Counterfeiting can be a significant problem for brand owners and legitimate rights holders. It directly undermines legitimate business through lost sales revenue and has the potential to strain relationships between IP owners and their licensees. The sale of counterfeit products can also damage the value of the associated brand in various ways. This could be where the counterfeit products are defective or of poor quality compared with the genuine article; or where unauthorised trade mark uses disrupt brand owners from effectively controlling the use of their brands, resulting in brands being presented to the market unfavourably or in a way that is inconsistent with the brand owner’s interests.

Even consumers seeking to do the right thing by purchasing legitimate products can be confused about whether a particular product is authentic or being traded through an authorised channel. This is especially the case in the context of online retail.

To help with combatting counterfeiters, IP Australia has begun trialling its “Smart Trade Mark” initiative with industry and government partners. The expectation is that the Smart Trade Mark will become an effective tool to identify and authenticate genuine products and sales channels, thereby resolving the potential for consumer confusion and allowing consumers to be confident that they are purchasing the genuine article from a legitimate source.

What is Smart Trade Mark?

The Smart Trade Mark is a digital platform that uses blockchain technology to enable businesses to verify that certain products, sales channels and trade mark uses are legitimate by linking them to their registered trade marks as published on the Australian Trade Marks Register.

How Smart Trade Mark works

The platform currently being trialled involves 3 main steps:

  1. The trade mark owner submits certain product information and/or domain addresses to IP Australia;
  2. IP Australia stores the details and authenticates the trade mark by linking the details provided by the trade mark owner to the Australian Trade Marks Register; and
  3. A Trust Badge is displayed on the relevant websites notified to IP Australia. Consumers can verify the Smart Trade Mark digitally by referring to the Trust Badge, which links through to details of the registered trade mark and information confirming that the website is verified.

NRL

The NRL (Australian Rugby League Commission Limited) is one of the key industry partners trialling the Smart Trade Mark. Shaun McMartin, NRL’s General Manager Consumer Business, sees the Smart Trade Mark as a potential “game changer” for similar businesses, stating that:

NRL members and fans are the lifeblood of our sport who want to buy the genuine article when supporting their club – the Trust Badge helps NRL fans identify authentic and licensed products online

The Smart Trade Mark is currently used by the NRL at www.nrlshop.com and by one of its authorised distributors at www.savvysupporter.com.au to indicate that both are legitimate sources of authentic NRL merchandise.

Shelston IP is proud to act for NRL in connection with protection and maintenance of its trade mark portfolio. Along with the NRL, we are excited by the prospects of Smart Trade Mark becoming an effective tool in the fight against counterfeiters.

Smart Trade Mark will be made available to all Australian trade mark owners if the trials are successful. IP Australia has not provided a specific timeframe for completion of the trials. However, trade mark owners can register their interest and subscribe to receive further updates at – https://smarttrademark.search.ipaustralia.gov.au/.

Authored by Felipe Pereira and Michael Deacon

This article discusses the current state of the law concerning electronic signature and witnessing of documents in Australia including so-called click-wrap contracts, e-signing laws and the specific electronic witnessing regulations arising from the COVID-19 pandemic.

In general, terms, Australian law establishes that most documents can be executed electronically.  There are exceptions for certain formal documents.  However, in the absence of the temporary COVID-19 Witnessing Regulation discussed below, the position in relation to electronic witnessing of documents is far from clear.

1.  Electronic Signature of Documents

1.1  Basic contractual requirements

The essential requirements for a binding contract in Australia are derived from ancient English law:  (1) there must be a clear offer; (2) there must be acceptance of the offer (3) there must be an intention to create legal relations between the parties; and (4) there must be consideration (benefit) flowing to each party in forming the contract.  Documents executed as deeds are an exception to the benefit requirement but have their own issues in relation to execution and witnessing.

The need to show acceptance of the offer potentially raised questions in an e-commerce world.  However, it was no great step for Australian law to recognise online acceptance given the gradual evolution of contract law in a world of changing business and technological conditions.

