Something to think about in drafting an exclusive licence

The Full Court has declared that a former exclusive licensee has to contribute towards the costs of patent infringement litigation. Cementech has a patent, No 2007219709, for a “matrix of masonry elements and method of manufacture thereof”. It had granted Austral an exclusive licence for a term of 4 years commencing in February 2010. Austral had an to renew, but didn’t take it up. There were provisions in the licence agreement dealing with infringements. There was the usual clause requiring Austral to tell Cementech if it came across any infringements. Then clause 9.2 provided:

9.2 Infringement Actions

(a) Upon receipt of an Infringement Notice [Cementech] may, at its sole discretion, take all steps reasonably required to protect the Intellectual Property from infringement.

(b) In the event that [Cementech] elects to initiate proceedings for prosecuting or defend any Claims with respect to the Intellectual Property, all expenses incurred by [Cementech] in conducting any such proceedings or defending any Claims will be borne by the parties equally and all amounts received (including in respect of costs) from settlements or adjudications will be dealt with in the manner described in clause 9.2(f).

….

Cl 9.2(f) went on to provide for distribution of any monetary awards resulting from the litigation to pay down the costs and the balance to be split between the parties in proportion to their losses suffered.

Cementech started infringement proceedings against Adbri during the term of Austral’s licence. Austral first tried to argue that, since it hadn’t given notice of the infringement to Cementech, cl. 9.2 didn’t apply. That went for six (well, five reasons):

  • the words “in the event that” in cl 9.2(b) established a condition, but not one triggered by any notice from Austal
  • the parties had a common interest in stopping infringements
  • Cementech could take proceedings regardless of receipt of a notice from Austral
  • (as is quite common) the scheme of the clause allowed Cementech first choice whether to sue or not – Austal did get rights to sue during the term if Cementech did not take action
  • under the terms of the licence, Austral did not have a discretion to notify infringements, if it became aware of one, it had an obligation to notify.

The real bite in the clause, however, is that the Full Court held it meant Austal had to pay half the costs of the infringement action against Adbri even after the licence had come to an end. Austral argued that the licence having terminated, the obligation terminated too citing the Westralian Farmers case. The Full Court however held:

It must have been in the common contemplation of the parties that Cementech might commence proceedings during the term which would continue after the expiry of the term. Clause 9.2(b), if engaged by the commencement of proceedings during the term, survives termination of the Licence Agreement, as does cl 9.2(f). It is apparent from the scheme of cl 9.2, which is a code in respect of litigation commenced during the term as Cementech submitted, that the parties intended the cost burden provision (cl 9.2(b)) and the proceeds benefits provision (cl 9.2(f)) to survive. That intention prevails …

The Full Court pointed out that under clause 9.2(f) Austal had a right to claim its proportionate share of any pecuniary remedies even after the licence terminated. The Full Court noted tersely:

The examples of commercial impracticality advanced by Austral apply equally during the term. The parties simply did not provide details about how their relationship in respect of the litigation other than in respect of cost sharing and benefit sharing would be regulated. But that is no reason to rewrite the commercial deal they did. Nor is the fact that, as it turns out, Austral does not wish to fund these particular proceedings.

If you are thinking about using this clause as a model for your future contracts, the Full Court recognised that the scheme set up by the parties might not work to either’s benefit in different cases:

Austral’s reluctance to be bound by cl 9 is understandable. The provision is capable of working to its disadvantage. For example, Austral (as apparently in the present case) may not agree that there has been any infringement and thus may not wish to fund any part of the proceedings. Austral’s interest in the proceedings may be limited depending on the nature of the alleged infringement and the time during the term when the proceedings are commenced (presumably, Austral’s interest might be greater if proceedings are commenced earlier rather than later in the term). Austral may well perceive, accurately, that it will pay 50% of the costs of expensive proceedings which will lead to no or little reward for it if Cementech manages to obtain any proceeds from the litigation. But all of these circumstances might apply equally to Cementech in different circumstances. As Cementech submitted, the potential for an unequal commercial interest in proceedings results from the deal the parties did when they entered into the Licence Agreement.

Austral Masonry (NSW) Pty Ltd v Cementech Pty Limited [2014] FCAFC 72 (Jagot, Nicholas and Yates JJ)

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