IP licences and agreements: recent developments

IP licences and agreements: recent developments 1. Introduction The authors Richard Binns is a Partner at Simmons & Simmons LLP, and James Agnew is a Supervising Associate at Simmons & Simmons LLP, specializing in commercial licensing and the IP aspects of corporate transactions, financings and commercial arrangements. This article This article provides an overview of various developments within the last year or so regarding IP licences and agreements, with a focus on cases that have come through the UK courts. Some of the cases reviewed involve IP agreements specifically but some do not (however, many of the principles from these cases have broader application for IP-related agreements across the life sciences, TMT and other sectors). The authors briefly review the courts’ conclusions in the recent Illumina1 and Oxford Nanopore2 cases, regarding whether third party option rights affect exclusivity for patent standing, and look at the Chugai3 ruling on whether the UK court has jurisdiction to consider the construction of US patent claims in determining whether royalties were payable under a patent licence agreement. A recent Supreme Court4 ruling, which found a contractor liable when performing obligations in line with an agreed standard which subsequently was found to be incorrect, is worth bearing in mind for agreements containing multiple performance obligations where some of those obligations are tied to agreed standards, specifications or designs (as is typical for IP-related agreements). Two recent Court of Appeal5 decisions apply the principles of business common sense and textual/contextual interpretation in the context of the licensing and transfer of IP rights, respectively, and Astex v AstraZeneca6 also provides a timely reminder on the basic principles of contractual interpretation in the context of licence agreements. Otherwise, the authors look at the High Court’s assessment of a fair, reasonable and non-discriminatory (FRAND) rate in the Unwired Planet7 litigation, and note a case8 which illustrates the importance of notifying other contracting parties when assigning a contract. This article seeks to provide an overview of a number of developments within the last year or so regarding IP licences and agreements, with a focus on (the somewhat surprisingly high number of) cases that have come through the UK courts. Some of the cases reported below involved IP agreements, but some do not (however, many of the principles from these cases have broader application for IP-related agreements across the life sciences, TMT and other sectors). Topics covered below include whether third party option rights under a licence agreement affect exclusivity for patent standing, and who is liable when obligations are performed in line with an agreed standard which subsequently was found to be incorrect. We will also briefly review a case which illustrates the willingness of the UK courts to rule on infringement of foreign patents in the context of licence disputes, and a number of cases that provide a refresher on the basic principles of contractual interpretation as adopted by the UK judges when interpreting provisions in IP agreements. We will also touch upon the first assessment by the UK court of a fair, reasonable and non-discriminatory (FRAND) rate for a licence of standard essential patents (SEPs). 2. Developments A. High Court rules on the requirements of ‘exclusivity’ in patent licensing arrangements in two recent decisions The High Court’s recent decisions in Illumina9 and Oxford Nanopore10 serve as a helpful reminder as to how the court will assess whether a licence is truly ‘exclusive’ for the purposes of section 130(1) of the Patents Act 1977. By way of a reminder, under section 67(1) of the Patents Act 1977, an exclusive licensee has the same right as the patentee to bring proceedings in respect of any infringement of the patent committed after the date of the licence. Section 130(1) of the Patents Act 1977 defines an exclusive licence as ‘a licence from the proprietor of … a patent conferring on the licensee, or on him and persons authorised by him, to the exclusion of all other persons (including the proprietor …), any right in respect of the invention to which the patent or application relates …’. Illumina In Illumina, Sequenom purported to have granted Illumina an exclusive licence to work three patents (referred to as Lo1, Lo2 and Lo3). However, the licence granted under Lo1 was granted to Illumina and its affiliates (Licence 1); while the licence granted under Lo2 and Lo3 was subject to reserved rights for the patentee to use and develop the Lo2 and Lo3 patents for academic research and publication as well as a right for the patentee to grant the Hong Kong Government a non-exclusive licence if certain conditions were met (Licence 2). Carr J held that Licence 1 did not constitute an exclusive licence under section 130(1) of the Patents Act 1977 on the basis that the licence was not granted to Illumina to the exclusion of all others, but rather to Illumina and all of its affiliates. Importantly, Carr J distinguished between an exclusive licensee who had the right to grant sub-licences and a licence granted directly to a group of companies. Carr J noted that each affiliate was a licensee in its own right and did not need the authority of Illumina to work the patent. Conversely, Carr J held that Licence 2 was an exclusive licence for the purposes of standing notwithstanding that the patentee had the right to: (i) use and develop the Lo2 and Lo3 patents for academic research and publication; and (ii) grant a third party a non-exclusive licence upon certain conditions (including that a request must be made by the third party). In reaching this conclusion, Carr J noted that: the retained right of the patentee to use and develop the Lo2 and Lo3 patents only extended to non-commercial research; it did ‘not extend to authorisation of any third party for commercial purposes’. Illumina still had the benefit of an exclusive licence to exploit the patents for commercial purposes which was sufficient because a licensee need only have an exclusive licence in respect of ‘any right’ under the patent. the right to grant the Hong Kong Government a non-exclusive licence had not yet been exercised and was ‘conditional and contingent on a request being made, which has not happened. The licence to Illumina remains exclusive since no other party has a licence nor is [the patentee] contractually able to grant a licence to any other party’. Oxford Nanopore In a similar case to Licence 2 above, Harvard granted Oxford Nanopore an exclusive licence under certain licensed patents subject to an option for a third party to have a non-exclusive licence under the same patents upon such third party’s request. Guided by Carr J’s decision in Illumina (amongst other jurisprudence), much of the debate centred on the fact that the licence to the Hong Kong Government in Illumina could only be made if requested and if one of the other conditions was met, whereas, the third party in the Oxford Nanopore case had ‘an absolute, indefeasible right to a licence immediately on request’ from Harvard. While the Judge, Mr Stone (sitting as a Deputy High Court Judge), acknowledged that there was a distinction, he considered it to be slight on the basis that the conditions in the Illumina licence were not particularly onerous and would, presumably, be easily met if the Hong Kong Government decided it wished to take a licence. In particular, the Judge commented that ‘it cannot be the position that the exclusivity (or otherwise) of a patent licence depends on the difficulty of the hurdle a third party has to meet before calling for a licence. If the Lo 2 and Lo 3 licence is exclusive, then, in my judgment, so must [this licence]…’. The Judge included in his judgment a helpful summary of the key principles to bear in mind when assessing whether an exclusive licence is, in fact, exclusive for the purposes of section 67(1) of the Patents Act 