1.2  Oral contracts

Even oral contracts have always been generally capable of enforcement subject to the necessary proof of the contract being available.  This general enforceability rule excludes documents with specific statutory requirements for writing such as dealings with real property beginning with the English Statute of Frauds 1677.  From a legal perspective, oral contracts are highly undesirable given the challenges in proving that the basic requirements for a contract mentioned above have been met.  It can be difficult to prove the terms of the offer, or the terms may not be sufficiently clear – especially in a situation where one of the parties to the alleged contract is likely disputing the terms or that a contract even exists.  It can also be difficult to prove that the other party has accepted the terms of the offer, in the absence of clear actions indicating acceptance, such as performing or commencing to perform the contract.  Therefore, while theoretically enforceable, oral contracts are obviously undesirable for evidentiary reasons.

1.3  The rise of electronic communication

Long before electronic mail was invented, written electronic communication flourished, beginning with the telegram and the telex and progressing to the facsimile machine.  These technologies are now either obsolete or rapidly approaching that point.  However, the law adapted easily to these technological developments.  Numerous cases have held that an offer accepted by telegram, telex or fax was legally binding – with the necessary intention to create legal relations established by the transmission of the communication.  The early Tasmanian decision of the Full Court of the Supreme Court of Tasmania in Dehle v Denham (1899) 1 N & S 128 followed earlier English authority in upholding the validity of a contract formed by the exchange of telegrams.  Later cases in relation to telex and fax communications are to the same effect.

1.4  Ticket cases – published terms and acceptance by action

In addition to oral contracts and electronically formed contracts, the courts have long held that a contract can be created where a party indicates acceptance of a contract not by signing it but by conduct.  A good example of this is the so-called ticket cases – the carpark owner conspicuously displays access terms at the entrance to the carpark or the car owner receives a printed ticket containing the entry terms at the entry point.  By entering the carpark, the car owner is taken to have accepted those terms, without any signature required.  It is worth noting that not all cases before the court have upheld the validity of a ticket/conduct based contract.  The courts have refused to enforce ticket-based contracts where the terms were only visible after entry to the carpark, if the terms could not be rejected prior to entry or if the contractual terms were onerous and not sufficiently drawn to the customer’s attention.  Despite this, the courts have generally upheld contracts created in this situation without the need for any signature.

1.5  Shrink-wrap contracts

For decades now, companies such as Microsoft have sold software containing a notice about the licence terms printed on the outside of the plastic (or shrink-wrap) packaging.  By opening the packaging, the user is taken to have accepted the licence terms contained inside the package.  If the customer does not wish to accept the terms, the customer can return the product for a refund.  Again, although with some reluctance due to the lack of full disclosure of the legal terms prior to purchase, the courts have generally upheld the enforceability of shrink-wrap contracts.  While the days of shrink-wrap licences are largely over due to the rise in e-commerce and online downloading of software, the general principles of enforceability remain.

1.6  Click-wrap contracts

We have seen above that an oral contract, a contract formed by telegram exchange, a carpark contract accepted by entry and a shrink-wrap contract can be enforceable without any formal signature.  It was therefore inevitable that a contract created by someone clicking an OK or Place Order button on a website or even simply proceeding to access the website might be bound by the website or online purchase terms, provided of course that those terms were adequately disclosed.  The ubiquitous nature of e-commerce now places the enforceability of such contracts beyond any doubt.

1.7  Electronic Transactions Acts

As demonstrated by the various examples above, general contractual principles were flexible enough to adapt to changing business and community requirements for execution of documents.  However, to provide greater certainty, the Australian Federal Government passed the Electronic Transactions Act 1999 generally confirming the validity of electronic transactions and electronic signatures in particular.Beginning with New South Wales and Victoria in 2000, all Australian States and Territories passed corresponding Electronic Transactions Acts.  The Acts are broadly the same as the Federal Act but there are certain State-based variations that need to be considered with care.

Each of the Acts specifies three requirements for valid electronic execution of a document.  Firstly, there must be a method to identify the person who is signing and to confirm the person’s intention to be bound.  Secondly, the agreed method of identification must be as reliable as is appropriate taking into account the purpose of the communication (more formal or serious documents require a high level of certainty).  Thirdly, the person receiving the signature (generally the other party to the transaction) must consent to the use of the specified electronic means to execute the document and to confirm the signatory’s identity.

While most documents can be executed electronically, some of the Acts specify one or more of the following exceptions: documents that need to be witnessed (for example, deeds or statutory declarations), documents requiring personal service, court documents, powers of attorney and wills.  Interestingly, the Corporations Act 2001 is specifically excluded from the operation of the Acts.  Refer below for further discussion.

