FEDERAL COURT OF AUSTRALIA

Regency Media Pty Ltd v MPEG LA, L.L.C. [2014] FCAFC 183

THE COURT ORDERS THAT:

1.    The appeal be dismissed.

2.    The appellant pay 50% of the respondent’s costs of the appeal.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

BENNETT AND PAGONE JJ

1        The appellant (Regency) and the respondent (MPEG) executed a “Patent Portfolio Licence” on 28 July 2009 (Contract). The Contract was amended on 16 October 2009.

2        MPEG is in the business of representing patent owners in relation to various patent pools, such as those essential to a standard, here the MPEG-2 Standard, which is an international standard relating to video data compression and data transport (Standard).

3        MPEG acted as “licensing administrator” on behalf of the patentees whose patents were licensed. The Contract conferred licences over a portfolio or pool of patents, including Australian and foreign patents. The pool was defined in the Contract as the MPEG-2 Patent Portfolio (Portfolio). MPEG was authorised under the Contract to sublicense the Portfolio. The Contract was a single sub-licence from MPEG to Regency for the Portfolio.

4        The Contract defined three classes of subject matter in relation to which rights were granted: “MPEG-2 Decoding Products”, “MPEG-2 Encoding Products” and “MPEG-2 Packaged Medium (Media)”. MPEG-2 Decoding Products was defined as:

MPEG-2 Decoding Product – shall mean any instrumentality or combination of instrumentalities, including by way of example and without limitation: a DVD player or Blue-ray Disc player; decoding software; a digital television receiver; cable broadcast, terrestrial broadcast, satellite broadcast or IPTV television “set top box” or receiving equipment; a computer, a computer accelerator card or a computer tuner card; a digital camcorder; video telecommunications equipment; video packaged media playback equipment; and video game equipment; which is capable of or primarily designed in whole or in part for decoding video information in accordance with the MPEG-2 Standard, and which is Sold to an End User.

5        The MPEG-2 Encoding Products definition was similar in form. MPEG-2 Packaged Medium (Media) was defined as: ‘… any storage medium, including by way of example and without limitation magnetic tape, magnetic disc and optical disc, storing one or more MPEG-2 Video Events’. In general terms, the products were used for decoding video data according to the Standard, products for encoding such data, and storage media storing such data, respectively. Regency was involved in the manufacture and sale of such storage media.

6        It was common ground that, by 5 July 2012, a number of Australian patents in the Portfolio had expired. Seven such patents were listed in a Statement of Agreed Facts and Issues before the primary judge. Some patents remained in force at the time of the hearing before the primary judge, some have subsequently expired and some are still in force. The last patent in the Portfolio will expire on 3 January 2015. It is not in dispute that the various patents described and claimed different inventions, albeit that they all related in some way to the Standard. This is reflected in the titles of the different inventions and the different patentees and different dates of expiry, as recorded in the agreed facts. An example of one of the expired patents was in evidence.

7        Thus, the Contract is for a licence to exploit a number of different patented inventions. The inventions are unrelated, save that each is necessary for the practice of the Standard. Each of the patents is a standard essential patent. That is, any party wishing to implement the Standard in a device needs a licence to each of the standard essential patents.

8        The Contract required Regency to pay royalties for so long as one or more of the Portfolio patents remained in force. It purported to provide that Regency could not terminate the Contract prior to 31 December 2015. However, on 5 July 2012, Regency gave three months’ notice of its intention to terminate the Contract, relying on s 145 of the Patents Act 1990 (Cth) (Act).

9        The issue in the appeal, as before the primary judge, is whether Regency’s purported termination was effective. This depends on the construction of s 145 of the Act.

10        There is no dispute that s 145 of the Act applies to the Contract, despite the fact that the Portfolio contains foreign patents in addition to the Australian patents. The relevant patents for the purposes of the appeal are the Australian patents. There is no dispute that s 145 provides a right to terminate the Contract, if it is enlivened.

11        Section 145 of the Act provides:

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.

