A core tenet of IP regulation is that it incentivises creativity, anointing IP creators with rights to protect and exploit their work(s) to the exclusion of all others (provided they meet the relevant requirements under the relevant IP laws). The two primary means of exploiting IP are through selling IP to others (assignment) and allowing others to use IP (licensing). Assignment results in a full transfer of IP ownership, whereas licensing affords certain third parties with the right to do something (which they otherwise would be prevented from doing by virtue of the exclusivity of an original IP creator’s rights), with the original creator maintaining ownership of the IP.
But what is the nature of this ‘right to do’ and what protections, if any, does a licence holder (licensee) possess in the event that the original creator of a work (licensor) assigns their IP away, or the IP right is otherwise invalidated?
Let’s take a look.
What is an IP licence?
Today dealings with IP are mostly regulated by federal legislation, such as the Copyright Act1 and the Patents Act2. However, historically, the common law (a body of case law which binds Australian courts in their decision-making) has shaped the way in which people can deal with IP, particularly the law of contract and property.
Property can be categorised into two distinct areas, ‘real’ property’3 and ‘personal’ property, which are each separated into further sub-categories. Personal property is often unhelpfully defined as ‘anything that is not real property’, but nonetheless is the umbrella category that captures IP4. Within the field of personal property are ‘choses in action’. A ‘chose in action’ is an intangible right which is only enforceable by legal action, for example, the right to sue for performance of a contractual obligation.
A key aspect of property law is an owner’s right to exercise control over their property. Unlike real property which has a physical presence, an owner of IP cannot physically exercise control over their property. As such, IP rights are often considered to be ‘choses in action’. While a home owner can install locks on their doors to keep other people from entering or using their house, an owner of IP needs to enforce their rights against third parties through legal action in order to prevent them from exercising their otherwise exclusive IP rights.
The common law principles of property gave IP the legal character of personal property such that it could be used, regulated and enforced. However, once this was developed, IP owners needed structures to govern situations where their intention was to allow third parties to use their IP. Such principles of use were developed as a result of contract law, which governs agreements between two or more parties. Such agreements include licences. A licence is an affirmative right that is afforded to a licensee to do something which could only previously be done by a licensor. For example, the owner of copyright in a photograph possesses the exclusive right to communicate this work in public5. If the licensee does not use the IP in accordance with the licence, the owner (licensor) can enforce this right though legal action.
Types of licences
Licences are creatures of contract, being either:
- express (ie written) – for example, between a user and Spotify to listen to music on its app with regular fees being paid; or
- implied (by virtue of conduct between parties) – for example, between A and B in the creation of a report. If A has created the report for B, then in the absence of any express term, there will generally be an implied licence for B to use the report for the purpose it was commissioned.
As stated, licences allow an IP creator to maintain ownership of their work. However, the type of licence afforded to a licensee may prevent an IP creator from using the work for the term of the licence agreement, for example:
- an exclusive licence provides a licensee with the right to use and commercialise the IP to the exclusion of all others, including the licensor;
- a non-exclusive licence allows the licensor to license their IP to multiple parties; and
- a sole licence (arguably a combination of the previous two licence types), is an exclusive licence afforded to one licensee only, however, it allows the licensor to continue to use their IP.6
How can a licence be granted?
A licence can be granted to an individual, entity or corporation in respect of most forms of IP, including inventions which are the subject of patent applications. Common licence arrangements include:
- software agreements, for example, between the copyright holder of a software program and another entity, allowing the entity to use the software in trade or commerce;
- technology transfers, for example, between a university and corporation jointly exploring the development of a new prescription drug; and
- franchise agreements, for example, between a convenience store franchisor such as 7-eleven and a prospective store owner, allowing the prospective store owner to use 7-eleven’s branding.
As stated, IP in Australia is legislated federally and constrained by the common law. In addition, IP licences are subject to the principles of equity (a branch of law developed alongside the common law which is primarily concerned with the principles of ‘fairness’ and ‘justice’), and other public policy considerations. However, provided a licence agreement meets the relevant legal requirements, it can be established in the same way as most other commercial contracts are, through negotiation between the relevant parties.
How do you protect your licence rights? How long does a licence last?
Due diligence and pre-contractual negotiations
Unless a licence arrangement is in the context of a franchise agreement, a licensor is not obliged to make any disclosures about a proposed arrangement to a prospective licensee. Nor are they bound by any strict duty of good faith.
