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Now is the time to consider how they work.

What is their purpose?

Intellectual property licence agreements have a scheme for taking proceedings against infringers during the term of the licence.  The scheme normally provides for the licensee to give notice to the licensor of any infringement coming to its attention and, should the licensor not take action against the infringer, permits the licensee to take action.  It is not uncommon for the licensor and licensee to agree to share the costs and proceeds of infringement proceedings.

What are the issues?

While the licence continues, the scheme maybe commercially acceptable; but infringement proceedings taken by the licensor during the license period may continue after the expiry of the licence.  What are the issues for the licensee?

Firstly, the scheme often permits the licensor to take infringement proceedings irrespective of whether the licensee has given notice of the infringement.  As a result, the licensee may be required to share in the cost of proceedings that it considers are unwarranted or unlikely to succeed.  Next, proceedings taken late in the term of the licence may result in the share of the proceeds of the infringement action being far less for the licensee than if the proceedings were commenced early in the term of the licence.  Finally, a recent case has made clear that the licensee’s obligations under the scheme can continue after the expiry or termination of the licence.

What are the lessons?

In Austral Masonry (NSW) Pty Ltd v. Cementech Pty Ltd [2014] FCA FC72 the Full Federal Court agreed with the findings of the trial Judge that, in the absence of a provision in the licence to the contrary, a scheme that provided for the liability for litigation expenses to be shared in respect of proceedings taken during the term of the licence and which also provided for the sharing of its proceeds, would survive the expiry or termination of the licence.  As a result, Austral Masonry, the licensee, which feared that the infringement proceedings taken by the licensor may be unsuccessful, was nonetheless obliged to continue to share in the liability for the litigation costs both during the term of the licence and after the expiry or termination of the licence agreement.

A licensee should not assume that its licence obligations come to an end with the demise of the agreement. The scheme in the infringement clause needs to be crafted to deal with disputes between the licensor and licensee as to the viability of the proceedings and the effect of expiry or termination of the licence.

Austral Masonry argued that because the licence had come to an end, it could not have any continuing liability for further acts of performance, and in this case, to share in the costs of the litigation continuing to be prosecuted by the licensor after the licence agreement had expired.  The Full Federal Court of Australia rejected this argument finding that the scheme in the licence agreement applied to all cases of litigation commenced during the term and that it must have been in the common contemplation of the parties that the licensor might commence proceedings during the term which would continue after the expiry of the term.  Accordingly, the operation of the scheme in the licence agreement survived the licence agreement.

Do you need advice?

If you are negotiating or require advice upon the terms of an intellectual property licence, please call Peter Bolam on 07 3223 9155 or email peterbolam@solusip.com.au to discuss what assistance you may need.

Something to think about when you are contracting.

Business owners know to secure assets such as trade marks and patents by registration.  One reason is so that on sale of the business they can be transferred to the buyer.  The same attention is needed so the seller’s business contracts can be included in the sale.  The business contracts could be long term contracts with customers, agreements with suppliers or agreements with licensees permitting the use of the seller’s assets such as patents or trade marks.  The business contracts could comprise a substantial part of the value of the business sale, so it is important that they can be assigned to the buyer.

What are the circumstances in which a business contract can be assigned?

Business contracts can be assigned by a seller without the consent of the other party to the contract if the contract is not personal to the seller or, alternatively, with the consent of the other party.  We shall look at each of these.

What Business Contracts are personal?

Some obligations in a contract are not personal to the contract parties.  For example, an obligation to pay a licence fee for the use of an asset is not personal to the party providing the asset as the right to receive the licence fee could be exercised by another party in place of the original contracting party.  However, other rights and obligations may be personal, and will not be assignable.  For example, if the party wishing to assign the contract has the right and obligation to assess and approve the conduct of the other party to the business contract, such as its marketing plans or marketing materials, that right and obligation will be personal to the party wishing to assign the business contract and will not be assignable to a buyer.  Accordingly, while a business contact as a whole may, depending upon its terms, not be assignable to the buyer, a right under the business contract to say receive royalties or a licence fee, may be assignable to the buyer.

Do you need advice?

If you are negotiating or require advice upon the terms of a business contract or the sale of a business including business contracts, please call Peter Bolam on 07 3223 9155 or email peterbolam@solusip.com.au for further assistance.