) and will fully disclose to C.R. the nature and manner of
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performing the same and all such improvements and further inventions shall
be deemed to be within the scope of this Agreement.
s
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15
20
25
" 10. C.R. will communicate to National all details of any improvements in
Gear Shaving Machines which may be developed by C.R. during the subsistence of this Agreement and shall if National so require and at the cost
of National make applications for patents in such countries at National may
request. Any patents so obtained shall be the property of National but so that
C.R. shall have free exclusive licences under any such patents in the United
Kingdom of Great Britain and Northern Ireland and the Republic of Ireland.
If National shall not require C.R. to apply for patents in respect of any such
improvement then C.R. shall be free to apply for patents in any country or
territory and any patents so obtained shall be the sole property of C.R.
" 11. During the subsistence of this Agreement National shall pay all
renewal fees as rnay be necessary to maintain and keep on foot all the Letters
Patent in respect of which licenses are granted to C.R. by this Deed.
" 12. National shall not during the continuation of this Agreement export
into or manufacture or use or sell in Great Britain, Northern Ireland or the
Republic of Ireland otherwise than through C.R. any Gear Shaving Machines
the subject of any of the said Letters Patent Nos. 415,875 474,281 and 503,952
or of any improvements or further inventions referred to in Clauses 9 and 10
hereof and shall not during the subsistence of this Agreement grant to any
other person firm or company whatsoever any license to manufacture use or
sell in Great Britain, Northern Ireland or the Republic of Ireland any Gear
Shaving Machines the subject of Letters Patent Nos. 415,875 474,281 and
503,952 or of any such improvement or further invention as aforesaid."
The agreement continued until, by notice given by C.R. on 16th June 1959 it
was determined on 27th January 1960. The reasons for this determination, though
much discussed before Cross, J., are irrelevant to any question that your Lordships
have to consider.
30
The two questions of construction of clause 10 which fall for your Lordships'
decision are
(i) What is the true construction of clause 10 which obliges C.R. to communicate to National all details of any improvements in gear shaving machines
which lnay be developed by C.R. during the subsistence of the agreement; and
35
(ii) If, as a result of any such communication from C.R., a patent is
obtained, is C.R. entitled to an exclusive licence in the United Kingdom for the
term of the patent so obtained, or only during the subsistence of the agreement.
These two questions of construction have been argued on broad principles without much reference to the precise facts, but I can state shortly the real issues
40 between the parties which make these questions of construction ·so important to
them.
Originally, as I have already said, C.R. were buying the "know-how" of
National, it is quite clear that at the start they had no research department and
that until about 1955 they depended completely upon National for all technical
50 progress. Gradually, however, a research staff was built up and in 1959 the position
seems to have been this: C.R. were meeting with competition from certain German
machines which C.R.'s technical staff thought incorporated certain improvements
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National Broach ,& Machine Co. v. Churchill Gear Machines Ltd.
(Patent licence, construction H.L.)
over the machines of National; relations between National and C.R. were deteriorating and, of course, the question arose on the part of C.R. as to what they
could do in the way of manufacture on their own after the determination of
the Agreeement without infringing any patents of National. Accordingly, C.R. in
1959 were engaged upon research for improvements in three directions: first, as 5
to the development of an improved knee; secondly, as to the development of an
improved table and, thirdly, an improved crowning apparatus: it is not in the
least degree necessary that I should describe any of these devices for the purposes
of the question of construction. These researches were successful and resulted in
applications by C.R. for three United Kingdom patents, two of which have been 10
granted and the third was still pending at the trial of the action. The real question
between the parties is as to who is entitled to the benefit of these patents and
pending patent application.
It is most important to observe that the case has been argued by both sides
before your Lordships upon the footing that (however unrealistic it may be) the 15
obligation of C.R. to make communications in pursuance of their obligations under
clause 10 remained in full force until the moment of the determination of the
agreement in January 1960, and that obligation was not in any way affected,
impaired or lessened, by the notice given in June of the previous year.
