Court gives precedence to Purchase Agreements over Licence Terms

The company “Business Media” owns a patent for a utility model in respect of an “Advertising board”. In July 2016 it issued a non-exclusive licence to a sole entrepreneur, Ms. Lesnikova, for producing, using, importing, offering for sale, selling and introducing in civil-law transactions in any other way, products  produced on the basis of the utility model. “Business Media” was obliged to issue no more than one licence to third parties and reserved the right to use the utility model itself. Lesnikova was to pay monthly royalties until such time as the licence was terminated AND the recordal of termination was made in the Russian patent office. In addition, under the licence, “Business Media” had to deliver to Lesnikova 500 boards. The licence was to run for seven years unless otherwise agreed. In January 2017 the non-exclusive licence was amended to exclusive and the royalties increased.

In May 2017 a purchase agreement for 500 boards was concluded, and “Business Media” delivered them to Lesnikova. In July 2017 Lesnikova stopped paying royalties. “Business Media” notified her of the licence termination and filed a suit against her. Lesnikova did pay the royalty for July, however, referring to the licence termination, refused to pay further. The licence termination was recorded in the Russian patent office in January 2018. Therefore, “Business Media” demanded royalties for the period from August to December 2017.

The first instance court upheld the claims of “Business Media”.This was upheld on appeal. The cassation court, however, sent the case back to the first instance court for a new consideration stating that the previous instances had not taken into account the exhaustion of rights for those 500 boards that Lesnikova purchased from the patent owner “Business Media”.

The first instance court reconsidered the case. “Business Media” acknowledged that those 500 boards had become Lesnikova’s property after she purchased them; yet she might not use them commercially because the licence had terminated. The court disagreed and explained that after the licence termination exhaustion of rights happened. Therefore, Lesnikova could use them without paying any royalties. Thus, the court rejected the suit of “Business Media”.

The court’s decision seems rather controversial for the following reasons.

The exhaustion of rights for utility models is stipulated by item 6 of Article 1359 of the Civil Code of the Russian Federation, namely:            

“The following are not deemed an infringement of the exclusive right to… utility model…the importation onto the territory of the Russian Federation, the application, offer for sale, sale, another introduction in civil-law transactions or storage for such purposes of a product in which the… utility model is used… if the product… has been earlier introduced in civil-law transactions on the territory of the Russian Federation by the patent holder or by another person by permission of the patent holder.”

Can it be considered that those 500 boards were introduced in civil-law transactions? Arguably, yes. Indeed, according to the purchase agreement Lesnikova bought them. On the other hand, according to the licence agreement, she also had to pay royalties every month for using them. Exhaustion of rights presupposes that the patent owner sells a product unconditionally. The buyer, therefore, should pay the “full price”. In this case, however, “Business Media”, even after selling 500 boards, still had the right to receive royalties. Lesnikova stopped paying them. Was this not enough to consider that she had not paid “the full price” such that there had been no exhaustion of rights?

Furthermore, if rights had been exhausted, it should have happened immediately after the 500 boards were sold. In that case, however, it should have been acknowledged that Lesnikova had to pay no royalties at all, and those she had already paid were unnecessary, which is strange. Perhaps it’s for this reason that the court pointed out that the exhaustion of rights had happened only after the licence terminated. However, this also looks a little bit far-fetched in terms of item 6 of Article 1359, which does not mention licenses.

Thus, there seems to be a conflict between the licence and the purchase agreement. Now Lesnikova can forever freely use the 500 boards she bought, despite the fact that the licence was initially made for seven years only. It suggests that the court decided that the purchase agreement took priority over the licence.