Patents, Copyrights, and the Rule of Co-ownership of Chattel

Suppose that two entities jointly own a patent. If the first entity grants a non-exclusive license to a company, must it share the resulting royalty proceeds with the co-owner if there is no contract requiring that it do so? The answer is no.


 



Joint owners of a patent each own an undivided interest in the whole patent, and they are free to use it in its entirety, so long as they do not restrict the ability of their co-owner to do the same. Thus, the first entity can make, use and sell products under the patent, and can grant non-exclusive licenses to others to do so as well - without permission from, or obligation to, the co-owner. Similarly, the co-owner is free to make, use and sell products under the patent, and to grant non-exclusive licenses.


 


But neither co-owner can grant an exclusive license to a third party, because such a license would encroach on the rights of the other owner to use or license the patent rights. An exclusive license can, of course, be entered into if both owners agree to do so. The most common mechanism for such agreement in academia is the Inter-institutional Agreement.


 


Now suppose that the two entities jointly own a copyright on some new computer software. If the first entity licenses a company to copy and distribute the software, must it share the resulting royalties with the co-owner if there is no contract requiring that it do so? Based on the analysis given in the paragraphs above, you might suspect that the answer is no; but that would be incorrect.


 


In this case, the entity licensing the rights is required to share royalties it receives with the co-owner, even if there is no contract between them. Furthermore, if one co-owner itself copies and sells the software, it must pay a royalty to the other. The reason is that patents do not obey the “rule of co-ownership of chattel”, but copyrights do. This means that copyrights are treated like any other co-owned personal property. For example, it is easy to see that if two parties co-owned an apartment, one party couldn’t rent it out without sharing the rental fee with the other. By renting out the apartment, the first party has prevented the other from enjoying the property itself, and has prevented it from renting the apartment out itself. The second party is therefore entitled to a share of the rental income generated by the first. The situation is the same for copyrights.


 


How can we rationalize this difference between patents and copyrights? The special treatment of patents appears to arise from an assumption that the rights conferred by patents are not diminished by the manufacture and sale of a given product.


 


Theoretically, in the above example, if the company manufacturers and sells a product covered by the patent under license from the first co-owner, the second co-owner can license its rights separately, and its licensee can make and sell commercially distinct products that are covered by the same patent, and for which there will be separate and distinct markets. In practice, of course, such products may directly or indirectly compete with one another, and the sale of one may well diminish the market for another. Nevertheless, since it is possible that the first entity’s act of licensing the patent rights may not diminish the market opportunity for its co-owner, there is no need to compensate the co-owner.


 


In the case of copyrights, however, there is only one product that can be copied and sold the work covered by the copyright. The sale of each copy of the software by the company diminishes the market for future sales of that software. Since someone who buys a copy of the software from the first entity’s licensee will not likely buy an identical copy from the co-owner’s licensee, the first party’s licensing act clearly diminishes the market opportunity of its co-owner.  Therefore, it would be fundamentally unfair for the first entity to keep the entirety of the royalty it earns under its license, and it is obligated to share the royalties that it receives with its co-owner, even in the absence of an agreement between the parties. The formula for royalty sharing is, of course, negotiable.