12        The central issue for the determination of this appeal is the meaning of ‘a patented invention’ in s 145(1).

13        While s 145 has received little judicial consideration, as the primary judge noted at [15], the object and purpose of such a provision is relatively clear. It is, at least in part, to prevent the holder of a patent from taking potentially unfair advantage of the statutory monopoly conferred by a patent after it has expired. However, as his Honour stated, s 145 is not a provision designed to deny contractual rights to the holder of a patent prior to a patent ceasing to be in force. Such a construction would permit the termination of an agreement with respect to patents which have not ceased to be in force, which would deny to a patent holder the benefit of the payment of royalties in amounts that have been the subject of agreement.

14        The alternative questions posed by the parties are:

    Does the entitlement to terminate the Contract arise when all of the patents in the Portfolio (which protect different inventions) expire?; or

    Does the entitlement to terminate the Contract arise when all of the patents that protect any one invention expire?

15        In the latter circumstance, this termination would also affect those patents the subject of the Contract that are still in force.

16        We accept Regency’s characterisation of a ‘patented invention’ as an invention in respect of which a patent has been granted under the Act. While ‘patented invention’ is not defined in the Act, a ‘patent’ means a standard patent or an innovation patent and an ‘invention’ means any manner of new manufacture the subject of letters patent and grant of privilege within s 6 of the Statute of Monopolies, and includes an alleged invention. Section 13 of the Act provides that 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. That means that a contract which authorises another to exploit the invention has as its subject the invention the subject of the patentee’s patent, the “patented invention”.

17        MPEG sought to advance, as its primary submission, as it did before the primary Judge, that “patented invention” was determined by the description in the Contract. We do not accept MPEG’s primary submission that “patented invention” should be determined by the description of the products the subject of the Contract. Accordingly, we accept Regency’s submission that “patented invention” is not defined by the classes of subject matter in the Contract but in accordance with the way in which that term is conventionally used in the Act, as this means that a patent has been granted for a patented invention. In our view, s 145 does not mandate or require an inquiry as to whether or not the claimed invention is patentable under s 18(1) of the Act. In that respect, we take a different view to that of the primary judge, who looked to a meaning defined by the subject matter of the Contract and considered whether it constituted a patentable invention.

18        Accordingly, Regency succeeds in the appeal.

19        However, we do not accept that the issue in the appeal is determined, as submitted by MPEG, by the meaning of “patented invention”. By an amended notice of contention, MPEG relies on the Acts Interpretation Act 1901 (Cth) (Interpretation Act) to argue, in the alternative, that the singular reference to “a patented invention” includes the plural. Section 23(b) of the Interpretation Act taken with s 2, provides that words in the singular number include the plural ‘unless the contrary intention appears’.

20        Regency notes that the term is “a patented invention” and says that this does not include the plural because a contrary intention appears in the words in the section, the context of the section in the Act, and the policy of the Act. Regency’s submissions as to the contrary intention are, in summary:

    The singular is used – “a patented invention” whereas, when the plural was intended to be included, the section expressly refers to: “the patent, or all of the patents”.

    It is commercially unrealistic that a licensee should continue to pay royalties where patents covered by the Contract have expired.

    The enforcement of royalties for inventions the subject of expired patents is anti-competitive.

    The location of s 145 in Chapter 14 of the Act, headed “Contracts” is addressed to anti-competitive consequences of patents.

    The legislative history suggests that the section was intended to avoid anti-competitive conduct.

21        That is, Regency submits that s 145 applies ‘where any invention covered by the licence under the agreement is no longer protected by a patent’ (emphasis added).

22        In submitting that s 145 applies when any one patented invention the subject of the contract is no longer subject to patent protection, Regency recognises that it must give the words “or all of the patents” work to do. Regency points out that that the Act allows for more than one patent in respect of an invention. Regency points to provisions in the Act for divisional applications (s 79B) and patents of addition (ss 25 and 81). Further, s 64(1) of the Act provides:

Subject to this section, where there are 2 or more applications for patents for identical, or substantially identical, inventions, the granting of a patent on one of those applications does not prevent the granting of a patent on any of the other applications.

