Section 145 of the Patents Act is intended to prevent patentees gaining de facto patent extensions by licensing their patent for a period that exceeds the term granted under the Act. It provides that a “contract relating to” a “licence to exploit” a “patented invention” may be terminated by either party on three months’ notice once “the patent, or all the patents by which the invention was protected” cease to be in force (for example, where they expire). Section 145 applies despite anything stated to the contrary in the contract.

The scope of the provision has been somewhat of a mystery to patentees and licensees. Until Justice Flick’s decision in MPEG LA LLC v Regency Media Pty Ltd [2014] FCA 180 was handed down on 6 March 2014, there was no judicial guidance on the provision in Australia.

In 2009 MPEG and Regency Media had entered into a Patent Portfolio Licence Agreement. The agreement included a licence covering numerous patents in various jurisdictions relating to the MPEG-2 Standard, an international standard for video data compression and data transport. MPEG administered a patent pool owned by numerous patentees. Royalties were payable by Regency under the licence at a decreasing rate (corresponding to the expiry of patents).  Following the expiry of certain Australian patents, in July 2012 Regency purported to terminate the agreement under section 145.

The interpretation of the phrase “patented invention” in section 145, which is undefined in the Patents Act, was key to Justice Flick’s decision.

Regency argued that each of the patents related to a separate “patented invention” and therefore the agreement could be terminated under section 145 upon expiry of any one of the licensed Australian patents. MPEG argued that the patents related to three “inventions”, being the three separate products which were the subject of three separate licences granted to Regency Media in the agreement: Decoding Products, Encoding Products and a Packaging Medium.

Justice Flick accepted MPEG’s submission that each of the products was a “patented invention”.

He found that a right to terminate the agreement under section 145 would only arise where all patents for a particular “patented invention” had expired. In this case, since each of the three licences granted in respect of the three patented inventions were granted under all of the “MPEG-2 Patent Portfolio Patents”, the right to terminate the agreement would only arise where all of the Australian “MPEG-2 Patent Portfolio Patents” had expired.

While Justice Flick acknowledged that each party’s approach had considerable merit and found support in the language used in the Patents Act, he held that where a construction is available that is consistent with the commercial agreement and preserves the royalty stream for patents that remain in force, then that construction should be adopted. He observed that, “unless confined to the true area or scope of [its] intended operation, [section 145 has] the potential to work commercial unfairness – to both the patentee and a licensee”.

The approach taken by Justice Flick suggests that the Court will be guided by the way in which the “invention” or “inventions” are identified in the agreement when assessing whether all the patents protecting the invention have expired and the agreement may be terminated under section 145.

A patentee granting a licence in respect of multiple Australian patents may wish to consider ensuring that the contract identifies an “invention” which is protected by a greater number of the licensed patents in an effort to delay a licensee’s ability to terminate under section 145. However, this strategy will only be effective where the “invention” actually falls within the scope of the claims of each of the patents (i.e. the patents relate to the same product or technology).

Deeper consideration needs to be given to the structuring of patent licences where:

  • both Australian and foreign patents are licensed; or
  • different patents or families of patents are licensed in respect of two or more inventions.

While not before Justice Flick for determination in this case, these are scenarios where both a licensor and a licensee may find themselves exposed to the risk of early termination of the contract unless the licence is carefully drafted to try to address this risk.

We hope to soon see legislative or further judicial consideration of section 145, which remains a trap for the unwary licensor and licensee.