Two recent cases on patent licensing highlight important issues that parties need to consider when drafting or negotiating their patent licensing deals.
Standing to bring proceedings - Bristol-Myers Squibb Company (BMS) v Apotex Pty Limited (Aus)
This decision is important for exclusive licensees who have (or think they have) the right to sue for infringement of a licensed patent in Australia.
In a number of jurisdictions, including Australia, New Zealand and England, an exclusive licensee under a patent can bring proceedings for infringement of that patent. In Bristol-Myers Squibb Company (BMS) v Apotex Pty Limited, the Federal Court of Australia considered what it means for a licence to be exclusive, thereby giving a right to sue.
BMS was a licensee under certain patents owned by Otsuka Pharmaceuticals. The licence was for the rights to sell, advertise, market, promote and distribute the product in Australia. Otsuka Pharmaceuticals retained the right to manufacture the product. BMS initiated infringement proceedings (as an exclusive licensee) against Apotex. Amongst other things, Apotex argued that BMS was not an exclusive licensee because BMS did not have full rights to exploit the patent, including the right to manufacture.
The Australian Patents Act 1990 defines an exclusive licensee 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'.
Exploit includes to:
'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 '.
The Federal Court of Australia upheld the decision of the primary judge 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, and that it followed that there could only be one exclusive licensee.'¹ BMS was therefore not an exclusive licensee, as the licensor had reserved the right to manufacture the product.
Given the scarcity of New Zealand cases on this point, it is difficult to know whether the New Zealand courts would adopt the same position. Importantly, the wording in the definition of 'exclusive licence ' in the New Zealand Patents Act 2013 is different to the wording in the Australian Act. The 2013 Act says that an exclusive licence is:
'a licence from a patentee that gives the licensee (or the licensee and persons authorised by the licensee) any of the patentee's exclusive rights under section 18 to the exclusion of the patentee and all other persons'.
The wording in the New Zealand Act is more similar (although not identical) to the wording in the corresponding definition in the English Patents Act 1977, and the courts in England have held that there can be more than one exclusive licensee, for example where two licensees are given full rights to exploit the patents, but in different fields.
Given the lack of clarity in the law in New Zealand, when drafting a patent licence we recommend expressly dealing with this issue and either:
- giving the licensee the right to bring proceedings for infringement (if that is the intention), and providing that those proceedings may be brought in the name of the licensor if necessary, or
- prohibiting your exclusive licensee from bringing proceedings at all or without at least giving the licensor the first opportunity to do so.
In either case, the licence should set out the process under which proceedings are run and, usually, how any damages are split.
Term of licence - Kimble v Marvel Entertainment, LLC (US)
This decision serves as a reminder that royalties for patent licensing are generally tied to the term of the patent. This sounds like a simple concept but where multiple IP rights are licensed, this can create complexities in drafting licences.
In Kimble v Marvel Entertainment, LLC the Supreme Court of the United States of America declined to overturn the longstanding precedent of Brulotte v Thys. Brulotte v Thys held that a licence is unenforceable to the extent that it requires the payment of royalties for use of a patented invention after the patent has expired. The majority opinion of the Supreme Court said that 'when the patent expires, the patentee's prerogatives expire too, and the right to make or use the article, free from all restriction, passes to the public...'. The Supreme Court has interpreted that cut-off date as precluding 'measures that restrict free access to formerly patented … inventions.'
In New Zealand and Australia, the relevant Patents Acts say that a patent licence may be terminated by either party, on three months' notice, at any time after the patent, or all the patents, by which the product or process was protected at the time the licence was made, has or have ceased to be in force.
While this does not make a royalty provision that applies after expiry unenforceable, as is the case in the United States, it does give the licensee an exit if the relevant patent or patents have expired. This can be important, particularly where the licence covers other IP or contains other important terms governing the relationship between the parties that a licensee may be looking to avoid.
Kimble v Marvel Entertainment, LLC sets out some ways in which the effect of Brulotte v Thys can be avoided in the United States. For example, the parties could agree that:
- if there are multiple patents, the royalties will continue until the last of the patents expire
- there will be a higher royalty rate during the life of the patents, payable over a longer period (for example 10% of the net sales value during the life of the patents, payable over 40 years)
- if there are non-patent rights licensed alongside patent rights, there will be a lesser royalty payable for use of the non-patent rights after the patent rights have expired.
In our view, not all of these would work in New Zealand or Australia. For example, the second option of amortising a higher royalty rate over a longer period would probably not work, because the licensee would be able to terminate the Licence Agreement under the Patents Acts once the patents had expired, thereby avoiding any further obligation to pay.
However, while the decision in Kimble v Marvel Entertainment, LLC might not apply in New Zealand or Australia, it is a timely reminder to carefully consider the term of any licence of patent rights against the remaining period of the patents in question when drafting or negotiating a patent licence. Also, given most patent licences will include the United States as a key territory, the decision may well have more direct relevance.