How to avoid damaging the right to sue for infringement when maximising your licensing value

Structuring a Patent Portfolio to Enable Effective Claims for Infringement Damages – A Little Extra Planning to Ensure Exclusive Licensees Have Standing to Sue May Greatly Increase a Portfolio’s Value

When negotiating license agreements, technology managers often seek to “slice and dice” their intellectual property portfolio so that each licensee receives only the rights that it can best commercially exploit.  That makes good business sense, as granting overly broad rights to a licensee can mean that a portion of such rights will simply lie dormant and will not be fully exploited to the benefit of the licensor.  Thus “field of use” and territorially restricted licenses are common.

However, withholding some rights from otherwise “exclusive” patent licensees can limit a licensee’s ability to effectively enforce those rights.  Recent Federal Court decisions in Australia will make it more difficult for exclusive licensees to claim damages without clear prior planning by the licensor.  The law in Australia concerning whether exclusive licensees have standing to sue is now quite different from the law overseas, including in the USA.  This article reviews the law in Australia and the USA concerning the commercial effects of a licensee’s status as the holder of exclusive patent rights, and provides recommendations on how an Australian patent portfolio can be structured to improve the ability to claim infringement damages.

In the Australian case Bristol-Myers Squibb Company v Apotex Pty Ltd (No 5)[1], Justice Yates held:

“An exclusive licence cannot be one that reserves to the patentee or any other person any residual right with respect to the exploitation of the invention. It follows that there can only be one exclusive licensee.”[2]

The decision is thus quite clear that where a licensor grants multiple “field of use” exclusive licenses, no licensee will have standing to sue infringers.  This is the rule even when the patent owner is joined as a party to an infringement suit, as is required under the Australian Patents Act.[3] The decision seems to ignore practical bases for legal standing, and places significant restrictions on licensees, particularly licensees who obtain rights to worldwide patent portfolios and who may be surprised at their limited ability to enforce their rights in Australia.

In the Bristol-Myers Squibb (BMS) case, BMS had been granted an exclusive patent license throughout Australia to use and sell the blockbuster antipsychotic drug aripiprazole (marketed by BMS as Abilify).  However in the license granted to BMS, the patentee, Otsuka Pharmaceutical Co., Ltd (Otsuka), had reserved to itself the exclusive right to make the drug.  The court ruled that the reservation of this right in the license agreement prevented BMS from acquiring standing to sue infringers.

Background on Legal Standing

Under English common law, the concept of legal standing to sue, or locus standi, was used to determine whether a plaintiff had a sufficient interest in a controversy to warrant the use of judicial resources in the resolution of that controversy.  Thus courts were not to be used for the resolution of purely hypothetical questions, rather some actual injury to a person was required to gain the attention of a court.  The injury however did not need to be great, as Lord Diplock stated:

“[i]t would…be a grave danger to escape lacuna in our system of public law if a pressure group…or even a single public spirited taxpayer, were prevented by outdated technical rules of locus standi from bringing the matter to the attention of the court to vindicate the rule of law and get the unlawful conduct stopped.”[4]

In Australia, the general test for legal standing is 1.) Does the plaintiff have a special interest in the matter; and 2.) Is that interest too distant?[5]  Where a statute is involved, one generally looks to the statute to define who has legal standing.

Reasoning of the Australian Federal Court

Although acknowledging that whether BMS could sue Apotex was an issue of standing[6], Justice Yates’ resolution of this issue seemed to apply none of the general principles of standing referred to above.  Rather, Justice Yates referred to s. 120(1) of the Australian Patents Act 1990 that states “infringement proceedings may be started by the patentee or an exclusive licensee.”  Justice Yates then relied primarily on a High Court decision, Ex parte British Nylon Spinners Limited and Imperial Chemical Industries Limited  (British Nylon Spinners) [7], which interpreted the definition of “exclusive licensee” under the 1952 Patent Act, to conclude that BMS did not meet the definition of an exclusive licensee.

BMS presented a cogent argument that the definition of an “exclusive licensee” is very different under the 1952 Act than it is under the Patents Act 1990 that applied in the present case.  In the 1952 Act, an “exclusive licensee” is defined as a licensee having “… the right to make, use, exercise and vend the patented invention, throughout Australia, to the exclusion of all other persons, including the patentee.” (Emphasis added.)  In the Patents Act 1990, an “exclusive licensee” is defined as a licensee having “… the right to exploit the patented invention throughout the patent area to the exclusion of the patentee and all other persons.”  The term “exploit” is then defined in the Act as “…where the invention is a product—make, hire, sell or otherwise dispose of the product, offer to make, sell, hire or otherwise dispose of it, use or import it, or keep it for the purpose of doing any of those things….”  (Emphasis added.)

