Insights / April 4th, 2016

Australian Patent Licences - Surprise Exit

A right to terminate an Australian patent licence may come as a surprise to patent licensors and licensees and their advisers. The ability to exit a licence agreement may arise under section 145 of the Australian Patents Act.

A decision of the Full Court of the Federal Court of Australia has examined the application of section 145. A US company, MPEG had licensed a portfolio of patents to Regency Media. The portfolio included Australian patents and foreign patents over a group of inventions, all of which were required to exploit the collective intellectual property. At a point during the term of the licence agreement when some but not all of the Australian patents had expired, Regency purported to terminate the licence agreement pursuant to section 145 of the Patents Act.

There was no other basis for Regency to terminate the agreement and it would have to keep paying the royalties required under the agreement if, contrary to its view, the termination right in section 145 had not become available.

Section 145 says:

  1. A contract relating to the lease of, or a licence 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 the patents, by which the invention was protected at the time the contract was made, have ceased to be in force.

  2. Sub-section 1 applies despite anything to the contrary in that contract or in any other contract.

The Federal Court decision turned mainly on some statutory interpretation issues but the judgment also displayed an appreciation of the commercial realities involved in the application of the section.

It is not uncommon for IP licence agreements to grant licence rights in respect of a portfolio of patents, some of which may be Australian patents and some of which may be foreign patents. The patents may cover different inventions, all of which are required for a licensee to properly exploit the licence. The MPEG – Regency Media licence agreement was an example of this. The licence agreement may also grant licence rights in respect of related trade marks and/or other IP rights. Thus, if the section 145 termination right becomes available to a party, that could lead to unexpected results and commercial outcomes that either or both of the parties did not expect or intend.

Based on the Regency Media decision, the following points can be made:

  • If all of the Australian patents that are licensed under the agreement expire, either the licensor or the licensee can terminate the agreement on giving 3 months’ notice. This will be so even if foreign patents are licensed under the agreement and those foreign patents are still in force.

  • Even if the contract is expressed to be subject to other than Australian law, the termination right under section 145 can be relied upon when all relevant Australian patents have expired, notwithstanding that there is no right under that other jurisdiction’s law to terminate the agreement.

  • The section 145 termination right does not arise if some of the Australian patents licensed by the agreement are still in force.

  • The ramifications of termination may be beneficial or commercially unpalatable, depending upon one’s perspective.

    • A licensee may lose the right to use trade marks or other IP rights that had been licensed under the agreement.

    • Particularly if the licence had been exclusive, the licensor may then enter into other arrangements to derive revenue from the invention(s) that it could not pursue while the agreement was in force.

    • A licensor may lose a royalty stream from the licensee but may have an ability to prevent a licensee exploiting inventions in jurisdictions out of Australia where the licensor has extant patents.

    • A licensee may cease to have to pay royalties and may be able to exploit the inventions unfettered in Australia, since the Australian patents will have expired, but may lose the right to exploit inventions in other jurisdictions in which patents are still in force.

  • Even if the licence agreement (or some other agreement) says that the licence agreement cannot be terminated when all of the licensed Australian patents expire, such a provision will not prevent the right of termination being exercisable under section 145 and that termination being upheld by an Australian court. If the agreement is expressed to be subject to the laws of another jurisdiction, that may give rise to some very interesting (read “difficult”) choice of law and enforcement issues.

Licensors, licensees and their legal advisers need to very carefully consider how best to prepare agreements that grant licences over Australian patents. They need to consider and address the commercial outcomes in the event that a party becomes entitled to terminate an agreement pursuant to section 145. One option may be for the parties to enter into an agreement that licences just the Australian patents and another agreement that licences other IP assets. In that case, the interplay between the two agreements would have to be appropriately documented.

If you need assistance in relation to IP licensing or a review of existing arrangements, please contact us.

Regency Media Pty Ltd v MPEG LA, L.L.C. [2014] FCAFC 183