23        Section 64(2) then prohibits the grant of patents for the same invention in certain circumstances, although that prohibition does not cover the field and leaves open cases in which multiple patents for an invention may be granted. For example, it does not preclude the grant of an innovation patent. It does not apply where the inventors or priority dates are different. The prohibition has also been construed narrowly, so as to permit differently framed claims drawn around the same invention (“Australian Patent Office Manual of Practice and Procedure”, Part 2.18.6). Moreover, multiple patents for an invention may, in practice, be granted despite s 64(2). In Arbitron Inc v Telecontrol Aktiengesellschaft (2010) 86 IPR 110 at [160] – [177], Emmett J held that such a contravention cannot be remedied by revocation or by rectification of the Register under the Act.

24        Section 145 may apply to all of the patents for a single invention (see R v Westralian Powell Wood Process Ltd (1919) 27 CLR 236 concerning the predecessor of s 145, s 87B(2) of the 1903 Act) but this does not answer the question whether it should be limited to that circumstance, as Regency submits.

25        Regency points to commercial and policy reasons why a licensee should not continue to pay royalties where an invention the subject of the licence is no longer the subject of a subsisting patent. However, this possible disadvantage to a licensee can be taken into account during negotiations for a contract. Regency negotiated a licence fee that included patents now expired but must be taken to have been aware of the expiry of patents during the term of the Contract when it negotiated that fee. This is supported by the fact that the October 2009 amendment to the Contract provided for royalty rates, those rates decreasing over specified periods of time in recognition of the ever approaching end to each of the patents (as observed by the primary judge at [11]).

26        Regency suggests that there is no unfairness to a patentee if the licence for subsisting patents is then also terminated, as the patentee retains the right to sue for infringement of any patent that remains in force. This may be so but it hardly provides commercial certainty for a licensor.

27        However, there are countervailing commercial and policy reasons of at least equal force. For example, if the licensor of a machine, or of essential patents necessary to implement a standard in a device, took advantage of s 145(1) to terminate the licence, a licensee would be left without the benefit of a licence where only one patent for one of the myriad of inventions the subject of the licence necessary for the working of the machine, or for the implementation of the standard, had expired. The effect of a termination would be to deprive a licensor of its contractual licence fees and the licensee of its right to exploit the product after expiry of the first patent, for the remaining term of the agreement. A licensee, faced with termination by the licensor and wishing to continue to exploit the product, would need to approach the licensee for a fresh licence of the remaining patents, or be exposed to infringement proceedings. A licensor who wished to continue to receive the contracted royalties would need to approach the licensee to seek fresh terms, or to commence infringement proceedings. Alternatively, a licensee would need to contract separately for each patent comprising the product, which is likely to create a significant commercial burden, particularly in respect of complex products covered by many patents.

28        The alternative construction is that s 145 does not permit termination of the Contract until all of the patents protecting the subject matter of the licence have ceased to be in force; it cannot be terminated while any invention covered by the licence is protected. This result was found by the primary judge not only to make commercial sense but also to accord with the statutory language, purpose and history of the section.

29        Section 145(1) may be invoked by either party; that is by the licensor/patentee or by the licensee. The primary judge observed (at [15]) that a purpose of s 145 was to prevent the holder of a patent from taking potentially unfair advantage of the statutory monopoly conferred by a patent after it has expired. Where a licensed “product” is protected by more than one patent, third parties are not entitled to exploit the “product” until all of the patents have expired. Where, as here, all of the standard essential patents are necessary to implement the standard in a device, Regency is at no competitive disadvantage, as all parties need a licence to work the inventions the subject of the patents still in force. No third party can exploit the “product” until all of the patents for the inventions necessary to implement the Standard in the product, have expired.

30        Conversely, if MPEG were entitled to terminate the licence when one of the patents or all of the patents for one of the inventions had expired, Regency would be in the position that, having implemented the Standard, it would be required to cease exploitation of the outstanding patents or negotiate a fresh licence.

31        The primary judge recognised the lack of commercial reality and potential unfairness in such circumstances and so do we. It would lead to the absurd result that parties wishing to negotiate for a patent pool would necessarily have to enter into multiple contracts or face the uncertainties and possible damage caused upon the expiry of a single patent of that patent pool. This would be of particular difficulty for a licensee which had “tooled up”, or entered into financial obligations on the faith of the right to exploit the necessary patent, and could also affect third party end users of a product.

32        It cannot be assumed that the intention of s 145 was to apply only to one patented invention. Contracts relating to a lease or licence to exploit a patented invention may reasonably relate to more than one patented invention. There is no good reason to restrict them to an application only for the relatively unusual cases of patents of addition or divisional patents, as was contended for by Regency.

