Section 145 and its earlier equivalents have lain like an unexploded bomb in Australian patents legislation since 1909, without a single reported decision of an Australian court interpreting the provisions. This is quite surprising in view of the dramatic consequences s.145 can have for both patent licensors and licensees.
Section 145 reads:
Termination of contract after patent ceases to be in force
(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.
Its purpose is clear; to prevent patentees obtaining a de facto extension of the patent term by requiring licensees to sign contracts which bind them to continued payment of royalties after the expiry of the patent.
What is not clear is why the patentee is also given the right to terminate the licence, and how s.145 is intended to operate when the licence to the expired patent is combined in a single agreement with other rights, including the right to exploit other Australian or foreign patents, or other forms of intellectual property. This was the situation before the court in the MPEG LA case.
The licence in question was for a “patent pool” of patents relating to the MPEG-2 Standard, which is the standard for the compression of raw digital video and audio data to allow it to be encoded and decoded for use on CD’s, DVD’s and for digital transmission. The licensor was the administrator of the patent pool, and the licence allowed the exploitation of “MPEG-2 Encoding Products” (in effect, digital recorders that comply with the MPEG-2 Standard), “MPEG-2 Packaged Medium” (e.g. CD’s and DVD’s) and “MPEG-2 Decoding Products” (anything that could play back MPEG-2 compliant digital data, such as Blu-ray players and set top boxes). Some products, such as PVRs, fell into all three categories. The licence was worldwide, and royalties were assessed on a global basis, making severance of obligations in relation to specific patents impossible.
The decision turned on the definition of “patented invention” in s.145. This expression is not defined in the Patents Act, although both “invention” and “patentable invention” are defined. The licensee contended that “patented invention” in s.145 must be interpreted consistently with other uses of “invention” in the Act, and therefore must mean something for which a patent could be granted. Accordingly, the subject matter of each licensed Australian patent was a separate “patented invention”, and on the expiry of each Australian patent, all of the patents by which that patented invention was protected at the date the licence was entered into expired. The licensee submitted that as a result, it was entitled to terminate the licence agreement when the first Australian patent expired. The difficulty with the licensee’s argument was that on this interpretation, the words “all of the patents” are redundant, except in the case of a patent for a combination, one component of which is itself the subject of a patent.
The licensor argued that each of the three types of subject matter identified in the licence (MPEG-2 Encoders, MPEG-2 Media and MPEG-2 Decoders) was a “patented invention” for the purposes of s.145, and accordingly, all of the patents by which any of the three “inventions” were protected at the time the licence was entered into would not expire until all the patents relating to at least one of these categories of subject matter had expired. The difficulty with this approach is that the interpretation of “patented invention” and the operation of s.145 would depend on the drafting technique adopted in the individual licences. For example, if the MPEG-2 agreement had granted a single licence in respect of “MPEG-2 Subject Matter” defined as any appliance, device or medium capable of encoding, storing or decoding MPEG-2 data, there would have been only a single “patented invention” to which the MPEG-2 agreement related.
Flick J preferred the licensor’s interpretation, essentially because the licensee’s submission, that “all the patents” in s.145 applied only to combination patents, was unsatisfactory. In addition, his Honour preferred a construction which gave effect to the commercial agreement between the parties, and did not work commercial injustice to either of them as being preferable to an interpretation which did not have this result.
The judgement did not consider whether the substitution of “patented invention” in s.145 for “patented article or patented process” s.112(4) of the Patents Act 1952 was intended to change the meaning of the section. An “article” suggests an embodiment of an invention rather than as the invention itself, and there is no conceptual difficulty in an article or process being protected by more than one patent.
The only thing that can be said to be clear about s.145 is that its drafting is unsatisfactory, and that if it is retained in the Patents Act, it should be amended to better give effect to the policy of preventing de facto extension of the patent term without destroying the whole of the parties’ bargain. In the meantime, licences should if possible be drafted so that any terms applying to an Australian patent are capable of severance, and are deemed to constitute a separate contract from the remaining terms.