1977, including: The assessment of whether a licence is exclusive is not a ‘once and for all assessment’, but rather an assessment at the relevant point in time, eg an exclusive licence which allows the licensor to convert the licence into a non-exclusive one if certain obligations are not met is still considered to be exclusive unless and until that right is exercised (although, query when this point in time is, and the consequences of converting the licence after proceedings have commenced and before they have been resolved (would the, previously exclusive but now non-exclusive, licensee be reliant on the patentee to enforce the patent?)). An exclusive licence may only be granted to one person—licences granted to multiple entities, even where such entities are within the same group (ie affiliates),11 will not be exclusive; Where there is a conditional right in equity to call for a licence, the licence will be considered exclusive unless and until the right is exercised. Ensuring a licensee has standing to bring patent infringement proceedings can be material in cases where significant loss is suffered by the licensee as a result of infringement and such loss would not otherwise be recoverable by the patentee. The Illumina and Oxford Nanopore cases are useful in clarifying the basic matrix for determining a licensee’s standing. In particular, confirming that a licence to a group of affiliates will constitute a non-exclusive licence is likely to mean that licensees wanting to ensure exclusivity simply procure a right to sub-license freely to affiliates rather than pursue a direct grant. B. Not up to spec? Rules of contractual interpretation for inconsistent performance obligations in IP agreements The Supreme Court12 recently found a contractor liable when performing obligations in line with an agreed standard which subsequently was found to be incorrect. The principles are applicable to agreements containing multiple performance obligations where some of those obligations are tied to agreed standards, specifications or designs, as is typical for IP-related agreements. MT Højgaard A/S (MTH) was the successful bidder for a tender from E.ON for the design and installation of the foundations for two offshore wind farms. The parties entered into a contract in December 2006 and MTH completed the works in February 2009. Over the next year or so the foundations failed, primarily due to a lack of ‘shear keys’ (which reduce fatigue) for the grouted connections for the turbines. The decision not to include ‘shear keys’ was due to reliance by MTH on an incorrect formula in an international standard referred to in the ‘design and build’ contract (J101 Standard). The parties asked the court to determine who should bear the cost of the remedial works (around €26 million), E.ON asserting various breach of contract claims against MTH. The Supreme Court found in favour of E.ON, such that MTH was liable for the cost of the remedial works. The contract in question required that the works/foundations be ‘fit for purpose’, where ‘fitness for purpose’ was defined by reference to various specifications including a document containing technical requirements which was expressly incorporated in (and attached to) the contract. These technical requirements included two performance related provisions such that: MTH prepare the design of the foundations in accordance with the J101 Standard, and the design of the foundations shall ensure a lifetime of 20 years. Primarily, the court sought to analyse arguments as to why the second provision (item (b) above) should not be given its natural effect, including that such an interpretation results in an obligation which is inconsistent with MTH’s obligation to construct the foundations in accordance with the J101 Standard (item (a) above), and that this provision was simply ‘too slender a thread’ (as per the Court of Appeal) on which to hang such an important and potentially onerous obligation (given it was contained in an appended technical specification and not the main body of the contract). Dealing with the potential inconsistency between the two provisions, the court reiterated that reconciliation of inconsistent terms, and the determination of their combined effect, must be decided by reference to ordinary principles of contractual interpretation. Following a review of past cases ranging from shipbuilding to the replacement of Blackfriars Bridge, the court referred to the law as summarized in Cammell Laird v The Manganese Bronze and Brass Co,13 such that ‘where a manufacturer or builder undertakes to produce a finished result according to a design or plan, he may be still bound by his bargain even though he can show an unanticipated difficulty or even impossibility in achieving the result desired with the plans or specification’, acknowledging that ‘[t]hough this is the general principle of law, its application in respect of any particular contract must vary with the terms and circumstances of that contract’. In this case, where the two provisions potentially imposed different or inconsistent standards or requirements, rather than concluding that they are inconsistent, the court considered that the correct analysis was that: (1) the more rigorous or demanding of the two standards or requirements must prevail, as the less rigorous can properly be treated as a minimum requirement; and (2) if there is an inconsistency between a design requirement (ie design to the J101 Standard) and the required criteria (ie 20-year lifetime), MTH would be liable for the failure to comply with the required criteria as it was MTH’s duty to identify the need to improve on the design. The court’s decision here was broadly in line with existing jurisprudence whereby the courts are generally inclined to give effect to the requirement that the contracted works comply with prescribed criteria (loadbearing weight of a ship/lifetime of a turbine, for example) on the basis that, even if the other party/customer has specified or approved the design of the works, the contractor may be expected to take the risk if they agreed to work to a design which would render the works incapable of meeting the prescribed criteria. The court rejected the argument that the provision relating to the 20-year lifetime (item (b) above) contained in the technical specification was too weak a basis or ‘too slender a thread’ on which to provide that MTH had liability to warrant that the foundations would survive for 20 years or would be designed to achieve a 20-year lifetime. In doing so, the court rejected arguments directed towards the fact that the contractual provisions in this case were long, diffuse and multi-authored, and contained ambiguities and inconsistencies, restating that ‘inelegant and clumsy’ drafting of ‘a badly drafted contract’ is not a reason to depart from the fundamental rules of contractual construction. In this case the court considered that the relevant provision made it clear in its terms that it appears to impose a duty on MTH which involves the foundations having a lifetime of 20 years. In addition, it was not relevant that such an onerous obligation was contained in a technical document as opposed to the body of the contract given that the contract clearly stated that the terms of such technical document were intended to have contractual effect, or that the provision in question was ‘tucked away’ within the technical document itself. The underlying legal principles from this case have wider application to agreements that contain multiple performance obligations where some of those obligations are tied to designs, specifications or industry/international standards. Such performance obligations are typically included within a broad range of IP-related agreements across sectors. Overall, this case indicates that currently the courts are inclined to find that liability rests with a contractor when performing contractual obligations in line with an incorrect specification, design or standard, even if the other party/customer has agreed these items. This appears to