CROWN USE OF DESIGN RIGHT: COMPENSATION FOR LOSS OF PROFIT (Hansard, 25 July 1988)

HC Deb 25 July 1988 vol 138 cc86-93 86

§ '. —(1) Where Crown use is made of a design, the government department concerned shall pay—

(a) to the design right owner, or
(b) if there is an exclusive licence in force in respect of the design, to the exclusive licensee,

compensation for any loss resulting from his not being awarded a contract to supply the articles made to the design.

§ (2) Compensation is payable only to the extent that such a contract could have been fulfilled from his existing manufacturing capacity; but is payable notwithstanding the existence of circumstances rendering him ineligible for the award of such a contract.

§ (3) In determining the loss, regard shall be had to the profit which would have been made on such a contract and to the extent to which any manufacturing capacity was under-used.

§ (4) No compensation is payable in respect of any failure to secure contracts for the supply of articles made to the design otherwise than for the services of the Crown.

§ (5) The amount payable shall, if not agreed between the design right owner or licensee and the government department concerned with the approval of the Treasury, be determined by the court on a reference under section 242; and it is in addition to any amount payable under section 232 or 233.

§ (6) In the application of this section to Northern Ireland, the reference in subsection (5) to the Treasury shall, where the government department concerned is a Northern Ireland department, be construed as a reference to the Department of Finance and Personnel.'.—[Mr. Butcher.]

§ Brought up, and read the First time.

§ Mr. Butcher
I beg to move, That the clause be read a Second time.

§ Mr. Deputy Speaker
With this it will be convenient to take the following: Government new clause 19—Crown use of registered design: compensation for loss of profit

§ Amendment No. 14, in clause 231, page 102, line 41, at end insert— '(d) purposes of protecting the environment.'.

§ No. 15, in page 102, line 41, at end insert— '(d) civil defence purposes'.

§ Government amendment No. 99.

§ Amendment No. 32, in page 102, line46, after 'matters', insert— 'and which agreement relates specifically to the articles concerned or to equipment embodying such articles'.

§ No. 26, in page 103, line 11, at end insert— 87 '"competent authority" means a Secretary of State, a Minister of State or a Parliamentary Under-Secretary of State acting in person.'.

§ No. 28, in page 103, line 19, leave out 'either before or after the use and'.

§ No. 29, in page 103, line 21, at end insert— 'but may not be given after the use'.

§ No. 27 in clause 232, page 103, line 26, leave out subsection (1) and insert— '(1) Subject to this section, Crown use of a design by a government department, or by a person authorised by a government department, under section 231 shall be made only after a competent authority has given notice in writing to the government department concerned authorising such use. (1A) No authorisation shall be given under this section unless the competent authority has notified the design right owner in writing of the intention to use or authorise the use of his design for the services of the Crown and such authorisation shall not be given unless either—

(a) at the expiration of three months beginning with the date of service of the notice on the design right owner no agreement between the design right owner and the government department has been con-cluded; or
(b) before the expiration of said period the design right owner has given notice in writing to the government department concerned that no such agreement is likely to be concluded within that period.

(1B) An authorisation under this section may be given by a competent authority without compliance with subsection (1A) of this section in any case where the government department concerned.

(a) is unable to ascertain the identity of the design right owner on reasonable enquiry; or
(b) where, and for so long as, it appears to the competent authority that the disclosure of use of the design for the services of the Crown would be prejudicial to the safety of the State.

(1C) Where Crown use is made of a design, the government department concerned shall, in cases not falling within paragraphs (a) and (b) of subsection (1B) of this section, give to the design right owner such information as to the nature and extent of use as he may from time to time require.'.

§ Government amendments Nos. 335 to 337, 245, 249 and 157.