Franchising arrangements are treated differently due to the unique structure of franchises and because a franchisee (the licensee of a business’ brand) is reliant on the IP from the licensor to successfully run their franchise. Typically, a franchisee is in a more vulnerable negotiating position when compared to an established franchisor, and the Government has therefore sought to regulate this relationship. Part 2 of the Franchising Code of Conduct (Code), found within the Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (Cth), sets outs the specific disclosures a franchisor must make to a prospective franchisee. These disclosures are designed to ensure that prospective franchisees are able to access information about a business in a standardized format so that they can make an informed decision before agreeing to join the franchise. The information about the franchise must be set out in a key facts sheet (section 9A) as well as a disclosure document (section 8). Section 6 of the Code imposes specific obligations on the parties to act in good faith during the negotiation and term of a franchise agreement, with civil penalty provisions enforceable against franchisors found to have limited or excluded this obligation in their agreement(s).
Although other licensees are not afforded the same sort of protection as franchisees, the accuracy of information disclosed in licensing negotiations can be challenged through misrepresentation, bad faith or misleading and deceptive conduct under the Australian Consumer Law (ACL). Notwithstanding, it is crucial that a licensee engages in proper due-diligence prior to such negotiations to avoid the prospects of meeting any commercial ‘foul play’.
Following successful negotiations, the nature and subject matter of a licence agreement will determine what happens next. As stated, licences are creatures of contact. Subject to any legislation, or principles of common law and equity, parties can establish the terms of a licensing arrangement, including any rights and obligations, as they see fit. Let’s take a look at some of these now.
Duration and revocability
Generally, the duration of a licence will be for a specified period, such as the duration of the IP right. Otherwise, a licence can be granted in perpetuity, meaning that the arrangement will continue indefinitely unless the agreement is terminated, either in accordance with the terms set out in the agreement or due to other circumstances (for example, frustration7).
Similar limitations can be set by revocability terms. If parties agree that a licence is revocable, then the licensor can withhold their permission for the licensee to use the IP at any point during the term of the agreement, and the agreement can be terminated if the licensor deems it necessary. An irrevocable licence, on the other hand, prevents the licensor from doing this, and the agreement can only be terminated in the event that a party fails to act in accordance with the terms of the agreement.
Further licence or assignment
A licensor may also agree to afford a licensee with the option to either:
- license the use of the IP to a third party (a sub-licence); or
- assign the licence they have been granted to a third party (assignment of licence).
When IP rights are sub-licensed, the third party (sub-licensee) is generally bound by a separate sub-license agreement. This agreement should always reflect the rights and obligations set out in the primary licence agreement to ensure you are only giving the sub-licensee the same or less rights that were granted under the primary licence.
When an IP licence is assigned, all of the rights afforded under the licence are transferred from the licensee to the assignee. This means that the assignee steps into the shoes of the former licensee and becomes the primary licensee under the agreement. A typical licence agreement will require the licensee to obtain the licensor’s consent before they can sub-license or assign their licence rights. Although a licensor can withhold their consent, this withholding cannot be unreasonable, with the High Court in Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd8 stating that the reason for the refusal must ‘be a reason affecting the subject matter of the contract…. and not something extraneous and disassociated’.
So, in practice
Although a licence does not result in a transfer of title (ownership) in IP, specific types of licences can effectively mirror ownership. Returning to our earlier photograph example, if the copyright owner in the photograph (licensor) provided the owner of the website (licensee) with an exclusive, perpetual, transferrable and irrevocable licence to communicate the work, then the licensee’s rights would essentially be greater than the licensor’s in relation to the specific right to communicate the work (ie because the licensor would not be allowed to communicate the work).
Security interests
Perhaps a less obvious consideration in terms of IP licences is that of a security interest. A security interest is an interest in property (referred to as a ‘collateral’) which secures payment or performance of an obligation. The Personal Properties Securities Act9 (PPSA) regulates security interests in relation to personal property and establishes the Personal Properties Securities Register (PPSR). Once a security interest is ‘perfected’ (secured) through registration on the Personal Properties Securities Register (PPSR), the interest provides the secured party with priority over unsecured creditors in the event that the debtor becomes bankrupt or goes into liquidation.
An IP licence in and of itself cannot be a security interest, and is specifically excluded under section 12(5)(a) of the PPSA. However a security interest can be granted in relation to:
- IP itself, such as patented technology or a design;
- goods which have an IP component, such as a clothing brand with a registered trade mark (the security here extends to the registered trade mark as per section 105 of the PPSA);
- a transferrable IP licence where it is used as collateral to secure a loan; and
- a royalty stream created by an IP licence.
The above present a number of scenarios prospective licensees and licensors need to take into account. For example:
A (licensee) runs a business which is dependent on patented technology developed by B (licensor/patent-holder). A acquires a loan from C who takes a security interest in relation to all of A’s present and after-acquired personal property (an AllPAP).
