Judge: Kenny J
The Federal Court of Australia awards almost $3m in damages to the exclusive sublicensee under a patent licensing agreement. The patent owner (licensor) was ordered to pay $1.32m for granting another licence over the patent in breach of the original patent licensing agreement. The party who was granted the conflicting licence was ordered to pay $1.64m for inducing or procuring the patentee to breach the original patent licensing agreement. The Court decided that a third party is liable in tort for inducing breach of contract if it is granted patent rights in breach of a pre-existing patent licensing agreement where the third party knowing of, or being recklessly indifferent to, such agreement induces or procures the licensor of the pre-existing patent licensing agreement to breach it by granting the conflicting licence.
Aus-Lid Enterprises Pty Ltd (Aus-Lid Enterprises) was the registered owner of Australian Patent AU754978 with an expiry date of 18 September 2017. The patent concerned an invention entitled “Container Lid and implement” which referred to a container lid that featured an internal component which could be used for removing contents from the container (Patent). Auslid Operations Pty Ltd (Auslid Operations) was the exclusive licensee of the Patent. Sealed Air Australia Pty Limited (Sealed Air) and Visy Packaging Pty Ltd (Visy) are manufacturers and suppliers of containers, including containers and lids for pre-packaged dairy products.
In January 2011, Aus-Lid Enterprises and Auslid Operations (together, AusLid) entered into a patent license agreement (2011 Licence Agreement) with Sealed Air (previously Cryovac Australia Pty Ltd) by which AusLid granted an irrevocable, exclusive sublicense to Sealed Air to exploit the Patent in the Field. The Field was defined under the 2011 Licence Agreement as the “manufacture and supply of containers for pre-packaged food containing dairy products”. Under the 2011 Licence Agreement, Auslid also agreed to not conduct any commercial activity within the Field or grant any rights to third parties in relation to the Field and not to interfere with Sealed Air’s enjoyment of the sublicence granted under the 2011 Licence Agreement – clauses 4.1 and 7.1(c) (Relevant Terms). In 2012, Sealed Air began to manufacture a “spoon-in-lid made from a single piece of plastic” called the Combo-Lid pursuant to its rights under the 2011 Licence Agreement. Sealed Air sold the Combo-Lid to Chobani Australia Pty Ltd (Chobani) for use as part of the containers for Chobani’s “Gippsland Dairy” yoghurt.
In January 2014, AusLid purported to grant Visy a licence to use the Patent to produce integrated lids for yoghurt containers. The licence was oral (Informal Licence). In May 2014, Sealed Air discovered that Visy was supplying to Chobani a virtually identical product to its Combo-Lid (Competing Product). Sealed Air, through its lawyers, demanded that AusLid revoke any rights that it had granted to Visy. In response to Sealed Air’s request, AusLid advised that it intended to continue the agreement it had in place with Visy. Sealed Air’s lawyers then sent several letters to Visy informing it of the 2011 Licence Agreement and the Relevant Terms. Despite this, Visy continued to manufacture and sell the Competing Product to Chobani. In doing so, Visy relied on its Informal Licence and on AusLid’s repeated assurances that it had terminated the 2011 Licence Agreement with Sealed Air due to Sealed Air’s breach, or that the licence in the 2011 Licence Agreement had become non-exclusive due to Sealed Air’s breach. The matter was managed by Visy’s in-house lawyer. Visy took no material steps to verify AusLid’s assurances.
In December 2014, AusLid and Visy entered into a formal written licence agreement (2014 Licence Agreement) by which AusLid confirmed in writing the grant of the Patent rights to Visy pursuant to the Informal Licence including the right to manufacture and sell the Competing Product. The agreement also provided that AusLid would indemnify Visy from any losses or damages resulting from claims of third parties alleging that Visy’s actions in relation to the Competing Product breached their Patent and other rights. Visy’s continued sales of the Competing Product to Chobani adversely affected Sealed Air’s sale of its Combo-Lid to Chobani to the point that by March 2015 Sealed Air no longer sold the Combo-Lid to Chobani. Evidence was lead that Chobani now required the lid for its Gippsland Dairy product to be supplied in matte black in-mould labelling form which Sealed Air was unable to supply while Visy’s Competing Product met this requirement. Visy and AusLid argued that this was the reason for Sealed Air’s lost sales. The Competing Product was also supplied at a lower price than Sealed Air’s Combo-Lid. The Judge was not satisfied that these factors explained Sealed Air’s lost sales.