It is important to note that these Acts do not replace or over-ride the common law position in relation to contract formation and execution discussed above.  They are intended to provide further support for electronic transactions where the requirements of the particular Act are met.  So, electronic execution of a particular document may be enforceable at common law in accordance with the general principles and examples set out above even if the particular mode of execution does not meet the Act’s requirements, or if the type of document is specifically excluded from the operation of the Act.

1.8  Corporations Act 2001

Section 127 to 129 of the Corporations Act deal with execution of documents by companies.  Section 127(1) states that a document is sufficiently executed by a company if signed by two directors, a director and secretary or the sole director/secretary, without the need for the company seal to be affixed.  When a document is executed in any of these ways, section 129 specifies that other parties can rely on that execution as binding without the need to undertake further enquiry to confirm that the execution was authorised.  This raises an important question about whether electronic signature by these officers meets the requirements.

Interestingly, and somewhat confusingly, the Corporations Act is excluded expressly from the operation of the Electronic Transactions Acts discussed above.  The purpose and effect of this exclusion has created conflicting views as to whether other parties can rely on documents executed by company officers electronically.  Some argue that the exclusion shows a clear intent by Parliament that company documents should be signed physically (and not electronically).  Others argue that the Electronic Transactions Acts only supplement, and do not replace the common law, as they explicitly confirm.  Applying this principle, electronic signature by company officers is still permitted because the common law generally permits electronic execution and accordingly section 129 of the Corporations Act is still available for electronically executed documents.

There is no clear legal authority to resolve this issue which suggests that the safest approach is for company officers to physically sign documents.  However, in practice, the authors’ experience is that the vast majority of documents today are executed and exchanged electronically including where companies are parties.  It is very difficult to see a court holding that such a document is not validly executed as this would create commercial chaos.

2.  Electronic Witnessing of Documents

Having considered above in some detail the legal effectiveness of the electronic signature of documents in Australia, we now consider the legal effectiveness of the electronic witnessing of documents.  Many documents do not require that signatures be witnessed for the document to be effective. The above principles can be readily applied to documents where witnessing is not required.  However, certain statutes regulating the execution of particular types of documents do specify that execution of such documents must be witnessed for the document to be legally effective.  Examples of documents in this category include deeds, wills, statutory declarations/oaths, powers of attorney and real property (land) related documents.  Australian contract law has proved to be very flexible in relation to electronic signature and acceptance of most contracts. However, statute law has proved to be far less flexible in relation to electronic witnessing of documents. The position in relation to electronic witnessing at common law is unclear due to the lack of Australian cases considering the issue.  Following recent legislative intervention, electronic witnessing is permitted, at least temporarily, as outlined below.

2.1  Impact of the COVID-19 Pandemic

In addition to enormous personal hardship, the COVID-19 pandemic has caused major business interruptions across the globe and has presented serious challenges to the execution of documents.  Social distancing measures, community lockdown rules and the closure of interstate and international borders has redefined the way people including parties negotiating contracts and lawyers and clients are able to interact.  Telecommunication applications specialising in video chat and voice calls (e.g. Skype, Zoom, Facetime, etc.) have now become the norm for business interactions during the COVID-19 pandemic. Although these applications have allowed parties to continue many dealings virtually, they are obviously unable to solve the legal requirement for witnesses having to be physically present when witnessing the signing of certain documents.  For example, under the Conveyancing Act 1919 (NSW), a person who witnesses the signing of a deed made under the laws of New South Wales must be physically present at the time the deed is signed by the signatory.

2.2  The Regulation

In response to this problem, on 22 April 2020, the New South Wales Government amended the Electronic Transactions Act 2000 by enacting the Electronic Transactions Amendment (COVID-19 Witnessing of Documents) Regulation 2020 (Regulation).  The Regulation is set to expire on 20 September 2020 unless extended.  It allows a person in New South Wales to witness the signature of certain documents by audio visual link (AVL) provided certain requirements are satisfied. In particular, the Regulation at section 2(1) provides that:

if the signature of a document is required under an Act or another law to be witnessed, the signature may be witnessed by audio visual link, and arrangements in relation to witnessing signatures and the attestation of documents may be performed by audio visual link” (our emphasis).

The Regulation lists several types of documents that fall under the definition of “document”. These include deeds, agreements, affidavits (including annexures and exhibits) and statutory declarations. In addition, the Regulation defines AVL as a “technology that enables continuous and contemporaneous audio and visual communication between persons at different places, including video conferencing”.