C.R. argued that the obligation to make any communication under clause 10 20
only arose at a late stage of development contrasted with the obligation on the
part of National under clause 9 which was said to arise at an early stage.
The successive steps in the development of an invention were elaborately
advanced before your Lordships; the idea; the reduction of the idea to sketch
form on paper; the design form; the reduction of the design form to detailed 25
drawing or working drawings; the building of a working prototype and then, finally,
commercial manufacture if thought fit. It was said that until the prototype had
been constructed and tested there could be no obligation to make a communication
or, alternatively, if that was too late the obligation did not arise until there were
available detailed or working drawings to be sent to National.
30
My Lords, I am quite unable to accept such arguments which seem to me to be
quite artificial and to bear no relation whatever to the words of clause 10. There
was much discussion upon the meaning of the word "improvements" and upon
the word" developed" in the first sentence of that clause. For my part I decline
to place any gloss upon the meaning of those words beyond saying that they 35
must be construed through the eyes of a reasonable man reasonably wen versed
in the relevant engineering techniques. Cross, J. thought that the proper test to
determine the time when the obligation to communicate arose was the moment
when the licensees were satisfied in their own mind, rightly or wrongly, that they
had got something which would work. In the Court of Appeal a rather different 40
test was proposed. Willmer, L.J. thought that the time for communication arose
as soon as it could be seen that an application for a patent could safely be made
without incurring the risk of being held invalid for inutility. Harman and Salmon,
L.JJ. came to much the same conclusion though expressed in slightly different
words.
45
My Lords, for my part I am unable to accept these tests. They certainly cannot
be accepted as a judicial interpretation of the true meaning of the words of clause
10. The words are there; they are perfectly ordinary words of the English language;
they must be, as I have already pointed out, interpreted through technical eyes
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but, apart from that, I do not think they are capable of further interpretation or
exposition. All that one can say is that the court, looking at the matter through
such eyes, must in all the diverse circumstances which may arise, answer the
double question in any particular case; at what time did the obligation to cornmunicate something which had been developed arise? To show how impossible it
is to give any further judicial interpretation to the construction of these words
let me give examples of one of two cases. No doubt, when some idea has arisen
which is likely to lead to some great and patentable improvement in the machine,
an obligation will arise at a very early stage to communicate that to National for,
in the world of patents, as we all know, an early application for a patent may
make all the difference, especially when in other countries there may be others
researching on the same lines, and National must have time to consider whether
they want patents to be applied for not only in the United Kingdom but in other
countries in which National are interested. On the other hand, there may be an
improvement, hardly patentable but which may in fact be very important in the
workshop in that it improves the speed, or ease of production or lowering its
expense, something called in the patent cases "a workshop improvement ".. In
such a case I would expect the licensees to test it out by practical work in ordinary
manufacture to see whether in fact it was such an improvement, and did establish
substantial commercial advantage before communicating it to National. So it
seems to me quite impossible to lay down any criterion as a matter of construction
as to the meaning of these perfectly ordinary words found in clause 10.
My Lords, having regard to the facts of this case it is quite clear that, whatever
test be adopted, the Court of Appeal and Cross, J. carne to a correct conclusion
25 upon the matter. So far as the knee invention was concerned, the working drawings
were available in July 1959, the prototype was ordered in the same month, complete specifications for the purposes of the patent were ready at about the same
time, and, indeed, 12 machines, all containing this particular improvement, were
ordered in January 1960. It is perfectly plain whatever test be applied that this
30 invention should have been communicated to National long before the agreement
came to an end. The evidence as to the other inventions, that is to say the table
and the crowning apparatus, is a little more vague but all three inventions were
treated on the same basis in the courts below and counsel for "C.R. admitted that
they were in a position to file complete specifications for the purposes of the
35 patent application of each of these inventions before the expiry of the agreement.