be the case even if the contractor uses due care and professional skill and adhered to good industry practice (as was the case here). It is therefore important to consider carefully the interaction between performance obligations when agreements are being negotiated, especially when dealing with large complex agreements which refer to and incorporate other documents, some of which may appear more technical in nature but could still contain legally binding obligations. Contracting parties should also review all documentation which will form part of the agreement, as onerous obligations are not always found front and centre in the main body of the contract, and can be ‘tucked away’ in other documents which on the face of it may appear less legal in nature. Furthermore, a contractor should consider expressly limiting its liability in the transaction documentation (to the extent legally permissible) for breaches of those of its performance obligations which relate to specifications, designs or standards, and the cost of related remedial works. C. Chugai14 and jurisdiction over foreign patents It appears that the UK court is willing to consider the scope of foreign patent rights (at least in the context of infringement and payment of royalties under a licence agreement) where the parties have agreed to give the UK court jurisdiction to do so under the relevant licence agreement. Patentees, licensors and licensees should, therefore, consider carefully the potential scope of exclusive jurisdiction clauses in their patent licences. Chugai has brought an action in the High Court seeking a declaration against UCB that it is not obliged to continue paying royalties under a patent licence agreement which allows Chugai to exploit a patent portfolio relating to products containing tocilizumab, an antibody principally used in the treatment of rheumatoid arthritis. Since 12 January 2016, the only patent still in force under the licence agreement was a US patent (771 Patent). Chugai have claimed that its tocilizumab products fall outside the scope of the 771 Patent, and, accordingly, is seeking a declaration that it owes no royalties under the licence agreement for products manufactured after 12 January 2016. The trial for this case was listed for February/March 2018. The licence agreement in question is governed by English law, and contains an exclusive jurisdiction clause under which the parties submit to the exclusive jurisdiction of the English courts, subject to an exception/qualification whereby only the US courts can determine whether the 771 Patent is invalid. Such jurisdiction arrangements are not uncommon in patent licences. UCB applied for strike out and/or summary judgment in relation to certain parts of Chugai’s pleading which raise issues of invalidity of the 771 Patent. UCB alleged that the English proceedings concerned not only the scope of the 771 Patent, but also the validity of it, and this was not a matter for the UK court to determine, since an UK court has no power to determine the validity of a foreign patent. The aspects of Chugai’s pleading challenged by UCB relate primarily to Chugai’s arguments concerning the principles of patent claim construction under the US law, specifically that, on a construction under which Chugai’s tocilizumab product infringes the claims of the 771 Patent, the 771 Patent would be invalid for lack of novelty over the prior art. UCB alleged that this argument was akin to a classic ‘squeeze’ between infringement and validity, but ‘dressed up’ as a claim for a declaration about royalties under a licence. Arguing that issues of infringement and validity were inseparable, UCB submitted that the UK court cannot hear or determine a dispute concerning the validity of a foreign patent. In response, Chugai asserted that it was not arguing that the 771 Patent is invalid, and was not seeking any relief as to invalidity. Furthermore, reliance on and reference to the US law on patent validity was incidental to the determination of the contractual question of whether royalties are due under the licence agreement. The High Court agreed with Chugai’s arguments, dismissed UCB’s applications for strike out/summary judgment in respect of the disputed paragraphs in Chugai’s pleading, and held that the UK court had jurisdiction in respect of the issues raised by these disputed paragraphs. The court found that not every infringement dispute concerned a challenge to validity, and, therefore, that validity and infringement were separable. The court also recognized the commercial importance of exclusive jurisdiction clauses in patent licences, and of requiring parties ‘to stick to their agreements’. As was the case for this licence agreement, the court considered that patent licences commonly provide that patents may only be declared invalid in the countries in which they are registered, but that infringement is to be determined by the court of a single state (and that from a commercial point of view this makes sense). The court also rejected UCB’s arguments relating to the principle of comity, the Moçambique rule and the doctrine of foreign act of state. Finally, the court went on to make some obiter comments supporting the position that, had the case concerned a direct challenge to the validity of the 771 Patent, it would not have been justiciable by the UK court. D. A warning to keep IP contracts black and white, not fluffy: Court of Appeal refuses to adjust bad bargains Two recent Court of Appeal decisions15 on the interpretation of IP agreements have shared the Supreme Court’s caution to apply a business common sense approach to contractual interpretation, opting instead for a strict literal interpretation where the meaning of a term is clear. Licensing counterparties and those wishing to sell or purchase technology outright should take note of the latest affirmations of the strict literal approach, given the increased risk of a ‘bad bargain’ that may result from poor drafting. Resolution of contractual ambiguity has for some time now been resolved by reference to the approach of a fictional objective business person, as opposed to a slavish following of the literal words. The ‘business common sense’ approach16 codified this concept and remains good law, subject to the below constraints imposed by the Supreme Court. Rainy Sky17 found that where there are multiple plausible readings of a term in a contract, the interpretation that most closely resembles business common sense will prevail. In Arnold v Britton,18 the Supreme Court advised caution in applying the business common sense approach, stating that the clearer the natural meaning of a written term, the more difficult it would be to justify a departure from it. In Wood v Capita,19 the Supreme Court clarified that Arnold v Britton did not mean that Rainy Sky’s guidance on business common sense has no place in the interpretation of terms with rival meanings. It found that agreements could be interpreted successfully either by a: ‘textual’ analysis (ie strict literal interpretation)—greater emphasis strictly upon the text where the agreement is sophisticated, complex and/or negotiated with the assistance of professionals; or ‘contextual’ analysis (ie business common sense)—greater emphasis placed on the factual matrix where the agreement is informal, brief and/or where professionals had not assisted in negotiations. These types of analysis are not conflicting concepts, but rather tools with which to assess the objective meaning of the language that the parties have used to express their agreement. Both Teva v AstraZeneca and KKG v PCL evidence the Court of Appeal’s willingness to apply the Supreme Court’s approach in Arnold v Britton / Wood v Capita, in particular, favouring a textual (or ‘strict literal’) interpretation where the wording of a negotiated agreement is clear. The court refrained from applying commercial sense other than to resolve ambiguity, even if to do so resulted in a poor bargain for one party. The cases are also a useful reminder of the court’s approach when