To assist in understanding and implementing the Regulation, on 22 May 2020, the Law Society of New South Wales issued guidelines entitled “Implications of the Electronic Witnessing Provisions – Electronic Transactions Amendment (COVID-19 Witnessing of Documents) Regulation 2020 (New South Wales) and its impact on the practice of property, wills and estate practitioners” (Guidelines).

(a)   The specific requirements of the Regulation

Witnesses who choose or are required to witness signing of documents by AVL in accordance with the Regulation must:

  1. Observe the person signing the document (the signatory) sign the document in real time”. Based on the Guidelines, witnesses should ask the signatory to have their camera at an angle that allows witnesses to see concurrently the signatory and their act of signing the document.
  2. Sign the document or a copy of it to either attest or confirm they witnessed the signing of the document or copy. If a document is being signed as a counterpart, witnesses should sign the counterpart “as soon as practicable after witnessing the signing of the document” or if the signatory scans and sends to the witness the document by electronic means, sign the counterpart “as soon as practicable after witnessing the signing of the document” – see section 2(3) of the Regulation.
  3. “[B]e reasonably satisfied” that the document they sign is the same document as the document signed by the signatory. Based on the Guidelines, a witness should request the signatory to either read the document aloud or hold the document against the camera to permit the witness to compare the document to be signed by the signatory with the document they have with them.  This is obviously quite problematic for long documents.
  4. Endorse the document by specifying the method used to witness the signatory’s signature and that the signatory’s signing of the document was witnessed in accordance with the Regulation. Witnesses can endorse the document with a statement that “the document was signed in counterpart and witnessed over audio visual link in accordance with clause 2 of Schedule 1 to the Electronic Transactions Regulation 2017” – see the Note under section 2(2)(d) of the Regulation.

(b)   The Guidelines’ recommendations to lawyers

In addition to providing recommendations to people witnessing documents generally, the Guidelines provide specific recommendations to lawyers where they are required to witness documents.  According to the Guidelines, if a lawyer is witnessing his or her client’s signature on a document under the Regulation, they should observe the following:

  1. Confirm the client’s identity – This can be achieved in several ways, including by requesting a copy of the client’s identification document, asking the client to hold an identity document that displays his or her face against the camera, or requesting the client to sign a piece of paper so that the signature can be compared with the signature displayed on his or her identity document. Ultimately, a lawyer must be satisfied with the client’s identity. It is also recommended that lawyers maintain records of the method used to confirm their client’s identity.  This issue will obviously be less problematic for regular clients.
  2. Only take instructions from clients – Lawyers should only take instructions directly from their clients and no one else, regardless of the AVL tool that they use to communicate with clients.
  3. Clients’ mental condition and undue influence – Lawyers should ask clients whether any other person is present in the video call, be attentive to unusual body behaviours from clients suggesting duress, take time in taking clients’ instructions, understand that clients may not be familiar with AVL technologies and allow clients to terminate the video call at any time.
  4. Privacy and confidentiality – Lawyers can achieve this by several means, including by ensuring that they and their clients utilise secure internet connections, hold the video call in a private location, use headsets, delete browser history once the video call has ended and switch off pop-up notifications if the screen on the device being used is being simultaneously shared by the lawyer and the client.
  5. Document storing – Lawyers should store all documents together if the document was signed in counterparts to demonstrate that their client’s act of signing was done in accordance with the Regulation.
  6. Counterparts – If the document being signed by clients is to be signed in counterparts, lawyers should ensure that the documents expressly reflects this.
  7. Recording Video Calls – Although lawyers are not obliged to record their video calls with clients, it may be advisable to do so as this can be evidence that they complied with the Regulation. Obviously, recording the video call requires the client’s consent.  Furthermore, lawyers should ensure that the recording is of good quality as otherwise a court may hold that “there is no way for the Court to know exactly what transpired” between the parties involved in the process of signing the document (see Re Besanko [2020] VSC 170).
  8. Electronic signature – According to the Guidelines, electronic signature is still permissible. That is, if electronic signature was permissible prior to the introduction of the Regulation it continues to be. This means that electronic signatures are not permissible for affidavits and statutory declarations as these documents are expressly excluded from the operation of the Electronic Transactions Acts.

