Terminating patent licences – traps and opportunities for licensees and licensors

Key Highlights:
  • Section 145 of the Patents Act provides that either party may terminate a patent licence on expiry of the licensed patent. The section overrides anything to the contrary in the licence agreement
  • A multi-patent licence cannot be terminated under s.145 until the expiry of all of the licensed patents
  • Patent licences that extend to Australia should be drafted carefully in light of s.145
Termination of patent licences

The question in Regency Media v MPEG LA * was whether s.145 permitted the licensee to terminate a licence to multiple patents upon the expiry of some (but not all) of the licensed patents, or whether termination was only possible after the expiry of all the licensed patents.

The licence agreement in question related to a pool of “standards essential” patents for MPEG audio-visual encoding technology.  Some of the patents in the licence pool had expired, and so Regency Media (the licensee) argued that it was entitled to terminate the MPEG licence under s.145.

The decision

At first instance, the Court held that the reference to “patented invention” in s.145 means an invention as identified in the licence contract.     On appeal, the Full Court accepted Regency Media’s argument on this point and held that “patented invention” means an invention as claimed in a single patent.

On a literal reading of s.145, this would suggest that a multi-patent licence could be terminated upon the expiry of any one of the licensed patents.  However, the Full Court relied on the Acts Interpretation Act 1901 (Cth). That Act provides that in the absence of a contrary intention, when interpreting legislation any word expressed in the singular includes the plural and vice versa (i.e. “patent” can be read as “patents”).

Regency argued that the wording of s.145 expressly incorporates both the singular and plural, so the Acts Interpretation Act should not modify the literal meaning of the section.

The Full Court was not convinced, and found that s.145 permitted a multi-patent licence to be terminated only when all of the licensed patents had expired (by reading “invention” as “inventions”).

Commercial considerations

The Full Court was concerned that permitting termination of a multi-patent licence after the expiry of any one the licensed patents would lead to uncommercial outcomes. The Court gave the example of a licensee of a machine who might be left “without the benefit of a licence where only one patent for one of the myriad of inventions the subject of the licence necessary for the working of the machine… had expired”.

It is common for patent licences to form part of a wider transaction involving other IP rights, or the supply of products or services. A company might be licensed to sell a patented product under a registered trade mark, or to use confidential know how in addition to patented technology.   The Full Court’s concerns in relation to the position of a licensee would apply equally to those situations.   On its face section 145 would allow termination of a hybrid licence involving a patent and other IP, despite the other IP remaining on foot after expiry of the licensed patent. But that issue was not considered by the Court.

The Full Court was also influenced by the fact that the expiry dates of patents will generally be known at the time a patent licence is negotiated and the parties can take this into account when negotiating the licence – for example by providing for royalty reductions as patents expire.

The Full Court’s approach provides opportunities for patentees to secure royalty streams beyond the life of their core patents. For example, a licence might extend to patented improvements, even if the commercial value of those improvements is minimal, for the sole purpose of extending the licence term.

Section 145 requires that patent licences be drafted carefully. It might be prudent to a separate a hybrid patent and trade mark licence into separate contracts, each capable of independent termination. Royalty obligations might be limited to products that are within the scope of a claim of a current patent. As always, the best approach will reflect the commercial aims of the parties, and whether the agreement is drafted to favour the licensor or licensee.

* Watermark IP Lawyers represented Regency Media in the appeal.