considering the need to imply terms to give business efficacy to a contract. Agreements for the assignment or licensing of IP require careful and comprehensive drafting to ensure that fundamental issues within the contemplation of the parties are properly negotiated and provided for in the agreement, such as the foreseeable term (in the case of Teva v AstraZeneca), or the scope of IP rights to be transferred (in the case of KKG v PCL). E. More on contractual interpretation … The High Court20 recently ruled on the interpretation of a research collaboration and licence agreement between AstraZeneca and Astex (a drug discovery company) relating to a project for developing a BACE inhibitor, relevant to the treatment of Alzheimer’s disease. It found that two drugs nominated by AstraZeneca as candidate drugs were not in fact compounds that attracted royalty payments to Astex under the licence agreement. Furthermore, the court determined that AstraZeneca had previously misinterpreted the licence agreement and mistakenly made milestone payments relating to one of these drugs, for which it was entitled to restitution of the payments. Finally, the court held that the licence agreement was capable of expiring, despite the fact that there was no express provision to this effect in the licence agreement itself. The licence agreement provided for a collaborative research project which could be continued solely by AstraZeneca after a ‘Collaboration Term’, for certain milestone payments to be made by AstraZeneca to Astex, and for Astex to receive a royalty on sales of certain licensed products which contained a ‘Collaboration Compound’. The ‘Collaboration Term’ lasted for just over two years, after which AstraZeneca continued the project on its own. A number of years later, two compounds (CD1 and CD2) were developed by AstraZeneca, who then nominated these compounds as candidate drugs falling under the scope of the licence agreement, and made two corresponding milestone payments of $1 million each to Astex in respect of CD1. CD1 progressed to clinical trials but was subsequently discontinued, and CD2 is currently in Phase III clinical trials in collaboration with Eli Lilly. AstraZeneca subsequently reviewed its position and considered that neither CD1 nor CD2 were in fact ‘Collaboration Compounds’ within the meaning of the licence agreement, and, therefore, that it has no obligation to pay Astex royalties and had mistakenly paid the two milestone payments. The court had to establish whether CD1 and CD2 were ‘Collaboration Compounds’ within the meaning of the licence agreement, given the definition of ‘Collaboration Compound’ underpinned the provisions relating to payment of milestones and royalties. This required interpretation of various provisions of the licence agreement and the meaning of certain defined terms such as ‘Program’, ‘Collaboration Term’ and ‘Project’. In its interpretation of the licence agreement, the court’s task was to ascertain ‘the objective meaning of the language which the parties have chosen to express their agreement when read in the context of the factual background available to the parties at the time of the agreement, excluding prior negotiations’.21 The court determined that neither CD1 nor CD2 were ‘Collaboration Compounds’, and AstraZeneca was entitled to restitution of the milestone payments that it had made in relation to CD1. The court held that AstraZeneca was entitled to restitution of the payments given it had been mistaken as to the contractual status of CD1 at the time when it had made the milestone payments, and that that mistake had caused the payments to be made. Despite the absence of provisions specifically prescribing a set duration or expiry, the court considered that the licence agreement contained references to its expiration and it was held that to construe otherwise would not be to give effect to the intention of the parties when making the agreement. It was also deemed highly improbable that it could have been intended that the licence agreement would continue forever unless terminated. This case highlights the importance of parties understanding the meaning, relevance and application of key defined terms before entering an agreement, and underlines that pursuing more accurate drafting may help to avoid ambiguity in interpretation of the agreement by the parties and/or a court further down the line. It is also a useful reminder of the basic rules of contractual interpretation under English law, notably ‘to ascertain the objective meaning of the language which the parties have chosen to express their agreement when read in the context of the factual background available to the parties at the time of the agreement, excluding prior negotiations’. F. Unwired Planet22—High Court sets FRAND royalty rate For the first time in the UK, the High Court has assessed a FRAND rate for a licence of SEPs under the European Telecommunications Standards Institute (ETSI) rules, finding that there can only be one set of licence terms which are FRAND in a given set of circumstances. Unwired Planet has a worldwide patent portfolio that includes numerous patents which are declared essential to various telecommunications standards. Part of its business is licensing those patents to telecommunications companies. In March 2014, Unwired Planet brought a patent infringement action against Huawei, Samsung and Google for infringement of six UK patents from its portfolio, five of which were claimed to be SEPs. This well-known and widely reported dispute consisted of a series of technical trials, followed by one non-technical trial to address competition law and FRAND issues. The April 2016 judgment related to the non-technical trial (concerning Huawei only as the other defendants had settled with Unwired Planet), in which the High Court considered whether there could be a range of FRAND terms, and if so what principles should be applied to determine that range, or whether there could only ever be one single set of FRAND terms in any given set of circumstances. In this case, both parties made offers of licence terms, neither of which were accepted by the other party. On the facts, the High Court found that neither offer was considered FRAND, and determined benchmark FRAND rates for a worldwide licence based on Unwired Planet’s patent portfolio. The headline points of Birss J’s conclusions are recapped below: It is not necessary to rely on competition law to enforce the FRAND undertaking. The boundaries of FRAND and competition law are not the same. A rate may be above the FRAND rate but not contrary to competition law. There is only one set of licence terms which are FRAND in a given set of circumstances. The legal effect of the FRAND undertaking relating to a SEP is not that the implementer is already licensed. Its effect is that an implementer who makes an unqualified commitment to take a licence on FRAND terms (settled in an appropriate way) cannot be the subject of a final injunction to restrain patent infringement. Whereas an implementer who refuses to take a licence on terms found by the court to be FRAND has chosen to have no licence, and so if they have been found to infringe a valid patent an injunction can be granted against them. FRAND characterises the terms of a licence but also refers to the process by which a licence is negotiated. Although an implementer does not owe a FRAND obligation to ETSI, an implementer who wishes to take advantage of the patentee’s FRAND obligation, must themselves negotiate in a FRAND manner. Offers in negotiation which involve rates higher or lower than the FRAND rate but do not disrupt or prejudice the negotiations are legitimate. An appropriate way to determine a FRAND royalty is to determine a benchmark rate which is governed by the value of the patentee’s portfolio. That will be fair, reasonable and generally non-discriminatory. The rate does not vary depending on the size of the licensee. It will eliminate hold-up and hold-out. Small new entrants are entitled to pay a royalty based on the same benchmark