It is very common to establish a corporate structure including two or more entities, in which one entity holds the assets of the business, while another entity acts as the operating or trading company. I am not a corporate lawyer or a financial advisor, so I do not propose to go into the pros and cons of such arrangements in general. The only important point to make for the purpose of this article is that ‘assets’ generally include intangible assets, and that intangible assets include patents.
This raises the issue of authorisation: if one entity owns a patent, and a different entity exploits the patented technology, then the operating entity must be licensed by the holding entity. It may be that the two entities are companies with common ownership and/or directorship, in which case the terms of the licence may not be set out fully (or perhaps even at all) in writing. It is not uncommon for an operating company to carry on business without any formal written licence agreement with its related holding company, with the effect that an ongoing royalty-free licence to exploit the patent rights would usually be implied from the circumstances.
There are all sorts of reasons why this is an undesirable situation. For example, a formal licence agreement can set out in detail what happens to the licence in the event that the operating company is sold or becomes insolvent. An implied licence, or verbal agreement, will never be sufficiently clear to address such situations without ambiguity.
However, I am concerned here with one very specific issue that arises under the Australian Patents Act 1990. Section 120 of the Act provides that ‘infringement proceedings may be started … by the patentee or an exclusive licensee.’ Thus, if the operating company is not an exclusive licensee it will not have standing to sue for infringement. An exclusive licence is one which grants to the licensee a right to exploit the patented invention to the exclusion of all others, including the patentee. By comparison, a licence limited to a single licensee where at least some rights are retained by the patentee is known as a sole licence, while a non-exclusive licence leaves the patentee free to grant further licences to other parties.
In the case of the holding/operating company structure, the operating company is likely to be the entity suffering damage as a result of infringing activities, and with the funds to take action. Thus an inability to do so on its own behalf may place it at a disadvantage.
This issue arose recently in a series of decisions issued by Justice Middleton in the Federal Court of Australia, Damorgold Pty Ltd v JAI Products Pty Ltd  FCA 150, Damorgold Pty Ltd v JAI Products Pty Ltd (No 2)  FCA 377 and Damorgold Pty Ltd v JAI Products Pty Ltd (No 3)  FCA 651. It is the third of these judgments that relates specifically to the issue of standing. Despite what might be described as some degree of informality in past licensing arrangements, Justice Middleton was prepared to find that Damorgold’s operating company, Vertilux Corporation Pty Ltd, had been, at all relevant times, an exclusive licensee of the patent at issue.
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