Scintilla – a flash, a spark, an iota. Shorthand for creativity and an indicator of inventiveness under Australian law.

Thursday, December 24, 2015

Defining the relationship. Are we exclusive?

by Lauren John, Associate

Earlier this year, the Full Federal Court in Bristol-Myers Squibb Company v Apotex Pty Ltd (2015) 228 FCR 1 (Bristol-Myers) apparently resolved the uncertainty created by conflicting decisions by single judges as to the meaning of 'the right to exploit the patented invention' as used in the definition of 'exclusive licence' in the Patents Act. The Full Court confirmed that in order to be an exclusive license, a licensee must be granted all the rights to 'exploit' the patent to the exclusion of all others, including the patentee. The question of whether or not a license is exclusive is important in the context that an exclusive licensee has standing to commence proceedings for infringement of a patent pursuant to s 120(1) of the Patents Act.

A recent decision of the Federal Court has considered whether a party is an exclusive licensee in light of the decision in Bristol-Myers, and provides guidance for licensing entities as to how to structure their licensing arrangements to reflect their intended relationship.

A few months ago, Rares J delivered judgment relating to the validity and infringement of a patent owned by Orion Corporation (Orion) that claims compositions consisting of a combination of three known active pharmaceutical ingredients (APIs), which are used in the treatment of Parkinson's disease. Rares J upheld the validity of the patent and found that Actavis' products infringed some of the patent's claims. That decision has been appealed.

Novartis Pharma AG (Novartis) and Novartis Pharmaceuticals (Australia) Pty Ltd (Novartis Australia), claimed to be, respectively, the exclusive licensee and sub-licensee of the patent. The proceedings were commenced prior to the decision in Bristol-Myers. Actavis had challenged Novartis' and Novartis Australia's standing to bring infringement proceedings under s 120(1), however this issue was deferred for hearing at a later date. Earlier this month, Rares J held that Novartis and Novartis Australia had title to sue.

Why did the outcome in this case differ to that in Bristol-Myers?

Licensing arrangements
  1. September 2000: Orion and Novartis entered into a license, supply and distribution agreement for product containing the three APIs, for all territories excluding Europe and the United States; the so-called 'rest of the world' agreement (ROW Agreement). Orion granted Novartis a number of exclusive rights in the ROW Agreement, that excluded any right for Novartis to manufacture the product, that right being expressly reserved for Orion. The ROW Agreement provided Orion with a right to terminate the ROW Agreement in the event Novartis decided to manufacture or distribute a product that would compete with the Orion product.
  2. March 2014: Orion granted Novartis an exclusive licence in respect of the patent (2014 Licence), which was intended to replace a confirmatory 'exclusive' licence agreement entered into in December 2013, under which Novartis could not manufacture the product or the three APIs. Relevantly, cl 1 provided that 'Orion hereby grants to the Licensee … an exclusive licence under the Patent … to exploit (as that term is defined in Schedule 1 to the Patents Act 1990) the patented invention … to the exclusion of all other persons'. Clause 2 provided that in consideration for the rights granted under cl 1, Novartis 'undertakes to purchase the Products and the active ingredients that are contained in the Products, exclusively from Orion or a party authorised by Orion'. Novartis then granted an exclusive sub-licence to Novartis Australia, the terms of which were relevantly similar to the 2014 Licence, including the purchase condition.
Is there an exclusive licence?

Actavis disavowed any argument that the 2014 Licence was a 'sham'; however it argued that the 2014 Licence simply confirmed Novartis' existing distributorship rights, which excluded the right to manufacture. Actavis submitted that Orion, by virtue of cl 2, had reserved for itself the exclusive right to manufacture the product and the three APIs, because Orion was entitled to terminate the ROW Agreement if Novartis manufactured the product, which in turn would result in termination of the 2014 Licence (as agreed by the parties).

First, in considering cl 1, Rares J said that the parties chose the terminology of the Patents Act in which to express the nature and extent of the exclusive licence, and the commercial result that the parties had in mind was to create such an exclusive licence and to give Novartis title to sue under s 120(1). Accordingly, cl 1 had the effect of granting to Novartis all the rights to 'exploit' the patent to the exclusion of all others, including Orion (and the omission of Orion from the words of cl 1 did not alter this). Orion did not reserve for itself any of the activities falling within the definition of 'exploit'.

Secondly, in considering cl 2, Rares J rejected Actavis' argument that it had the effect of altering the grant of the exclusive licence pursuant to cl 1, finding that each clause was an independent promise. His Honour recognised that an exclusive licensee may need to contract with third parties for the supply of goods or services that the licensee wishes to use in order to exploit the exclusive licence, and that the identity of that third party is irrelevant.

Rares J regarded as crucial the fact that cl 2 did not require Novartis to purchase either the manufactured product or the three APIs as a condition of its exercise of its rights under the exclusive licence cl 2 did not preclude Novartis from exploiting any of the rights granted to it under cl 1. Though as a practical matter, if Novartis breached cl 2 by purchasing a generic form of the product or any one or more of the three APIs from a supplier other than Orion (or otherwise acted in breach of its other separate contractual obligations under the ROW Agreement), the latter could choose to terminate the 2014 Licence, such a breach would occur as a result of exploiting its plenary rights under cl 1 and not as a breach of cl 1. Accordingly, by changing the drafting and structure of the 2014 Licence the parties were able to achieve the same end result as that desired under the ROW Agreement, and this did not alter the nature and extent of the rights granted to Novartis under the 2014 Licence, nor render them non-exclusive.

Further, in what is more good news for licensees, Rares J also determined that s 120(1) does not preclude persons other than the patentee or exclusive licensee from bringing infringement proceedings.

  • A licensee must be granted all the rights to 'exploit' the patent to the exclusion of all others, including the patentee, in order to be an 'exclusive licensee' under the Patents Act which allows a licensee to enforce the patent and to commence infringement proceedings.
  • A patentee may seek, as consideration for the grant of an exclusive licence, the exclusive licensee to promise to purchase goods or services that the licensee requires in order to exploit the exclusive licence, or make some other promise relating to the exercise of the rights granted to the licensee under the licence agreement (subject to competition law considerations).
  • Any agreement to purchase (or another promise by the licensee relating to the exercise of the rights granted to it under the licence agreement) should be drafted as a stand-alone 'promise' and not as a condition of the exclusive licensee's right to exploit the patented invention.

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