as established large entities. A FRAND rate can be determined by using comparable licences if they are available. In assessing a FRAND rate, counting patents is inevitable. In assessing the dominant position of a SEP holder, the practical effect of the FRAND undertaking and the potential for hold-out by an implementer are relevant factors and may lead to the conclusion that a SEP holder is not in a dominant position. G. Failure to give notice of an equitable assignment of a trade mark licence: lessons from GNIC v Holland & Barrett23 The High Court has recently confirmed the position that notice of an equitable assignment must be given before the equitable assignee can enforce its contractual rights against the other contracting party. This judgment serves as a timely reminder of the importance of notifying other contracting parties when assigning a contract, whether pursuant to restructuring, acquisitions or otherwise. Whilst this case concerned the exercise of termination rights under a trade mark licence agreement, the principles apply more widely to the assignment of other contracts. The central issue in this case was whether GNIC had validly terminated a trade mark licence agreement (Licence) which permitted Holland & Barrett to use certain ‘GNC’ trade marks in the UK. The substantive issues of the case concerned the alleged breaches of the Licence by Holland & Barrett and whether GNIC’s termination rights had been triggered. However, the court considered three preliminary issues, one of which was whether GNIC was able to exercise the rights of the licensor at a time when it was only an equitable assignee of the benefit of the Licence, given that Holland & Barrett had not received notice of the assignment of the Licence to GNIC. The Licence was originally agreed between another company within the GNIC group (Oldco) and Holland & Barrett, but was assigned to GNIC as part of an internal restructuring (GNIC and Oldco being part of the same group). Holland & Barrett was not given notice of the assignment of the Licence to GNIC at the time of the restructuring or subsequently. Interestingly, Holland & Barrett was informed of the proposed restructuring shortly beforehand, but this was not deemed notice of assignment of the Licence. After around a decade since the assignment of the Licence, GNIC (now acting as licensor) served a number of termination notices on Holland & Barrett for alleged breach of the Licence by Holland & Barrett, such breaches relating to brand protection provisions and the scope of use under the Licence. Holland & Barrett disputed that it was in breach of the Licence, and, furthermore, claimed that GNIC did not have the right to terminate the Licence because it had not provided Holland & Barrett with notice of assignment of the Licence to GNIC (i.e. notice that GNIC, as opposed to Oldco, was the current licensor). It was established that the lack of notice to Holland & Barrett meant that GNIC was only an equitable (not legal) assignee of the Licence. In light of this, the court considered that Holland & Barrett could not have been expected to accept a termination notice from GNIC, without ever having received notice of any assignment taking place and of GNIC becoming the new licensor. The court felt that it would have been unfair on Holland & Barrett to find otherwise—Holland & Barrett was clearly entitled to know with whom it was in a contractual relationship. In reaching its decision the court applied Warner Bros,24 which related to exercising an option to extend a recording agreement against one of the parties that had not received notice of the assignment of the underlying recording agreement. The court considered that the principles from Warner Bros also applied to exercise of a termination right. A counterparty could not be expected to act on a notice to terminate which ‘comes out of the blue’ (as per Lord Denning in Warner Bros) from someone that it knows nothing about. The court considered that this was the case even in the context of trade marks. GNIC asserted that it was bound by the Licence but unable to police it, however, the court considered (amongst other objections) that by giving notice to Holland & Barrett, GNIC would then have been able to police the Licence. The court also stated that it is important that a licensee knows the identity of the licensor to whom it may have to pay royalties. It is worth noting that the court placed importance on the fact it considered it would not have been difficult, but ‘the simplest thing in the world’, for GNIC to have given notice to Holland & Barrett in this case (query then, perhaps, what would be the position where service of notice would have been more difficult). Interestingly, the court did not specify whether it should be the assignor (Oldco) and/or the assignee (GNIC) who should give notice of the assignment to the other contracting party. Practically, therefore, notification should be considered at the time of the transfer/assignment because providing notice could be problematic later down the line. Notice with or from the assignor (being original counterparty) may not be possible at a later date if, for example, the assignor has been wound up. As a result, an assignee may want to consider including that notices are given as a condition precedent in the assignment documentation, or a suitably worded further assurance clause providing that the assignor assists with notification to other counterparties. Given that the court applied Warner Bros, which has been heavily criticized in subsequent judgments and academic commentary, it is not surprising that this case has been appealed.25 Footnotes 9 Illumina (n 1). 10 Oxford Nanopore (n 2)—we understand that this case has been appealed. 11 However, this does not preclude multiple exclusive licensees under the same patent in respect of different fields or an exclusive licensee being able to have the right to sub-licence. 12 MT Højgaard A/S (n 4). 13 [1934] AC 402. 14 Chugai (n 3). 15 Teva Pharma (n 5); Kason Kek-Gardner Limited (n 5). 16 Rainy Sky SA & ors v Kookmin Bank [2011] UKSC 50. 17 ibid. 18 Arnold v Britton & ors [2015] UKSC 36. 19 Wood v Capita Insurance Services Limited [2017] UKSC 24. 20 Astex v AstraZeneca (n 6)—we understand that this case has been appealed. 21 As per the recent Supreme Court decision in Wood v Capita (n 19). 22 Unwired Planet (n 7). 23 General Nutrition Investment Company (n 8). 24 Warner Bros Records v Rollgreen [1976] 1 QB 430. 25 We understand that the appeal is outstanding currently. 1 Illumina Inc & Ors v Premaitha Health PLC & Anor [2017] EWHC 2930 (Pat). 2 Oxford Nanopore Technologies, President and Fellows of Harvard College v Pacific Biosciences of California and others [2017] EWHC 3190 (Pat). 3 Chugai Pharmaceutical Co Ltd v UCB Pharma SA and Celltech R&D Limited [2017] EWHC 1216 (Pat). 4 MT Højgaard A/S v E.ON Climate & Renewables UK Robin Rigg East Limited and another [2017] UKSC 59. 5 Teva Pharma - Produtos Farmaceuticos Lda & Anor v Astrazeneca-Produtos Farmaceuticos Lad & Anr [2017] EWCA Civ 2135; Kason Kek-Gardner Limited v Process Components Limited [2017] EWCA Civ 2132. 6 Astex Therapeutics Limited v Astrazeneca AB [2017] EWHC 1442 (Ch). 7 Unwired Planet International Ltd v Huawei Technologies (UK) Co Ltd & Anor [2017] EWHC 711 (Pat). 8 General Nutrition Investment Company v Holland And Barrett International Limited & Anor [2017] EWHC 746 (Ch). © The Author(s) 2018. Published by Oxford University Press. All rights reserved. This article is published and distributed under the terms of the Oxford University Press, Standard Journals Publication Model (https://academic.oup.com/journals/pages/about_us/legal/notices) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Intellectual Property Law & Practice Oxford University Press

IP licences and agreements: recent developments

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Oxford University Press
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© The Author(s) 2018. Published by Oxford University Press. All rights reserved.
