A recent decision of the Full Court of the Federal Court of Australia has clarified the operation of s 145(1) of the Patents Act 1990 (Cth). This provision permits either party to a contract relating to a licence to exploit a patented invention to terminate the contract on three months’ written notice “at any time after the patent, or all the patents, by which the invention is protected at the time the contract was made, have ceased to be in force”.

Section 145 and its earlier equivalents have been dormant in Australian patent legislation for the past century without a single reported decision of an Australian court interpreting the provisions since 1919. This is quite surprising in view of the dramatic consequences s 145 can have for both patent licensors and licensees.

The purpose of s 145

The purpose of s 145 is fairly clear; to prevent patentees obtaining a de facto extension of the patent term by requiring licensees to sign contracts which bind them to continued payment of royalties after the expiry of the patent. What is not clear is why the patentee is also given the right to terminate the licence, and how s 145 is intended to operate when the licence to the expired patent is combined in a single agreement with other rights, including the right to exploit other Australian or foreign patents, or other forms of intellectual property. This was the situation before the court in the MPEG LA case.

The use of the licence

The licence in the this case was for a “patent pool” of patents relating to the MPEG-2 Standard, which is the standard for the compression of raw digital video and audio data to allow it to be encoded and decoded for use on CDs and DVDs, and for digital transmission. The licensor was the administrator of the patent pool, and the licence stated that it allowed the exploitation of three types of products. These were “MPEG-2 Encoding Products” (digital recorders that comply with the MPEG-2 Standard), “MPEG-2 Packaged Medium” (e.g. CDs and DVDs) and “MPEG-2 Decoding Products” (anything that could play back MPEG-2 compliant digital data, such as Blu-ray players and set top boxes). Some products, such as Personal Video Recorders, fell into all three categories.The licence was worldwide, and royalties were assessed on a global basis, making separation of the obligations in relation to specific patents impossible.

MPEG LA, LLC v Regency Media Ltd

At first instance, in MPEG LA, LLC v Regency Media Ltd [FCA 2014 180] the trial judge rejected the licensee’s argument that the subject matter of each Australian patent licensed by the agreement was a separate “patented invention”, and therefore on the expiry of a single Australian patent, the invention claimed in it was no longer protected by a patent, and the licensee could terminate the entire licence agreement.

The trial judge preferred the licensor’s argument that each of the three types of subject matter identified in the licence agreement was a “patented invention” for the purposes of s 145, and therefore the licence agreement could not be terminated until there were no Australian patents in force relating to at least one of these three “inventions”. The weakness of  this interpretation is its inconsistence with the way “invention is used throughout the Patents Act, and that it makes rights under s 145(1) dependent on the way the contract defines the subject matter of the licence (although s 145(2) states that the section applies despite anything to the contrary in the contract).

The Full Federal Court in the Regency Media Pty Ltd v MPEG LA, LLC [2014 FCAFC 183] rejected the trial judge’s approach to “patented invention”, preferring the licensee’s argument that a “patented invention” in s 145(1) is the invention that is the subject of a licensed patent. However, this partial victory was not a triumph for the licensee. The Full Court accepted the licensor’s argument (not raised at first instance) that s 23(b) of the Acts Interpretation Act 1901 (Cth), which provides that words in the singular number include the plural unless the contrary intention appears, should be applied. Accordingly, the Full Court interpreted s 145(1) as meaning that the contract could not be terminated until all patents by which the inventions to which the contract related had ceased to be in force. This meant that the licensee had improperly purported to terminate the licence agreement. Because the licensor had raised this point so late in the litigation, the licensee was ordered to pay only half of the licensor’s costs of the appeal.

Minimising the effect of s 145

The best way to minimise the effect of s 145 on a licence that includes both Australian patents and foreign patents or other intellectual property is to have a separate licence for the Australian patents with a separate licence fee. It would be wise not to rely on severance clauses, as they might be rendered ineffective by s 145(2).

An interesting issue not addressed in this litigation is the effect of governing law and exclusive jurisdiction clauses. It seems likely that s 145 would be applied by Australian court to contracts not governed by Australian law, as it applies “despite anything to the contrary in the contract”. There is a reasonable argument that an Australian court should not give effect  to a foreign judgement against an Australian defendant enforcing a contractual claim under  a contract validly terminated under s 145. It is less clear whether an American defendant in an American court could rely on termination under s 145 of a patent licence that was governed by the law of an American state, but included Australian patents.