In today’s globalised life sciences sector, the licensing of patents between related entities of a company, or even externally, is increasingly common. In Australia, consideration must be given to the type of patent licence granted by the patent owner, as it may affect the ability of the licensee to enforce a patent against an infringer.

Background

In Australia, the grant of a patent confers upon the patent owner the exclusive rights set out in section 13(1) of the Patents Act 1990 (Cth) (the Act):

“Subject to this Act, a patent gives the patentee the exclusive rights, during the term of the patent, to exploit the invention and to authorise another person to exploit the invention.”

The term “exploit” is defined by the Act to include in relation to an invention the subject of an Australian patent:

“(a) where the invention is a product – make, hire, sell or otherwise dispose of the product, offer to make, sell, hire or otherwise dispose of it, use or import it, or keep it for the purpose of doing any of those things; or (b) where the invention is a method or process – use the method or process or do any act mentioned in paragraph (a) in respect of a product resulting from such use.”

A patent licence sets out the manner in which a licensee can exploit a specified patent, the ownership of which remains with the patentee. As intellectual property laws vary between countries, global life sciences companies often grant a subsidiary in each country a licence to patents owned by the parent company in that country.

One of the motivations of entering into such a licence arrangement may be to enable the local subsidiary to enforce the relevant patents against infringers in that jurisdiction.

While patent licence agreements enable the licensee to exploit the relevant invention, in Australia the Act presents a challenge for licensees in bringing patent infringement proceedings if they are not exclusive licensees. Under section 120(1) of the Act, infringement proceedings “may be started … by the patentee [patent owner] or an exclusive licensee”.

An exclusive licensee is defined under the Act as:

“A licensee under a licence granted by the patentee and conferring on the licensee, or on the licensee and persons authorised by the licensee, the right to exploit the patented invention throughout the patent area to the exclusion of the patentee and all other persons.”

If a licensee under a patent licence cannot establish that it is an exclusive licensee of the patent in question, it will need to rely on the patent owner to bring the infringement proceedings, as it will not itself have standing to do so. This would be the case even where the patentee did not exploit the patent in question in Australia, for example, where a local subsidiary was the licensee and distributed the product that was the subject of the patent. In this scenario, it is likely to be more difficult to establish that the balance of convenience favours the granting of an interlocutory injunction to restrain infringement of the patent. Further the licensee would not be able to recover damages or lost profits to compensate for the harm that it suffers as a result of infringement of the patent. For these reasons, it is important that a patent licence agreement purporting to grant an exclusive licence to the licensee actually has such legal effect under Australian law.

The recent decisions of Bristol-Myers Squibb Company v Apotex Pty Ltd [2015] FCAFC 2 (the BMS Decision) and Actavis Pty Ltd v Orion Corporation [2016] FCAFC 121 (the Actavis Decision) have considered what constitutes an exclusive licensee for the purposes of the Act. These decisions provide guidance for life sciences companies in structuring their licence agreements so as to enable effective patent enforcement in Australia.

The BMS Decision

In last year’s BMS Decision, the Full Court upheld the primary judge’s finding that BMS was not an exclusive licensee of a patent owned by Otsuka relating to aripiprazole, an anti-psychotic agent used for the treatment of schizophrenia.

Under the patent licence agreement, Otsuka granted BMS a licence to exclusively advertise, market, promote, sell and distribute the compound aripiprazole, while retaining for itself the worldwide right to manufacture the compound. The dispute about the exclusivity of the licence arose because Otsuka was not joined as an applicant when BMS commenced infringement proceedings against Apotex in 2009.

In coming to its conclusion, the Court held that “an exclusive licence cannot be one that reserves to the patentee, or any other person, any residual right with respect to the exploitation of the invention”. In other words, a licensee of a patent will not be an exclusive licensee if the patent owner reserves for itself any individual right to exploit (as defined under the Act) the invention, such as the right to make the invention.

The Actavis Decision

Background

In early September 2016, the Full Federal Court handed down the Actavis Decision, which further clarified the definition of exclusive licensee under the Act, as well as the requirements for standing to bring patent infringement proceedings, as they relate to licensees and sub-licensees.

The series of proceedings culminating in the Actavis Decision concerned a patent licence agreement (the Agreement) between the patent owner, Orion Corporation (Orion), and the licensee, Novartis Pharma AG (Novartis). The Agreement concerned an Australian patent relating to a treatment for Parkinson’s Disease comprising the active ingredients entacapone, levodopa and carbidopa (the Product).