Scenario 1
A encounters financial difficulty and is unable to repay their loan. Accordingly, C appoints a receiver, who wants to sells A’s business to recoup the debt owed. However, A’s business is useless without the patent licence.
If the patent licence is non-transferrable, it will not fall within the scope of the PPSA. However, if the licence is transferrable then the receiver will be able to use it in the sale of A’s business.
A licence that is transferrable subject to the licensor’s consent is also caught by the PPSA. However, a secured party’s rights can be no greater than the licensee’s. For example, in this scenario, C would have to seek B’s consent before the receiver could use it in the sale of A’s business. Whether B would be willing to provide such consent would have likely been a consideration when C granted A the loan.
Scenario 2
Before the receiver is appointed, B assigns the patent to a third party (D), but A continues to hold its licence pursuant to the terms of the licence agreement (now between A and D). Section 106 of the PPSA stipulates that D will be subject to C’s security interest over A’s licence to the same extent that B was.
In other words, a security interest survives assignment. In the event that A is unable to repay their loan, C will be entitled to step in and deal with the licence to the same extent that A was under the licence agreement.
Accordingly, prior to executing the sale agreement, D (as the prospective licensor) should search the PPSR to determine whether any security interest rights capture the licence and, if identified, have B warrant that they are not bound by these interests.
Registering your licence?
The Designs Act10 , Trade Mark Act11 and Patents Act each establish a public register of IP which is primarily used to determine the ownership of a registered IP right. However, each Act also permits other interests to be recorded, including licences. Although this is not compulsory under the first two Acts, section 187 of the Patents Act requires the particulars of a patent, including any licences, to be listed on the public patents register. Notwithstanding that this is an additional step for a patent licensee, the recordal of a patent licence is advantageous for two reasons. First, it protects a licensee against a bona fide purchase for value12 by providing proof of notice of the licensee’s interests. Second, pursuant to section 195 of the Patents Act, the public register can be used as admissible evidence in court to establish that a licensing arrangement existed.
What about if an IP right is infringed, invalidated, or the licence agreement is terminated?
Infringement and breach
IP legislation has been inconsistent in its treatment of licensees. Exclusive licensees of designs were only recently afforded the right to take action against infringers without needing to rely on the design’s owner, whereas exclusive licensees of copyright, trade marks and patents have had standing to sue for infringement for some time.13
Licensees with non-exclusive rights are limited to infringement actions under the Competition and Consumer Act14 (CCA) (most notably, misleading and deceptive conduct under the ACL), or, if applicable, under the Trade Marks Act. However, in the latter circumstance, such a person or entity must be an ‘authorised user’, that being, someone who ‘uses the trade mark in relation to goods or services under control of the owner of the trade mark’.15
It is important to determine the type of licensing arrangement you have entered into, as even licences that appear to be exclusive may not be. For example, in Bristol-Myers Squibb v Apotex (No 5)16 , a licensee who otherwise had an ‘exclusive’ licence to use a patent in Australia was held to have no standing to sue for infringement as the patentee had reserved itself the right of manufacture. Moreover, in Actavis Pty Ltd v Orion Corporation17 and Vald Performance Pty Ltd v Kangatech Pty Ltd18 the court held that an exclusive sub-licensee could not be considered an ‘exclusive licensee’ for the purpose of the Patents Act.
As stated, IP owners are afforded with multiple exclusive rights, for example, in relation to copyright, to use, reproduce and communicate a work. Not only can multiple non-exclusive licensees exist in relation to the right to use a work for particular purpose, but multiple exclusive licensees can exist across the work itself – ie three licensees each with separate exclusive rights to use, reproduce or communicate a work.
This divisibility of IP is something that prospective licensees need to consider. Although exclusive licensees have the right to bring an action for infringement under the respective IP laws, this is limited to infringement relating to the right in respect of which they have been licensed, and in respect of copyright, exclusive licensees can only sue for infringement against those who have not been afforded a licence from the copyright owner. For example, if the owner of copyright granted a licence to A in breach of an exclusive licence of the same work afforded to B, B could not sue A for infringement. Instead, B would be limited to suing the copyright owner for damages under a breach of contract.19
Invalidation and termination
In most situations, if an IP right is invalidated or an IP registration expires, the corresponding IP licence agreement will also likely terminate. Similarly, where a non-perpetual licence is revoked in accordance with the terms of the licence agreement, a licensee will be prevented from lawfully exercising the rights granted by the agreement even if they have acted in reliance of the licence continuing.