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1747-1532
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1747-1540
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10.1093/jiplp/jpy073
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Abstract

1. Introduction The authors Richard Binns is a Partner at Simmons & Simmons LLP, and James Agnew is a Supervising Associate at Simmons & Simmons LLP, specializing in commercial licensing and the IP aspects of corporate transactions, financings and commercial arrangements. This article This article provides an overview of various developments within the last year or so regarding IP licences and agreements, with a focus on cases that have come through the UK courts. Some of the cases reviewed involve IP agreements specifically but some do not (however, many of the principles from these cases have broader application for IP-related agreements across the life sciences, TMT and other sectors). The authors briefly review the courts’ conclusions in the recent Illumina1 and Oxford Nanopore2 cases, regarding whether third party option rights affect exclusivity for patent standing, and look at the Chugai3 ruling on whether the UK court has jurisdiction to consider the construction of US patent claims in determining whether royalties were payable under a patent licence agreement. A recent Supreme Court4 ruling, which found a contractor liable when performing obligations in line with an agreed standard which subsequently was found to be incorrect, is worth bearing in mind for agreements containing multiple performance obligations where some of those obligations are tied to agreed standards, specifications or designs (as is typical for IP-related agreements). Two recent Court of Appeal5 decisions apply the principles of business common sense and textual/contextual interpretation in the context of the licensing and transfer of IP rights, respectively, and Astex v AstraZeneca6 also provides a timely reminder on the basic principles of contractual interpretation in the context of licence agreements. Otherwise, the authors look at the High Court’s assessment of a fair, reasonable and non-discriminatory (FRAND) rate in the Unwired Planet7 litigation, and note a case8 which illustrates the importance of notifying other contracting parties when assigning a contract. This article seeks to provide an overview of a number of developments within the last year or so regarding IP licences and agreements, with a focus on (the somewhat surprisingly high number of) cases that have come through the UK courts. Some of the cases reported below involved IP agreements, but some do not (however, many of the principles from these cases have broader application for IP-related agreements across the life sciences, TMT and other sectors). Topics covered below include whether third party option rights under a licence agreement affect exclusivity for patent standing, and who is liable when obligations are performed in line with an agreed standard which subsequently was found to be incorrect. We will also briefly review a case which illustrates the willingness of the UK courts to rule on infringement of foreign patents in the context of licence disputes, and a number of cases that provide a refresher on the basic principles of contractual interpretation as adopted by the UK judges when interpreting provisions in IP agreements. We will also touch upon the first assessment by the UK court of a fair, reasonable and non-discriminatory (FRAND) rate for a licence of standard essential patents (SEPs). 2. Developments A. High Court rules on the requirements of ‘exclusivity’ in patent licensing arrangements in two recent decisions The High Court’s recent decisions in Illumina9 and Oxford Nanopore10 serve as a helpful reminder as to how the court will assess whether a licence is truly ‘exclusive’ for the purposes of section 130(1) of the Patents Act 1977. By way of a reminder, under section 67(1) of the Patents Act 1977, an exclusive licensee has the same right as the patentee to bring proceedings in respect of any infringement of the patent committed after the date of the licence. Section 130(1) of the Patents Act 1977 defines an exclusive licence as ‘a licence from the proprietor of … a patent conferring on the licensee, or on him and persons authorised by him, to the exclusion of all other persons (including the proprietor …), any right in respect of the invention to which the patent or application relates …’. Illumina In Illumina, Sequenom purported to have granted Illumina an exclusive licence to work three patents (referred to as Lo1, Lo2 and Lo3). However, the licence granted under Lo1 was granted to Illumina and its affiliates (Licence 1); while the licence granted under Lo2 and Lo3 was subject to reserved rights for the patentee to use and develop the Lo2 and Lo3 patents for academic research and publication as well as a right for the patentee to grant the Hong Kong Government a non-exclusive licence if certain conditions were met (Licence 2). Carr J held that Licence 1 did not constitute an exclusive licence under section 130(1) of the Patents Act 1977 on the basis that the licence was not granted to Illumina to the exclusion of all others, but rather to Illumina and all of its affiliates. Importantly, Carr J distinguished between an exclusive licensee who had the right to grant sub-licences and a licence granted directly to a group of companies. Carr J noted that each affiliate was a licensee in its own right and did not need the authority of Illumina to work the patent. Conversely, Carr J held that Licence 2 was an exclusive licence for the purposes of standing notwithstanding that the patentee had the right to: (i) use and develop the Lo2 and Lo3 patents for academic research and publication; and (ii) grant a third party a non-exclusive licence upon certain conditions (including that a request must be made by the third party). In reaching this conclusion, Carr J noted that: the retained right of the patentee to use and develop the Lo2 and Lo3 patents only extended to non-commercial research; it did ‘not extend to authorisation of any third party for commercial purposes’. Illumina still had the benefit of an exclusive licence to exploit the patents for commercial purposes which was sufficient because a licensee need only have an exclusive licence in respect of ‘any right’ under the patent. the right to grant the Hong Kong Government a non-exclusive licence had not yet been exercised and was ‘conditional and contingent on a request being made, which has not happened. The licence to Illumina remains exclusive since no other party has a licence nor is [the patentee] contractually able to grant a licence to any other party’. Oxford Nanopore In a similar case to Licence 2 above, Harvard granted Oxford Nanopore an exclusive licence under certain licensed patents subject to an option for a third party to have a non-exclusive licence under the same patents upon such third party’s request. Guided by Carr J’s decision in Illumina (amongst other jurisprudence), much of the debate centred on the fact that the licence to the Hong Kong Government in Illumina could only be made if requested and if one of the other conditions was met, whereas, the third party in the Oxford Nanopore case had ‘an absolute, indefeasible right to a licence immediately on request’ from Harvard. While the Judge, Mr Stone (sitting as a Deputy High Court Judge), acknowledged that there was a distinction, he considered it to be slight on the basis that the conditions in the Illumina licence were not particularly onerous and would, presumably, be easily met if the Hong Kong Government decided it wished to take a licence. In particular, the Judge commented that ‘it cannot be the position that the exclusivity (or otherwise) of a patent licence depends on the difficulty of the hurdle a third party has to meet before calling for a licence. If the Lo 2 and Lo 3 licence is exclusive, then, in my judgment, so must [this licence]…’. The Judge included in his judgment a helpful summary of the key principles to bear in mind when assessing whether an exclusive licence is, in fact, exclusive for the purposes of section 67(1) of the Patents Act 1977, including: The assessment of whether a licence is exclusive is not a ‘once and for all assessment’, but rather an assessment at the relevant point in time, eg an exclusive licence which allows the licensor to convert the licence into a non-exclusive one if certain obligations are not met is still considered to be exclusive unless and until that right is exercised (although, query when this point in time is, and the consequences of converting the licence after proceedings have commenced and before they have been resolved (would the, previously exclusive but now non-exclusive, licensee be reliant on the patentee to enforce the patent?)). An exclusive