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

Monday, September 19, 2016

Defining the relationship (again). Are we really exclusive?

By Lauren John, Associate

If you thought your love life was complicated, wait until you try to unravel the meaning of 'exclusive licensee' in the Patents Act, which has again arisen for interpretation, this time by the Full Federal Court in Actavis Pty Ltd v Orion Corporation [2016] FCAFC 121.

It is crucial to have a firm grasp of what is meant by 'exclusive licensee' when commencing infringement proceedings as a failure to establish this relationship can be a 'deal breaker'. Whether or not you are an exclusive licensee is determinative of whether you have standing to commence infringement proceedings under s120(1) of the Patents Act, and, in seeking interlocutory injunctions, will impact the ability of a party to demonstrate that it has suffered damage in relation to balance of convenience arguments, and whether it is necessary to provide a bank guarantee in order to obtain an interlocutory injunction.

If you feel like you're having déjà vu, you might be thinking of my previous post on this issue which considered the first instance decision, Orion Corporation v Actavis Pty Ltd (No 3) [2015] FCA 1373, in light of the Full Court decision in Bristol Myers Squibb Company v Apotex Pty Ltd [2015] FCAFC 2. There's more on those decisions below. Collectively, these decisions may trigger renewed efforts for reform – the Law Council of Australia has previously submitted to IP Australia that the definition of 'exclusive licensee' ought to be expanded under the Patents Act to include any licensee with exclusive rights to perform one or more acts within the rights conferred by the patent.

Relationship status? It's complicated

The Full Court decision clarifies that only the patentee or an exclusive licensee has standing to sue under s120(1). Under the Patents Act, an 'exclusive licensee' is:

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.

Significantly, the Full Court said in obiter that an exclusive sub-licensee is not an 'exclusive licensee' for the purposes of the Patents Act, and therefore does not have standing to sue for infringement. This, if followed, will have ramifications for Australian subsidiaries of multinational corporations which are exclusive sub-licensees, and those corporations above them in a chain of exclusive licences, particularly where an interlocutory injunction is sought to restrain an alleged infringer. If an exclusive sub-licensee cannot be joined as a party to an infringement action, particularly in the context of pharmaceutical patents, this may create difficulties for a patentee or exclusive licensee in demonstrating the type of damage that is generally required in order to tip the balance of convenience in favour of granting an interlocutory injunction.


In the first instance decision, Orion v Actavis (No 3), Orion and Novartis entered into the ROW Agreement in relation to a product consisting of a combination of three active pharmaceutical ingredients for a number of territories including Australia. Though Orion granted Novartis a number of exclusive rights in the ROW Agreement, the right to manufacture the three APIs and the product was expressly reserved for Orion.

Following the decision of BMS v Apotex, which exposed deficiencies in an earlier confirmatory licence agreement, Orion and Novartis entered into a so-called 'exclusive licence' in respect of the patent and the product to address those deficiencies (2014 Licence). Clause 1 provided that 'Orion hereby grants to the Licensee … an exclusive licence under the Patent … to exploit (as that term is defined in … 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 this Exclusive Licence, the Licensee undertakes to purchase the Products and the active ingredients … exclusively from Orion or a party authorised by Orion.' 

An exclusive sub-licence was then granted by Novartis to Novartis Australia in essentially the same terms as the 2014 Licence (2014 Sub-Licence).

Curiously, after the 2014 Licence was entered into, Orion entered into a licence, supply and distribution agreement with an unnamed company (LS&D Agreement) under which that company was granted the right to market generic product in Australia in the event that a third party lawfully obtains regulatory approval and is not prevented from commercialising, in Australia, a generic product.

At first instance, Justice Rares held that both Novartis and Novartis Australia had standing to sue. Actavis appealed.

Is Novartis an exclusive licensee?

The Full Court observed that the contractual arrangements between Orion and Novartis under the ROW Agreement, and the LS&D Agreement between Orion and the unnamed company, created rights that are, in legal effect (although not necessary in practical operation) inconsistent with both the rights that are held by an exclusive licensee for the purposes of the Patents Act, and with the exclusive rights which Novartis claimed to hold under the 2014 Licence.

According to the Full Court, the only way to reconcile these conflicting rights with the grant made under clause 1 of the 2014 Licence would be to treat the 2014 Licence as a sham, or to read down clause 1 in some way. Actavis had disavowed any argument that the 2014 Licence was a sham, but it argued that clause 1 should be read down as a matter of construction.

The Full Court said it was 'not apparent' how clause 1 could be read down. In finding that Justice Rares was correct to conclude that Novartis is an exclusive licensee for the purposes of the Patents Act, the Full Court relied on the following findings.

  • Clause 1 is 'unequivocal in its terms' and its words 'abundantly clear', such that it is manifest that the rights that were granted were intended to be exclusive in the sense that they were granted to the exclusion 'of all other persons' (including Orion, the patentee).
  • The conflicting rights conferred by Orion on the unnamed company did not alter the effect of the 2014 Licence and provided no basis to give the 2014 Licence a more limited scope (particularly because it is conduct by only one party to the licence involving a third party).
  • Justice Rares' analysis of the relationship between clauses 1 and 2 of the 2014 Licence was correct. As clauses 1 and 2 are independent promises, clause 2 does not act as some limitation to cut down the legal effect of the rights granted by clause 1.
  • The interdependence between the ROW Agreement and the 2014 Licence – Orion could terminate the ROW Agreement and the 2014 Licence if Novartis acted in breach of the ROW Agreement – did not point to a different characterisation of the rights granted by clause 1. There is nothing in the definition of 'exclusive licensee' which requires such a licence to be of any specific duration nor one that cannot be terminated by an agreed event.

What about Novartis Australia?

At first instance, the parties agreed that Novartis Australia was not an 'exclusive licensee' for the purposes of the Patents Act. Notwithstanding that, Justice Rares held that Novartis Australia had standing to sue for infringement for three reasons.

  • Section 120(1), which uses the term 'may', does not preclude persons other than the patentee or exclusive licensee from bringing infringement proceedings. 
  • Section 13(2) of the Patents Act recognises that the exclusive rights granted to a patentee are capable of assignment. Justice Rares considered that the 2014 Licence and the 2014 Sub-Licence involved an assignment of exclusive rights of property, namely the right to exploit the patented invention during the term of the patent.
  • An exclusive sub-licensee must be able to bring infringement proceedings without the need to bring separate proceedings against its licensor and those above it, seeking to compel them to start infringement proceedings. 

The Full Court disagreed. Importantly, on appeal (and at first instance), the respondents did not dispute that Novartis Australia is not an exclusive licensee of the patent. The Full Court said that position was 'properly taken'. First, the Full Court disagreed with Justice Rares that s120(1) is merely indicative of the persons who can sue for infringement. Accordingly, unless a party is a patentee, or an exclusive licensee within the meaning of the Patents Act, that party cannot sue for infringement. Secondly, the Full Court said that Justice Rares erred in holding that the 2014 Licence or the 2014 Sub-Licence involved an assignment of rights that effectively passed from Orion to Novartis Australia.

Further, the Full Court said that Novartis Australia is not an exclusive licensee because it does not hold its licence from the Orion, as patentee. It is questionable that an exclusive sub-licensee does not meet the definition of 'exclusive licensee' in the Patents Act merely because those rights are acquired indirectly from the patentee. As noted above, however, the issue was not debated before the Full Court. It appears there remains scope to argue in the future that the phrase 'under a licence granted by the patentee', as used in the definition of 'exclusive licensee', includes a chain of exclusive licence agreements leading to an ultimate exclusive sub-licensee.

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