Patents are very often, if not most often, exploited by licensees. A licensee may suffer more damage than the patentee from infringing conduct and therefore have more reason to enforce the patent.

Since only patentees and “exclusive licensees” have standing to sue, the definition of “exclusive licensee” in the Patents Act 1990 is commercially important. However, recent Federal Court decisions have caused confusion, and the law needs clarification.

Patent infringement proceedings may be commenced by the patentee or an “exclusive licensee”. A licensee that is not an exclusive licensee has no standing to claim relief for patent infringement, and it follows that a patentee cannot claim relief from infringement on behalf of such a person.

An infringer will not be liable to pay compensation for damage suffered by anyone other than the patentee and any exclusive licensee. Accordingly, whether or not a person authorised to exploit a claimed invention in Australia is an “exclusive licensee” is an important issue.

Unfortunately, the law on the issue is not clear. Three recent decisions of the Federal Court and the commentary on those decisions have not helped. The decisions are the first instance decision of Justice Yates in BMS v Apotex (No 5) [2013] FCA 114 (BMS), the appeal decision in Apotex v BMS [2015] FCAFC 2 (Apotex), and the recent first instance decision of Justice Rares in Orion Corporation v Actavis [2015] FCA 1373 (Orion).

Many commentators seem to have interpreted both BMS and Apotex as proscribing a very narrow definition of “exclusive licensee” that is only satisfied if the licensee has been authorised by the patentee to exploit the claimed invention across the full breadth of the monopoly to the exclusion of all others. For example the following formula has been repeatedly used:

The Full Court in Apotex has held that an ‘exclusive licensee’ within the definition of the Patents Act 1990 (Cth), must be granted the exclusive right to undertake ALL of the activities falling within the meaning of “exploit”.

This apparently popular interpretation is troubling and unrealistic. In particular, why is it necessary for a licence to be expressed as a positive grant of ALL the rights across the breadth of the monopoly?

Why isn’t it enough if the patentee authorises a person to exploit the claimed invention in some way (making that person a licensee), and at the same time agrees that it will not itself exploit the invention or authorise anyone else to exploit the invention in the jurisdiction (making the licence exclusive)?

A licence under a patent may be limited in any number of different ways. For example, it may permit some types of activities, such as importation and sale, but not others, such as manufacture. Alternatively, it may permit all types of activities in one field but none in another field, or the exploitation of some products within the patent claims, but not different products. The commentary on BMS and Apotex asserts that a limited licence cannot be an exclusive licence. The type of limitation is not relevant. This does not seem right.

Taxonomy

To be clear, we are here comparing the following types of licences:

  1. a licence that grants to the licensee the right to exploit the invention in a limited way, precludes the patentee from exploiting or authorising another person to exploit the patent in the same way, but reserves to the patentee the right to exploit the invention in another way;
  2. a licence that grants to the licensee the right to exploit the invention in a limited way, precludes the patentee from exploiting or authorising another person to exploit the invention, but nevertheless reserves to the patentee the right to object to the licensee undertaking some activities within the monopoly; and
  3. a licence that grants exclusively to the licensee the right to exploit the invention across the full breadth of the patent monopoly in the relevant territory.

The license considered by the Court in BMS and Apotex was in the same form as (1). It granted BMS exclusive rights to import and sell, but not the right to manufacture within the jurisdiction, which Otsuka reserved to itself. A licence in form (2) was not in issue. Nevertheless, the popular interpretation of the decisions in those cases is that only (3), but not (2), makes the licensee an “exclusive licensee” within the meaning of that term in the Patents Act 1990 (the Act).

In the authors’ view, there are good reasons for rejecting this interpretation. First, it sits uneasily with the notion that patent rights are negative in character. Secondly, it ignores the commercial realities of patent licensing. Accordingly, it is not consistent with a natural, purposive, construction of the relevant provisions of the Act.

In both scenario (2) and (3), the licensee is the only person permitted to exploit the patented invention in the territory. This ought to be sufficient.