However, at the risk of over repetition, this will depend on the express terms of the licence agreement and any non-exclusionary legislative provisions. In Apple & Pear Australia Ltd v Pink Lady America LLC20 Croft J noted that the question of whether a licence right survives termination is a matter of contractual construction, with the contract in this case providing only one circumstance where a licence (which was otherwise perpetual) could be brought to an end.
In relation to copyright, licence agreements may also contemplate a situation where, for example, an author and publisher agree to split the profits of future book sales between them even after their agreement has been terminated. In this situation, the licensee (publisher) will retain the right to sell the books without infringing author’s copyright.
The most salient example of non-exclusionary legislative provisions applying to IP licences is that of section 145 of the Patents Act, which states that:
a contract relating to the licence to exploit a patented invention may be terminated by either party, on giving 3 months’ notice in writing to the other party, at any time after the patent, or all the patents, by which the invention was protected at the time the contract was made, have ceased to be inforce.
While the Full Federal Court in Regency Media Pty Ltd v MPEG21 held that section 145 is only enlivened after ‘all the patents for all the inventions the subject of the contract…have expired’, this decision has been the subject of debate and thus, patent licensees and licensors should consider whether it is appropriate in the circumstances to avoid section 145, by, for example:
- evidencing the licence in a deed, noting that the section only applies to a contract; or
- if involving multiple patents, drafting separate licence agreements for each patent concerned.
Noting the initial sentiments expressed at the outset of this section, one obligation that is often drafted to remain in force following the invalidation of an IP right is that of confidence between the parties. In addition to the above, licensees should ensure that they are aware of the existence of any such clauses in their licence agreements, noting that there is the potential to challenge these, in addition to any other restrictive trade practices enforced by a licensor, under the CCA. This is a relatively new ability, with the CCA amended in 2019 to remove the exemptions IP licensors otherwise had from Division 1 (cartel provisions), section 45 (anti-completive contracts) and section 47 (exclusive dealing) under section 51(3).
The ACCC has published a guide to these amendments, which include examples of licensing arrangements such as the following that would now be in breach of the previously mentioned provisions:
B is the owner of copyright in an independent Australian film. A is a film distribution corporation, specialising in acquiring licences to independent Australian films for distribution to cinemas across Australia. B agrees to licence its film to A for distribution. A insists that the licence agreement contains a clause preventing B from licensing its film to any other distributors in Australia.
Prior to the repeal of section 51(3), A may have been exempted from liability for giving effect to the agreement given the condition related to the IP rights at issue. However, post CCA amendments, A would be considered to acquiring (or offering to acquire) the film from B on the condition that B would not supply this film to any other party than A. Pursuant to section 47(4) of the CCA, this would likely have the purpose, effect, or likely effect of substantially lessening competitions and thus, be a breach of the prohibition on exclusive dealing.
What about if the IP is assigned?
The Copyright Act is the only IP law in Australia that expressly considers third party interests in the context of assignment. Under section 196(4), a ‘licence granted in respect of a copyright by the owner of the copyright binds every successor in title to the interest in the copyright of the grantor of the licence to the same extent as the licence was binding on the grantor’. As such, the interest of a licensee is not defeated by a subsequent assignment: the licence follows the IP.
Whether this position is the same for the other IP regimes is less clear. Section 189 of the Patents Act operates such that a patentee is entitled to deal with their patent free of any prior interests not recorded on the public register, provided such interests are not known to them. It is difficult to image a situation where a patentee would be unaware of an existing licensing arrangement. However, a patent assignee could be misrepresented as to the interests and obligations existing to third parties under the patent. In such a situation, a unregistered licensee would likely have to rely on equity to enforce their rights upon such an assignment occurring.
The position under the Trade Marks Act differs to the Patents Act, with section 116 noting that the fact a person has recorded their licence on the public register ‘is not proof or evidence that the person has that right or interest’. Nonetheless, trade mark licensees who do register their licence are provided with two months to object to the recording of a trade mark assignment on the public register. Although this will not necessarily preserve a licensee’s rights, it means that a licensee will at least be put on notice in the event a trade mark assignment is occurring and can attempt to negotiate the continuation of their licence if they have not already.
Otherwise, if a licensor assigns their IP right away contrary to their licence agreement, a licensee may have recourse to remedies against the licensor such as termination for breach of contract (for example, as mentioned above in relation to copyright) or compensatory damages. In relation to recouping the actual licence rights, a licensee may be able to enforce their rights through an injunction, estoppel or specific performance. For example, in Painaway Australia Pty Ltd v JAKL Group Pty Ltd22 , although the Supreme Court of New South Wales’ findings did not warrant the enforcement of such a remedy, the Court nonetheless noted that that the Respondents could have been estopped from denying the existing of a binding licence agreement to use a trade mark.
