IP licensing: 5 lessons learned from litigation

The licensing of intellectual property (IP) rights brings many benefits to all parties involved. Aside from financial gains, IP licensing arrangements can assist with building brand exposure, risk sharing and commercialising the IP through geographical expansion.

Looking at the recent examples below, we highlight the top 5 key lessons learned from cases that have involved consideration of IP licensing arrangements. As the cases demonstrate, IP rights holders and their licensees can avoid commercial risks (including litigation) by ensuring that their arrangements are drafted with care. In particular, parties should draft their agreements having regard to: 

• the significance of the underlying rights and intended purpose of the licensed use;
  
  
• particular requirements under the relevant legislation with respect to maintaining IP validity, as well as with respect to standing and enforceability; and
  
  
• the operation of statutory provisions to ensure that IP licensing arrangements do not offend competition law obligations.

1. Think about the whole IP picture

Licence agreements concerning branding should expressly deal with all key brand elements and the nature and purpose of the licensed use.

In a decision of the Federal Court earlier this year, Chevron Global Energy Inc v Ampol Australia Petroleum Pty Ltd[1] concerned a dispute that arose following the termination of a trade mark licence agreement. Pursuant to the agreement, Ampol transitioned its service stations from the Caltex brand to Ampol brand during a ‘work-out’ (phase out) period. While successful in some respects, Caltex failed in the court proceeding to prevent Ampol’s ongoing use of the ‘Caltex Red’ colour on the re-branded service stations. In this instance, the decisive factor was the wording of the licence agreement. Specifically, as the licence agreement required Ampol to remove ‘signage and/or [any] element bearing [or displaying]’ any of the licensed marks, the clause (as drafted) did not cover the red coloured canopy fascia.

Parties should ensure that all key brand elements (including any slogans, product shape, trade dress or colours) are expressly dealt with in the licence agreement. The nature and purpose of the licensed (and any restricted) use and the action required to be taken by the licensee at the end of the licence agreement should also be clearly set out to ensure that the agreement covers the intended scope.

2. Maintain control over licensed trade marks

Licensors should ensure that they have, and exercise, ‘actual control’ over a licensee’s use of a trade mark.

Lodestar Anstalt v Campari America LLC[2] serves as an important reminder that trade mark owners cannot simply rely upon the existence of a licence to prove ‘authorised use’ of a trade mark for the purposes of the Trade Marks Act 1995 (Cth). The case concerned Lodestar’s applications to remove two of Campari’s trade marks on the ground of non-use and Campari’s reliance on its licensee’s use of the trade marks. While the licence agreement specified certain quality control measures and restrictions on export trade, those terms had no practical effect on the way in which the trade marks were used or how the licensee conducted its business. As there was nothing beyond the appearance of control, the licensee’s use was not ‘authorised use’ and could not assist in defending the removal applications. The decision marked a departure from earlier cases, which held that the mere theoretical possibility of contractual control was sufficient.[3]

While the more recent decision of Trident Foods Pty Ltd v Trident Seafoods Corporation[4] saw an easing of the required standard in the context of ‘inter-company’ licensing arrangements, it does not represent a departure from Lodestar beyond that context. In circumstances where a trade mark owner licenses a third party to use its trade marks, and the parties do not operate within a corporate group, the owner should ensure that it is able to establish the level of control necessary to constitute ‘authorised use’, namely:

• the licence agreement should set out the contractual mechanisms whereby the owner exercises control over the use of the trade mark and the relevant goods or services (e.g. quality standards or pre-approval requirements); and
  
  
• during the term of the licence agreement, the trade mark owner should exercise control in practice to ensure that it maintains ‘actual control’ over the licensee’s use of the trade mark.

3. Exclusivity as a prerequisite to enforcing patent rights

An exclusive licensee of a patent will not have standing to sue for patent infringement if any right to exploit the patent is reserved to the patentee or a third party. 

In Australia, only the patentee or ‘exclusive licensee’ may commence patent infringement proceedings. Whether or not a licence is considered to be ‘exclusive’ therefore has significant implications for patent enforcement and the ability to claim damages – particularly where an offshore patentee does not trade in Australia but licenses a local entity to exploit the patent locally. In these scenarios, it may well be the local entity (licensee) who suffers the most significant damage from infringing conduct. 