The nature of patent rights

Section 13 of the Act provides:

“Subject to this Act, a patent gives the patentee the exclusive rights, during the term of the patent, to exploit the invention and to authorise another person to exploit the invention.”

This provision can be a little misleading because on its face is suggests that a patent gives the patentee a positive right to exploit the invention claimed in the patent. However, that is not the case. The rights conferred by the grant of a patent are negative. Patents do not allow or permit the patentee to do a particular thing. Lord Herschell LC made this point more than 120 years ago, in Steers v Rogers [1893] AC 232 at 235:

“The truth is that letters patent do not give the patentee any right to use the invention — they do not confer upon him a right to manufacture according to his invention. That is a right which he would have equally effectually if there were no letters patent at all; only in that case all the world would equally have the right. What the letters patent confer is the right to exclude others from manufacturing in a particular way, and using a particular invention.”

This concept is indisputable. Interpreted in context, section 13 simply conveys the principle that a patent gives the patentee a monopoly in respect of the invention claimed in the patent. Only the patentee can exploit the invention or authorise someone else to exploit the invention.

The same context is relevant to the definition of “exclusive licensee” in Schedule 1 of the Act. This definition provides that “exclusive licensee” means:

“a licensee under a licence granted by the patentee and conferring on the licensee, or on the licensee and persons authorised by the licensee, the right to exploit the patented invention throughout the patent area to the exclusion of the patentee and all other persons.” [emphasis added]

If patent rights are negative in character, it seems illogical to approach the question of whether a licensee is ‘exclusive’ by reference to the scope of rights positively granted under the licence. Rather, it makes more sense for the test to focus on whether the licensee can prevent the patentee, and all persons deriving authority from the patentee, from exploiting the patent in the relevant jurisdiction. That is, the focus ought to be on the exclusion rather than the grant. A licence which excludes the patentee and all other persons from practising the claimed invention (without breaching the licence) will necessarily result in the licensee having the relevant monopoly. In such circumstances, it seems odd to impose an additional requirement that the licence positively grant ALL the rights to perform acts within the monopoly in order for the licensee to have standing to sue.

BMS and Apotex

In BMS Justice Yates held that BMS was not an “exclusive licensee” because under the relevant agreement BMS was not authorised to manufacture aripiprazole in the jurisdiction and Otsuka had reserved that right to itself. This outcome was upheld by the Full Court on appeal in Apotex.

The Court could have found that BMS was not an “exclusive licensee” because under the licence Otsuka was entitled to manufacture something within the claims in the jurisdiction, so BMS’s rights to exploit were not to the exclusion of the patentee. A number of paragraphs in both BMS and Apotex do focus on this requirement. However, most commentators seem to have assumed that the Court found that BMS was not an “exclusive licensee” because it had not also been authorised to manufacture aririprazole within the jurisdiction and so had not been granted the exclusive rights to exploit the invention across ALL activities within the claimed monopoly.

This interpretation imposes an additional limitation on the definition, which is not necessary to explain the result. The confusion possibly arises because Justice Yates described the right to exploit a patent as a “single indivisible right”, implying that where the definition of “exclusive licensee” requires the licence to confer the right to exploit, it requires the licence confer all rights to exploit, not just a right to exploit. This gives the definite article in the phrase the right to exploit a crucial role.

The key paragraph in BMS appears to be [436]:

“In my view, the Act speaks of “the right to exploit” the invention as a single, indivisible right. The word “exploit” is used in the Act as a hypernym to cover a range of activities. The inclusive nature of the definition employed by the Act, and the exemplification of particular activities to elucidate the meaning of the word, signify that a broad range of activities is intended to be covered. However, s 13(1) of the Act recognises that only two rights are conferred by the patent: the right to exploit the invention and the right to authorise others to exploit the invention. The use of disjunctive language in the definition of “exploit” to identify particular activities falling within the scope of the term does not create separate rights with respect to those activities. It merely recognises that the right to exploit covers a range of activities, any one of which, if undertaken, would amount to the exercise of the right to exploit.”

