Australian policy makers should amend section 145 of the Patents Act to address the uncertain application of the provision and its potential circumvention in relation to patent pool licence agreements

A recent Federal Court ruling by Justice Flick has provided judicial guidance on whether a licence can be terminated when any one of the patents it covers expires. However, broader issues still need to be considered. 

In the case of MPEG LA LLC v Regency Media [2014] FCA 180, Justice Flick ruled that all the Australian patents for the “inventions” it covered would need to expire before the MPEG licence agreement could be terminated under section 145 of the Patents Act. Under section 145, a contract relating to a patent licence can be terminated early by a licensor or licensee when all the patents by which the invention was protected cease to be in force (for example, where they expire). 

Regency Media had argued that each of the licensed patents related to a separate “patented invention” and the agreement could be terminated upon expiry of any Australian patent.

But Justice Flick accepted MPEG’s argument that the licensed patents covered three separate “inventions” related to video data compression and transport, and held that the agreement could not be terminated while any of those patents were still in force.

He ruled that the commercial agreement and royalty streams for the patents should remain in force.

Justice Flick’s ruling highlights two key issues:

  • the need to carefully structure patent licences to avoid the risk of the licences being terminated early; and
  • the need for legal reforms that ensure section 145 is not circumvented where patents are pooled into single licences.

Defining the “invention”

In identifying whether all of the relevant patents have expired, Justice Flick’s approach focuses on the way in which licence agreements identify and describe an “invention” or “inventions”.

A licensor granting a licence of Australian patents should consider ensuring that the contract identifies an “invention” that is protected by a greater number of the licensed patents. This will delay a licensee’s ability to terminate under section 145.

However, this strategy will only work if the “invention” falls within the scope of the claims of each of the patents (i.e. the patents relate to the same product or technology).

Separate agreements?

In MPEG v Regency Media, the challenge to MPEG’s royalty stream might have been avoided if each “patented invention” had been the subject of a separate agreement, or at least severable licences and royalty streams.

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

  • both Australian and foreign patents are licensed (discussed below);
  • different patents or families of patents are licensed for two or more inventions; or
  • the contract deals with matters other than the patent licence -- for example, know-how licences, trade mark licences or material supply arrangements.

Bundling Australian and foreign patents

While Justice Flick simply refers to expiry of all the patents relating to the “patented invention”, it is fairly clear that he is referring to all Australian patents. This raises the difficult question of when a party can terminate a licence that includes both Australian and foreign patents under section 145.

While this was not the key issue in this case, Justice Flick seems to have accepted that there is a right to terminate the agreement when all of the relevant Australian patents expire even if there are foreign patents still in force (i.e. section 145 applies to “bundled licences”). The same position is likely to apply to licences of both patents and know-how, often referred to as “mixed licences”.

A licensor licensing more than a single Australian patent will be in the best position to protect its royalty stream if it grants licences under separate agreements or, at least, under a single agreement with separate and severable licences and royalty streams that are not then at risk of all being terminated when the relevant Australian patents expire.

Can early termination be avoided by patent pooling?

There is a growing trend of patent owners “pooling” patents that apply to particular technologies and licensing them together to third parties, often to implement an industry standard. It’s convenient and efficient and avoids the need for licensees to enter into many separate licences. For example, MPEG acts for, and grants licences or sub-licences on behalf of, a number of patent owners.

The licensing of patents owned by multiple parties under a single contract limits the achievement of the objective of section 145 because owners of expired patents can (in certain cases) still receive royalties when patents bundled with theirs remain in force.  

Indeed patent pooling arrangements (including the MPEG arrangement) have faced significant criticism in the United States over the continued collection of licence fees in circumstances where many of the patents in the patent pool have expired. 

Section 145 was drafted before “patent pooling” was widely used in Australia. Justice Flick queried whether it should be amended to address this approach to licensing.

Key messages

Justice Flick’s decision reinforces the need to consider the risk of early termination under section 145 when entering into patent licences.

“Invention(s)” need to be well defined and different sets of rights -- local patents, foreign patents, know-how and others – should be separated. 

Parties to existing patent licences may wish to review the risk of, or opportunity for, early licence termination.

For policy makers, it highlights the need to amend the provision to account for “patent pooling” and address the uncertainty it introduces into contracts which include licences of Australian patents.