A recent Decision handed down by the Federal Court of Australia on 6 March 2014 has provided some certainty as to how the statutory entitlement provided by Section 145 of the Patents Act 1990 (Cth) to terminate a Patent License Agreement should be interpreted. Until now, this provision has received little judicial consideration in Australia.

In MPEG LA, L.L.C. v Regency Media Pty Ltd, the early termination of a Patent Portfolio License Agreement (“the PPL Agreement”) by Regency Media Pty Ltd (“Regency Media”) was disputed by MPEG LA, L.L.C. (“MPEG”) as being unlawful.

The Court held that a licensee will only be statutorily entitled to terminate a Patent License Agreement in Australia when all the Australian Patents in respect of the inventions described in the Agreement have ceased. A licensee cannot rely on Section 145 to terminate such an Agreement in circumstances where only some of the Australian Patents, which relate to the invention described in the Agreement, have ceased.

This Decision is of relevance to parties entering into royalty-bearing Patent License Agreements, which include the licensing of Patent rights in Australia.

The facts of the Case

The PPL Agreement related to “MPEG-2 Essential Patents” and provided to Regency Media “a royalty-bearing worldwide, non-exclusive, non-transferable sublicense under all MPEG-2 Patent Portfolio Patents to make, have made, use, and sell, or offer for sale MPEG-2 Decoding Products.” Similar rights were granted with respect to “MPEG-2 Encoding Products” and “MPEG-2 Packaged Medium.” Each of the terms “MPEG-2 Decoding Products,” “MPEG-2 Encoding Products” and “MPEG-2 Packaged Medium” were defined in the PPL Agreement

The PPL Agreement also provided that Regency Media may “not terminate this Agreement prior to December 31, 2015.” However, some of the Australian Patents that were the subject of the license expired prior to 5 July 2012, while others expired between July 2012 and October 2013. A further Patent expired on 17 January 2014, and other Australian Patents were due to expire between March 2014 and January 2015.

Regency Media purported to terminate the PPL Agreement by way of a letter dated 5 July 2012, relying on the statutory entitlement of a licensee to terminate a contract which is provided by Section 145 of the Patents Act 1990 (Cth).

The Issue in Dispute

The issue in dispute was whether Regency Media could lawfully rely on Section 145 of the Patents Act (Cth) to terminate the PPL Agreement.

Section 145 of the Patents Act 1990 (Cth) provides for the termination of a contract after a Patent ceases to be in force as follows:

“Section 145(1)        A contract relating to the lease of, or a license 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 of the Patents, by which the invention was protected at the time the contract was made, have ceased to be in force.

(2)     Subsection (1) applies despite anything to the contrary in that contract or in any other contract.(emphasis added)

The parties disagreed on the way in which the statutory term “a Patented invention” should be interpreted. This phrase is not defined in the legislation.

Regency Media submitted that the term “patented invention” meant each of the individual Australian Patents referred to in the PPL Agreement for the purposes of Section 145. This would mean that the phrase “patented invention” would refer to eachinvention” embraced by a single Patent.

In contrast, MPEG contended that the “patented invention” referred to the “MPEG-2 decoding Products,” “MPEG-2 Encoding Products” and “MPEG-2 Packaged Medium” as described in the PPL Agreement.

Although the Court considered both approaches to have merit, it was ultimately concluded that the approach of MPEG to the construction of Section 145 was to be preferred.

The Court held that Section 145 does not permit a contract to be terminated where “all of the Patents, by which the invention [is] protected” have not ceased to be in force.

Emphasising that this provision is aimed at anti-competitive conduct, the Court cautioned against any construction that would permit termination of an Agreement in respect to Patents “which have not ceased to be in force and which would deny to a Patent holder the benefit of the payment of royalties in amounts that have been the subject of the Agreement.

The Court thus held that Regency Media had unlawfully terminated the PPL Agreement. Section 145 was considered as only permitting a party to the PPL Agreement to terminate it where all the Patents in respect of “MPEG-2 decoding Products,” “MPEG-2 Encoding Products” and “MPEG-2 Packaged Medium” had ceased to be in force.

Take Home Message

A licensee entering into a Patent License Agreement, which includes the grant of Patent rights in Australia, should bear in mind the limited circumstances under which the Australian statutory entitlement can be relied upon to terminate such an Agreement as provided by Section 145 of the Patents Act 1990 (Cth).

Licensees should ensure that a tiered royalty payment structure is included in any Patent License Agreement entered into in order to take into account ceased Australian Patents. Otherwise, licensees could well end up paying full royalties under an enforceable Patent License Agreement even after some of the Australian Patents of the portfolio licensed have ceased.