§ Mr. Butcher
New clauses 18 and 19 and amendments Nos. 335 to 337,245 and 249 deal with the issue of how the compensation to be paid for Crown use is to be calculated, especially in relation to lost profits. That was a point raised in Committee by my hon. Friend the Member for Canterbury (Mr. Brazier) and we think that it is right that there should be compensation for lost manufacturing profit. In this respect, a rights owner will be able to claim compensation both for lost trading profit and for losses in respect of underused capital assets. Of course, any claimant must be in a position to supply the Crown from his existing capacity; he will not be able to claim losses by arguing that he could supply the Crown by building a new factory, and he will not be able to claim for further losses. For example, where a foreign Government order from the same source as the Crown, the claimable loss will not include lost profits in respect of foreign orders that go elsewhere because the Crown has gone elsewhere.
I am sure that those new arrangements will make a very significant contribution towards ensuring that the Crown user provisions do not act in any way as a disincentive to those who would invest in R and D. Unlike a number of other issues arising on Crown use, they are concerned only with the practical, economic effects of Crown use and do 88 not depend on the nature of the property right involved. We are therefore proposing to make the necessary change in respect of design right, registered designs, and patents, which will mean that any manufacturer can be sure that he will receive fair and proper compensation, irrespective of the type of right he holds.
Another point raised in Committee by my hon. Friend was the width of the provisions on foreign defence. His point was that the Bill would allow any article to be supplied to a foreign Government wherever we had any sort of agreement with the Government concerned. Amendent No. 99 includes the words "in pursuance of", which has exercised my hon. Friend to a considerable extent, the idea being that there must be a connection between what is in the agreement and what is supplied to the Government concerned. I do however recognise that my hon. Friend may see amendment No. 99 as a case of one step forward, one step back, because it refers to "agreements or arrangements".
The inclusion of a reference to "arrangements" will cover any memorandum of understanding that we have with a foreign Government. That is unavoidable because the United Kingdom has very few formal "agreements" with other countries. In this regard, "agreements" is a legal expression and most of the United Kingdom's dealings with other countries will not qualify as an "agreement". The expression "arrangement" is therefore quite proper. However, my hon. Friend made the point that many of these "arrangements" are cast in very broad terms, without any reference to particular equipment. His argument is that, as a consequence, clause 231 will give the Ministry of Defence carte blance to supply any equipment to those countries.
I can, however, tell my hon. Friend that the Ministry of Defence does not intend to rely on general, non-specific memoranda of understanding that do not define the equipment to be supplied. It is concerned here with the more specific arrangements that refer to particular equipment, and it would not normally expect to use the Crown use powers to supply equipment to foreign Governments without giving the rights owner prior notification, which is the key point for my hon. Friend.
I appreciate that my hon. Friend would prefer to see all that written into the Bill, but we have found it impossible to distinguish in statute between the different types of "arrangements". I must therefore ask my hon. Friend to accept what I have said about the Ministry of Defence not seeking to abuse the unavoidable width of the provision.