Thus, from a grammatical standpoint, the use of the disjunctive conjunction “or” in the Patents Act 1990 seems to explicitly define as an exclusive licensee someone who has exclusive rights to hire and sell–but not to make–a product.  But this argument proved unpersuasive, as BMS was held to not be an exclusive licensee, and thus BMS had no standing to sue Apotex.

On appeal, the Full Federal Court agreed with Justice Yates, as it also seemed bound by the British Nylon Spinners High Court decision.[8]  The Court stated “[w]e accept that, as BMS and Otsuka contended, it is possible to read the sections with the distributive definition of ‘exploit’, but we think the primary judge’s construction is the preferred one.”[9]

Impact of the Decision

The holding of the Australian Federal Court seems quite harsh, as it will often leave licensed patent portfolios without any licensee having standing to sue infringers.  The most significant damages are generally suffered by licensees, and alternative claims by a patentee for an account of profits is often for a much smaller amount.[10]

Regrettably, the Federal Court’s reasoning seemed to lack consideration of the general principles of legal standing discussed above, which would seem to favour finding that BMS had a strong “interest” in the matter, and that such an interest was in no way “remote”.  Thus the decision appears to rigidly adhere to High Court precedent that interpreted a different act, without consideration for the purposes of legal standing, and without consideration for the decision’s commercial impact.

Further, the decision makes the law in Australia out of line with the law of some of Australia’s major trading partners, including the USA and the UK[11].  That presents additional difficulties for companies, universities and other technology managers who often negotiate worldwide license agreements when commercialising their patent portfolios.

Standing for Exclusive Licensees in the USA

In the US, exclusive patent licensees have long been considered to have legal standing under the US Constitution to sue for infringement, provided that the licensee holds “some of the proprietary sticks from the bundle of patent rights.”[12]  Where a licensee holds less than “all substantial rights” in a patent, the patent owner is required to be joined as a party in an infringement action initiated by the licensee.[13]  This is known as a requirement of “prudential standing” that operates in addition to “constitutional standing”.[14]  However, in 2010, the defendants in the case of WIAV Solutions v. Motorola[15] asserted that WIAV did not have constitutional standing to sue for infringement of a portfolio of signal transmission patents because WIAV was only an exclusive licensee in a particular field of use.  In the WIAV case the patent owner had been joined as a party to the suit and thus the requirements of prudential standing were ostensibly satisfied.[16]

Focusing on the fundamental principles underlying legal standing, the US Court of Appeals for the Federal Circuit ruled that WIAV was in fact injured by infringement of the licensed patents, and therefore WIAV did have constitutional standing to sue.  WIAV’s exclusionary rights with respect to the particular defendants were “violated by any acts of infringement that such party is alleged to have committed, and the injury predicate to constitutional standing is met.”[17]

In contrast to the new rule in Australia where standing to sue by a licensee can result only if there is a single licensee and no others, in the WIAV decision the patent portfolio had been divided up among at least four different licensees, where some licensees had exclusive field of use licenses and others had non-exclusive licenses.  However, the Federal Circuit held that “an exclusive licensee does not lack constitutional standing to assert its rights under the licensed patent merely because its license is subject not only to rights in existence at the time of the license but also to future licenses that may be granted only to parties other than the accused.”[18]

Thus in the US the courts have adopted a very practical approach to standing for exclusive licensees, which considers whether an accused infringer could obtain rights in an asserted patent from anyone other than the exclusive licensee who is presently asserting the patent against the infringer.

Practical Options for Managing an Australian Patent Portfolio Having Multiple Field of Use Exclusive Licensees

Option 1.  To enable exclusive licensees of Australian patent rights in various fields of use to effectively sue infringers for damages, Australian patent portfolios can be divided based on the same fields of use using one or more divisional patent applications.  That will enable each field of use exclusive licensee to satisfy Justice Yates’ requirement that “there can only be one exclusive licensee”, as each licensee can be granted all rights to its respective patent(s) maturing from the divisional patent application(s) in its field of use.  However, such divisional applications will not assist in empowering licensees with a right to sue in cases where the patentee has reserved rights to itself such as the right to manufacture.

Option 2.  Another option to increase potential patent damages is for patentees to seek enhanced damages under s. 122(1A) of the Patents Act 1990. Patentees who do not suffer significant direct damages related to sales by one or more licensees can still sue for enhanced damages based on the losses of the licensees.  The Federal Court has recently shown a willingness to apply enhanced damages under this section of the Act.[19]

Summary

The Australian Federal Court has established a very strict rule that prevents any patent licensee from having legal standing to sue for infringement damages in circumstances where there are other licensees having rights under the same patent, or where some patent rights have been reserved for the patentee.  The rule appears to be contrary to basic principles of legal standing, and contrary to corresponding rules adopted by some of Australia’s major trading partners.  Although the rule is not ideal for managers of patent rights, and may make negotiation of exclusive licenses to international patent portfolios more complex, prior planning regarding Australian divisional patent applications and patent enforcement strategies can ensure that patent infringement damages are claimable.

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