What about if a licensee or licensor becomes insolvent?
A final point of consideration is the status of a licensing arrangement if either party becomes insolvent. Australia has three forms of insolvency procedure – receivership, voluntary administration and liquidation – which are regulated by the Corporations Act23 . Licence agreements are often drafted to include broad termination clauses allowing a party to terminate the agreement on written notice if an insolvency event occurs. Importantly, however, the insolvency of a company does not automatically invalidate or terminate a license agreement. In practice, it is common for a receiver, administrator or liquidator to continue to perform the obligations under the licence agreement on behalf of a company while that company is being sold or restructured. Additionally, there are current prohibitions in Australia on certain ipso facto clauses which prevent a party from terminating a licence agreement purely on the basis that the other party is experiencing one of the following insolvency events:
- receivership or appointment of a managing controller;
- voluntary administration; or
- a court approved compromise or scheme of arrangement.
However, these prohibitions only prevent the enforcement of ipso facto clauses for a limited term, and a licensor or licensee will not be prohibited from terminating a licence agreement for reasons other than an insolvency event (ie if the insolvency is incidental to the termination).
Again, the rights of the licensee and licensor in these situations will largely depend on the terms of the licence agreement and circumstances at hand. For example, where the insolvent party is the licensee, a receiver or administrator may be able to repudiate the licence agreement, and if a licensee goes into liquidation, the liquidator may be able to disclaim that the licensing arrangement is unprofitable and potentially take steps to terminate the licence agreement. Where the insolvent party is the licensor, the licensee (being the solvent party) may be able to compel the licensor through an injunction to continue performance of the licence. As such, it is crucial that well considered provisions pertaining to insolvency are embedded into a licence agreement, and a licensee should otherwise ensure that they are able to negotiate with insolvency appointees in the event their licensor enters into an insolvency event, such that they can continuing using any effected IP.
Takeaways
Participating in IP licensing arrangements can create new commercial opportunities to expand your business, providing the possibility of brand exposure, financial gain and risk sharing. However, as these arrangements are largely context-dependent, much of the onus rests on the parties involved to ensure their licence agreements are carefully drafted, and that they are fully aware of the extent of their duties, obligations, and any rights to recourse in circumstances where the relevant IP right ceases to exist.
Thinking about entering into a IP licence agreement but not sure where to start? HWLE can help! Contact our Intellectual Property team today.
This article was written by Luke Dale, Partner and Annabel Bramley, Law Graduate.
1 1968 (Cth) (‘Copyright Act’).
2 1990 (Cth) (‘Patents Act‘).
3 Being land and buildings on land.
4 The North Shore Gas Company Limited v The Commissioner of Stamp Duties (New South Wales) (1940) 63 CLR 52.
5 Copyright Act (n 1) s31(1)(a)(iv).
6 For completeness, we note the existence of compulsory licences – for example, under Chapter 12 of the Patents Act and Part 3 of the Designs Act 2003 (Cth), which give a party non-exclusive rights to exploit a patented invention or design without the consent of the owner in certain circumstances. However, these are not the subject of this article.
7 Where an ‘unforeseen event renders performance of a contract impossible or radically different from that originally contemplated by the parties’.
8 [1979] HCA 51.
92009 (Cth) (‘PPSA‘).
10 Designs Act 2003 (Cth) (‘Designs Act‘).
11Trade Marks Act 1995 (Cth) (‘Trade Marks Act’).
12 A ‘good-faith buyer without knowledge of existing prior claims or equitable interests’.
13Designs Amendment (Advisory Council on Intellectual Property Response Act 2021, Sch 5; see e.g. Copyright Act (n 1) s 119. Note, however, the recent case of H. Lundbeck A/S v Sandoz Pty Ltd [2022] HCA 4 where the High Court held that only a patentee can bring infringement proceedings during the extended term of a patent after its initial term has expired.
14 2010 (Cth) (‘CCA‘).
15Trade Marks Act (n 10) s 8, 26(1)(b); ‘Authorised use’ in relation to trade mark license arrangements were recently discussed in Lodestar Anstalt v Campari America LLC [2016] FCAFC 92 and Trident Foods Pty Ltd v Trident Seafoods Corporation [2019] FCAFC 100.
16 [2013] FCA 114.
17 [2016] FCAFC 121.
18 [2019] FCA 1880.
19Copyright Act (n 1) s121.
20 [2015] VSC 617.
21 (2014) 231 FCR 588.
22 (2011) 91 IPR 298.
23 (2001) (Cth) (‘Corporations Act‘).