In the circumstances of this case it seems to me quite clear that C.R. failed in
their obligations under clause 10 in respect of all three inventions.
None of the patents for these inventions were applied for before the expiry of
the agreement, but it has been conceded before your Lordships that, nevertheless,
40 if C.R. are held to have failed in their obligations under clause 10 down to the
expiry of the agreement, these patent applications (and as to two of them ·the
subsequent patents) 111Ust be held by C.R. for the benefit of National. One is not
perhaps surprised at this concession, having regard to the fact that C.R. deliberately
withheld application for these patents until after the expiry of the agreement in
45 January 1960.
I turn, then, to the second point. Are C.R. entitled to an exclusive licence to
exercise the patents which they have invented in the United Kingdom and Ireland
for the duration of the patents or only for the subsistence of the agreement? In
both courts below it has been held that they are only entitled to a licence for the
50 period of the agreement. My Lords, I approach this problem with this in mind,
that in an agreement whereby National are granting a licence to use patents and
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[No.4]
REPORTS OF PATENT, DESIGN AND TRADE MARK CASES
[1967]
National Broach & Machine Co. v. Churchill Gear Machines Ltd.
(Patent licence, construction H.L.)
" know-how" for a limited period, including any improvements on patents communicated to C.R. under clause 9, it seems clear that those rights come to an
end upon the termination of the agreement, and that thereafter the parties are at
arm's length with regard to trading in these machines. It would therefore be
strange if C.R. thereafter had the right to exercise the patents it had invented which
they expressly agreed by clause 10 should become the property of National. It
would be productive of the most unbusinesslike trading situation, most unlikely
to have been intended by businessmen. The result would be' this: although National
on the termination of the agreement would have the right to trade freely in the
United Kingdom, they would. then be quite unable to sell their goods if incorporating
any patents invented by C.R., although those patents had become their property.
On the other hand C.R. could not sell any of National's machines if they included
any inventions of National, but there seems no reason why they should be entitled
to do so. So upon a natural construction of clause 10 it seems to me that C.R.
can only be entitled to a licence for the period of the agreement. But what has
troubled me is the difficulty created by the second sentence of clause 10. Literally
construed, as it must be, while the agreement is subsisting all information must
be communicated to National. That may lead (as, indeed, in this case) to a patent
sealed and granted to National years after the agreement has expired. So that upon
this construction C.R. can obtain no benefit whatever from its own invention even
in this country. That seems indeed very harsh upon C.R. I was sympathetic to the
argument that it must have been intended that C.R. should obtain some benefit
from their inventions made during the subsistence of the agreement which were
incorporated in patents obtained after its expiry, and if this is right the term
could then only, as a matter of construction, be for the term of the patent. But in
drafting clause 10 the draftsman probably never really contemplated what would
happen in the closing months of the agreement. His mind was fixed upon the
situation arising during the currency of the agreement and in such circumstances it
would be quite reasonable that any improvement by C.R. to the machines which
broadly were the product of the inventive mind of National should become the
property of National, and that C.R. would only have any right to use that improvement they had discovered for the duration of the agreement. This view is, I think,
clearly supported by clause 11 which supposes that all obligations by National to
C.R. come to an end at the end of the agreement and that thereafter the patents
will belong to National. Clause 12 also supports this view once it is realised that its
somewhat obscure phraseology is conditioned by the fact that National could not
grant an exclusive licence in respect of one of the patents to C.R.
5
10
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25
30
35
Upon the whole of this matter I cannot feel any real doubt that C.R. are only
entitled to a licence during the period of the agreement and, harsh though it may
seem, they are' not therefore entitled to any licence under the agreement in respect 40
of those patents for which they have been responsible but which they have agreed
should become the property of National. My Lords, for these reasons I would
dismiss this appeal.
Lord WUbe'riorce-I concur.
C.l.E.