Fastening Supplies Pty Ltd v Olin Mathieson Chemical Corporation [1969] HCA 61; (1969) 119 CLR 572 (8 December 1969)

HIGH COURT OF AUSTRALIA

FASTENING SUPPLIES PTY. LTD. v. OLIN MATHIESON CHEMICAL CORPORATION [1969] HCA 61; (1969) 119 CLR 572

Patents

High Court of Australia
Menzies J.(1)

CATCHWORDS

Patents - Compulsory licences - Discretion of Court - Grounds of exercise - Material time for existence of matters to be considered in exercise of discretion - Patents Act 1952-1966 (Cth), ss. 108, 110*.

HEARING

Melbourne, 1969, October 20, 21; December 8. 8:12:1969
PETITION under s. 108 of the Patents Act 1952-1966 (Cth).

DECISION

December 8.
MENZIES J. delivered the following written judgment:-
Part XII of the Commonwealth Patents Act makes provision for a person use, exercise and vend a patented invention on terms specified in s. 108 (3A) of the Act and otherwise on such terms as the Court thinks fit, s. 108 (3). Such an order operates as "if it were embodied in a deed granting a licence executed by the patentee and all other necessary parties", s. 108 (5). A necessary party is any person having an interest in the patent as exclusive licensee or otherwise, s. 108 (4) (a). (at p574)

2. The condition of the Court making an order for a compulsory licence is its satisfaction "that the reasonable requirements of the public with reference to the patented invention have not been satisfied", s. 108 (3), and there is set out in s. 110 a list of circumstances (a) to (d) proof of any one of which would require an affirmative finding under s. 108 (3). Upon making such affirmative finding the Court has the discretion whether or not to make an order. As, however, the discretionary power is conferred for the public good, it seems to me that an order should follow an affirmative finding under s. 108 (3) unless the Court is satisfied that there is some sound reason for declining to make the order. Such a reason would, I think, be that local manufacture has been established by the patentee and a satisfactory reason has been given for delay in fulfilling a long-standing intention to establish such manufacture or that the applicant for a compulsory licence is not a person fitted to be a licensee. The capacity of a prospective licensee to maintain the reputation of the patented article is a matter of legitimate concern to the patentee and to the Court. There could, of course, be other sound reasons but, the two I have just given, as instances, have, I think, special relevance in this case. (at p575)

3. An examination of the circumstances set out in the lettered paragraphs of s. 110 suggests that the objects of the compulsory licensing provisions of the Acts cover both (1) fostering Australian manufacturing industry to make the patented article or to use the patented process and (2) ensuring that the Australian demand for the patented article or articles made in accordance with the patented process should be reasonably met whether from local production or from imports. It could, therefore, be that the reasonable requirements of the public would not have been satisfied simply by the importation of enough patented articles to meet the Australian demand. See particularly s. 110 (1) (c) and (d). The circumstance that to foster Australian manufacture is an object of the provisions as a whole might well dictate that in some circumstances a compulsory licence should be confined to the use of the invention for local manufacture and the sale of the products of such manufacture and should not afford the licensee the right to import and sell patented articles. (at p575)

4. As to the construction of s. 110 (1) (a), I am of the opinion that the demand for the patented article has not been reasonably met if the Court should be satisfied that, because of its superiority over articles already on the market, potential purchasers would have bought it had it been available. A market for a less efficient article indicates, other things being equal, a market for a more efficient article. (at p575)

5. There is one further matter of construction to be mentioned. Mr. Searby argued that, in the exercise of its discretion under s. 108 (3), the Court should confine its attention to circumstances as they existed when the petition was lodged. I do not agree. Apart from the inherent unreasonableness of so doing, it appears to me that s. 110 (2) indicates quite clearly that the Court will have regard to circumstances as they may exist at the time of the actual hearing of the petition. (at p576)

