It's been an unusually busy period for patent licensing, with the Federal Court of Australia issuing a number of important decisions in 2014. The decisions, which consider the issues of exclusivity, termination rights and obligations to fund litigation, provide useful guidance to licensors and licensees alike. They also underscore the importance of paying attention to the fine detail of patent licences during their negotiation and in court proceedings. The cases are also noteworthy because it is unusual for a patent licence itself to be the subject of a decision. It is more common that an exclusive licence will be pleaded in patent cases since the patent is owned typically by one (often overseas) entity with an Australian company licensed to exploit the patent. The exclusive licensee will usually want to be a party to an infringement proceeding to ensure that it recovers any damages.
Damorgold v JAI Products (No 3) and Bristol-Myers Squibb v Apotex (No 5)
Two cases explored the definition of 'exclusive licensee' – most recently the matter known as Damorgold (No 3) and an earlier decision known as BMS (No 5). The Damorgold decision demonstrated why it is important to take care in describing relationships between parties during the course of a proceeding. In this case, the alleged infringer relied on statements by the patentee's CEO during cross-examination to challenge the 'exclusivity' of the patent license between the patentee IP holding company and the licensed operational company. To be considered an 'exclusive licensee', the licensee must have all rights to exploit the patented invention throughout the patent area (ie. Australia) to the exclusion of the patentee and all other persons. Anything less will result in the license being considered 'non-exclusive'. In Damorgold,the licensee Vertilux Corporation Pty Ltd wanted to launch an action against JAI Products Pty Ltd for patent infringement alongside the patentee, Damorgold Pty Ltd. In order to do so, Vertilux had to be an exclusive licensee as defined by Patents Act 1990 (Cth). Clause 3.1 of the licence agreement between Damorgold and Vertilux provided that Damorgold granted Vertilux 'a royalty-free exclusive licence to Exploit the Patented Invention throughout the Patent Territory to the exclusion of Damorgold and all other persons for the Term, subject to the terms of this Agreement.' Notwithstanding this, JAI argued that Vertilux was not an 'exclusive licensee' because there was a pre-existing licence agreement between Damorgold and a third party. Fortunately for Vertilux, the evidence showed that the earlier licence from Damorgold to the third party was only to sell particular products overseas and not in Australia. Consequently, the Court held that Damorgold's licence to the third party did not affect Vertilux's status as an exclusive licensee within the patent area (i.e. Australia). The question of whether a party was an 'exclusive licensee' was also an important issue in last year's decision of Bristol-Myers Squibb v Apotex (No 5) (BMS (No 5)). In BMS (No 5), the Court considered whether Bristol-Myers Squibb was an 'exclusive licensee' over a patented antipsychotic agent from Otsuka Pharmaceutical, and therefore entitled to sue Apotex for infringement of the patent. The licence agreement between Otsuka and Bristol-Myers Squibb granted extensive rights over various patents (including the patent in question), but reserved to Otsuka the right to manufacture the antipsychotic agent under one of Otsuka's patents. Accordingly, the Court held that Bristol-Myers Squibb was not granted all rights to exploit the relevant patented invention to the exclusion of Otsuka and all other persons. Bristol-Myers Squibb was therefore not entitled to sue Apotex for infringement of the patent. Both decisions have been appealed to the Full Federal Court - the BMS (No 5) appeal was heard on 15 May 2014 and the Damorgoldappeal was heard on 14 November 2014 - with the outcomes pending.
Statutory right to terminate a patent licence
MPEG LA, L.L.C. v Regency Media
The MPEG LA decision was the first decision to consider a party's statutory right to terminate a patent licence under section 145 of the Patents Act 1990. The decision provides reassurance to licensors that, absent a contractual provision to the contrary, where a multi-patent licence agreement grants rights to subject matter constituting a single invention, section 145 cannot be invoked to terminate the agreement while any of the licensed patents relating to that invention remain in force. In July 2009 MPEG LA, L.L.C. licensed to Regency Media Pty Ltd three 'patent pools' (each containing numerous patents) relating to the use and implementation of the MPEG-2 video and data compression and data transport standard (MPEG-2 Standard). Regency purported to terminate the licence in writing in July 2012, in reliance on section 145 of the Patents Act, which states:
Termination of contract after patent ceases to be in force
- A contract relating to the lease of, or a licence to exploit, a patented invention may be terminated by either party, on giving 3 months' notice in writing to the other party, at any time after the patent, or all the patents, by which the invention was protected at the time the contract was made, have ceased to be in force.
- Subsection (1) applies despite anything to the contrary in that contract or in any other contract.
The case considered whether Regency lawfully terminated the licence agreement and depended on an interpretation of what constituted the 'patented invention' for the purposes of section 145. Regency contended that each of the patents the subject of the licence agreement constituted a separate 'patented invention' and that the licence agreement could be terminated pursuant to section 145 once any one of those patents had ceased to be in force. MPEG contended that there were three 'patented inventions', being the three matters the subject of the grant of rights indentified by the licence agreement, so that section 145 could only be invoked by Regency when all of the patents under the licence agreement had expired. The Court agreed with MPEG finding that the three matters the subject of the grant of rights indentified by the licence agreement were the 'patented inventions' for the purposes of section 145. Accordingly, since not all of the patents had expired as at July 2012, Regency had unlawfully terminated the licence agreement.
Litigation funding clauses
Austral Masonry (NSW) v Cementech
The Austral Masonry decision in the Full Court of the Federal Court of Australia served as a reminder for patent licensors and licensees alike to think very carefully when negotiating litigation funding clauses, to ensure that a party is not obliged to fund a litigation that it does not want to proceed. Unfortunately for the licensee in the Austral Masonry case, the wording of litigation funding provisions imposed an obligation which the licensee could not avoid. The licensee was obliged to fund a patent infringement proceeding that it did not want to proceed. Austral Masonry involved a patent licence from Cementech Pty Ltd to Austral Masonry (NSW) Pty Ltd to exploit a patent for 'a matrix of masonry elements and method of manufacture thereof'. Cementech alleged that a third party, Adbri Masonry Pty Ltd, had infringed the patent. The licence agreement between Cementech and Austral established a code in respect of the distribution as between Cementech and Austral of the costs burden and any proceeds of litigation commenced to protect the patent during the term of the licence agreement. Cementech launched proceedings against Adbri during the term of the licence agreement with Austral, and sought a declaration from the Court that Austral was obliged to pay Cementech one half of the costs incurred by Cementech in that proceeding. Austral denied liability to Cementech on two primary arguments:
- first, that subclause 9.2(b) could not be enlivened as Cementech had never received an Infringement Notice from Austral; and
- secondly, that, although Cementech launched proceedings during the term of the licence agreement, the obligation on Austral to pay the costs to Cementech could not survive the expiry of the licence agreement (which had occurred by the time of this court hearing).
Austral lost on both arguments. The Court held that:
- subclause 9.2(b) was not conditional on an Infringement Notice being served on Cementech; and
- it must have been in the common contemplation of the parties that Cementech might commence proceedings during the term of the licence agreement that would continue after the expiry of the term. As such, the obligation on Austral to pay a contribution towards the costs incurred by Cementech survived the expiry of the licence agreement.