§ Mr. Julian Brazier (Canterbury)
I should repeat the declaration of interest that I made to the Committee. Before I came to the House I worked as a management consultant and several of my clients were in the defence industry. However, I severed all financial ties with them when I was elected to the House.
I thank my hon. Friend the Minister for the considerable amount of time that both he and his officials have put into the area of Crown user provisions, and I welcome the introduction of new clause 18 and amendment No. 249. The House will recall that my concern with the Crown use provision in clauses 231 to 233, relating to the Crown's rights to seize design rights outside emergency situations, was that such powers accidentally strangle the goose that lays the golden eggs. Companies will invest their own money in design only if they feel that they will benefit from the results. Therefore, 89 I welcome new clause 18, which, as my hon. Friend rightly said, provides for a proper level of compensation if the Crown user rights are invoked, and which takes account of the loss of manufacturing profit and of unused manufacturing capacity that would result from the award of an order somewhere else.
I have two concerns and one question on new clause 18, and also one question on amendment No. 249. My view and the view of the industry, or such parts of it as I have been able to consult since new clause 18 was tabled, is that it provides adequate safeguards for the bulk of the defence industry, but I am concerned about the position of smaller companies which cannot afford to go to court to enjoy the protection that new clause 18 would give.
In particular, the small company is opened up to two weaknesses, one of which is being threatened: there is nothing to stop an official in a negotiation saying to a company, "If you don't cut your prices a bit further, we will get one of these slapped on you," in the knowledge that the company cannot afford to go to court. The other weakness is the problem of retrospective use. If, by accident, the Ministry should leak information and as a result do millions of pounds' worth of damage to a company, as the law is now drafted, it could retrospectively authorise that leak.
That is why I have introduced some safeguards in my suggested amendments. The first is in amendment No. 26, which says that a Minister must authorise use of these powers. That means that it will not be done lightly by an official. Secondly, amendment No. 27 imposes a three-month cooling-off period. Both amendments were incorporated in the Defence Contracts Act 1958, which dealt with technical information. The second provision ensures a clean break between a company and the Ministry on one hand and the point at which the powers are invoked on the other. Thus the small company can talk to its Member of Parliament, trade association and so on in the knowledge that that is next best to being able to go to court if the company cannot afford that. In amendments Nos. 28 and 29, the retrospective use of those powers is banned.
My hon. Friend the Minister more or less covered the other area of concern, which is the extreme width of the foreign defence purposes clause. Let me expand a little on what my hon. Friend said. Basically, there are two types of arrangements or memoranda of understanding between the British Government and foreign Governments. There are general ones that cover a blanket agreement to trade and can be signed at the drop of a hat by the Ministry, without consultation with industry. There are specific ones, which involve a specific agreement to supply a specific type of equipment. My concern, which is embodied in amendment No. 32, is that the Ministry should invoke those powers only in the second case where there is a specific agreement by the Ministry with the foreign power, covering a specific piece of equipment.
The Minister has assured us that, if powers are to be invoked for foreign defence purposes, the company will be given notice. Notice is worth something, but if the Minister is unable to accept amendment No. 32 I hope that he will go a little further and say that the Ministry will not invoke it without a specific agreement being entered into on that particular equipment.
If I read new clause 18 correctly, the compensation for which it provides is in addition to the small licence fee to which a company will be entitled under clause 232.I hope that the Minister will confirm that I am right. Amendment 90 249 deals with a completely new matter, a change to the Patents Act 1977. That was completely unexpected. Indeed, such a change was not asked for in Committee. It is a bold move and I welcome it. It will encourage companies to invest their money in projects that might lead to the issue of patents, in the full knowledge that they will enjoy the benefit of those patents. It is a good move and I strongly support it.
I understand the merits of this proposal for future agreements on patents, but I am not sure that the Ministry of Defence's flank is covered regarding past agreements. I hope that the Minister will confirm, either now or in writing, that past agreements are covered and that the Ministry will not have to pay compensation to companies for patent rights for which it has already paid under past agreements.
Abraham Lincoln, that great statesman, said that the introduction of patents into the American economy added the fuel of interest to the fire of innovation. My hon. Friend has gone to much trouble to meet my requests about design rights and he has taken a very bold step regarding patents. The defence industry will be much healthier for it. More defence companies will be willing to put their money up front. I congratulate him.

§ Mr. Frank Doran (Aberdeen, South)
I am pleased that the hon. Member for Canterbury (Mr. Brazier) has modified his position since Committee, when he thought that the clause would effectively destroy our armed forces' re-equipment programme in the next century."—[Official Report, Standing Committee E, 16 June 1988, c. 602.] My conversion will not be quite so dramatic.

§ Mr. Brazier
If the hon. gentleman looks at my words, he will see that I said that the clause unamended would do that. I tabled amendments and the Government have gone a long way towards meeting my criticism.