33        We do not accept that there is a contrary intention in the words of s 145, or in the context of the Act, such that the singular of “a patented invention” does not include the plural. To the contrary, while there are some commercial and competitive disadvantages that flow from a construction that allows for the plural, they are vastly outweighed by commercial and competitive disadvantages that flow from a construction that limits the term to the singular. This conclusion is further reinforced by the decision of Parliament to remove the proviso “unless the contrary intention appears” from the wording of s 23 of the Interpretation Act.

34        While standard essential patents such as those the subject of the contract would not have been in contemplation at the time that s 145 and its predecessors were introduced into the Act, it is not unreasonable to presume that products or processes the subject of multiple patents were known. An example that comes to mind is a machine made up of a number of patented components.

35        Section 145 requires that there may be termination of a contract only after all of the patents the subject of the contract, that is, all of the patents for all of the inventions the subject of the contract, have expired. This construction accords with the words of the section, the reference to “all of the patents” and:

    reflects the balance between contractual rights and patent rights reflected in the inclusion of Chapter 14 of the Act;

    reflects the balance struck by the Act to ensure that the effective term of the patents of the contract are not extended by the contract; and

    accords with commercial sense.

36        Looked at another way: the licence may be determined after the article or process which was protected at the time of the making of the contract has ceased to be in force. This was the way in which the corresponding predecessor provision in the English Patents Act 1949 was described in Blanco White T.A., Patents for Inventions and the Registration of Industrial Designs (Stevens & Sons Limited 1st edition, 1950) at 223. In the present case, the patented “article or process” is, collectively, the MPEG-2 Products as defined in the Contract. On this basis, it is clearly the case that the section applies to the patents that, collectively, protect the “product”.

37        A corollary of Regency’s submission, that s 145 applies only to a single patented invention, is that the section does not apply at all to a contract relating to the lease of, or a licence to exploit, numerous patented inventions. That would mean, in the present case, that Regency is not entitled to terminate the Contract because s 145 has no application. This consequence forms another basis for rejecting the submission.

Conclusion

38        It follows that Regency succeeds on its notice of appeal but that MPEG is successful as to the notice of contention. It follows that the appeal should be dismissed. In the circumstances, including the late timing of an amended notice of contention to raise the point on which MPEG succeeded and taking account of the time expended in the appeal on arguments advanced by MPEG and rejected, MPEG is entitled to 50% of the costs of the appeal.

Associate:

Dated:    22 December 2014

REASONS FOR JUDGMENT

NICHOLAS J

39        I have had the advantage of reading the reasons for judgment of Bennett and Pagone JJ. I gratefully adopt their Honours’ explanation of the background to the appeal and the issue that arises for determination. For the following reasons I agree that the appeal should be dismissed.

40        In my view the expression “patented invention” as it appears in s 145(1) of the Patents Act 1990 (Cth) (the Act) refers to an invention defined by the (unrevoked) claim or claims of a patent that was in force at the time the relevant contract or licence was made. Section 145(1) will therefore apply to a contract relating to the lease of, or a licence to exploit, an invention that is within the scope of one or more such claims.

41        The respondent contended before the primary judge that the phrase “patented invention” was to be construed by reference to the definition of the word “invention” in Sch 1 of the Act and the High Court’s elucidation of that definition in National Research Development Corporation v Commissioner of Patents (1959) 102 CLR 252 (NRDC). This contention was advanced in support of the respondent’s argument that “patented invention” when used in s 145(1) refers to any patentable invention which may be protected by one or more patents. This explains why the primary judge’s reasons make reference to NRDC and later authorities concerned with what constitutes a “manner of manufacture”.

42        I do not think the question of patentability has any relevance to the question whether the appellant was entitled to terminate the contract pursuant to a right of termination arising under s 145(1). The proper application of s 145(1) does not require any inquiry into whether the invention (or the inventions) the subject of the relevant contract or licence constitutes patentable subject matter under s 18(1) of the Act. In my respectful opinion, the primary judge misapplied s 145(1) by embarking on such an inquiry.

