The Full Federal Court has determined that a licensee to a licence agreement is liable to contribute towards the licensor’s costs of patent infringement proceedings initiated by the licensor during the term of the agreement, despite the agreement having expired.  The case of Austral Masonry (NSW) Pty Ltd v Cementech Pty Limited [2014] FCAFC 72 demonstrates the importance of careful drafting when preparing a licence agreement, and parties fully understanding their obligations including continuing liabilities after the licence term expires.

The Parties and Background

Cementech Pty Ltd (Cementech) and Austral Masonary (Austral) were parties to a licence agreement (Agreement).  The Agreement allowed Austral to make exclusive use of a patent and relevant intellectual property (Patent) owned by Cementech for a period of 4 years.  The Agreement contained specific provisions to deal with infringements of the licensed Patent, including that the parties share the costs and proceeds of any infringement actions.  Before the Agreement had expired, Cementech commenced Patent infringement proceedings against a third party Adbri Masonarty Pty Ltd (Adbri).  A dispute arose between Cementech and Austral as to Austral's continued liability for half of the costs incurred by Cementech in connection with the proceedings against Adbri.

The Agreement

Clause 9 of the Agreement was the pivotal clause.  Relevantly, clause 9.1 required Austral to immediately give written notice to Cementech (Infringement Notice) if it became aware of any actual or threatened infringement of the Patent.

Further, clause 9.2 of the Agreement provided:

  1. Upon receipt of an Infringement Notice [Cementech] may, at its sole discretion, take all steps reasonably required to protect the Intellectual Property from infringement.
  2. In the event that [Cementech] elects to initiate proceedings for prosecuting or defend any Claims with respect to the Intellectual Property, all expenses incurred by [Cementech] in conducting any such proceedings or defending any Claims will be borne by the parties equally and all amounts received (including in respect of costs) from settlements or adjudications will be dealt with in the manner described in clause 9.2(f).

Clause 9.2(f) consisted of a method of distributing any proceeds between Cementech and Austral that may be awarded as a result of the litigation outlined in clause 9.2, including repayment of costs.

At first instance, Justice Stevenson of the Supreme Court of New South Wales declared that Austral was liable for half of Cementech's costs and disbursements which were reasonably necessarily incurred in connection with the Adbri litigation, as and when those costs were incurred.  Austral appealed this decision (and the underlying infringement litigation was also transferred to the Federal Court).

Was Service of an Infringement Notice a Condition to Austral’s liability?

On appeal, Austral contended that the primary judge erred in its finding that Austral was liable to contribute to the Adbri litigation costs pursuant to clause 9.2 of the Agreement.  Austral argued that as Cementech had not received an Infringement Notice from Austral in relation to the Adbri infringement (which fact was agreed), clause 9.2 of the Agreement was not engaged.  There were additional issues before the Full Court on this point including leave to raise this argument, as this issue had not been raised before the trial Judge.  Had it been raised, Cementech would, in the Full Court's view, likely have raised itself issues as to Austral's knowledge as to the Adbri infringement and if, in fact, Austral was in breach of the Agreement by failing to notify.

The Full Court, in any event, considered the argument lacked merit because:

  • The words “[i]n the event that” contained in clause 9.2(b) established a condition that related to the election to initiate proceedings, not the service of an Infringement Notice.  It could have been that Cementech decided to commence proceedings other than on the basis of an Infringement Notice.  Clause 9.2(b) and the apportionment of costs was not, nor expressed to be, conditional upon receipt of an Infringement Notice;
  • The parties had a common interest in protecting the Patent during the term of the Agreement and it was unlikely in the Full Court's view that the parties intended that the costs sharing regime would be dependent on Austral’s awareness of an infringement;
  • Cementech's rights, as the owner of the relevant Patent (in the context of the Patents Act 1990 (Cth) and the terms of the Agreement) afforded it the ability to take infringement proceedings against Adbri regardless of whether Austral, as the licensee, had served an Infringement Notice or not;
  • If infringement proceedings were commenced during the term of the Agreement, clause 9 provided for Austral to have an interest in those proceedings, including proceeds of any settlement and costs recovered (clause 9.2(f));
  • Clause 9 presumed Cementech would be responsible for protecting the Patent, but if it failed to do so, Austral would be entitled to do so and indemnify Cementech in relation to the costs (clause 9.2(e)); and
  • Finally, clause 9.1(b) and Austral's obligation to serve an Infringement Notice for all threatened or actual infringement was not discretionary.  If it was, then perhaps Austral's argument may have had more merit, with Austral in effect being able to decide if it wanted to notify a possible infringement and be involved in any subsequent litigation and be liable for a portion of the costs.

Ultimately, the Full Court considered it was only Cementech's commercial view as to what steps to take to protect the Patent which was relevant.  Austral was bound by that commercial view under the Agreement in respect of any litigation and the payment of its share of costs.  Austral's liability as to those costs could not be avoided merely by a decision not to (or failure to) serve an Infringement Notice.

Did Austral's liability extend past the expiry date of the Agreement?

In relation to clause 9.2(b), Austral sought to argue that any liability as to costs it may have had ended at the expiration of the term of the Agreement.  Austral contended that clause 9.2(b) required further acts of Cementech (the incurring of costs) post expiration and relying on Westralian Farmers Limited v Commonwealth Agricultural Service Engineers Limited (in liq) (1936) 54 CLR 361, as a result no continuing liability for Austral in respect of costs could exist.  Further, the Agreement lacked any express provision that clause 9 survived expiration.  Austral also argued that it was commercially unrealistic that the parties intended that Austral remained liable for costs of litigation when it had no continuing interest in the outcome of the proceeding (or the Patent) as a licensee after expiration of the term.

In contrast, Cementech contended that clause 9.2 comprised a "Code" for dealing with litigation during the term.  Clause 9.2(f) reflected that the parties understood litigation may not be concluded during the term and referred to litigation "commenced" not "completed" during the term of the Agreement.  Contrary to the submission made by Austral, it did have a continuing interest in the outcome of any infringement proceedings because it would be entitled to a share of any awarded damages and/or costs if the claim was successful, and this would be the case after the Agreement expired.  This, Cementech argued, denoted an intention that the clause survived after the Agreement had expired and if clause 9.2(f) survived termination, so did clause 9.2(b).

The Full Court agreed with Cementech and found that the proper construction of clause 9.2 was that clause 9.2(b) would survive expiration of the Agreement if it was engaged during the term and that this was the intention of the parties.

Lessons from the Case

It is imperative that the terms of any Licence agreement are clear and accurately reflect the intentions of the parties.  In relation to clauses surviving termination and how they will apply, this should be expressly dealt with if possible.

Clauses dealing with potential litigation and the parties' ability to control the process need careful consideration.  This should include the respective parties' ability to commence proceedings and liability as to associated costs.  For example, there may be instances where a licensee may not agree there is infringement, or see little merit in proceeding with litigation (as the Full Court noted in this case).  Issues as to commercial interests and outcomes should be given due consideration at the outset.  The Court should not be relied upon to rewrite commercial arrangements between the parties.  Parties will need to express their intentions clearly and be conscious of the practical effect of those agreed matters, whether during the term or after expiration of the Licence agreement.