2.3   The Regulation and its uncertainties

Although the Regulation does provide a temporary solution to the challenges imposed by the COVID-19 pandemic, it has remained silent on several points involved in the process of electronic witnessing under the Regulation. These are:

  1. Real time” – although section 2(2)(a) of the Regulation requires witnesses to witness the signatory’s act of signing in “real time”, the Regulation is silent on what is to be understood by “real time”. Potential issues that may arise from this include lawyers and clients who hold video calls at different time zones. Based on the Guidelines, lawyers should understand “real time” as the actual time the witness does in fact witness the signing of the document by the signatory.
  2. Location of witness and signatory – the Regulation does not indicate where the signatory and witnesses should be located at the time the document is signed. As provided under the Guidelines, this can raise questions of where the document was made. According to the Guidelines, “it may be appropriate to seek judicial guidance or declaratory relief before taking action to implement the instrument”.
  3. Original and copy versions – the Regulation does not determine which document should be considered the original and which should be deemed as a copy. According to the Guidelines, lawyers should “produce or certify all documents” as signed by the signatory and the witness.
  4. When the document is made – the Regulation fails to address the issue of when the document is made, in particular whether the document should be considered to be made when it is signed by the signatory or by the witness. According to the Guidelines, “the safest approach is to treat the document as not being executed until the witness has signed”.

Despite these ambiguities and shortcomings, the Regulation provides a useful means of ensuring documents are properly witnessed when physical proximity between signatory and witness is not feasible.

2.4  Expiry of the Regulation

The Regulation is currently due to expire on 20 September 2020.  However, as the New South Wales Parliament has the power to extend the time of its application, we may see the Regulation still being applied for a period of time longer than was originally expected if travel restrictions and lockdowns are extended or re-imposed.  In view of this, as the Regulation has left a few uncertainties it is important that transacting parties and their lawyers applying the Regulation ensure that witnesses and signatories adopt measures that minimise the risks of the validity of the document they sign being later questioned for not meeting the requirements of the Regulation.  Furthermore, as some social distancing restrictions have been recently lifted across New South Wales, those who wish may still choose to witness the signing of documents in the traditional way.

Concluding Remarks

Electronic execution of most documents is clearly permitted under Australian law and will generally be enforceable provided basic contractual requirements including clear disclosure of the offer terms are met.  However, the legal status of electronic witnessing of documents is far less clear.  While temporarily useful, the COVID-19 Regulation is obviously a transitory phenomenon linked to the extraordinary effects of the COVID-19 pandemic and will have no operation after its specified expiry date.

No doubt electronic witnessing of documents will be formally recognised by statute in the future but that appears to be some time away yet.  For now, its use is limited to the specific circumstances and lifespan of the COVID-19 Regulation.  The COVID-19 Regulation and its operation will provide a useful template and learning experience for future more general legislation facilitating electronic witnessing of documents.  In our view, that legislation is long overdue.

Authored by Chris Bevitt and Felipe Pereira

Sealed Air Australia Pty Limited v Aus-Lid Enterprises Pty Ltd [2020] FCA 29 (24 January 2020)

Judge: Kenny J

The Federal Court of Australia awards almost $3m in damages to the exclusive sublicensee under a patent licensing agreement.  The patent owner (licensor) was ordered to pay $1.32m for granting another licence over the patent in breach of the original patent licensing agreement.  The party who was granted the conflicting licence was ordered to pay $1.64m for inducing or procuring the patentee to breach the original patent licensing agreement. The Court decided that a third party is liable in tort for inducing breach of contract if it is granted patent rights in breach of a pre-existing patent licensing agreement where the third party knowing of, or being recklessly indifferent to, such agreement induces or procures the licensor of the pre-existing patent licensing agreement to breach it by granting the conflicting licence.

Background

Aus-Lid Enterprises Pty Ltd (Aus-Lid Enterprises) was the registered owner of Australian Patent AU754978 with an expiry date of 18 September 2017. The patent concerned an invention entitled “Container Lid and implement” which referred to a container lid that featured an internal component which could be used for removing contents from the container (Patent). Auslid Operations Pty Ltd (Auslid Operations) was the exclusive licensee of the Patent. Sealed Air Australia Pty Limited (Sealed Air) and Visy Packaging Pty Ltd (Visy) are manufacturers and suppliers of containers, including containers and lids for pre-packaged dairy products.

