How long do you have to pay royalties for?

Vickery J in the Supreme Court of Victoria has had to construe how long an obligation to pay royalties under a sale of patents and technology and associated consultancy agreement lasts: ruling it is as long as the purchaser is using the “invention”.

Roberts came up with the “Roberts Differential Lock”. It enables the driver of a vehicle, such as a 4-wheel drive vehicle, to lock the “dif” from the cabin without having to get out and manually adjust the wheels. The invention could be retrofitted to existing vehicles. Roberts made a provisional patent application for his invention in 1983 and a standard application followed in 1984. Corresponding applications were made in the USA, the UK and Japan in 1985. Roberts and his wife marketed the Roberts Differential Lock though their company, Altair.

In 1987, the Roberts and Altair sold all their rights in the invention to ARB. There was a lump sum payment and royalties to be paid on products made using the invention. Roberts also entered into a Consultancy Agreement for an initial period of 6 months and thereafter until terminated on 30 days’ written notice.

There were two questions before Vickery J:

(1) did ARB have to keep paying roylaties after (presumably) the (1984/1984) patents expired; and

(2) if so, to whom – the Roberts or also Altair?

The terms of the sale agreement

 2. In consideration of the consideration set out in clause 7 of this Sale Agreement and subject to clause 20 hereof, the Vendors hereby jointly and severally sell transfer and assign absolutely to [ARB] all the right title and interest in and to the Roberts Differential Lock including (without limiting the generality of the foregoing) all patent applications, patent rights and proprietary rights relating thereto, and the business name ‘Roberts Diff-Lock’.

11(a). In further consideration of the rights granted hereunder the Company shall pay to the Roberts the following royalties calculated on the net invoice value arising from the sale, lease, hire and use (hereinafter referred collectively as a ‘sale’ or ‘sold’ as the case may be) of the Products by the company and its licensees:-

[a specified dollar amount for each unit sold]. (Those amounts were subject to increase according to increases in the CPI – All Groups Index – Melbourne.)

For this purpose, “Products” were defined to mean:

‘Products’ means the differentials as manufactured pursuant to the patents as specified in the First Schedule

and the First Schedule listed the 1984 Australian patent application and the pending applications in the USA, the UK and Japan – none of which had been granted at that time.

How long?

You will have noticed that clause 11(a) does not say anything about how long the obligation to pay royalties lasted. Vickery J held as a matter of construction the obligation did not end when the “patents”[1] expired. A number of factors led to his Honour’s conclusion.

First, when the sale agreement was executed, the patent terms in the different countries where applications were pending were different. Moreover, as is typical in such agreements, the definition of “patents” extended to divisonals, re-issues, continuations, continuations in part and the like. So, his Honour concluded, the parties contemplated that there would be potentially be different expiry dates in different countries.

Secondly, although the obligation to pay royalties was imposed on sales of Products, what was sold by clause 2 were “all rights in and to the Roberts Differential Lock including … the patents and the proprietary rights relating thereto”. Then “proprietary rights” were defined not just as rights in patents, but also included copyright, confidential information, trade secrets, data, formulae and so on. So ARB was not just buying rights to the patents it was buying all rights to all the technology. Moreover, under the Consultancy Agreement, “all inventions, techniques and improvements developed in the course of the consultancy agreement ‘shall become the sole and exclusive property of ARB …’”

Together, these arrangements indicated the “ambulatory nature” of the proprietary rights ARB obtained.

Thirdly, if ARB was right and its obligations extended only to the “patents”, it had no obligation to pay royalties until at least one of the pending applications was actually registered. However, Vickery J considered it quite clear the obligation to pay was intended to apply to all products ARB sold as soon as the sale took effect whether an application had proceeded to grant or not.

Finally:

109 Further, the object and purpose of the Sale Agreement may be said to be the allocation of the risks and rewards of the patent rights and the proprietary rights to be assigned to ARB by the Vendors. The risk allocation was achieved by means of the mechanism selected for determination of the price to be paid for that assignment.

110 I accept that the Vendors’ construction is commercially sensible in that it provides for an arrangement whereby each party managed its risk as to the proper price to pay (from ARB’s perspective) and to charge (from the Vendors’ perspective) in relation to the bundle of rights sold under the Sale Agreement, which at the time of entry into the contract had a value which was difficult to calculate or even estimate. Accordingly, the Sale Agreement provided for an ambulatory consideration through the royalties regime. If the rights proved to be valuable so that commercialisation of them resulted in a higher number of total sales than anticipated, then ARB would pay a higher total purchase price to the Vendors. On the other hand, if the rights proved to be valuable so that commercialisation of them resulted in a higher number of total sales than initially expected, then ARB would pay a higher total purchase price to the Vendors.

111 I also accept that such a risk-sharing arrangement is not one that had any obvious connection to the life of the patents that might be granted on the assigned patent applications, or to whether any patents became registered at all. In this regard the following is to be noted:

(a) ARB received an immediate and continuing benefit from the sales that it made using the assigned patent rights. In other words, the benefits that ARB received were not contingent upon any patent application listed in the First Schedule of the Sale Agreement proceeding to grant; and

(b) the assigned rights included proprietary rights which did not depend upon a patent proceeding to grant or remaining registered.

Vickery J then rejected ARB’s argument that it would be faced with a perpetual obligation to pay royalties: its obligation was to pay only on products that embodied the invention described in the patents. If it didn’t use that invention, it had no obligation to pay.

Pay the royalty to whom

This is one of those odd arguments where ARB was trying to contend Altair, the Roberts’ company, had no standing to sue. While cl. 11 did say that ARB had to pay “the Roberts”, Vickery J noted that the Roberts and Altair were the “Vendors” as defined and so cl. 11 should be understood as requiring payment to all three.

The conclusions reached by Vickery J, assuming there is no successful appeal, may immediately be contrasted with Maggbury Pty Ltd v Hafele Australia Pty Ltd.[2] One obvious point of difference, is that it appears that patents did actually issue in this case. Moreover, it appears that there was, or may have been, further technology of value apart from the patents – such as copyright, confidential information and further improvements.

The conclusion may also seem at odds with the policy in s 145 of the Patents Act. Even at its strongest, however, that only gives a right to terminate and does not automatically terminate the contract. As we have recently seen, however, the operation of the provision, particularly in a multi-jurisdictional context involving many faceted technologies, is less than clear.[3] In any event, ARB did not invoke the provision and it is not clear from the judgment whether there are other patent, or for that matter other “proprietary”, rights still on foot.

Nonetheless, if ARB could terminate the contract, it is an interesting question how Vickery J’s approach would sit with Maggbury if ARB used only technology now in the public domain.

Finally, as I am sure you have already concluded, if you are acting for the payor in this type of situation this case illustrates the importance of considering very carefully and providing specifically in the agreement for the duration of the obligation to pay royalties and what it is payable on if you are drawing a clause providing for a royalty – especially when the technology comes into the public domain and others may use it royalty free.

ARB Corporation v Roberts & Ors [2014] VSC 495

Lid dip: James McDougall