However, a licence is not ‘exclusive’ if it reserves to the patentee (or any other person) any residual right with respect to the exploitation of the patented invention. For example, the patentee in Bristol-Myers Squibb v Apotex (No 5)[5] had reserved to itself the right to manufacture the aripiprazole drug when granting the (otherwise exclusive) licence in Australia. As a result, this was not an exclusive licence and the licensee had no standing to sue for patent infringement.

The nature of an exclusive licence was further considered in Actavis Pty Ltd v Orion Corporation (Actavis),[6] a decision cited more recently in Vald Performance Pty Ltd v Kangatech Pty Ltd.[7] Both decisions demonstrate that an exclusive sub-licensee will not itself be considered an ‘exclusive licensee’ for the purposes of the Patents Act 1990 (Cth) (Patents Act) as the licence has not been granted by the patentee. Further, Actavis establishes that an exclusive licence may retain its character as such in circumstances where the licensee is granted all exploitation rights and licenses back one (or some) of the rights to the patentee. This may involve agreeing to procure the product or active ingredients from the patentee and is to be distinguished from a reservation or derogation from the exclusivity of the granted licence.

As demonstrated by the cases above, the general position in Australia dictates that a licensee will not have standing to sue and recover damages for patent infringement unless it has been granted all exploitation rights to the exclusion of any other person (including the patentee). Where it is not commercially feasible to structure an exclusive licence in such a way, alternative options should be explored – for example: 

• applying for divisional patents in various fields of use and entering into exclusive licences which then grant the right to exploit as a ‘single indivisible right’; and
  
  
• a ‘grant-back’ approach, where all exploitation rights are granted to a licensee and the licensee grants back to the patentee one (or some) of the rights (e.g. the right to manufacture).

4. Risk of early termination 

Licensors and licensees should consider the real prospect and risk that a patent licence may be terminated early pursuant to section 145 of the Patents Act. 

Parties should be aware of any legislative provisions which may apply regardless of the agreed terms. To take an example, the ability to terminate a patent licence agreement pursuant to section 145 applies despite anything to the contrary in the contract. Section 145 allows a patent licensor or licensee to terminate a licence to exploit a ‘patented invention’ on three months’ notice after ‘the patent, or all the patents by which the invention was protected’ cease to be in force (e.g. upon expiry or revocation).

The Full Federal Court considered this provision in Regency Media Pty Ltd v MPEG LA, L.L.C.,[8] where the relevant licence agreement covered a portfolio of Australian and foreign patents relating to the ‘MPEG-2’ standard. The Court found that Regency was not entitled to terminate the licence agreement pursuant to section 145 as some but not all of the licensed Australian patents which were the subject of the agreement had expired. The Court recognised the commercial realities of the situation, namely that the alternative construction would create uncertainty (for all parties) in relation to the duration of licence agreements. Some key considerations include:

• weighing the benefits of entering into one licence agreement in respect of a ‘patent pool’ or separate agreements (with separate royalty or licence fees) for each patent;
  
  
• the implications and potential risk where a licence agreement covers both Australian and foreign patents, or covers the licensing of other (non-patent) rights; and
  
  
• the commercial implications if either party invokes the section 145 termination right.

5. The intersection of IP and Competition Law

As the High Court has recognised, IP rights are often ‘a very clear source of market power’.[9] While we have not yet seen a significant amount of Australian litigation concerning whether IP licensing arrangements comply with the Competition and Consumer Act 2010 (Cth) (CCA), we expect that the Australian Competition and Consumer Commission (ACCC) would take action in an appropriate case (as it did in ACCC v Pfizer Australia Pty Ltd [2018] FCAFC 78 which concerned supply arrangements with pharmacies for Lipitor).

Following the repeal of section 51(3) of the CCA in 2019 (which provided a limited ‘IP exemption’ for some CCA provisions), IP licensing arrangements have been exposed to the same prohibitions on anti-competitive conduct under the CCA as other commercial arrangements. The ‘guidelines’ released by the ACCC helpfully outline a number of examples where the use or licensing of IP rights is likely (or unlikely) to contravene the CCA. Parties should consider IP licensing arrangements which may present risk, including:

• restrictions on supply or the field of use;
  
  
• patent pooling;
   
• cross-licensing arrangements; and
  
  
• in the context of agreements to resolve pharmaceutical patent disputes, ‘pay for delay’ arrangements (where a generic or biosimilar company agrees to delay launch).