The Perils in Neglecting Pre-litigation Due Diligence.

By: HEDIE MEKA PhD

The costs judgment in Vald Performance Pty Ltd v Kangatech Pty Ltd [2019] FCA 1880 is a reminder of the importance of taking the time to conduct rudimentary due diligence prior to launching patent litigation.

On 23 July 2019, Vald Performance Pty Ltd (‘Vald’) filed proceedings and a statement of claim alleging that Kangtech Pty Ltd (‘Kangatech’) infringes one or more claims of Australian Patent No. 2012388708 (‘the Patent’). At this date, the Queensland University of Technology (‘QUT’) was the registered owner of the Patent and pursuant to s120 (2) and (3) of the Patents Act 1990 (‘the Act’), is named as the second respondent in the original application regarding infringement claim.

Under s120(1) of the Act, only the patentee or the exclusive licensee has standing to sue for infringement in patent litigation. Vald commenced proceedings in its asserted capacity as the exclusive licensee of the Patent. QUT granted its commercialisation company, QUTbluebox Pty Ltd, an exclusive licence to commercialise the Patent by a license dated 16 December 2014. Consequently, QUTbluebox granted Vald an exclusive licence to commercialise the Patent by a license dated 19 December 2014 for a period of 20 years from that date. At no juncture was Vald recorded on the Register as the exclusive licensee of the Patent.

Prior and subsequent to filing of the original application, Kangatech challenged whether Vald was, in fact, the exclusive licensee and thus has standing to sue for infringement. The Act defines exclusive licensee as “a licensee under a licence granted by the patentee and conferring on the licensee, or on the licensee and persons authorised by the licensee, the right to exploit the patented invention throughout the patent area to the exclusion of the patentee and all other persons.” According to Kangatech, Vald could not have been an exclusive licensee since the license (i) is not a license granted by the Patentee, QUT; (ii) does not include the right to import and therefore does not have the right to exploit the invention; (iii) reserves to QUTbluebox the right to use the Patent for research, development, and education, and to sub-license the Patentee on the same terms; and (iv) QUTbluebox granted licenses of the Patent to other parties at the date of license to Vald.

At all times, Vald maintained that the license is an exclusive license and thus has entitlement to sue for infringement proceedings. On 21 October 2019, Kangatech was informed that an assignment from the Patentee to Vald was in the process of being settled. An assignment from QUT to Vald dated 11 November 2019 was recorded by IP Australia on 15 November 2019.

As a consequence of this change in title, the parties sought a number of orders: (i) leave to amend the originating application and statement of claim; (ii) QUT be removed as a party to the proceeding; (iii) Kangatech file an amended defence; and (iv) the matter be referred to mediation.

To the question of costs, Kangatech asserted that it should have its costs of the entire proceedings of the patent litigation to date since Vald did not have standing to sue for infringement and Kangatech made efforts to test the standing issue from the outset of the dispute with Vald. In Kangatech’s view, Vald should have ensured that they had entitlement to bring proceedings prior to filing the original application. On the other hand, it was Vald’s position that their burden of costs is confined to the costs of Kangatech and QUT thrown away by way of the amended originating application and statement of claim, and the hearing that ensued. Moreover, the question of whether the license to Vald is an exclusive license is moot since Vald is now the Patentee.

The Court dismissed this assertion as the nature of the license goes to the question of costs. Justice Greenwood made the point that to have standing to sue for infringement, Vald must be an exclusive licensee and that is to the exclusion of the patentee and all other persons. His Honour was not satisfied that “an exclusive licensee of an exclusive licensee is within the scope of the term “exclusive licensee” for the purposes of the Act.” Furthermore, the licenses per se include provisions which negate the exclusivity of the grant in the form of “reservation of rights”. Therefore, Vald does not have standing to bring original proceeding and thus Kangatech incurred costs that it should not have incurred, noting that since the infringement action will proceed with Vald as the Patentee, some small part of Kangatech’s costs are not entirely lost. His Honour ordered that Vald pay Kangatech’s costs thrown away by reason of the amendments to the originating application and the statement of claim, due to the lack of standing issue, on an indemnity basis.

The outcome for Vald could have been more severe, both in terms of costs and the ability to enforce a right from which they understood to benefit. It is fortunate for Vald that an assignment could be executed in order to resurrect Vald’s standing in the matter.

This case underscores the importance to licensees of reviewing the terms of an exclusive license agreement prior to launching proceedings to ensure that the exclusive license is within the meaning of the Act and case law. It is highly advisable that the license is recorded on the Register before patent litigation proceedings are instigated.