In January 2011, Aus-Lid Enterprises and Auslid Operations (together, AusLid) entered into a patent license agreement (2011 Licence Agreement) with Sealed Air (previously Cryovac Australia Pty Ltd) by which AusLid granted an irrevocable, exclusive sublicense to Sealed Air to exploit the Patent in the Field.  The Field was defined under the 2011 Licence Agreement as the “manufacture and supply of containers for pre-packaged food containing dairy products”. Under the 2011 Licence Agreement, Auslid also agreed to not conduct any commercial activity within the Field or grant any rights to third parties in relation to the Field and not to interfere with Sealed Air’s enjoyment of the sublicence granted under the 2011 Licence Agreement – clauses 4.1 and 7.1(c) (Relevant Terms). In 2012, Sealed Air began to manufacture a “spoon-in-lid made from a single piece of plastic” called the Combo-Lid pursuant to its rights under the 2011 Licence Agreement. Sealed Air sold the Combo-Lid to Chobani Australia Pty Ltd (Chobani) for use as part of the containers for Chobani’s “Gippsland Dairy” yoghurt.

In January 2014, AusLid purported to grant Visy a licence to use the Patent to produce integrated lids for yoghurt containers.  The licence was oral (Informal Licence).   In May 2014, Sealed Air discovered that Visy was supplying to Chobani a virtually identical product to its Combo-Lid (Competing Product). Sealed Air, through its lawyers, demanded that AusLid revoke any rights that it had granted to Visy. In response to Sealed Air’s request, AusLid advised that it intended to continue the agreement it had in place with Visy. Sealed Air’s lawyers then sent several letters to Visy informing it of the 2011 Licence Agreement and the Relevant Terms. Despite this, Visy continued to manufacture and sell the Competing Product to Chobani.  In doing so, Visy relied on its Informal Licence and on AusLid’s repeated assurances that it had terminated the 2011 Licence Agreement with Sealed Air due to Sealed Air’s breach, or that the licence in the 2011 Licence Agreement had become non-exclusive due to Sealed Air’s breach. The matter was managed by Visy’s in-house lawyer.   Visy took no material steps to verify AusLid’s assurances.

In December 2014, AusLid and Visy entered into a formal written licence agreement (2014 Licence Agreement) by which AusLid confirmed in writing the grant of the Patent rights to Visy pursuant to the Informal Licence including the right to manufacture and sell the Competing Product. The agreement also provided that AusLid would indemnify Visy from any losses or damages resulting from claims of third parties alleging that Visy’s actions in relation to the Competing Product breached their Patent and other rights. Visy’s continued sales of the Competing Product to Chobani adversely affected Sealed Air’s sale of its Combo-Lid to Chobani to the point that by March 2015 Sealed Air no longer sold the Combo-Lid to Chobani.  Evidence was lead that Chobani now required the lid for its Gippsland Dairy product to be supplied in matte black in-mould labelling form which Sealed Air was unable to supply while Visy’s Competing Product met this requirement.  Visy and AusLid argued that this was the reason for Sealed Air’s lost sales. The Competing Product was also supplied at a lower price than Sealed Air’s Combo-Lid.   The Judge was not satisfied that these factors explained Sealed Air’s lost sales.

As a result of the above, on 6 January 2015 Sealed Air commenced proceedings against AusLid, Ashlyn Graeme de Souza (sole director of Auslid Operations and one of the directors of Aus-Lid Enterprises) and Visy before the Federal Court of Australia (FCA). During the course of the proceedings, Sealed Air obtained a default judgment in its favour for Aus-Lid Enterprises’ breach of contract. AusLid Operations was wound up in 2018 and accordingly, Sealed Air did not pursue its claims against it. Just before the trial, Sealed Air also decided to not pursue its claims against Mr de Souza. The only issues therefore standing for the FCA to decide was whether Visy had induced or procured AusLid to breach the 2011 Licence Agreement and, if so, what damages Visy and Aus-Lid Enterprises should pay.

Arguments

Sealed Air argued that once Visy was put on notice of the 2011 Licence Agreement, or had a reasonable basis to believe that the agreement existed, it should have stopped supplying the Competing Product to Chobani. Instead, it chose to shut its eyes to the truth and to protect its commercial interest by encouraging AusLid to breach the 2011 Licence Agreement by entering into the 2014 Licence Agreement with Visy. This, in turn, ensured that Visy could continue to supply the Competing Product to Chobani, an important customer. In its defence, Visy alleged that it had reasons to believe that the 2011 Licence Agreement had been repudiated by Sealed Air in 2014 due to Sealed Air’s breach, or that the licence had become non-exclusive and that it could rely on AusLid’s assurances to this effect.

