02 November 2020

Clear Signs Needed – Patent Exploitation by the Crown

Written by John SwinsonKim O’Connell and Johnathon Hall

Are you aware that the Crown can exploit inventions in pending and granted patents for its own purposes without infringing patent rights?

While the circumstances in which Crown exploitation may occur are limited, the recent Federal Court decision in Axent Holdings Pty Ltd t/a Axent Global v Compusign Australia Pty Ltd is a reminder that contractors acting on behalf of the Crown can be left exposed if they fail to take precautionary measures. Patent holders should also be aware of the Crown use defence as a potential fallback for the Crown during patent licensing negotiations and of the Crown’s compensation obligations where Crown use is relied on.

Section 163 – What protections are available to the Crown?

Section 163 of the Patents Act 1990 (Cth) (the Act) provides an avenue for government to use an invention in circumstances where a particular invention is required for Crown purposes and a licence cannot be reasonably negotiated.

Current Crown Use provision

Currently, section 163 of the Act provides that the exploitation of an invention is not an infringement by the Crown of a person’s rights in a pending or granted patent when:

    • the ‘relevant Minister’ considers that a Crown authority (being a Commonwealth, State or Territory department, agency, council or statutory body) has tried for a reasonable period, and on reasonable terms, to obtain an authorisation from the patentee to exploit the invention without success;
    • the relevant Minister approves the exploitation in writing;
    • the invention is exploited for Crown purposes;
    • if exploited by a person on behalf of the Crown – the person is authorised by the Crown before the exploitation starts; and
    • the relevant authority has given the patentee a copy of the Minister’s approval and a supporting rationale for the exploitation at least 14 days before the exploitation starts.

For the purposes of the above criteria, the ‘relevant Minister’ is either the Attorney-General (for States and Territories) or the relevant Minister (for the Commonwealth).

The terms for exploitation of an invention (including remuneration) are required to be either agreed between the Crown and the patentee or determined by the Federal Court on application. Despite the current provision balancing Crown needs against patentee rights, these terms are not required to be determined prior to the exploitation occurring.

Old Crown use provision

Section 163, as considered in Axent, was repealed and replaced in February 2020.

The previous section 163 was less prescriptive and offered a broader application. The defence applied to any exploitation of a patented invention by the Crown (or a person authorised by the Crown) if the exploitation was in service of the Crown, with no requirement for prior negotiation. A person acting on behalf of the Crown could also be authorised after the exploitation occurred, rather than the current requirement for prior authorisation.

The change aims to introduce a more balanced scope for the defence by requiring prior negotiation, Ministerial approval and removing the option to retroactively grant authorisation. The two provisions still share common features, however, including aspects given judicial consideration in Axent.

Axent – what happened?

The facts

Axent Holdings (Axent) was a supplier of electronic speed signs and held a patent for a sign capable of displaying speed limits by alternating between at least two pre-set speed limits. The patent was developed prior to and during a tender response Axent made to VicRoads for the Western Ring Road Project in 2001.

Axent claimed in December 2016 that Compusign Australia (Compusign) and Hi-lux Technical Services (Hi-lux) were infringing its patent in their respective supply of electronic road signs to VicRoads and other Crown entities. These parties then made a counter-claim of invalidity regarding Axent’s patent. 

The outcome

The Court found neither Compusign or Hi-lux infringed Axent’s patent and that Axent’s patent was invalid. In summary:

    • Compusign and Hi-lux were found not to have infringed Axent’s patent due to operational differences between their products and the claimed invention. For example, Compusign and Hi-lux’s products required an external input before any display would be shown (like calendar inputs) and were blank without an input, unlike the sign the subject of the claims.

    • Axent’s patent was held invalid because it was not considered novel (as required under the Act). In 2001, following a demonstration of Axent’s product, VicRoads based their Western Ring Road tender requirements on Axent’s product and provided the tender materials to Axent and two other parties. This occurred before Axent applied for its patent. VicRoad’s tender materials were held to be a disclosure of the patent’s basis to the public thus rendering it not novel (and therefore invalid).

The patent was also held invalid for lacking an inventive step. This finding was informed by the 2001 disclosure and the similarity of Axent’s patent to products being used elsewhere in the market prior to 2001.

The Crown use defence

Although it ultimately did not need to do so, Hi-lux relied on the now-repealed and replaced section 163 Crown use defence. In assessing the possible application of the defence, the Court considered whether:

    • the relevant bodies Hi-lux had contracted with were ‘an authority of a State’;
    • the invention was exploited for services of the State; and
    • the exploitation was authorised in writing by the State.

The Court held that VicRoads, amongst other contracting entities, constituted a State entity and that Hi‑lux’s supply of electronic road signs was for a service of the State.  Application of the defence instead turned on whether Hi-lux had been authorised by the contracting State authorities to exploit Axent’s patent.

The Court held that an actual authorisation is required for section 163 to apply, whether express or necessarily implied from the nature of the transaction.  For example, the Court considered that an authorisation may be implied by necessity where there was a detailed requirement to supply products in a way that would necessarily infringe another person’s patent.

In this case, the relevant contracts required Hi-lux to provide electronic speed signs, but the specifications given did not require the signs to specifically match that patented by Axent.  The Court considered the contracts gave the supplier some element of freedom in the supply that could have been used to avoid infringing Axent’s patent.  It was therefore held that neither an express nor an implied consent existed in the contracts, and that Hi-lux would have been unable to rely on the Crown use defence if an infringement had occurred.

This case highlights the importance of contractors obtaining an express authorisation where the Crown wishes to have a product supplied that falls within a third party’s patent.  Reliance on an implied authorisation through contracts places entities contracting with the Crown at risk, as patent infringement is likely to be alleged against the supplying entity rather than the Crown (as was the case in Axent).  Unless they have express (or clearly implied) authorisation, contractors will not be able to rely on the defence.

Crown exploitation in emergencies

In addition to the renewed section 163 defence, the Federal Government has recently introduced an additional defence to patent infringement by the Crown when the use occurs in emergency circumstances.

Section 163A features similar criteria to the defence discussed above but does not require the Crown to negotiate with the patentee prior to the exploitation. The defence was introduced as a pre-emptive measure in relation to the COVID-19 pandemic and is intended to be a rarely used power for granting the Crown access to patented inventions when timing and immediate access are critical factors.

Key takeaways

While the reforms to the Crown use defence in section 163 of the Act will make implied authorisations uncommon, the decision in Axent provides several key lessons to consider when undertaking services for the Crown:

    • Be aware of the circumstances of supply – if the Crown has provided tender requirements that mean a supplier could infringe another person’s patent, be clear that an express authorisation of the Crown should be given as part of the contracting arrangement.
    • Acknowledge the State’s alternative options – section 163 provides a defence for infringement if the Crown needs to use a patented invention without a licence. Acknowledging that the Crown has this option available to it can be key for patent holders in forming negotiation strategies with the Crown.
    • Clearly communicate the terms of any demonstration of a patented product – be clear on the terms of any disclosure or demonstration made to others, particularly for inventions you wish to patent. Failure to impose confidentiality obligations may destroy your ability to obtain valid patent protection for the product. If at all possible, file your patent application before disclosing the invention and ensure that confidentiality arrangements are in place prior to launch of a new product to market.

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