licence may only be granted to one person—licences granted to multiple entities, even where such entities are within the same group (ie affiliates),11 will not be exclusive; Where there is a conditional right in equity to call for a licence, the licence will be considered exclusive unless and until the right is exercised. Ensuring a licensee has standing to bring patent infringement proceedings can be material in cases where significant loss is suffered by the licensee as a result of infringement and such loss would not otherwise be recoverable by the patentee. The Illumina and Oxford Nanopore cases are useful in clarifying the basic matrix for determining a licensee’s standing. In particular, confirming that a licence to a group of affiliates will constitute a non-exclusive licence is likely to mean that licensees wanting to ensure exclusivity simply procure a right to sub-license freely to affiliates rather than pursue a direct grant. B. Not up to spec? Rules of contractual interpretation for inconsistent performance obligations in IP agreements The Supreme Court12 recently found a contractor liable when performing obligations in line with an agreed standard which subsequently was found to be incorrect. The principles are applicable to agreements containing multiple performance obligations where some of those obligations are tied to agreed standards, specifications or designs, as is typical for IP-related agreements. MT Højgaard A/S (MTH) was the successful bidder for a tender from E.ON for the design and installation of the foundations for two offshore wind farms. The parties entered into a contract in December 2006 and MTH completed the works in February 2009. Over the next year or so the foundations failed, primarily due to a lack of ‘shear keys’ (which reduce fatigue) for the grouted connections for the turbines. The decision not to include ‘shear keys’ was due to reliance by MTH on an incorrect formula in an international standard referred to in the ‘design and build’ contract (J101 Standard). The parties asked the court to determine who should bear the cost of the remedial works (around €26 million), E.ON asserting various breach of contract claims against MTH. The Supreme Court found in favour of E.ON, such that MTH was liable for the cost of the remedial works. The contract in question required that the works/foundations be ‘fit for purpose’, where ‘fitness for purpose’ was defined by reference to various specifications including a document containing technical requirements which was expressly incorporated in (and attached to) the contract. These technical requirements included two performance related provisions such that: MTH prepare the design of the foundations in accordance with the J101 Standard, and the design of the foundations shall ensure a lifetime of 20 years. Primarily, the court sought to analyse arguments as to why the second provision (item (b) above) should not be given its natural effect, including that such an interpretation results in an obligation which is inconsistent with MTH’s obligation to construct the foundations in accordance with the J101 Standard (item (a) above), and that this provision was simply ‘too slender a thread’ (as per the Court of Appeal) on which to hang such an important and potentially onerous obligation (given it was contained in an appended technical specification and not the main body of the contract). Dealing with the potential inconsistency between the two provisions, the court reiterated that reconciliation of inconsistent terms, and the determination of their combined effect, must be decided by reference to ordinary principles of contractual interpretation. Following a review of past cases ranging from shipbuilding to the replacement of Blackfriars Bridge, the court referred to the law as summarized in Cammell Laird v The Manganese Bronze and Brass Co,13 such that ‘where a manufacturer or builder undertakes to produce a finished result according to a design or plan, he may be still bound by his bargain even though he can show an unanticipated difficulty or even impossibility in achieving the result desired with the plans or specification’, acknowledging that ‘[t]hough this is the general principle of law, its application in respect of any particular contract must vary with the terms and circumstances of that contract’. In this case, where the two provisions potentially imposed different or inconsistent standards or requirements, rather than concluding that they are inconsistent, the court considered that the correct analysis was that: (1) the more rigorous or demanding of the two standards or requirements must prevail, as the less rigorous can properly be treated as a minimum requirement; and (2) if there is an inconsistency between a design requirement (ie design to the J101 Standard) and the required criteria (ie 20-year lifetime), MTH would be liable for the failure to comply with the required criteria as it was MTH’s duty to identify the need to improve on the design. The court’s decision here was broadly in line with existing jurisprudence whereby the courts are generally inclined to give effect to the requirement that the contracted works comply with prescribed criteria (loadbearing weight of a ship/lifetime of a turbine, for example) on the basis that, even if the other party/customer has specified or approved the design of the works, the contractor may be expected to take the risk if they agreed to work to a design which would render the works incapable of meeting the prescribed criteria. The court rejected the argument that the provision relating to the 20-year lifetime (item (b) above) contained in the technical specification was too weak a basis or ‘too slender a thread’ on which to provide that MTH had liability to warrant that the foundations would survive for 20 years or would be designed to achieve a 20-year lifetime. In doing so, the court rejected arguments directed towards the fact that the contractual provisions in this case were long, diffuse and multi-authored, and contained ambiguities and inconsistencies, restating that ‘inelegant and clumsy’ drafting of ‘a badly drafted contract’ is not a reason to depart from the fundamental rules of contractual construction. In this case the court considered that the relevant provision made it clear in its terms that it appears to impose a duty on MTH which involves the foundations having a lifetime of 20 years. In addition, it was not relevant that such an onerous obligation was contained in a technical document as opposed to the body of the contract given that the contract clearly stated that the terms of such technical document were intended to have contractual effect, or that the provision in question was ‘tucked away’ within the technical document itself. The underlying legal principles from this case have wider application to agreements that contain multiple performance obligations where some of those obligations are tied to designs, specifications or industry/international standards. Such performance obligations are typically included within a broad range of IP-related agreements across sectors. Overall, this case indicates that currently the courts are inclined to find that liability rests with a contractor when performing contractual obligations in line with an incorrect specification, design or standard, even if the other party/customer has agreed these items. This appears to be the case even if the contractor uses due care and professional skill and adhered to good industry practice (as was the case here). It is therefore important to consider carefully the interaction between performance obligations when agreements are being negotiated, especially when dealing with large complex agreements which refer to and incorporate other documents, some of which may appear more technical in nature but could still contain legally binding obligations. Contracting parties should also review all documentation which will form part of the agreement, as onerous obligations are not always found front and centre in the main body of the contract, and can be ‘tucked away’ in other documents which on the face of it may appear less legal in nature. Furthermore, a contractor should consider expressly limiting its liability in the transaction documentation (to the extent legally permissible) for breaches of those of its performance obligations which relate to specifications, designs or standards, and the cost of related remedial works. C. Chugai14 and jurisdiction over foreign patents It appears that the UK court is willing to consider the scope of foreign patent rights (at least in the context of infringement and payment of royalties under a licence agreement) where the parties have agreed to give the UK court jurisdiction to do so under the relevant licence agreement. Patentees, licensors and licensees should, therefore, consider carefully the potential scope