As a result of the above, on 6 January 2015 Sealed Air commenced proceedings against AusLid, Ashlyn Graeme de Souza (sole director of Auslid Operations and one of the directors of Aus-Lid Enterprises) and Visy before the Federal Court of Australia (FCA). During the course of the proceedings, Sealed Air obtained a default judgment in its favour for Aus-Lid Enterprises’ breach of contract. AusLid Operations was wound up in 2018 and accordingly, Sealed Air did not pursue its claims against it. Just before the trial, Sealed Air also decided to not pursue its claims against Mr de Souza. The only issues therefore standing for the FCA to decide was whether Visy had induced or procured AusLid to breach the 2011 Licence Agreement and, if so, what damages Visy and Aus-Lid Enterprises should pay.
Sealed Air argued that once Visy was put on notice of the 2011 Licence Agreement, or had a reasonable basis to believe that the agreement existed, it should have stopped supplying the Competing Product to Chobani. Instead, it chose to shut its eyes to the truth and to protect its commercial interest by encouraging AusLid to breach the 2011 Licence Agreement by entering into the 2014 Licence Agreement with Visy. This, in turn, ensured that Visy could continue to supply the Competing Product to Chobani, an important customer. In its defence, Visy alleged that it had reasons to believe that the 2011 Licence Agreement had been repudiated by Sealed Air in 2014 due to Sealed Air’s breach, or that the licence had become non-exclusive and that it could rely on AusLid’s assurances to this effect.
Kenny J held that for Sealed Air to be successful in its claim that Visy had induced or procured AusLid to breach the 2011 Licence Agreement, it was necessary for Sealed Air to prove that: (a) the 2011 Licence Agreement existed; (b) AusLid breached the 2011 Licence Agreement by granting to Visy the Informal Licence and then the 2014 Licence Agreement; (c) Visy knew of the 2011 Licence Agreement and of the Relevant Terms; (d) Visy intended to induce or procure AusLid to breach the 2011 Licence Agreement and that such inducement or procurement did cause AusLid to breach the 2011 Licence Agreement; and (e) AusLid’s breach of the 2011 Licence Agreement caused loss or damage to Sealed Air.
Kenny J only briefly considered requirements (a) and (b) above as these were not in dispute by the parties.
As for requirements (c) and (d) above, Kenny J held that if Sealed Air could demonstrate that Visy had actual knowledge of the 2011 Licence Agreement, including of the Relevant Terms, then Sealed Air would be able to also demonstrate that Visy had the necessary intention to induce or procure AusLid to breach the 2011 Licence Agreement. To determine this, Kenny J turned to the communications Mr Stein (Visy’s in-house counsel) received from both Sealed Air’s lawyers and Mr de Souza (on behalf of AusLid). According to Kenny J, the letters sent by Sealed Air’s lawyers to Mr Stein adequately informed him/Visy of the 2011 Licence Agreement and more importantly of the Relevant Terms. Furthermore, Mr de Souza’s communications to Mr Stein addressing the issues raised by Sealed Air’s lawyers never denied that the 2011 Licence Agreement existed at one point at least. In the course of her deliberations, Kenny J considered a section in a Memorandum of Understanding of 2012 (MOU) between Visy’s Thai company and AusLid which provided that the Thai company could not sell its product to the dairy industry in Australia. Justice Kenny found that the section was included due to the prior exclusivity AusLid had granted to Sealed Air in the 2011 Licence Agreement. Based on this evidence, Kenny J concluded that Visy did know of the 2011 Licence Agreement (including of the Relevant Terms) and that AusLid’s grant of Patent rights to it (including the right to manufacture and sell the Competing Product) was in breach of that agreement.
Kenny J then discussed what act (or acts) Visy had committed which induced or procured AusLid to breach the 2011 Licence Agreement. She held that from the time Visy and AusLid entered into the Informal Licence to when Visy received the first letter from Sealed Air’s lawyers in September 2014, Visy could not have committed any act which would have induced or procured AusLid to breach the 2011 Licence Agreement. However, after receiving the first letter from Sealed Air’s lawyers, Visy was then on notice of Sealed Air’s prior rights and in a position to induce or procure AusLid to breach the 2011 Licence Agreement, as in fact it did. In Kenny’s J view, Visy’s decision to continue to pay royalties to AusLid for the right to manufacture and sell the Competing Product to Chobani after becoming aware of the 2011 Licence Agreement , and Visy’s subsequent entry into the 2014 Licence Agreement, is what induced or procured AusLid to breach the 2011 Licence Agreement.