§ Mr. Doran
My conversion will not be quite so dramatic, but I welcome the compensation arrangements in the new clause.
As for amendments Nos. 14 and 15, clause 231(2) introduces an interesting element. For some years, the Government have had the power to override design right and patents in the interests of defence. They have now introduced the power to override design right for what subsection (2)(c) refers to as "Health Service purposes." The point was made forcibly in Committee that this was an interesting concept for a Conservative Government, and we teased the Minister about the effect, had such a clause been introduced by a Labour Government. It opens up the possibility of local health authorities using the powers. There is nothing to prevent them from doing so. They act as agents of a Government Department and they would be entitled to ignore the design rights of the drugs industry.
The two amendments deal with other important matters that affect the public interest—the defence of the realm, foreign defence purposes and health service purposes. It is important that the Government should also consider the use of these powers for the purpose of protecting the environment. The Select Committee on Agriculture is to publish a report tomorrow that we understand will be fairly critical of the Government's response to Chernobyl. We may in future be faced with a similar tragedy to that of Chernobyl in this country. The clause is restricted to foreign defence purposes and the 91 defence of the realm. It says nothing about civil defence purposes. I hope that the Minister will consider that issue. Purposes to protect the environment and civil defence purposes are two important issues.
I urge the Minister to let us have his views on that matter. I hope that he will also say how Health Service purposes, which he did not explain properly in Committee because he was slightly embarrassed by the points that were put to him, will work in practice.

7.45 pm

§ Sir Geoffrey Johnson Smith (Wealden)
As I take a keen and active interest in defence matters, I hope that my hon. Friend the Minister will accept that the new clause will be welcomed by those who work in the defence industry. I have to declare an interest. I am associated with a subsidiary of Philips which is known as MEL. My interest is wider than that, as is my concern. My hon. Friend knows that considerable apprehension was felt in the defence industry about the possibility of this Bill being passed unamended. We live in a tougher and, rightly, more competitive world for defence equipment. It is only right that money that is wholly funded by defence companies should be treated as set out in the Bill.
My hon. Friend the Member for Canterbury (Mr. Brazier) expressed other concerns. He shows a deep appreciation of the need for defence and takes an active interest in this country's defence policy. We cannot expect to get everything at one go, but we much appreciate what has already been done.