Decision

Kenny J held that for Sealed Air to be successful in its claim that Visy had induced or procured AusLid to breach the 2011 Licence Agreement, it was necessary for Sealed Air to prove that: (a) the 2011 Licence Agreement existed; (b) AusLid breached the 2011 Licence Agreement by granting to Visy the Informal Licence and then the 2014 Licence Agreement; (c) Visy knew of the 2011 Licence Agreement and of the Relevant Terms; (d) Visy intended to induce or procure AusLid to breach the 2011 Licence Agreement and that such inducement or procurement did cause AusLid to breach the 2011 Licence Agreement; and (e) AusLid’s breach of the 2011 Licence Agreement caused loss or damage to Sealed Air.

Kenny J only briefly considered requirements (a) and (b) above as these were not in dispute by the parties.

As for requirements (c) and (d) above, Kenny J held that if Sealed Air could demonstrate that Visy had actual knowledge of the 2011 Licence Agreement, including of the Relevant Terms, then Sealed Air would be able to also demonstrate that Visy had the necessary intention to induce or procure AusLid to breach the 2011 Licence Agreement. To determine this, Kenny J turned to the communications Mr Stein (Visy’s in-house counsel) received from both Sealed Air’s lawyers and Mr de Souza (on behalf of AusLid). According to Kenny J, the letters sent by Sealed Air’s lawyers to Mr Stein adequately informed him/Visy of the 2011 Licence Agreement and more importantly of the Relevant Terms. Furthermore, Mr de Souza’s communications to Mr Stein addressing the issues raised by Sealed Air’s lawyers never denied that the 2011 Licence Agreement existed at one point at least. In the course of her deliberations, Kenny J considered a section in a Memorandum of Understanding of 2012 (MOU) between Visy’s Thai company and AusLid which provided that the Thai company could not sell its product to the dairy industry in Australia.  Justice Kenny found that the section was included due to the prior exclusivity AusLid had granted to Sealed Air in the 2011 Licence Agreement. Based on this evidence, Kenny J concluded that Visy did know of the 2011 Licence Agreement (including of the Relevant Terms) and that AusLid’s grant of Patent rights to it (including the right to manufacture and sell the Competing Product) was in breach of that agreement.

Kenny J then discussed what act (or acts) Visy had committed which induced or procured AusLid to breach the 2011 Licence Agreement. She held that from the time Visy and AusLid entered into the Informal Licence to when Visy received the first letter from Sealed Air’s lawyers in September 2014, Visy could not have committed any act which would have induced or procured AusLid to breach the 2011 Licence Agreement. However, after receiving the first letter from Sealed Air’s lawyers, Visy was then on notice of Sealed Air’s prior rights and in a position to induce or procure AusLid to breach the 2011 Licence Agreement, as in fact it did. In Kenny’s J view, Visy’s decision to continue to pay royalties to AusLid for the right to manufacture and sell the Competing Product to Chobani after becoming aware of the 2011 Licence Agreement , and Visy’s subsequent entry into the 2014 Licence Agreement, is what induced or procured AusLid to breach the 2011 Licence Agreement.

In the course of reaching her conclusion, Kenny J considered whether Visy had reasonable grounds to honestly believe that the 2011 Licence Agreement had been repudiated. To resolve this issue, Kenny J considered the letters Mr Stein of Visy received from Sealed Air’s lawyers between September and November 2014. Sealed Air’s letters to Mr Stein informed him of the existence of the 2011 Licence Agreement, the rights that such agreement granted to Sealed Air and the reasons AusLid’s grant of rights to Visy to exploit the Patent was in breach of this agreement. Kenny J further considered the emails Mr de Souza of AusLid sent to Mr Stein from September to December 2014 which in Kenny J’s opinion were contradictory and unclear. At times, Mr de Souza acknowledged the existence of an agreement with Sealed Air (to the point that he offered to indemnify Visy against claims that Sealed Air might have against it in relation to the Patent rights).  However, at other times he informed Mr Stein that Sealed Air had breached the 2011 Licence Agreement or that such agreement had been repudiated or even amended so as to make it non-exclusive. In Kenny J’s view, this showed how “out of depth” Mr de Souza was as to AusLid’s legal position in relation to the 2011 Licensing Agreement and that an experienced commercial lawyer such as Mr Stein therefore did not and could not have reasonable grounds to therefore believe that the 2011 Licence Agreement had been either repudiated or in any way legally terminated. For these reasons, Kenny J held that Visy did not have any sufficient basis to genuinely believe on reasonable grounds that the 2011 Licence Agreement had been repudiated or otherwise legally ended.

