License Agreements for Patent Pools: licensees beware

Dr. Victoria Longshaw and Dr. Elizabeth Houlihan

A recent case before the Full Bench of the Australian Federal Court of Australia, Regency Media Pty Ltd v MPEG LA., L.L.C. [2014] FCAFC 183, is a cautionary tale for licensees entering into a License Agreement for a Patent pool which includes Australian Patents.

In this case, the Court confirmed that a licensee will only be statutorily entitled to terminate a Patent License Agreement in Australia when all of the Patents described in the Agreement have ceased.

The case involved an appeal from MPEG LA., L.L.C. v Regency Media Pty Ltd [2014] FCA 180, in which a licensee, Regency Media Pty Ltd (“Regency Media”) unsuccessfully relied on Section 145 of the Patents Act 1990 (Cth), and was found to have unlawfully terminated a Patent Portfolio License Agreement (“the PPL Agreement”).

This Decision provides guidance on how Section 145 of the Patents Act 1990 (Cth) should be interpreted. Until now, the application of this provision in terminating Patent License Agreements has received little judicial consideration in Australia.

The Facts of the Case

MPEG LA., L.L.C. (“MPEG”) represents Patent owners in relation to various Patent pools, such as those essential to a standard, in this case the MPEG-2 Standard, an international standard relating to video data compression and data transport.

MPEG entered into the PPL Agreement with Regency Media in relation to a pool of Patents, the “MPEG-2 Essential Patents.” The Patent pool included Australian Patents and foreign patents. The PPL Agreement provided to Regency Media “a royalty-bearing worldwide, non-exclusive, non-transferable sublicense under all MPEG-2 Patent Portfolio Patents to make, have made, use, and sell, or offer for sale MPEG-2 Decoding Products.” Similar rights were granted with respect to “MPEG-2 Encoding Products” and “MPEG-2 Packaged Medium.”

Importantly, the license was granted for inventions which were described and defined in the PPL Agreement using the terms “MPEG-2 Decoding Products,” “MPEG-2 Encoding Products” and “MPEG-2 Packaged Medium,” rather than by reference to the inventions described in the Patents covering those inventions.

The PPL Agreement provided that Regency Media may “not terminate this Agreement prior to December 31, 2015.” Some of the Australian Patents that were the subject of the license expired prior to 5 July 2012, while others expired between July 2012 and October 2013. A further Patent expired on 17 January 2014, and other Australian Patents were due to expire between March 2014 and January 2015.

After some of the Patents had expired, Regency Media relied on the statutory entitlement of a licensee to terminate a contract which is provided by Section 145 of the Patents Act 1990 (Cth) and purported to terminate the PPL Agreement by way of a letter dated 5 July 2012. This termination was disputed by MPEG as unlawful.

The Earlier case

The issue in dispute was whether Regency Media could rely on Section 145 to terminate the PPL Agreement.

Section 145 provides for the termination of a contract after a Patent ceases to be in force as follows:

“s145    (1) A contract relating to the lease of, or a license 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 of 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.(emphasis added)

MPEG argued that the “patented invention” of Section 145 referred to the “MPEG-2 decoding Products,” “MPEG-2 Encoding Products” and “MPEG-2 Packaged Medium” as described in the PPL Agreement.

Regency Media argued that the term “patented invention” of Section 145 referred to each “invention” embraced by a single Patent.

The Court preferred MPEG’s construction of Section 145. Regency Media was found to have unlawfully terminated the PPL Agreement.

The Appeal Case

Regency Media appealed to the Full Bench of the Federal Court. The central issue to be determined was the meaning of “a patented invention” in Section 145(1).

The Court also had to determine whether entitlement to terminate a License Agreement for a Patent pool arises when (1) all of the Patents in a licensed patent pool expire, or (2) when all of the Patents that protect any one invention expire.

Relying on Section 23(b), together with Section 2, of the Acts Interpretation Act 1901 (Cth), MPEG argued that the singular reference to “a patented invention” includes the plural, “unless the contrary intention appears.”

The Appeal Court disagreed with the finding of the primary Court and accepted Regency Media’s argument that the term “patented invention” of Section 145 is not defined by reference to the PPL Agreement, but instead refers to each “invention” embraced by a single Patent.

However, the Appeal Court also agreed with MPEG’s argument that the singular reference in Section 145 to “a patented invention” includes the plural. Consequently, Section 145 was interpreted as requiring that there may be termination of a contract only after all of the Patents the subject of the contract, that is, all of the Patents for all of the inventions the subject of the contract, have expired.

The Appeal was dismissed and half of the costs of the appeal awarded to MPEG.

Take Home Message

The current position in Australian law is that Section 145 is to be interpreted to mean that a License Agreement may only be terminated under this provision when all of the licensed Patents have expired.

Licensees should be cautious when entering into Patent License Agreements which include the grant of Patent rights in Australia. Where a licensee negotiates a license fee that includes Patents due to expire during the term of the Agreement, the licensee will be taken to have been aware of the expiry of Patents during the term of the Agreement when it negotiated that fee.

Tiered royalty payment structures should be included in any Patent License Agreement entered into in order to take into account Australian Patents due to expire during the term of the Agreement. Otherwise, licensees could well end up paying full royalties under an enforceable Patent License Agreement even after some of the Australian Patents of the portfolio licensed have ceased.