In this edition:
- A recent decision of the US Supreme Court confirmed that the inventor of a web-slinging glove is not entitled to demand royalties from patent licensee Marvel following the patent’s expiry.
- An October 2014 judgment by the Supreme Court of Victoria illustrated that there are situations where royalties remain payable even after the patents expire, if a broader licence has been granted.
- A December 2014 decision from the full Federal Court of Australia clarified a party’s right to terminate a licence agreement when the patents licensed expired.
June 2015: US court confirms that royalties not payable for patent licence after patent expiry
In Kimble v Marvel Entertainment (2015), the US Supreme Court decided that it was bound by a 1960s era decision that found that royalties could not be demanded by a patent holder when the patent expired. In 1990, Mr Stephen Kimble invented and patented a toy glove that allows its wearer to shoot pressurised foam from the palm of the hand, akin to Spider-Man’s web-slinging ability. Kimble licensed his invention to Marvel Entertainment (“Marvel”) in exchange for Marvel’s running payment of a royalty of 3% on sales of Kimble’s glove with no end date.
In 1964, the US Supreme Court held that a patent licensee was no longer bound to pay royalties once the patent expired. Marvel learned of this decision and sought a declaratory judgment that it no longer owed royalties to Kimble. The District Court entered judgment for Marvel; on appeal, the Ninth Circuit reluctantly affirmed the District Court’s decision. Kimble petitioned for the Supreme Court to hear a single question: “Whether the Court should overrule” the earlier decision.
In a 6-3 decision, the Supreme Court found that the 1964 decision was based on patent law and, in particular, the philosophy that “all patents, and all benefits from them, must end when their terms expire”.
October 2014: Supreme Court of Victoria confirms licensee had to pay royalties for broad licence of IP and analogous rights even after patent expiry
In ARB Corporation Limited v Roberts (2014), the Supreme Court of Victoria was asked to construe a sale agreement under which Roberts sold their “Roberts Differential Lock” to ARB Corporation Limited (“ARB”) in exchange for a combination of two lump sum payments and ongoing royalties. The Roberts invented their differential lock to enable 4WD vehicles to achieve better traction on rough terrain. The parties entered into the licence agreement in 1987.
The agreement provided that ARB paid ongoing royalty payments based on ARB’s net sales of the “Products”, which the agreement defined as “the differentials manufactured pursuant to the patents specified” in the agreement. The agreement identified four pending patent applications in the USA, Australia, Europe and Japan as the patents the subject of the licence agreement. The agreement did not specify an end date for the payment of royalties.
The court held that, by virtue of the definition of “patent” in the agreement, the parties expressly contemplated varying expiry dates for the patents, assuming that they were granted (as they were not granted as at the date the parties executed the agreement). Further, the court held that ARB acquired (in addition to the patents) copyright, confidential information, trade secrets, data, formula, etc, pertaining to the “Roberts Differential Lock”.
Additionally, the court found that, if ARB was only required to pay royalties in relation to the patents, then it would not have been obliged to pay royalties until at least one of the patent applications had been granted. The court concluded that the parties intended under the agreement that as soon as ARB sold products incorporating the licensed technology (and not just the patent), ARB was required to pay the royalty due under the agreement in respect of the licensed technology.
The court rejected ARB’s argument that a decision upholding an obligation to pay royalties post-expiry of the patents meant that ARB would pay royalties forever. The court held that ARB was only obliged to pay royalties when it sold products incorporating the Roberts Differential Lock. If it did not sell any products, it was not liable to pay royalties.
As Roberts and ARB entered into a sale agreement before the current patent legislation was passed, the court was not required to consider an argument made under section 145 of the Patents Act 1990 (Cth). In MPEG LA LLC v Regency Media Ltd (2014), the Full Federal Court of Australia was required to construe a “Patent Portfolio Licence Agreement” entered into between MPEG LA LLC (“MPEG”) and Regency Media Ltd (“Regency”) under which MPEG licensed a suite of patents to Regency in exchange for Regency’s payment of royalties to MPEG.
December 2014: Full Federal Court confirms when a party can rely on a statutory right of termination for expired patents
Section 145(1) of the Patents Act 1990 (Cth) provides that “a contract relating to a licence to exploit a patented invention may be terminated by either party, on giving three 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”. Section 145(2) holds that section 145(1) applies notwithstanding anything to the contrary in the contract.
At first instance, the Federal Court of Australia found that section 145 required that, where an agreement covered multiple patents, all the patents had to expire before a party could exercise a statutory right to terminate the licence agreement. The court’s decision turned on a complex construction of the relevant statutory provision and an estimation of the parties’ commercial agreement.
Regency appealed the decision to the Full Federal Court. In December 2014, the Court partially upheld Regency’s appeal, finding that the original decision incorrectly construed the provision. The Court held that the term “patented invention” (which is undefined in the Patents Act) simply means that a patent has been granted for an invention.
However, the Court agreed with MPEG’s argument that the Acts Interpretation Act 1901 (Cth) applied in this situation so that words in the singular number in another piece of legislation (such as the Patents Act 1990 (Cth)) include the plural (and vice versa).
Accordingly, the Court held that, where a licence agreement covers multiple patents, the statutory right to terminate the agreement could not apply until all patents by which the inventions to which the agreement related had either expired or had otherwise ceased to be valid.