6. The petitioner here seeking a compulsory licence is a Victorian company. The patent in respect of which the application is made is No. 215562, an invention patent with priority date 27th February 1957. The patent was granted to Ramset Fasteners Inc., a corporation of the State of Delaware in the United States of America. In 1959 that corporation assigned the patent to Olin Mathieson Chemical Corporation, a corporation of the Commonwealth of Virginia in the United States of America, which I shall call "Olin Mathieson". This company, as patentee, is respondent to the petition. There is, however, another company interested in the patent, a Victorian company, Ramset Fasteners (Aust.) Pty. Ltd., which holds an unregistered licence from the patentee. This company I shall call "Ramset". The patentee owns forty-nine per cent of the share capital of Ramset. Ramset has, in accordance with s. 108 (4) (a), been made a party to the proceedings. (at p576)

7. The Commissioner of Patents who, under s. 108 (2), has referred the petition to the Court, has appeared and been heard by counsel for my assistance. (at p576)

8. The patent was sealed on 5th December 1958. The petition was lodged on 23rd December 1968, some ten years after the sealing of the patent. (at p576)

9. The patent relates to a fastener driving tool in the form of a captive-bolt gun. The gun is loaded with a metal fastener and with a cartridge. It is fired by a trigger and the explosion of the cartridge actuates a driving ram which propels the fastener through a muzzle into the material to be fastened, against which, the muzzle bushing is pressed by the operator. The fastener penetrates the material to be fastened and the material to which it is to be fastened, e.g., steel to steel, or to masonry. Such fastener driving tools are widely used in industry, particularly the building industry. Despite some conflict in the evidence, I find that timber may be fastened to concrete by use of the tool. There are, of course, other uses. There is a substantial and constant demand for tools of this kind. (at p576)

10. The patent is concerned with improvements to captive-bolt guns for use for the purposes mentioned and, in particular, to provide for the automatic return of the driving ram from its fired position to its firing position. This is described in detail in col. 13 of the complete specification. It is not, I think, necessary to go into further particulars about the invention. It is common ground between the parties that guns made in accordance with the invention are better guns than those of earlier types. There has at all times material been a potential market for guns made in accordance with the invention in Australia. (at p577)

11. There is no doubt in my mind that when the petition was lodged in December 1968 it correctly alleged that the reasonable requirements of the public with respect to the patented article had not been satisfied. None had been available to the public despite a potential demand which became actual as soon as the articles made in accordance with the invention became available to the market. (at p577)

12. It appears from the affidavit and evidence of John Royston Siddons, the chairman of Ramset, that it was not until March 1969 that there was manufacture in Australia of articles made in accordance with the invention. In April 1969 the first products of this manufacture, guns called Ramset Model 4160, were put on the market in Victoria. The whole production to date, i.e. six hundred, has been sold. It is anticipated that by 30th June 1970, Ramset would have manufactured and sold two thousand guns. The Australian content is ninety-five per cent. The remaining five per cent, which is imported from the United States of America, is the ejector which cannot be made economically in Australia. No tools made in accordance with the patented invention have been imported into Australia by Ramset for sale to the public, although such tools have, for some years, been produced in the United States of America by Olin Mathieson. (at p577)

13. Before I examine the reasons put forward for the delay in manufacture and the absence of importation by the patentee or its licensee, I find it convenient to refer to an attempt made by the petitioner to put on the Australian market guns which would have infringed the patent. In 1967 the petitioner purchased from Scan Trading Co. Pty. Ltd. of Sydney about fifty Obo tools manufactured by Betterman Elektro O.H.G. of West Germany. At the time of its purchase of these tools the petitioner sought an indemnity against claims for infringement of any patent arising from its sale or use or distribution of the tools, but the Scan Trading Co. Pty. Ltd. and Betterman Elektro O.H.G. declined to give any such indemnity. Thirty or forty of the Obo tools so imported were sold by the petitioner. By a letter dated 14th March 1968, Olin Mathieson requested the petitioner to cease the sale of the tools and to account in damages for the tools sold. In reply to this letter the petitioner suggested a licensing arrangement. By a letter dated 24th April 1968, Olin Mathieson advised the petitioner that the patent was exclusively licensed to Ramset and that Ramset was not prepared to grant sub-licences. (at p578)