The Full Court in Apotex specifically agreed with the reasoning in this paragraph. It said, at [104] to [105]:

“The key to his Honour’s reasoning is that he read “the right to exploit” as a single indivisible right. He said that the word “exploit” was used in the 1990 Act as a hypernym to cover a range of activities (i.e., a superordinate term which encompasses other terms of a less general nature, such as furniture which includes table, chair, etc.). His Honour said at [436]


“We agree with that reasoning.”

However, Justice Yates’s reasoning remains consistent with accepting that a grant of rights to perform limited activities within the patented monopoly (for example rights to import and sell products made by the patentee but not to independently manufacture products), confers on the grantee the right to exploit the patent. Indeed, the last sentence of [436] in BMS suggests that this is what Justice Yates had in mind:

“It merely recognises that the right to exploit covers a range of activities, any one of which, if undertaken, would amount to the exercise of the right to exploit.” [emphasis added]

This is particularly so when one bears in mind that patent rights are negative and not positive in nature. A patent does not give the patentee the right to exploit products or processes, so this is not a right the patentee can confer on a third person, whether across the full scope of the monopoly or otherwise. Rather a licence comprises a contract under which the patentee agrees not to complain if the licensee exploits the invention - provided that the licensee complies with certain conditions in the contract. On the other hand, if the licence permitted the exercise by the patentee of any activity within the scope of the monopoly, the licensee could not be said to enjoy the right to exploit the patent to the exclusion of the patentee.

In other words, the definite article in the phrase the right to exploit ought not to have the role that some commentators have ascribed to it.

Practical issues

An important problem with approaching exclusivity by reference to the grant of positive rights is that in practice very few patentees will ever purport to confer on a licensee ALL the rights to exploit a claimed invention.

In this regard there is no difference in substance, and ought to be no difference in legal effect, where a patentee grants a limited authority to exploit a patented invention, or grants an unlimited authority then reserves the right to object to it being exploited in certain ways.

Imagine that a patentee manufactures the patented product outside the territory, supplies the product to the licensee, and grants the licensee exclusive rights to import, offer for sale and sell the product within the territory. Further, the patentee agrees with the licensee that it will not exploit the patent in the territory, and will not consent to anyone else exploiting the patent within the territory. If the popular interpretation of BMS is correct, even though the licensee is entitled to the relevant monopoly, it does not have standing to sue because it has not been granted ALL rights to exploit the invention.

A corollary of the licensee being granted ALL rights to exploit the invention is that the patentee does not reserve the right to complain (whether by asserting breach of the licence agreement or infringement of the patent) if the licensee commences manufacturing its own version of the products, or starts importing and selling a cheaper version of the patented article manufactured in other country - possibly by the patentee’s nemesis or principal competitor!

Further, in many cases a patent portfolio will comprise a series of patents with claims that overlap. The rule against “double patenting” in Australia is limited, and claims in a divisional patent may legitimately overlap with claims in a parent or with claims in another divisional. Alternatively, the patentee may come up with a patentable improvement to his or her earlier invention. For these reasons pharmaceutical companies will often have portfolios comprising patents with overlapping claims.

A corollary of a licensee being granted ALL rights to exploit the invention claimed in one patent is that the patentee does not reserve the right to object to the licensee performing the invention in a manner that infringes claims in another of his or her patents. A patentee could not grant exclusive licences of different patents to different parties if the scope of the claims overlapped. That is, if an exclusive licence of a patent must comprise a positive grant of ALL the rights in the monopoly, there could never be a circumstance in which both licences were exclusive, because neither could involve a grant of rights across the full breadth of the patent monopoly.

It follows that if the popular interpretation were correct, exclusive licensees are likely to be extremely rare. A licensee with a monopoly in the jurisdiction, with the most to lose as a result of infringing conduct and therefore the greatest interest in preventing infringement, may nevertheless not be an “exclusive licensee” with standing to sue.

