Australia: Full Court takes a non-literal approach to s145 of the Patents Act - commercial sense prevails

In March last year we reported on a decision by Justice Flick of the Federal Court in MPEG v Regency Media [2014] FCA 180. Our article can be found here. This was the first occasion in which an Australian Court had considered s 145 of the Patents Act which is intended to prevent patentees from gaining "de facto" extensions of patent term by licensing a patent for a period that exceeds the term granted under the Act.

The Full Court (Bennett, Nicholas and Pagone JJ) has now unanimously upheld Justice Flick's finding that the licence between Regency and MPEG was not terminable ( Regency Media Pty Ltd v MPEG LA, L.L.C. [2014] FCAFC 183). However, the Full Court rejected Justice Flick's reasoning in favour of an alternative construction of s 145.

BACKGROUND

Section 145 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.

MPEG and Regency had entered into a licence agreement covering numerous patents in various jurisdictions relating to technology for video data compression and data transport. The technology, the MPEG-2 standard, is widely used in the industry. Certain Australian patents expired in July 2012 and on this basis Regency purported to terminate the licence agreement under s 145.

JUSTICE FLICK'S DECISION

Justice Flick accepted MPEG's submission that each of the "products" defined in the licence agreement was a separate "patented invention" and that the right to terminate under s 145 would only arise where all patents relating to that product had expired. He rejected Regency's argument that each patent related to a separate "patented invention" and the right to terminate arose upon the expiry of any Australian patent.

THE ARGUMENTS ON APPEAL

On appeal Regency characterised Justice Flick's decision as finding that the "patented invention" in s 145(1) was defined by the terms of the licence rather than the Act. Regency contended that the words of the Act and the specification of any patent granted under it should enable a Court to identify the patented invention rather than the terms of the licence.

Regency argued that for commercial and policy reasons a licensee should not remain bound by a licence (and the obligation to pay royalties) where an invention the subject of the licence is no longer the subject of a subsisting patent. Regency also argued that the patentee is not unfairly treated if the licence for subsisting patents is terminated, as the patentee can still sue for infringement of any patent that remains in force.

MPEG maintained its primary submission that "patented invention" in s 145 means the article protected by the patents as defined in the licence. MPEG advanced an alternative submission, based on s23(b) of the Acts Interpretation Act 1901 (Cth), that "a patented invention" should be taken to include the plural (i.e. "patented inventions").

THE FULL COURT'S DECISION

The Full Court accepted Regency's argument that "patented invention" is an invention in respect of which a patent has been granted under the Act and cannot be determined by reference to the terms of the licence in question.

However, the Court accepted MPEG's alternative submission that the reference to "a patented invention" should be taken to include the plural, finding that a licence may only be terminated where all of the (Australian) patents that are the subject of the licence have ceased to be in force. The Court considered that this approach was consistent the commercial reality that licences may include multiple patents and that parliament would not have intended s 145 to produce uncertainty (for both licensees and licensors) in relation to the duration of such licences.

Interestingly, on the commercial and policy issues, the majority recognised the "lack of commercial reality and potential unfairness" arising from Regency's proposed interpretation of s 145 and noted:

• a licensee ought to negotiate licence fees which take account of the fact that licensed patents may expire (or be revoked) during the term of the licence
• on Regency's proposed interpretation:
• a licensor could terminate a licence early and a licensee who wished to continue exploiting the remaining licensed patents would need to negotiate a new licence or face infringement proceedings
• parties would need to contract separately for each patent comprising the licensed technology, which is likely to create a significant commercial burden

WHAT DOES THIS MEAN FOR PATENT LICENCES?

The Full Court's reasoning provides some certainty for parties to patent licences as to the duration of the licence. That is, no right to terminate will arise under s 145 until all Australian patents the subject of the licence cease to be in force. The Full Court has unanimously rejected Justice Flick's approach that regard should be had to the way in which the licence defines the invention. It followed then that there was no need to consider, as Justice Flick had, whether the claimed invention was patentable under s 18(1) of the Act.

The Full Court's construction of the phrase "patented invention" as including the plural is satisfying because (i) the meaning is consistent with the meaning of the phrase as used elsewhere in the Act and (ii) it is a commercially sensible approach which avoids the uncertainty that Regency's construction would create (for both licensees and licensors) in relation to the duration of licences.

However, one difficulty with this approach is that a licence covering two unrelated articles, each covered by different patents, may not be terminated despite the expiry of all patents relating to one article. Rather than defining the invention broadly (in the manner suggested by Justice Flick's approach), parties could seek to prolong a patent licence by including one or more Australian patents for an unrelated article. Licensors and licensees ought to consider whether it is in their interests to have separate licence agreements for patents for unrelated articles (rather than licensing them under one licence agreement).

Finally, while not before the Full Court in this case, there remains a risk of early termination of licences where a patent licence covers both Australian and foreign patents or Australian patents and other IP rights (e.g. know-how). To avoid uncertainty, careful consideration should be given to the way in which these licences are structured.

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