14. What happened with regard to the Obo tool shows (1) a demand for articles made in accordance with the patent (2) a willingness on the part of the petitioner to infringe the patent if it could secure the backing of an indemnity and (3) the reluctance of Olin Mathieson and Ramset to allow the sale in Australia of any tools made in accordance with the patent other than tools of their own manufacture. (at p578)

15. Evidence of the reason why it was not until March 1969 that Ramset began to manufacture in Australia tools in accordance with the patent showed to my satisfaction that it was not due to a lack of concern about the Australian market or to a lack of desire to meet the requirements of that market from its own manufacture in Australia. In the first place I think that the design of a tool made in accordance with the invention to meet the Australian demand for an all purpose tool was a task beyond the resources of Ramset and was reasonably left by Ramset to Olin Mathieson. Furthermore, I am satisfied that substantial difficulties were encountered by Olin Mathieson in designing a tool which Ramset considered could be made economically in Australia. It seems that Ramset considered that a tool which would not take three inch as well as shorter fasteners could not be sold in Australia in sufficient quantities to warrant local manufacture. A tool which would take fasteners up to two inches had been developed and manufactured by Olin Mathieson in the United States of America. Ramset, however, considered that this tool was not sufficiently versatile for economical manufacture in Australia and that it lacked durability. Not only was it thought unwise to establish local manufacture of such a tool, but the importation of such tools for sale in Australia was considered and rejected on commercial grounds. I do not think that Ramset was anxious to supply the local market by importation from the United States of America. Ramset, moreover, decided, not unreasonably, to defer local manufacture until a satisfactory tool had been developed which would take fasteners up to three inches in length. This, despite the considerable efforts of Olin Mathieson, did not occur until 1968. In the meantime Ramset brought into Australia from Olin Mathieson twenty-two different tools made in accordance with the invention. These tools represented five distinct designs. The purpose of this importation was for Ramset to assess the feasibility of manufacture in Australia and to study the field performance of the tools. This was done and twenty-one of the tools were found unsatisfactory. The twenty-second was a tool made in accordance with the design adopted by Ramset for manufacture in 1969. (at p579)

16. I think that Ramset acted reasonably with regard to local manufacture for it was not until 1969 that the invention had been developed sufficiently to enable the design of a versatile and long-lasting gun suitable for profitable manufacture in Australia. The task of Australian manufacture of the patented article was, I am satisfied, a major manufacturing undertaking not to be entered upon lightly, nor until Olin Mathieson had developed a tool that was, in fact, suitable for Australian manufacture. I am satisfied that Olin Mathieson has, throughout the life of the invention, been constantly at work upon the development of such a tool for its purposes generally, rather than specifically to meet Ramset's requirements. I accept the following evidence given by Mr. Siddons in the course of his cross examination:

"To come back to your statement that your company and
Olin have for many years been concerned to meet the needs
of the Australian market for effective power operated captive
bolt tools for driving fasteners, in what way do you say that
Olin has for many years been concerned to meet the needs
of the Australian market? . . . . . Well it has endeavoured to
develop a piston tool, trigger operated, that would
accommodate 3 inch fasteners.
And you say that they have taken, since 1960, to - well,
they commenced to do that in 1960 and finally in about March
or May 1968 they produced a satisfactory tool, is that right?
. . . . . That is correct, and they invested many millions of
dollars in research in doing this.
Is it true to say that the many millions of dollars of research
which have been devoted to doing this have been confined to
the difference between driving a 3 inch fastener and a 2 inch
fastener? . . . . . They have been directed towards developing
a universal piston tool, trigger operated. When I say universal,
I mean to accommodate the full range of fasteners from
approximately 3/8 inch to approximately 3 inches.
Of the special difficulty to which you adverted, of the 3
inch fastener, do you say that that has occupied their time
and attention over the period? . . . . . Yes, I can explain that
fairly simply, if you wish. It is a problem that sounds simple
but is in fact very difficult to overcome, due to the fact that
you have varying lengths of fasteners. You have a fixed
length of piston; if you retract the piston back to a constant
breaching point, it means that you have a varying length
air gap between the top of the fastener and the front end of
the piston. Because of this varying air gap, the question
of piston life was very, very considerable. You have a piston
moving at a fairly high velocity and then hitting the top of
the fastener at varying velocities, and this had an adverse
effect on piston life.
It follows, does it not, that if you did not have an air gap,
that is to say, if you had a tool which was designed specifically
to discharge a 3 inch fastener that there would be no air gap,
is that not so? . . . . . You could design a tool to discharge a
3 inch fastener specifically, yes.
Such a tool would have been an economically viable product
for the Australian market? . . . . . I would not agree to that,
no." (at p580)

17. The evidence establishes to my satisfaction that the manufacture, which has now been established in Australia by Ramset, is not merely a belated response to the petition for a compulsory licence. (at p580)

18. I turn now to the petitioner and to consider what it has in mind in the event of the grant of a compulsory licence to it. (at p580)

19. The petitioner is a small company. Its nominal capital is $10,000 divided into five thousand shares of $2.00 each, of which only forty-one have been issued and paid up. Its only director is a school teacher who is a brother of Dr. C. J. Osborn, a metallurgical engineer who holds forty of the issued shares. Dr. C. J. Osborn was formerly the director of the company but ceased to be so upon becoming a full time university lecturer. Since 1966 Dr. C. J. Osborn has not held any position in the company; he continues, however, to take an active interest in its business. I have not seen any balance sheet or profit and loss account of the petitioner, but its assets are something less than $100,000 made up of stock, vehicles, plant and money in the bank of from $10,000 to $20,000. The petitioner has not manufactured any captive-bolt guns. Mr. S. E. Cox, the manager of the petitioner, in a declaration made on 19th December 1968, made the following statement in par. 6:

"Since its incorporation on 2nd June 1960, the petitioner
has carried on in the State of Victoria a business consisting
in the manufacture and sale in Victoria of fasteners for the
building and allied trades and the manufacture sale and
hiring of tools and accessories for use with fasteners."

He elaborated this in par. 22 by saying the petitioner which

". . . is the only all-Australian company concerned with the
business of the manufacture distribution and sale of fasteners
and explosive-powered tools for use with them, has, despite
heavy competition from companies controlled from overseas,
conducted a profitable and expanding business. The petitioner
has an excellent trade reputation. The petitioner and its
officers and servants have the skill knowledge experience and
resources to develop the patented invention in Australia.
The petitioner is represented in all States of Australia."

These statements are over-statements. The following is part of the cross examination of Mr. Cox with regard to the statement in par. 6 of his declaration:

"Has your company actually manufactured tools for use
with fasteners? . . . . . No, I am sorry, this is incorrect. We
have not manufactured a tool; we have manufactured parts
of tools.
You have manufactured? . . . . . Parts of tools.
Parts of tools? . . . . . Yes.
Have you manufactured parts of tools which other
manufacturers have marketed? . . . . . Yes.
These are parts that have worn out and are being replaced?
. . . . . That's right.
Is this also what you mean by the manufacture of accessories
for use with fasteners? . . . . . That is correct." (at p581)

20. The petitioner has on two occasions imported and sold tools for use in connexion with fasteners. In 1964 fifty non-piston high velocity Remington tools were imported and sold and in 1967 the company purchased the fifty Obo tools already referred to. (at p581)

21. The course which the petitioner has in mind to take in the event of its obtaining a compulsory licence under the patent appears shortly from the declaration of Mr. Cox as follows:

"The petitioner has conducted research into the patented
invention and wishes to manufacture sell use and distribute
captive-bolt guns incorporating the said feature. The
petitioner's research involving considerable time has also been
directed to improving the said Obo tool as sold by it in
Australia and the petitioner believes that it has designed a
tool which will be even more useful and efficient than a tool
manufactured according to the specification of the said
patent. Since the petitioner's designs incorporate the feature
referred to in par. 10 hereof it cannot implement its plans to
manufacture and sell such tools under threat of an action for
infringement of the said patent.
I estimate the initial capital outlay required to manufacture
the tools at approximately $3,000 and the manufacturing
cost of each tool at approximately $50. The retail selling
price of an imported tool is about $115. If the petitioner sold
tools manufactured by it I would expect the retail price to be
significantly less than the price of the imported tool. The
number of tools manufactured and sold is not necessarily
indicative of the extent to which they are used. I would
expect the petitioner to manufacture about 200 guns in the
year following the commencement of manufacture."

This was elaborated in oral evidence in the course of which it was made clear that what the petitioner proposes to do is to have Australian sub-contractors copy the parts of the Obo tool and to have the parts so made, assembled for sale in Australia under some name other than Obo. It is necessary for me to state my findings with regard to the petitioner's proposals. I do not believe that the petitioner and its officers and servants have the skill, knowledge, experience or resources to develop the patented invention in Australia and I reject Mr. Cox's claim that he has designed a tool which will be an even more useful and efficient tool than one manufactured in accordance with the specifications of the patent. The petitioner's proposal has not been worked out and it has not approached any potential sub-contractors. I am not satisfied that the proposal that Mr. Cox outlined would produce satisfactory articles, particularly having regard to the evidence of Mr. Siddons about the complexity of what is involved in making the parts that are necessary. (at p582)

22. I summarize the findings upon which I will have to base my decision as follows:
1. In December 1968 the reasonable requirements of the public in respect of the patented invention had not been satisfied.
2. Ramset, by manufacture in Australia as already described, is now in the process of meeting Australian requirements and has the capacity to do so.
3. The delay in meeting Australian requirements from Australian production has been due primarily to the difficulty of designing a tool in accordance with the invention that is of sufficient versatility and endurance to secure sales that would warrant the establishment of manufacturing capacity on the large scale that would be necessary.
4. That despite the imperfections of earlier tools made by Olin Mathieson, more could reasonably have been done by Ramset importing tools made in accordance with the patent to meet the Australian demand therefor.
5. The petitioner is not capable itself of undertaking manufacture of tools in accordance with the patent. It has neither the resources nor the skill that is necessary.
6. The petitioner's proposal for Australian manufacture by sub-contractors is of doubtful practicability as a means for the local manufacture of satisfactory articles.
7. The petitioner has no improved designs for local manufacture of tools in accordance with the invention. In the event of any manufacture under a licence it would do no more than to arrange for parts of the Obo tool to be copied by sub-contractors and assembled.
8. That had an indemnity been forthcoming the petitioner would have sold Obo tools in infringement of the letters patent under which it now desires to obtain a licence. (at p583)

23. In the light of these findings I consider that any compulsory licence granted now should not extend to the importation of articles covered by the letters patent. Moreover I consider that the production now established by Ramset will meet the reasonable requirements of the public for the patented articles. Finally, I am not satisfied that the petitioner is a suitable company to be granted a licence to work the invention by the establishment of manufacture in Australia. (at p583)

24. For the foregoing reasons I dismiss the petition. (at p583)

25. In view of my findings that, at the date of the petition, the reasonable requirements of the public had not been satisfied to any extent, and that Olin Mathieson and Ramset could have done something towards supplying those requirements by importation of the patented articles, I have decided that the only order for costs which I will make is to order the petitioner to pay the costs of the Commissioner. (at p583)

ORDER

Petition dismissed. Petitioner to pay the costs of the Commissioner of Patents.