While the patentee will have standing to sue, it will not be able to recover damages suffered by the licensee. Indeed, damage caused to the patentee may be substantially less than that caused to the licensee, comprising circumstances favourable to the infringer. This is probably not what parliament intented.

Purposive construction

With these ideas in mind, the definition of “exclusive licensee” should not read as comprising two parts, each proscribing a separate requirement. That is, the definition should not be read as requiring that the licence confer (a) the (complete) right to exploit, and (b) the conferral of such rights to the exclusion of the patentee and all other persons.

Rather, the definition should be read as simply proscribing one requirement, namely “the right to exploit [the patent] to the exclusion of the patentee and all other persons”.

Orion

Following the decision in Apotex, Orion and Novartis amended their relevant patent licence so that by clause 1 it granted to Novartis ‘an exclusive licence under the Patent … to exploit (as that term is defined in Schedule 1 to the Patents Act 1990) the patented invention claimed in the Patent throughout the patent area … to the exclusion of all other persons.’

Importantly, clause 2 of the licence contained an undertaking by Novartis to purchase the patented product and active ingredients contained in the product exclusively from Orion. In other words, Orion reserved the right to object to Novartis exercising the claimed invention in certain ways. The licence was therefore a limited licence.

Actavis argued that clause 2 qualified, and derogated from, the grant of the right to exploit the patent in Australia. As a consequence, Actavis argued, Novartis could not be said to have been granted ALL of the exclusive rights to exploit the patented invention. Justice Rares rejected this argument without directly tackling the reasoning of the Court in BMS and Apotex.

His Honour found that the undertaking in clause 2 was an independent contractual promise, which did not affect the exclusivity of the patent licence. He observed that licences never exist ‘in a factual or contextual vacuum’ and noted that licensees of a patented invention may need to contract with third parties for the supply of goods and services necessary to the exploitation of the licence, and that such contracts often have ‘the legal effect of constraining the licensee’s otherwise plenary freedom to choose how to exploit the patented invention under an exclusive licence.’ His Honour found (at [46]) that:

“Had Novartis made a contract to the effect of cl 2 with a third party, its legal rights to act as exclusive licensee of the patented invention under cl 1 would be no different. That is, the identity of a supplier of goods or services that a licensee contracts with to secure the wherewithal with which to exploit a patented invention cannot convert what would be an exclusive licensee, if the supplier to the licensee were a third party independent of the patentee, into some lesser congeries of rights merely because the supplier happens to be the patentee.”

By focusing on the separate contractual nature of the undertaking, his Honour tried to avoid the need to decide whether a limited licence could still meet the definition of an ‘exclusive licence’ under the Act.

Clearly, granting an exclusive licence authorising the licensee to exploit the patent across the full breadth of the monopoly in one clause, then expressly derogating from that grant in another clause is no different in substance from making a limited grant. So it appears that Justice Rares was forced to a clumsy solution to the dispute in order to recognise commercial realities while paying lip service to the way in which the Full Court’s decision in BMS v Apotex has been interpreted.

The authors submit that the better approach is simply to recognise that the popular interpretation of BMS and Apotex is wrong.

Conclusion

A requirement that licensees be granted positive rights across the full breadth of the patent monopoly in order to have standing to sue in Australia is out of step with the realities of patent licensing, and the nature of patent rights generally. The decision of Yates J in BMS, and the subsequent decision of the Full Court in Apotex leave open a finding that a licence, which permits the licensee to undertake certain activities and prohibits others, can still be an ‘exclusive licence’ within the meaning of the Act, provided that it excludes the patentee and all persons deriving authority from the patentee from exploiting the patent in the territory.

The decision of Rares J in Orion is a missed opportunity to tidy up the law. It comprises an attempt to recognise commercial reality, but elevates form over substance and does not clarify the law.

This was first published in the June edition of IP Forum.

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