In the event Visy did not have actual knowledge of the 2011 Licence Agreement, Kenny J decided to also consider whether Visy had been wilfully blind (or indifferent) to the agreement and to the fact that AusLid was in breach of the agreement by granting rights to Visy to manufacture and sell the Competing Product. Kenny J once again considered the letters Mr Stein had received from Sealed Air’s lawyers and the emails Mr de Souza had sent him. In addition to this, Kenny J also turned to Mr Stein’s statements given in cross examination in which Mr Stein had stated that he did not know whether Mr de Souza understood AusLid’s legal position in relation to the 2011 Licence Agreement), Mr Stein’s decision to not seek independent legal advice in relation to the 2011 Licence Agreement (as had been suggested by Sealed Air’s lawyers), Mr Stein’s attempt to question the validity of the 2011 Licence Agreement by raising the question whether it had been properly executed and Mr Stein’s unwillingness in evidence to concede to some facts relating to the Informal Agreement.  All these factors led Kenny J to conclude that Mr Stein did not at any point in time have the interest to actually ascertain the true facts surrounding the 2011 Licence Agreement as Mr Stein understood that by doing so the commercial arrangement Visy had in place with Chobani would have been put at risk.

In determining the damages that were to be awarded to Sealed Air for Visy’s inducement of breach of contract, Kenny J held that damages were to be awarded so as to restore Sealed Air to the position it would have been in had there not been a breach of contract by AusLid. Justice Kenny held that it was necessary to assess the quantum of loss suffered by Sealed Air between September 2014 (when Visy first became aware of the 2011 Licence Agreement) and April 2018 (when the Patent expired and therefore Sealed Air’s exclusivity ended). In its evidence, Visy disclosed a gross profit of $1,635,417 between September 2014 and April 2018 from the sale of the Competing Product to Chobani. Kenny J determined that this amount represented the economic loss that Sealed Air had suffered due to Visy’s tortious act.

Justice Kenny also awarded damages of $1.32m against AusLid for breaching the 2011 Licence Agreement by granting a licence over the Patent to Visy.

Significance

For companies holding an exclusive intellectual property licence, the decision affirms that the exclusive licensee may have rights against both the licensor and a third party to whom the licensor grants inconsistent rights.  The rights against the licensor lie in a standard breach of contract claim.  The rights against the third party lie in the tort of interfering with contractual relations (also known as inducing breach of contract).  The rights against the third party will only arise where the third party is aware of, or should have been aware of, the exclusive licensee’s prior rights and carried on in disregard of those rights.

For the exclusive licensee, the lesson is to put the third party on notice of its prior rights as soon as possible, providing good details of the nature and source of those rights.  For the third party, the strong lesson is that it cannot simply ignore the claims of the exclusive licensee as being the licensor’s problem or rely on vague or dubious assurances from the licensor about the exclusive licensee’s situation as its defence against an action for inducing breach of contract.  Rather, promptly after becoming aware of the potential issue, the third party must take reasonable steps to ascertain the objective legal position and make a commercial and legal decision as to its next steps after properly assessing risk. If it determines to proceed with the conflicting arrangement (or fails to make the proper enquiries), it must be prepared to have a substantial damages award made against it.

In this case, Visy may subsequently seek to rely on the indemnity against claims provided to it by AusLid, on the hopeful assumption that AusLid had the financial resources to honour that indemnity following the expense of the case and meeting the large damages award made against it. Had Visy simply walked away from the arrangement with AusLid once it became aware of Sealed Air’s prior conflicting rights, Visy would have been free of liability to Sealed Air.  Of course, Visy may have then found itself in an awkward situation with the end client Chobani given the legal and commercial supply commitments Visy had made to Chobani in reliance on Visy’s arrangements with AusLid.

Authored by Felipe Pereira and Chris Bevitt