Clause 1 of the Agreement purported to grant Novartis an exclusive licence to exploit the patented invention (including the Product) in Australia. Clause 2 of the Agreement required that Novartis purchase the Product and active ingredients contained in the Products from Orion.

Separately, Novartis entered into an exclusive sublicence with Novartis Australia in respect of all its rights under the Agreement (the Sub-Licence). Following the entry into the Agreement with Novartis, Orion entered into a separate licence, supply and distribution agreement with an unrelated entity. Under this agreement, Orion granted the unrelated entity the right to market a generic version of the Product in Australia – but only in the event that a third party lawfully obtained regulatory approval and was not prevented from commercialising a generic version of the Product in Australia.

The licence to Novartis

At first instance, a single judge of the Federal Court held that both Novartis and Novartis Australia had standing to commence patent infringement proceedings.

The primary judge held that Novartis as licensee had such standing because the wording of the Agreement and its commercial context evinced an intention to confer on Novartis the rights of an exclusive licensee. The Court 18 | Life Sciences Spotlight – Issue 7 rejected the argument that by requiring Novartis to purchase the Product and active ingredients from Orion, clause 2 limited the exclusive rights granted by clause 1. Instead, these were found to be two separate, independent promises. The Court found that Novartis’ exclusive rights under clause 1 would be no less if Novartis contracted with a third party supplier to obtain the Product and the active ingredients, rather than with Orion.

On appeal, the Full Federal Court agreed that Novartis was an exclusive licensee of the patent under the Act. The Full Court ultimately found that the background circumstances to the Agreement and other provisions of the Agreement supported the construction that clause 1 created the plenary rights of an exclusive licensee, whereas clause 2 reflected the agreement between the parties as to how Novartis would exercise its rights.

While the Full Court found that Orion’s subsequent generic agreement with a third party created rights inconsistent with the exclusive licence to Novartis under the Agreement, it noted that the unilateral dealings of Orion could not vary the terms of the Agreement with Novartis.

Finally, the Full Court also rejected an argument that Novartis was not an exclusive licensee because the Agreement enabled Orion to terminate the patent licence. The Court stated that there is “nothing in the definition of “exclusive licensee” in the Act which requires such a licence to be of any specific duration or a licence that cannot be terminated by an agreed event”.

The sub-licence to Novartis Australia

It was common ground between that parties at first instance that Novartis Australia was not an exclusive licensee under the Act.

Nevertheless, the judge at first instance held that Novartis Australia, as sub-licensee, had standing to commence infringement proceedings for three main reasons:

■ the use of ‘may’ in section 120(1) of the Act indicated that the provision was permissive and did not preclude a person other than the patent owner or exclusive licensee from bringing patent infringement proceedings;

■ by virtue of the Sub-Licence from Novartis, Novartis Australia had received an assignment of Novartis’ exclusive rights to exploit the patented invention and that, as the legal assignee of a statutory right, Novartis Australia had standing to commence proceedings; and

■ if neither the patent owner nor the exclusive licensee wished to bring infringement proceedings, then an exclusive sub-licensee must be capable of enforcing the exclusive rights assigned to it.

On appeal, the Full Federal Court overturned the finding that Novartis Australia had standing to sue for infringement. While recognising that section 120(1) of the Act uses the word “may”, the Court held that the provision was specific as to who may sue for infringement – the patentee or an exclusive licensee. Moreover, the Court rejected the suggestion that either the Agreement or Sub-Licence involved an assignment of rights which effectively passed from Orion to Novartis Australia. This is because under the Agreement, Orion maintained its rights as patentee, including its right to sue for infringement, subject to Novartis’ rights as exclusive licensee (which were terminable by Orion). The Court also held that Novartis Australia was not an exclusive licensee because it did not hold its licence from the patent owner.

Lessons for Australian patent licence agreements

In light of the BMS Decision and the Actavis Decision, it is clear that under Australian law, as it presently stands:

■ only the patent owner or an exclusive licensee of a patent have standing to commence patent infringement proceedings

■ an exclusive licensee of a patent must be granted an exclusive licence to undertake all of the acts comprised in the definition of “exploit” under the Act, to the exclusion of all others, including the patent owner

■ an exclusive licence does not prevent the exclusive licensee from engaging another party to undertake one or more of the acts comprised in the definition of “exploit” under the Act, such as manufacturing a product the subject of the patent

■ the right of a patent owner to terminate an exclusive licence upon the occurrence of a specified event does not affect the exclusivity of the licence.