43        If the relevant contract or licence relates to a patent for a product or method, the contract or licence will presumably give the necessary permission to exploit the product or method. When the patent ceases to be in force, a right of termination may rise under s 145(1). But the question whether the product or method (as described in either the patent or the contract) constitutes patentable subject matter has nothing to do with whether a right of termination arises under s 145(1).

44        The respondent submitted in the alternative that s 145(1) should be read so that “a patented invention” refers not only to a single patented invention, but also to a number of different patented inventions. In support of this submission the respondent relied upon s 23(b) of the Acts Interpretation Act 1901 (Cth) (the Interpretation Act). Section 23(b), when read with s 2(2), provides (inter alia) that words in the singular number include the plural unless the contrary intention appears. If the respondent’s submission is correct, then s 145(1) is to be read as follows:

A contract relating to the lease of, or a licence to exploit, one or more patented inventions 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 or inventions was or were protected at the time the contract was made, have ceased to be in force.

(emphasis added)

45        In the present case the relevant contract gave a licence to exploit a number of patented inventions protected by different patents that were in force at the time the contract was made. Hence, on the respondent’s construction of s 145(1), any right to give notice of termination under that provision will not arise until all of the patents by which such patentable inventions were protected have ceased to be in force.

46        The appellant says that there are several problems with the respondent’s construction of s 145(1). First, the appellant submitted that in various places s 145(1) uses both the singular and the plural (“a patented invention” and “the patent, or all the patents”) and that s 145(1) thereby distinguishes between the singular and the plural in a manner that discloses the relevant contrary intention. Secondly, the appellant submitted that if the respondent’s construction of s 145(1) is correct, then the policy underlying the section is easily defeated. According to the appellant, the purpose of s 145 is to prevent a patentee obtaining a de facto extension of the term of a patent by entering into contractual arrangements that permit the patentee to recover royalties or other licence fees in return for the right to exploit an invention at a time when the patent that protected it is no longer in force.

47        I agree with the appellant that the legislature has attempted by s 145 to prevent a licensee from being held to a contract to pay royalties or other licence fees in return for the right to exploit a patented invention once the patent or patents by which it is protected ceases to be in force. A right of termination that arises under s 145 may be exercised by either party. Presumably the legislature considered that it would be unfair to the licensor if it was merely left to wait and see if and when the licensee would give a notice of termination once the entitlement to do so had arisen and that this could be addressed by giving the licensor the same right of termination as is conferred on the licensee.

48        However, the appellant’s construction of s 145 would, if adopted, lead to some irrational and unjust results. For example, a licensee who had entered into a contract giving it the right to exploit a large number of related patents covering many different patented inventions in return for a single royalty or other licence fee would be entitled to give a notice of termination the moment any one of those patents ceased to be in force. Moreover, the licensor would be entitled to do the same including in circumstances where one of the patents was revoked or (perhaps) surrendered by the patentee before expiration of the statutory term. So it is easy to see how the operation of s 145 could give rise to some very harsh consequences if it were to apply in the manner contended for by the appellant. This is so irrespective of whether one looks at the matter from the licensee’s or the licensor’s perspective.

49        So far as the actual language of s 145(1) is concerned, it is clear that the language used is directed at only those contracts or licences that relate to “a patented invention”. Understandably enough, no party submitted (at least not in the appeal) that s 145(1) cannot apply to a contract or licence that relates to more than one patented invention. Indeed, the validity of the appellant’s purported termination necessarily depends on s 145(1) applying in such circumstances. I do not see how the appellant can maintain, consistently with that position, that s 23(b) of the Interpretation Act does not apply to s 145(1) of the Act.

50        So far as the use of the plural in s 145(1) is concerned, the relevant words (“after the patent, or all the patents”) recognise that “a patented invention” may be covered by more than one patent (as seems to be recognised by s 64 of the Act). The use of the plural in s 145(1) merely makes clear that in the case of a patented invention covered by more than one patent, the right to give a notice of termination under s 145(1) arises when all such patents have ceased to be in force. I therefore do not see the use of the plural as disclosing the contrary intention necessary to displace the operation of s 23(b) of the Interpretation Act.

51        I also agree with the costs order proposed by Bennett and Pagone JJ.

Associate:

Dated:    22 December 2014