09 March 2014

The Right – Or Not – to Terminate a Patent Licence

Terminate with extreme prejudiceThe Australian Patents Act 1990 contains a provision, in section 145, permitting the termination of a patent licence, by either party, following expiration of a licensed patent.

The existence of this provision may well raise questions for some people.  For example, why would there be an need to terminate a licence after a patent has expired – would the licence not have also expired as a result?  Well, maybe not.  There is nothing to stop parties from entering into contracts with terms that continue beyond the expiry date of a patent. 

Which then raises the question of ‘freedom of contract’, i.e. if someone has signed a licence agreement in good faith, knowing its terms, why should they be granted a statutory right to nullify that agreement?

Last week, this question was addressed in a decision of Justice Flick in the Federal Court of Australia: MPEG LA, L.L.C. v Regency Media Pty Ltd [2014] FCA 180, at [15]

That object and purpose, at least in part, is to prevent the holder of a patent from taking potentially unfair advantage of the statutory monopoly conferred by a patent after it has expired. Like s 144, s 145 is aimed at anti-competitive conduct. A licensee wishing to use a patent may have no commercial option other than to enter into an agreement with a patent holder to pay royalties whilst the patent remained in force and for a period of time thereafter.

The issue in last week’s decision was, more specifically, whether or not s 145 permits a party to terminate a licence covering multiple patents when some, but not all, of those patents have expired.  The court ruled that it does not.

Disclaimer

This is one of those cases on which I cannot comment freely.  Regency Media Pty Ltd is a Watermark client with which I have worked closely for a number of years.  The decision remains subject to possible appeal by either party.

However, section 145 has never before been considered by the courts in Australia.  As a result of its rather unusual wording, the question of how it applies to licences covering multiple patents has been considered uncertain by many patent attorneys, IP lawyers and licensing professionals.  The decision is important because, if it stands, it will have an impact on the way patent licence agreements are drafted in the future.

Background

MPEG LA operates a patent pool relating to the MPEG-2 digital video compression standards.  In other words, it sublicenses a bundle of patents owned by a variety of companies, including Sony, Philips, Samsung, Panasonic and many others, under a single licence agreement, to licensees such as Regency Media.  Many of the patents date from the early 1990’s, and have therefore recently begun to expire.

Section 145 provides that:

(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)  Subsection (1) applies despite anything to the contrary in that contract or in any other contract.

The interpretation of the highlighted terms was at the heart of the dispute between the parties. 

The Competing Approaches of the Parties

I will use the court’s words, to avoid allowing my own views to colour my expression of the parties’ positions:

[32] … Regency Media contended that each of the patents the subject of the PPL Agreement constituted a separate “patented invention” and that the PPL Agreement could be terminated once any one of those patents have ceased to be in force.

[34] Contrary to the approach of Regency Media, MPEG contended that there were three “patented invention[s]”, namely the three matters the subject of the grant of rights identified in clauses 2.1, 2.2 and 2.3 of the PPL Agreement being:
  1. the MPEG-2 Decoding Products;
  2. the MPEG-2 Encoding Products; and
  3. the MPEG-2 Packaged Medium.
The court also noted, at [36], that:

Each of the competing approaches, with respect, has considerable merit. Each approach finds support in the statutory language employed in the Patents Act and the objects and purposes sought to be achieved by provisions such as s 145.

Judgment – No Right to Terminate

Despite the ‘considerable merit’ of both approaches, the court ultimately decided in favour of MPEG LA.  Again, I will simply quote the judge’s reasoning without further comment:

[40] Accepted is the submission of MPEG that each of the three matters identified in clauses 2.1, 2.2 and 2.3 of the PPL Agreement constitutes an “invention”. Each of these three matters is a “manner of new manufacture” for the purposes of the definition of an “invention” in Schedule 1 of the Patents Act. The definition is directed to the subject matter of the “invention” and not to the number of patents which may protect the “invention”. And a “manner of new manufacture” includes an “artificially created state of affairs” and new processes…. The term “patented” as used in s 145 thus describes the “invention” to which it refers.

[41] Rejected is the submission of Regency Media that the phrase “patented invention” refers to each “invention” embraced by a single patent. Also rejected is the attempt on the part of Regency Media to explain the reference in s 145 to “all the patents” as a reference to the so-called “combination patent”, namely those patents which may include as part of the patented invention an integer or element which itself is patented. … The prospect that a patent may itself include a further patented product provides no reason to construe the phrase “patented invention” in a confined manner and in a manner which would not also embrace an “invention” protected by one or more patents. ….

[42] The conclusion, it is further considered, does no disservice to the object and purpose of s 145. It may well be queried whether provisions such as s 145 were drafted at a time when a host of patents may be pooled and thereafter administered by a “Licensing Administrator”. If so, it may be prudent for consideration to be given to amending s 145 to expressly address what may be a comparatively more recent manner in which a pool of patents may be jointly administered. But whether that is so or not, s 145 must be applied to the facts of the present case. And, where a construction of that provision is available, which:
  1. gives effect to the commercial agreement between the parties;
  2. deprives a licensee of exploiting a change in commercial circumstances so as to permit the termination of an agreement which was otherwise seen at the outset to be of commercial utility to it for the term of the agreement; and
  3. continues to preserve the royalty payments to subsisting patents
the Court should prefer that construction.

Conclusion – Implications for Drafting Patent Licences?

Assuming this decision stands, it should be studied closely by licensing professionals drafting contracts relating to licences covering multiple patents.

On the court’s reasoning, it appears that the scope of a ‘patented invention’ in s 145 is to be determined from the circumstances in each instance, and in particular from the contract.  In this case, for example, the court found that the MPEG-2 patent pool licence agreement related to three ‘patented inventions’, identified in clauses 2.1, 2.2 and 2.3 of the agreement.  This suggests that the potential effect of s 145 on a licence agreement can, in fact, be controlled by careful drafting.

For obvious reasons, I may not be at liberty to respond to comments on this post.  But by all means feel free to talk among yourselves!

Image Copyright (c) 123RF Stock Photos

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