In the course of reaching her conclusion, Kenny J considered whether Visy had reasonable grounds to honestly believe that the 2011 Licence Agreement had been repudiated. To resolve this issue, Kenny J considered the letters Mr Stein of Visy received from Sealed Air’s lawyers between September and November 2014. Sealed Air’s letters to Mr Stein informed him of the existence of the 2011 Licence Agreement, the rights that such agreement granted to Sealed Air and the reasons AusLid’s grant of rights to Visy to exploit the Patent was in breach of this agreement. Kenny J further considered the emails Mr de Souza of AusLid sent to Mr Stein from September to December 2014 which in Kenny J’s opinion were contradictory and unclear. At times, Mr de Souza acknowledged the existence of an agreement with Sealed Air (to the point that he offered to indemnify Visy against claims that Sealed Air might have against it in relation to the Patent rights). However, at other times he informed Mr Stein that Sealed Air had breached the 2011 Licence Agreement or that such agreement had been repudiated or even amended so as to make it non-exclusive. In Kenny J’s view, this showed how “out of depth” Mr de Souza was as to AusLid’s legal position in relation to the 2011 Licensing Agreement and that an experienced commercial lawyer such as Mr Stein therefore did not and could not have reasonable grounds to therefore believe that the 2011 Licence Agreement had been either repudiated or in any way legally terminated. For these reasons, Kenny J held that Visy did not have any sufficient basis to genuinely believe on reasonable grounds that the 2011 Licence Agreement had been repudiated or otherwise legally ended.
In the event Visy did not have actual knowledge of the 2011 Licence Agreement, Kenny J decided to also consider whether Visy had been wilfully blind (or indifferent) to the agreement and to the fact that AusLid was in breach of the agreement by granting rights to Visy to manufacture and sell the Competing Product. Kenny J once again considered the letters Mr Stein had received from Sealed Air’s lawyers and the emails Mr de Souza had sent him. In addition to this, Kenny J also turned to Mr Stein’s statements given in cross examination in which Mr Stein had stated that he did not know whether Mr de Souza understood AusLid’s legal position in relation to the 2011 Licence Agreement), Mr Stein’s decision to not seek independent legal advice in relation to the 2011 Licence Agreement (as had been suggested by Sealed Air’s lawyers), Mr Stein’s attempt to question the validity of the 2011 Licence Agreement by raising the question whether it had been properly executed and Mr Stein’s unwillingness in evidence to concede to some facts relating to the Informal Agreement. All these factors led Kenny J to conclude that Mr Stein did not at any point in time have the interest to actually ascertain the true facts surrounding the 2011 Licence Agreement as Mr Stein understood that by doing so the commercial arrangement Visy had in place with Chobani would have been put at risk.
In determining the damages that were to be awarded to Sealed Air for Visy’s inducement of breach of contract, Kenny J held that damages were to be awarded so as to restore Sealed Air to the position it would have been in had there not been a breach of contract by AusLid. Justice Kenny held that it was necessary to assess the quantum of loss suffered by Sealed Air between September 2014 (when Visy first became aware of the 2011 Licence Agreement) and April 2018 (when the Patent expired and therefore Sealed Air’s exclusivity ended). In its evidence, Visy disclosed a gross profit of $1,635,417 between September 2014 and April 2018 from the sale of the Competing Product to Chobani. Kenny J determined that this amount represented the economic loss that Sealed Air had suffered due to Visy’s tortious act.
Justice Kenny also awarded damages of $1.32m against AusLid for breaching the 2011 Licence Agreement by granting a licence over the Patent to Visy.
For companies holding an exclusive intellectual property licence, the decision affirms that the exclusive licensee may have rights against both the licensor and a third party to whom the licensor grants inconsistent rights. The rights against the licensor lie in a standard breach of contract claim. The rights against the third party lie in the tort of interfering with contractual relations (also known as inducing breach of contract). The rights against the third party will only arise where the third party is aware of, or should have been aware of, the exclusive licensee’s prior rights and carried on in disregard of those rights.
For the exclusive licensee, the lesson is to put the third party on notice of its prior rights as soon as possible, providing good details of the nature and source of those rights. For the third party, the strong lesson is that it cannot simply ignore the claims of the exclusive licensee as being the licensor’s problem or rely on vague or dubious assurances from the licensor about the exclusive licensee’s situation as its defence against an action for inducing breach of contract. Rather, promptly after becoming aware of the potential issue, the third party must take reasonable steps to ascertain the objective legal position and make a commercial and legal decision as to its next steps after properly assessing risk. If it determines to proceed with the conflicting arrangement (or fails to make the proper enquiries), it must be prepared to have a substantial damages award made against it.
In this case, Visy may subsequently seek to rely on the indemnity against claims provided to it by AusLid, on the hopeful assumption that AusLid had the financial resources to honour that indemnity following the expense of the case and meeting the large damages award made against it. Had Visy simply walked away from the arrangement with AusLid once it became aware of Sealed Air’s prior conflicting rights, Visy would have been free of liability to Sealed Air. Of course, Visy may have then found itself in an awkward situation with the end client Chobani given the legal and commercial supply commitments Visy had made to Chobani in reliance on Visy’s arrangements with AusLid.