Victorian Supreme Court finds royalties still payable after patents expire

Victorian Supreme Court finds royalties still payable after patents expire

Victorian Supreme Court finds royalties still payable after patents expire

The Victorian Supreme Court has held that a party who purchased technology that was the subject of patent applications at the time of the transaction was still obliged to pay royalties, even after the patents granted on those applications had expired.

ARB’s royalty obligations under the Sale Agreement

On 27 February 1987, the defendants, Mr and Mrs Roberts, and their company, Altair Aviation Pty Ltd  (together, the Roberts) entered into a Sale Agreement with the plaintiff, ARB Engineering Pty Ltd (ARB) to sell the technology for the “Roberts Differential Lock”, a locking differential system developed by Mr Roberts.  

The purchase price payable to the Roberts was an up-front payment and ongoing royalties based on net sales ARB made of the “Products”.  “Products” were defined in the Sale Agreement as “the differentials as manufactured pursuant to the patents as specified in the First Schedule”.  The First Schedule identified four pending patent applications in each of Australia, Europe, Japan and the USA.

The Sale Agreement did not state an end date for the payment of the royalties.  

ARB’s application to recover royalties paid after expiration of the patents

ARB commenced proceedings against the Roberts seeking to avoid paying royalties under the Sale Agreement after the patents expired, and the return of royalties it had already paid to the Roberts after those patents had expired.  

The parties asked the Court to determine, in a separate preliminary trial, whether ARB owed any obligation under the Sale Agreement to pay further royalties to the Roberts as part consideration for the sale of the patents after they expired.

ARB argued that, on its construction of the Sale Agreement, its obligation to pay royalties was limited to the term of the patents granted on the applications listed in the First Schedule, and that an obligation to continue paying royalties post-expiration of those patents would result in an “absurdly onerous financial burden which was un-businesslike and not intended by the contract”.

Roberts entered the Sale Agreement intending that royalties would remain payable

According to the Roberts, the objective intention of the parties was that royalties would remain payable under the agreement for as long as ARB continued manufacturing the Roberts Differential Lock using the technology, and the obligation to pay royalties was not confined to, or limited by, the term of the patents.

Victorian Supreme Court decision reached

His Honour, Justice Vickery preferred the Roberts’ construction of the Sale Agreement, finding that the relevant clauses were consistent with a construction that the parties’ intention was for royalty payments to continue after any patents granted on the application listed in the First Schedule had expired.  

His Honour reached this view having regard to the fact that the Sale Agreement recognised that no patents may in fact be granted on any of the applications identified in the First Schedule and that the obligation to pay royalties was not contingent upon the grant of any patents.  His Honour was also no doubt influenced by the fact that the Roberts had sold not only their patent applications for the Roberts Differential Lock, but also their know-how and trade secrets, such that ARB acquired technical information about the Roberts Differential Lock which, if kept confidential, would extend the rights ARB acquired beyond the term of any patents granted in respect of that product.

According to his Honour, the Roberts’ construction produced a business-like result that was consistent with the commercial context and the purpose and object of the royalties clause, and the Sale Agreement as a whole.  

Things to remember: In construing clauses in an agreement, the parties intentions are objectively determined from the written agreement as a whole and consistently with what the Court regards as a business-like result

This decision makes it clear that purchasers and licensees of technology can be liable for ongoing royalties even after the term of any intellectual property, particularly registered patents and designs, covering the technology, has expired.  

Accordingly, if a party wants the duration of royalty obligations limited then that should be made clear.