Former licensee liable to contribute to licensor’s costs of patent infringement proceedings post-exp
Austral Masonry (NSW) Pty Ltd v Cementech Pty Ltd  FCAFC 72
The Full Federal Court has held that, under an exclusive patent licence agreement, a former licensee is liable to contribute towards the licensor’s costs of patent infringement proceedings the licensor commenced during the term of the agreement even though the agreement had since expired.
The Exclusive Patent Licence Agreement
On 11 February 2010, Cementech Pty Ltd (Cementech), as the owner of Australian Patent No. 2007219709, entered into a licence agreement with Austral Masonry (NSW) Pty Ltd (Austral) pursuant to which Cementech granted Austral an exclusive licence to exploit that patent for four years (Licence Agreement). Under the Licence Agreement, the parties agreed a regime for taking action against actual and threatened infringement of the patent, which included provisions for the parties to share the costs of and proceeds from any such action. In issue before the Full Federal Court was clause 9.2(b), which provided that if Cementech took action, the parties would bear all expenses incurred in connection with that action equally.
Before the Licence Agreement expired, Cementech commenced patent infringement proceedings against Adbri Masonry Pty Ltd (Adbri) in the Supreme Court of New South Wales. Cementech joined Austral as a defendant to those proceedings to obtain orders against it with respect to Austral’s obligations under the Licence Agreement.
The trial Judge’s construction of the Exclusive Patent Licence Agreement
At first instance, Cementech argued that, although the Licence Agreement had expired, clause 9.2(b) survived expiration such that Austral was liable for half Cementech’s costs of the infringement proceedings until they concluded. Justice Stevenson of the Supreme Court of New South Wales agreed, concluding that Austral’s obligation under clause 9.2(b) was enlivened once Cementech commenced infringement proceedings, which occurred during the term of the Licence Agreement. In his Honour’s opinion, that obligation was in the nature of an accrued right that Cementech acquired unconditionally when proceedings commenced.
Austral’s appeal to the Full Federal Court
On appeal, Austral argued that:
- its liability under clause 9.2(b) was dependent on it first notifying Cementech of an alleged infringement; and
- if it was liable under clause 9.2(b), that liability it did not survive expiration of the Licence Agreement.
Issue 1: condition precedent to Austral’s liability
Although not argued at trial, on appeal, Austral contended that its liability under clause 9.2(b) arose only if it first issued a notice of infringement to Cementech in accordance with clause 9.1. That clause required Austral to notify Cementech if it became aware that a third party had infringed or threatened to infringe the patent. According to Austral, it would only be liable to contribute to half of Cementech’s costs if Cementech took action in response to that notice; it would not be liable if Cementech took action of its own volition. In support of its argument, Austral relied on clause 9.2(a) (which provided that “upon receipt of a” notice of infringement, Cementech could, in its sole discretion, take whatever action it wished to protect the patent from infringement) and the structure of clause 9.2 (where the provision dealing with Austral’s liability for costs followed directly after the provision dealing with Cementech’s response to a notice of infringement). As it did not issue a notice in respect of Adbri’s alleged infringement, Austral argued that it could not be liable under clause 9.2(b).
Although the Court refused to allow Austral to raise this new point on appeal, it nevertheless considered the argument was without merit because:
- clause 9.2(b) was not expressed to be conditional upon Cementech’s receipt of a notice of infringement;
- the parties had a common interest during the term of the Licence Agreement to protect the patent, such that it seemed unlikely that the parties would have made the costs sharing regime dependent upon Austral’s awareness of an infringement;
- as the registered owner of the patent, Cementech could take action at any time against an infringer, irrespective of whether it received a notice of infringement;
- the scheme set out in clause 9 as a whole contemplated that Cementech would, in the first instance, be responsible for protecting the patent;
- as Austral was obliged to issue a notice of infringement if it became aware of any actual or threatened infringement, its interests in the outcome of any proceedings which might follow were irrelevant. Only Cementech’s interests, as the party with the initial right to decide whether to institute proceedings or not, were relevant to determining whether Austral was liable under clause 9.2(b); and
- it would be an odd outcome if Austral could avoid liability under clause 9.2(b) simply by choosing not to issue a notice of infringement.
Issue 2: survival of clause 9.2(b) post-expiration
Austral argued that the trial Judge had erred in concluding that Austral’s obligation under clause 9.2(b) was an accrued right unconditionally acquired when Cementech commenced infringement proceedings, and so survived termination, because:
- the Licence Agreement did not provide for any provision to survive termination;
- its liability under clause 9.2(b) depended on further action by the parties post-expiration (ie, Cementech actually incurring costs in connection with infringement proceedings), and thus could not survive termination (relying on High Court authority that, in the absence of a clear intention of the parties to the contrary, no liability can be brought into existence under an agreement if it depended upon a further act of performance);1 and
- given the nature of the agreement, it was commercially unrealistic that the parties intended that Austral remain liable for costs of litigation when it had no continuing interest in the outcome of the proceeding as a licensee.
Cementech contended that clause 9.2 expressly recognised that proceedings commenced in accordance with that clause might continue after the Licence Agreement had expired. It relied on clause 9.2(f), which provided a formula for distributing the proceeds resulting from any successful infringement proceedings “commenced” (but not completed) during the term between the parties. Accordingly, it argued that if clause 9.2(f) survived termination, clause 9.2(b) did too. Consequently, Cementech argued, Austral had a continuing interest in the outcome of proceedings, because it was entitled to a share of the proceeds of any successful proceedings even after the Licence Agreement expired.
Although the Full Court empathised with Austral’s position, it nevertheless agreed with Cementech. In relation to Austral’s argument that clause 9.2(b) could not survive expiration because its liability depended on Cementech taking some further action post-expiration, the Court found that, on the proper construction of clauses 9.2(b) and (f), the parties intended those clauses to survive expiration. That intention consequently prevailed over the principle that a liability does not arise where it depends on events occurring after an agreement ends.
Lessons for contracting parties
Parties (and legal advisers) should not assume that a provision of an agreement will or will not survive termination of an agreement. They should turn their mind to this issue, particularly where the consequences of a clause might have a significant financial impact on either or both of the parties after the agreement ends. If parties want a clause to survive termination, the agreement should expressly state that.
- Westralian Farmers Limited v Commonwealth Agricultural Service Engineers Limited (in liq) (1936) 54 CLR 361 at 379-380 per Dixon and Evatt JJ.