§ Mr. Butcher
The House is indebted to my hon. Friend the Member for Canterbury (Mr. Brazier) for the work that he has done. It is almost unprecedented for a colleague in his position to change so much in so short a period. It involved two, and possibly three, Ministries. I witnessed the way that he went about it, not least in my office, but he was perfectly amenable and agreeable in the way that he put forward his arguments. He impressed two Government Departments simultaneously. I hope, however, that he will not mind if I refer first to amendments Nos. 14 and 15 that deal with civil defence and environmental protection.
Amendments Nos. 14 and 15 would add environmental protection and civil defence to the purposes for which the Crown use provisions could be activated. These are two important and worthy topics. I do not wish the fact that I shall advise the House to resist the amendments to be taken as decrying their significance. There are other significant areas that are not covered by the powers in clause 231, because defence and Health Service purposes are unique. For example, the soldier in the field needs to be completely familiar with his equipment, especially in difficult circumstances. That means that as far as possible the equipment must be uniform and instantly recognisable. If the new manufacturer cannot manufacture exactly to the old design, the service man may hesitate while working out how to use the equipment. In those vital moments of hesitation under battlefield conditions the battle may be lost. For defence purposes we need to be able to manufacture to an established design.
Similar considerations apply to the Health Service. Where health, or life and death, is an issue, there can be no compromise on design. The Health Service must have the 92 best equipment, whether it is surgical, artificial joint replacements, or whatever. The existence of a design right covering the best equipment must not prevent the health authorities from going for the best. Important as they are, environmental protection and civil defence do not have that ultimate level of immediacy. Defence and Health Service purposes bear directly upon life and liberty in a particularly final manner. In our view, neither environ-mental protection nor civil defence qualify in quite the same way.
As I have been reminded repeatedly over the past few weeks, the Crown use powers represent a limitation on the rights of designers. We should not seek to limit design right except where it is necessary in the national interest, and that is the case only in defence and the Health Service and that is why the Crown use powers should be limited to those areas.
I now come to the points raised by my hon. Friend the Member for Canterbury (Mr. Brazier) and endorsed by my hon. Friend the Member for Wealden (Sir G. Johnson Smith). It is appropriate for me to record, as I did earlier, the cogency and enthusiasm of my hon. Friend the Member for Canterbury. He first made his case in Committee and I undertook to write to him and to other members of the Committee with our conclusions. I have done that on the four points he raised in Committee. I dealt with manufacturing profit in my earlier remarks and I shall now deal with the other matters in turn.
First, on ministerial authorisation, the question whether Crown use powers should only be invoked by a Minister personally, we have been persuaded that only Ministers should invoke those powers. Vigilant hon. Members will have noticed that we have not tabled an amendment on that matter. That is because that very question was dealt with when the Defence Contracts Bill, as it then was, was before the House. The view then was—and nothing has happened since to change it—that the most appropriate way of ensuring that only Ministers exercise the power is an assurance to that effect in the House. My hon. Friend has cited the resulting Act, the Defence Contracts Act 1958 as his precedent, and it would therefore be appropriate for me to deal with the matter in the same way as it was dealt with under that precedent. Therefore, we have decided, and we shall ensure that the powers in clause 231 will be invoked only by a Minister personally, and will not be delegated.
I now turn to the cooling-off period. I have to say that we cannot accept that in the form proposed by my hon. Friend. Formal invocation of the Crown powers will happen only where there is no alternative. The very urgency of which I spoke earlier will be paramount. A cooling-off period would compromise a vital need for continuous supplies in defence or the Health Service and for that reason I am not able to agree to one. Nevertheless, I appreciate that small firms in particular may be placed at a disadvantage because they are unfamiliar with the ins and outs of Crown use power. To meet that point, we have decided that, as soon as it appears that there is a need to invoke the powers set out in clause 231, steps will be taken to ensure that people concerned are aware of the rights and obligations of both sides. I cannot of course give any commitment on how far in advance of the powers being exercised this will happen, simply because the circumstances will inevitably vary from case to case.
Nevertheless, the Ministry of Defence will always endeavour to give the firm concern as much notice as 93 possible of its intention to use the Crown use powers. I hope that my hon. Friend will accept that assurance, which will mean that everyone will know where they stand so that negotiations can proceed on a fair and sensible basis.
Returning to my hon. Friend's point on foreign defence, I have already explained why we cannot avoid using the expression in pursuance of an agreement or arrangement. I can only reiterate that there is nothing sinister about the expression. It has been used to define the United Kingdom's dealings in statutes going back to 1949 and earlier. I have also said, and I am happy to repeat, that the Ministry of Defence does not intend to rely on general, non-specific memoranda of understanding. That is my hon. Friend's concern. It intends to consider only those arrangements which relate to specific equipment. It would expect to give rights owners prior notification if it intends to supply equipment to a foreign Government under the Crown use powers.
That is as far as I wish to go. I am sorry that my hon. Friend has at times—and he would argue, with due cause—seen my hon. Friends in other Ministeries in a particularly bleak light. He will not be surprised if I say that his views are not as justified as he may think, but I am satisfied that they will deal sensibly and responsibly if they ever have cause to use the design right Crown use powers. It is the time-honoured way of things that my hon. Friends at the MOD have not demurred in that draft.
I shall also say a few words about retrospective authorisation. My noble Friend has already given an assurance in the other place that the Crown use provisions will not be used to legitimise someone who has deliberately infringed design right. I am happy to repeat that assurance today.
As to the question whether loss manufacturing profit compensation will be in addition to payment fees for the right, the answer is yes. On compensation on manufacturing profits, my hon. Friend asked whether the payment which industry will obtain under the new clauses is additional to the payment industry will be entitled to under clause 232 or the equivalent patent or registered design provision. I am happy to assure him that it will be an additional payment and that is expressly stated in the new clauses.
Existing patent agreements fall into two categories. Where the MOD has made a settlement with a patentee manufacturer based on the use of a privately owned patent, that manufacturer will be able to renegotiate terms for all use after commencement. Where the MOD places a contract for the development of new equipment, and the contractor makes an invention with public funds, the practice is for the contractor to retain ownership. The MOD retains the right to use the invention free of charge for the services of the Government. That practice is not expected to change.
I apologise for the length of my reply, but in Committee all members of the Committee brigaded behind my hon. Friend, and the Committee expected such a reply to be forthcoming on Report.

§ Question put and agreed to.

§ Clause read a Second time and added to the Bill.