If I Could Turn Back Time, Episode Two

Can the obligation to pay patent royalties extend beyond the expiry of a patent in Australia? 

As we saw in Episode One, the US decision of Kimble v. Marvel Entertainment LLC suggests that it is difficult, but not impossible (in the US at least) to draft contract clauses that allow patent owners to receive royalties beyond the expiration of a patent. But what is the position in Australia? 

Where a contract relates to the lease or licence of a patent, section 145 of the Patents Act 1990 (Cth) states that a party may terminate a contract by providing three months’ notice after patent expiry.

This means that in Australia, at least, a lease or a licence of a patent can lawfully continue after the patent’s expiry and the licensee, for so long as the licence is on foot, will still be obliged to pay royalties and comply generally with the licence agreement.

All that section 145 of the Patents Act does, is it allows either party to terminate the contract after the patent has expired by giving three months’ notice to the other party.  Until that notice is given, however, the licence and all of its provisions are legally enforceable.

Of course, a lease and a licence are not the only way a patent holder can monetarize their patent. Patents can also be sold (or assigned).

So, what are the rules on paying royalties on a sold patent which has expired?

A 2014 Victorian case has some answers.

ARB Corporation Limited v Patricia Alys Roberts and Ors

In ARB Corporation Limited v Patricia Alys Roberts and Ors [2014] VSC 495, the Victorian Supreme Court explored the issue of whether patent royalties remain payable under a contract for the sale of a patent application, despite the grant of a patent subsequently expiring.

The patent in question was for a new engineering product named the ‘Roberts Differential Lock’, a device that helps cars go around corners, as anyone who has seen ‘My Cousin Vinny’ would know. 

Through the Sale Agreement, ARB Corporation Limited (ARB) purchased the Roberts Differential Lock patent application from its inventor, Tony Roberts. 

The consideration for the sale was in two parts: an upfront payment and royalties.

The Sale Agreement calculated royalties on the sale of the products made by ARB.

The Agreement also defined ‘Product’ as ‘differentials as manufactured according to the patent’.

However, the Agreement did not specify a start or end date for paying royalties. Instead, the obligation was to pay royalties for the ‘term’ of the Agreement – which was not defined. 

After the execution of the Agreement, the patent was granted. Still, as all patents do, it subsequently expired, and ARB took the stance that it should not have to pay any more royalties even if it continued to make and sell the Roberts differentials. 

Roberts believed that ARB should pay the royalty for as long as they made the Roberts differentials under the patent’s teachings, even though the patent had expired. 

In other words, Roberts argued the Agreement’s term went beyond the patent period and extended for so long as ARB sold the differentials. 

Judgement

To resolve the dispute, the Court applied ordinary principles of contractual interpretation. The key principle is that parties must interpret commercial agreements according to what a reasonable person would have understood them to mean. In this case, we would expect a “reasonable person” to consider the purpose and object of the transaction, as well as the surrounding circumstances known to the parties. 

The Court agreed with Roberts on the following basis:

• the clause relating to the payment of royalties was to be calculated by reference to the volume of sales of the products made in accordance with the invention. In other words, the obligation to pay royalties was not contingent upon any patent application proceeding to grant. Similarly, royalties became payable as soon as sales of the Roberts differential commenced i.e. they were not deferred until the patent was granted; 

• ARB maintained control of the volume of products manufactured, and if the product became unprofitable, ARB had the option to cease manufacture and sales; 

• the Sale Agreement was commercially sensible in that it provided a consideration via a royalty regime that was directly aligned to the benefit that ARB obtained under the Agreement, that is the exclusive right (initially at least) to see the Roberts differential and the ongoing benefit (after the patent had expired) of being first in the market; and

• the obligation to pay royalties did not depend upon a patent remaining registered. 

In summary, in interpreting the contract, the Court found that the royalty payments were not limited to the patent’s life; the fact that the patent had expired did not prevent the Court from holding that patent royalties were still payable. As such, ARB had an obligation to continue to pay royalties under the Sale Agreement, despite the patent’s expiration.

This case demonstrates that, in Australia, the payment of patent royalties may extend beyond the life of a patent where a contract is not a lease or a licence. 

Key points to consider from this case include: 

• it is essential to make it clear and correct how the consideration for the sale of the patent is structured and expressed; and
• if there is to be a time or other limitation on an obligation to pay a royalty, that also must be clearly expressed.

The decision is yet another instance of the importance and value of words. Just think, for the sake of a simple sentence along the lines of:

ARB must pay royalties for as long as it sells the Products, regardless of the expiry of the Patent,

the case would never have made it to Court, saving significant time and expense. 

It reminds you, doesn’t it, of the adage: a stitch in time saves nine; or, getting it right the first time is cheaper every time.

If you would like to discuss the contents of this article or require assistance in drafting your technology licence agreements, contact our expert Intellectual Property law team.

The information contained in this document is not legal advice. It sets out matters of general opinion and should not be applied to your particular circumstances without obtaining specific legal advice as to your position, rights and obligations.