Compulsory patent licences in Australia: time to take another look?

24 May 2021

Compulsory licensing has featured in Australian patent legislation since 1903. Despite this, only a small number of cases in Australia have considered the provisions.

In 2013, the Productivity Commission reviewed the workability and accessibility of the provisions and recommended amendments to clarify their operation. The legislation was amended to accommodate these recommendations in February 2020.

In this article, we take a look at the updated provisions and provide a brief assessment of the potential benefits.

The updated compulsory licensing provisions

Under the provisions,[1] a person may apply to the Federal Court for an order requiring the patentee to grant a licence of a patented invention, known as the ‘original invention’. Subject to the Court’s discretion, such a licence is available in the case of a patent granted for three or more years where:

demand in Australia for the invention is not being met on reasonable terms and the compulsory licence is essential to meet that demand;
the applicant has tried for a reasonable period (and failed) to obtain a licence from the patentee to exploit the invention on reasonable terms and conditions;
the patentee has given no satisfactory reason for failing to exploit the patent to the extent necessary to meet demand for the patented invention in Australia; and
granting a compulsory licence is in the public interest, having regard to the benefits to the public, the commercial costs and benefits to the patentee and applicant and any other matters the Court considers relevant.[2]

Where a compulsory licence is granted for at least two years and the patentee still fails to meet public demand without satisfactory explanation, the licensee may apply for revocation of the patent.[3]

Unmet demand

As mentioned, a compulsory licence will be available where the applicant shows that demand for the invention is not met on reasonable terms. Two cases on a previous version of this requirement provide useful guidance on how it might be satisfied.

In the first case,[4] a compulsory licence was sought for a patent that claimed improvements to a fastener driving tool in the form of a captive-bolt gun. The applicant relied on the fact that, at the time the application was made, the improved gun had not been manufactured or supplied in Australia by the local licensee for ten years.[5] By the time of the hearing, however, the patentee had commenced manufacture of the improved gun in Australia.

The High Court accepted that the patentee had delayed manufacture and supply because it took time and resources to develop a tool that would be appropriate for the Australian market and capable of being manufactured economically in Australia.[6]

The licence was refused primarily because, at the time the application was heard, the patentee was meeting demand.[7] The High Court accepted, however, that the demand for a patented product will not have been reasonably met if, because of a patented product’s superiority over products already on the market, potential purchasers would have bought the superior product if it had been available.[8]

In a second case,[9] the Court found a prima facie case for a compulsory licence where the applicant sought to manufacture and supply two types of hepatitis E diagnostic tests[10] in Australia that would have infringed the respondents’ patents. The Court accepted that demand for the patented invention might not be met despite the fact that the respondents were exploiting the patents to some extent by supplying two types of diagnostic tests in Australia (one of which the applicant also sought to exploit).[11]

Thus, the case indicates that a compulsory licence may be available where the applicant can establish that demand for an aspect of the claimed invention is not being met because the patentee is exploiting one product or process that falls within the claims but not another.

Both of these cases show that:

Whether or not demand has been met is likely to be assessed at the time of consideration (not filing) of the application.
The applicant is able to rely on projected, rather than actual demand.
There may be grounds for granting a compulsory licence where a patentee is not exploiting the invention across the breadth of the claims, even if there is some exploitation.

Remuneration

The compulsory licence must provide for remuneration of the patentee. Where the parties cannot agree, the Court will determine ‘just and reasonable’ remuneration having regard to specified factors.[12] Within certain limitations, the Court also has discretion to determine other terms of the licence provided they are consistent with the public interest.[13]

While there is no guidance on what is ‘just and reasonable’ remuneration in the context of a compulsory patent licence, the ‘just and reasonable’ standard, or other similar standards, are commonly applied by the Courts in other contexts, for example:

the ‘just and reasonable’ amount when assessing the quantum of costs claimed for a costs order;[14]
whether it is ‘just and reasonable’ to extend the limitation period for a personal injury claim founded on negligence, nuisance or breach of duty;[15]
whether a transaction is ‘fair, just and reasonable’ to rebut a prima facie case of unconscionable dealing in equity (such considerations include considering the adequacy of consideration in the transaction);[16]
implying a term in a contract to promote ‘fair and reasonable’ contract performance;[17] and
determining a ‘fair and reasonable’ price for contractual performance under the doctrine of quantum meruit.[18]

While not a patent case, the Winnebago decision[19] provides an example of the Court assessing a ‘reasonable’ royalty based on instructive facts and expert evidence in the context of applying the ‘user principle’ to assess damages for passing off in Australia. Both sides relied on brand licensing experts and the royalty rates in a number of earlier similar licences granted by the Winnebago brand owner to assist the Court in arriving at an appropriate figure.

Considering the licence terms and their respective contexts, the Court preferred an Australian licence between related parties as an appropriate guide. In the result, the Court determined that the 1% royalty rate of that licence (rather than the 5-6% royalty of third party US licences) should be applied to revenue earned by the user in the relevant period of unauthorised use.[20]

It is evident from these examples that, with the expected assistance of independent expert witnesses and taking information from instructive facts, the Court should have little difficulty in applying the ‘just and reasonable’ standard.

