A patent licensee has won $2.95m in damages in Federal Court proceedings against its licensor and Visy Packaging P/L (Visy) for, respectively, breach, and inducing breach, of a patent licence agreement. The decision provides important lessons for licensors and licensees, as well as guidance for in-house counsel and those responsible for contract management.
Louise Brunero and Jeff Bergmann discuss Sealed Air Australia Pty Limited v Aus-Lid Enterprises Pty Ltd  FCA 29 24 January 2020
In 2011 Sealed Air Australia Pty Limited (Sealed Air) was granted “an irrevocable, exclusive sublicence” in the field of manufacture and supply of containers for pre-packaged food containing dairy products, from Auslid Operations P/L of Patent AU754978 for a one-piece “spoon-in-lid” yoghurt tub (Combo-Lid). Aus-Lid Enterprises P/L (Aus-Lid) owned the patent, and exclusively licensed it to Auslid Operations.
Sealed Air was the exclusive supplier of Combo-Lids to Chobani from August/September 2012 through to mid-2014.
In mid-2014 Visy commenced supplying Combo-Lids to Chobani (patent stamped with “AUSLID”), and in legal correspondence with Sealed Air’s lawyers, claimed to have been granted a licence under the Patent by Aus-Lid. Sealed Air’s supply to Chobani ceased completely in March 2015. The decision does not indicate whether Visy searched the patent register to see whether Sealed Air had registered its licence interest, nor that, had Visy done so it would not have identified any results in any event, as Sealed Air did not do so until February 2015.
Sealed Air sued Aus-Lid and Visy for (amongst other things), respectively, breach, and inducing breach, of the exclusive patent sublicence.
Visy claimed that Aus-Lid had represented that Aus-Lid was entitled to grant a licence to Visy due to Sealed Air having breached the 2011 sublicence.
Justice Kenny found that:
- Sealed Air’s exclusive sublicence was valid, enforceable and remained on foot
- in granting the later licence to Visy, each Aus-Lid entity had breached the exclusive sublicence with Sealed Air
- Visy had induced such breach
Her Honour also:
- rejected Aus-Lid’s view that a purported breach by Sealed Air had converted the exclusive licence to a non-exclusive licence, thereby allowing Aus-Lid to grant subsequent rights to Visy
- considered correspondence between Aus-Lid and Visy in which Aus-Lid sought to justify its later grant by asserting (without any indication that it had any basis for such claims) that Sealed Air had breached the sublicence agreement by working outside the licensed territory (ANZ)
- noted that even if Sealed Air was in breach, none of the emails disclosed an act amounting to an acceptance by Aus-Lid of the supposed repudiation
In considering whether Visy induced a breach of contract by Aus-Lid, Justice Kenny:
- gave particular attention to Visy’s assertion in correspondence to Sealed Air that it had in place a licence agreement with Aus-Lid and that it had been “assured that the rights of the Visy group to manufacture the [‘spoon-in-lid’ for Chobani] are not compromised”
- found that these statements were made by General Counsel for Visy even though the emails with Aus-Lid revealed Aus-Lid had given no indication that it had any basis for such claims
- found that General Counsel for Visy:
- did not ask Aus-Lid to explain its understanding of its position or request further information
- did not ask for any further information around the alleged breaches (such as emails in relation to the alleged breach) or whether independent legal advice had been sought by Aus-Lid, nor did he recommend to Aus-Lid that it should do so
- rejected offers by Sealed Air to view a copy of the exclusive sublicence agreement (on the basis that he ‘didn’t see the value in it’ and ‘that it would have cost [Visy] more money‘)
- did not seek external legal advice, with Her Honour noting ‘Visy might well have saved itself from further expensive risk exposure if it received legal advice independent of the issues that might cloud an in-house lawyer’s judgment’
- noted that it was revealed in cross-examination that while General Counsel for Visy was asserting that a licence agreement with Aus-Lid was in place, he was simultaneously drafting documents to formalise the licensing arrangements with Aus-Lid, and that as part of that process Visy sought to document an earlier indemnity that Aus-Lid had provided by e-mail to hold Visy harmless against any legal claims Sealed Air asserted under the sublicence
- found that these actions of the General Counsel for Visy fell well short of conduct of a reasonable in-house lawyer who wished to ascertain his employer’s true legal position
- also found that the General Counsel chose to put what he considered Visy’s commercial interests ahead of everything else, and that this amounted to a wilful blindness or reckless indifference as to whether Visy’s licence was inherently inconsistent with Sealed Air’s exclusive rights under its earlier sublicence with Aus-Lid
- concluded that Visy intended to procure Aus-Lid to breach its contract with Sealed Air.
Additional (unresolved) issue
Visy also argued that a licensee later in time can receive an effective licence, even if an earlier licence remains on foot. Under this argument, Visy would at all relevant times have held an effective licence to manufacture and supply Aus-Lid’s patented lids to Chobani (but this would not necessarily alter the analysis of the breach, and inducing breach, claims discussed above).
- noted there was “much force” in Visy’s proposition
- noted that the issue was not extensively argued and clearly not free from difficulty
- ultimately found it unnecessary to decide this point
It will be interesting to see how this issue is addressed when it arises for decision in a future case. Also, if such a subsequent grant is found to be valid in circumstances where the prior grant conferred exclusive licensee status on the initial licensee, it will be interesting to see whether a subsequent valid grant has any detrimental effect on that status.
Key take aways
- Licensors should ensure they understand the nature of the rights granted under a licence.
- Licensees should promptly register their licence interest on all relevant registers.
- Parties should properly consider whether to act on a potential breach of contract at the time, and not assume that certain consequences ensue. A breach of an exclusive licence does not automatically convert the grant to non-exclusive licence, unless the terms provide otherwise. A licensor would only be free to grant a new licence after the earlier exclusive licence has been discharged (eg for repudiation).
- Contract Managers should inform themselves of the detailed circumstances of any alleged breach and maintain appropriate records.
- If it’s too good to be true… Licensees should carry out careful due diligence to ensure the rights being granted are free from encumbrances. Such due diligence includes:
- requesting evidence supporting any claimed fact, such as emails or notes of discussions passing between the parties, rather than relying on ‘facts’ asserted by others within the business or from third parties (eg an alleged breach of an existing licence agreement);
- searching relevant registers and reviewing any existing licence agreement; and
- being wary of the limited protection afforded by an indemnity – it won’t cover reputational damage and may also, as noted in this instance, not be “worth anything” (especially where provided in an e-mail message and without clearly specifying the indemnifying entity, noting that in this instance Auslid Operations was in liquidation at the time of the proceedings).
- In-house counsel’s primary duty is to the court. This duty prevails over the commercial interests of the business and requires the incumbent to bring an independent perspective to the situation.
- In-house counsel should consider the risk/exposure to business and budget when considering briefing out to external advisors. In instances where the risk/exposure to business is high or there is tension between business meeting its contractual obligations and its commercial interests, in-house counsel should seek legal advice independent of the issues that might cloud an in-house lawyer’s judgment. Also, although the decision does not mention legal professional privilege, a further benefit of seeking independent legal advice from an external adviser, is that such advice would be subject to such privilege.