Judges will also likely take guidance from the UK judiciary’s approach to the slightly different Fair, Reasonable and Non-Discriminatory (FRAND) standard in the Standard Essential Patent Context.

For example, in Unwired Planet v Huawei, the UK High Court determined a global FRAND licence figure based on factors such as:

the relative strength of the patent portfolio compared to another portfolio for the same technology;
the value of the portfolio’s share in all standard essential patents for the technology; and
the terms in a number of comparable licences.[21]

The Court also rejected that the royalties in a previously commercially agreed licence with Samsung for the same patent portfolio were FRAND given that Samsung was able to secure a more favourable royalty rate when Unwired Planet was in a distressed financial position.[22]

Other terms of compulsory licences

The legislation clarifies matters relating to other terms of the compulsory licence:

The compulsory licence will not be exclusive.[23]
The compulsory licence is only able to be assigned with the enterprise or goodwill in which the licence is exercised. This means that the licence will almost always remain inextricably linked with the licensee business.[24]
The licence may be revoked when it is no longer required. This might occur where the circumstances that justified the grant of the licence have changed and are unlikely to recur; and the legitimate interests of the licensee are “not likely to be adversely affected by the revocation”.[25]
Where seeking a compulsory licence to exploit the applicant’s patented invention that is dependent on the original invention, the applicant may be required to cross-license its dependent patents.[26]

Opportunities

Naturally, there will always remain challenges in the concept and implementation of forcing a non-cooperative party to grant a licence on commercial terms. Nevertheless, the option of pursuing a compulsory licence is worth considering given potential strategic benefits.

The threat of a compulsory licence application may bring a patentee to the negotiating table given that patents subject to a compulsory licence may be revoked where the patentee fails to exploit its invention two years after the grant of the licence.[27]

Further, a compulsory licence application may be a more appropriate (and potentially, cost-effective) alternative to seeking to invalidate a patent that would be otherwise infringed, or an important additional claim in such proceedings.

Given these potential benefits for those involved in IP commercialisation and patent disputes, compulsory licences are now worth another look.

^[1]^{The provisions are contained in Chapter 12 of the Patents Act 1990 (Cth) and include both general compulsory licensing provisions and provisions specific to the licensing of pharmaceutical inventions for manufacture for export. This article will focus on the general provisions.}
^{[2] The court may also grant a compulsory licence where it is satisfied that the patentee has engaged in restrictive trade practices (contravening Part IV of the Competition and Consumer Act 2010) but this is beyond the scope of this article.}
^{[3] Patents Act 1990 (Cth), s 134; Patent Regulations 1991 (Cth), r 12.2.}
^{[4] Fastening Supplies Pty Ltd v Olin Mathieson Chemical Corp (1969) 119 CLR 572.}
^{[5] Ibid, 576.}
^{[6] Ibid, 577.}
^{[7] Ibid, 582. The Court was also of the view that the applicant did not have the resources or skills necessary to meet demand for the patented invention in Australia.}
^{[8] Ibid, 575.}
^{[9] Amrad Operations Pty Ltd v Genelabs Technologies Inc [1999] FCA 633. The context was that of an application for service out of the jurisdiction, so the decision is a limited guide.}
^{[10] Specifically, an HEV IgM diagnostic assay in ELISA and ICT format.}
^{[11] The patentee was exploiting an HEV IgG diagnostic assay and the ELISA format of the HEV IgM diagnostic assay (although only in one hospital in Sydney).}
^{[12] Patents Act 1990 (Cth), s 133(5).}
^{[13] Ibid, s 133(3C).}
^{[14] W&A Gibley Ltd v Continental Liqueurs Pty Ltd [1964] NSWR 527, 534.}
^{[15] Limitation Act 1969 (NSW), s 60C}
^{[16] Commercial Bank of Australia Ltd v Amadio and Another (1983) 46 ALR 402, 422.}
^{[17] Renard Constructions (ME) v Minister for Public Works (1992) 26 NSWLR 234, 257-263, 279.}
^{[18] Brenner v First Artists’ Management Pty Ltd [1993] 2 VR 221, 265-272.}
^{[19] Winnebago Industries Inc v Knott Investments Pty Ltd and Ors (No 4) (2015) 331 ALR 594.}
^{[20] Ibid, [124]-[126], [177].}
^{[21] Unwired Planet v Huawei [2017] RPC 19, 915 upheld by the Supreme Court in Unwired Planet v Huawei [2020] UKSC 37.}
^{[22] Unwired Planet v Huawei [2017] RPC 19, 844. Note that in the standard essential patent context, there will often be a number of different FRAND licences for the same patent portfolio in evidence to assist the court. This may not be the case for a compulsory licence (in fact, it is unlikely that the patentee will be able to put any licences for the relevant technology into evidence) so care needs to be taken in the application of this guidance.}
^{[23] Patents Act 1990 (Cth), s 133(3B)(a).}
^{[24] Ibid, s 133(3B)(b).}
^{[25] Ibid, s133(6).}
^{[26] Ibid, s 133(3A).}
^{[27] Ibid, s 134; Patent Regulations 1991 (Cth), r 12.2}^.