of exclusive jurisdiction clauses in their patent licences. Chugai has brought an action in the High Court seeking a declaration against UCB that it is not obliged to continue paying royalties under a patent licence agreement which allows Chugai to exploit a patent portfolio relating to products containing tocilizumab, an antibody principally used in the treatment of rheumatoid arthritis. Since 12 January 2016, the only patent still in force under the licence agreement was a US patent (771 Patent). Chugai have claimed that its tocilizumab products fall outside the scope of the 771 Patent, and, accordingly, is seeking a declaration that it owes no royalties under the licence agreement for products manufactured after 12 January 2016. The trial for this case was listed for February/March 2018. The licence agreement in question is governed by English law, and contains an exclusive jurisdiction clause under which the parties submit to the exclusive jurisdiction of the English courts, subject to an exception/qualification whereby only the US courts can determine whether the 771 Patent is invalid. Such jurisdiction arrangements are not uncommon in patent licences. UCB applied for strike out and/or summary judgment in relation to certain parts of Chugai’s pleading which raise issues of invalidity of the 771 Patent. UCB alleged that the English proceedings concerned not only the scope of the 771 Patent, but also the validity of it, and this was not a matter for the UK court to determine, since an UK court has no power to determine the validity of a foreign patent. The aspects of Chugai’s pleading challenged by UCB relate primarily to Chugai’s arguments concerning the principles of patent claim construction under the US law, specifically that, on a construction under which Chugai’s tocilizumab product infringes the claims of the 771 Patent, the 771 Patent would be invalid for lack of novelty over the prior art. UCB alleged that this argument was akin to a classic ‘squeeze’ between infringement and validity, but ‘dressed up’ as a claim for a declaration about royalties under a licence. Arguing that issues of infringement and validity were inseparable, UCB submitted that the UK court cannot hear or determine a dispute concerning the validity of a foreign patent. In response, Chugai asserted that it was not arguing that the 771 Patent is invalid, and was not seeking any relief as to invalidity. Furthermore, reliance on and reference to the US law on patent validity was incidental to the determination of the contractual question of whether royalties are due under the licence agreement. The High Court agreed with Chugai’s arguments, dismissed UCB’s applications for strike out/summary judgment in respect of the disputed paragraphs in Chugai’s pleading, and held that the UK court had jurisdiction in respect of the issues raised by these disputed paragraphs. The court found that not every infringement dispute concerned a challenge to validity, and, therefore, that validity and infringement were separable. The court also recognized the commercial importance of exclusive jurisdiction clauses in patent licences, and of requiring parties ‘to stick to their agreements’. As was the case for this licence agreement, the court considered that patent licences commonly provide that patents may only be declared invalid in the countries in which they are registered, but that infringement is to be determined by the court of a single state (and that from a commercial point of view this makes sense). The court also rejected UCB’s arguments relating to the principle of comity, the Moçambique rule and the doctrine of foreign act of state. Finally, the court went on to make some obiter comments supporting the position that, had the case concerned a direct challenge to the validity of the 771 Patent, it would not have been justiciable by the UK court. D. A warning to keep IP contracts black and white, not fluffy: Court of Appeal refuses to adjust bad bargains Two recent Court of Appeal decisions15 on the interpretation of IP agreements have shared the Supreme Court’s caution to apply a business common sense approach to contractual interpretation, opting instead for a strict literal interpretation where the meaning of a term is clear. Licensing counterparties and those wishing to sell or purchase technology outright should take note of the latest affirmations of the strict literal approach, given the increased risk of a ‘bad bargain’ that may result from poor drafting. Resolution of contractual ambiguity has for some time now been resolved by reference to the approach of a fictional objective business person, as opposed to a slavish following of the literal words. The ‘business common sense’ approach16 codified this concept and remains good law, subject to the below constraints imposed by the Supreme Court. Rainy Sky17 found that where there are multiple plausible readings of a term in a contract, the interpretation that most closely resembles business common sense will prevail. In Arnold v Britton,18 the Supreme Court advised caution in applying the business common sense approach, stating that the clearer the natural meaning of a written term, the more difficult it would be to justify a departure from it. In Wood v Capita,19 the Supreme Court clarified that Arnold v Britton did not mean that Rainy Sky’s guidance on business common sense has no place in the interpretation of terms with rival meanings. It found that agreements could be interpreted successfully either by a: ‘textual’ analysis (ie strict literal interpretation)—greater emphasis strictly upon the text where the agreement is sophisticated, complex and/or negotiated with the assistance of professionals; or ‘contextual’ analysis (ie business common sense)—greater emphasis placed on the factual matrix where the agreement is informal, brief and/or where professionals had not assisted in negotiations. These types of analysis are not conflicting concepts, but rather tools with which to assess the objective meaning of the language that the parties have used to express their agreement. Both Teva v AstraZeneca and KKG v PCL evidence the Court of Appeal’s willingness to apply the Supreme Court’s approach in Arnold v Britton / Wood v Capita, in particular, favouring a textual (or ‘strict literal’) interpretation where the wording of a negotiated agreement is clear. The court refrained from applying commercial sense other than to resolve ambiguity, even if to do so resulted in a poor bargain for one party. The cases are also a useful reminder of the court’s approach when considering the need to imply terms to give business efficacy to a contract. Agreements for the assignment or licensing of IP require careful and comprehensive drafting to ensure that fundamental issues within the contemplation of the parties are properly negotiated and provided for in the agreement, such as the foreseeable term (in the case of Teva v AstraZeneca), or the scope of IP rights to be transferred (in the case of KKG v PCL). E. More on contractual interpretation … The High Court20 recently ruled on the interpretation of a research collaboration and licence agreement between AstraZeneca and Astex (a drug discovery company) relating to a project for developing a BACE inhibitor, relevant to the treatment of Alzheimer’s disease. It found that two drugs nominated by AstraZeneca as candidate drugs were not in fact compounds that attracted royalty payments to Astex under the licence agreement. Furthermore, the court determined that AstraZeneca had previously misinterpreted the licence agreement and mistakenly made milestone payments relating to one of these drugs, for which it was entitled to restitution of the payments. Finally, the court held that the licence agreement was capable of expiring, despite the fact that there was no express provision to this effect in the licence agreement itself. The licence agreement provided for a collaborative research project which could be continued solely by AstraZeneca after a ‘Collaboration Term’, for certain milestone payments to be made by AstraZeneca to Astex, and for Astex to receive a royalty on sales of certain licensed products which contained a ‘Collaboration Compound’. The ‘Collaboration Term’ lasted for just over two years, after which AstraZeneca continued the project on its own. A number of years later, two compounds (CD1 and CD2) were developed by AstraZeneca, who then nominated these compounds as candidate drugs falling under the scope of the licence agreement, and made two corresponding milestone payments of $1 million each to Astex in respect of CD1. CD1 progressed to clinical trials but was subsequently discontinued, and CD2 is currently in Phase III clinical trials in collaboration with Eli Lilly. AstraZeneca subsequently reviewed its position and considered that neither CD1 nor CD2 were in fact ‘Collaboration Compounds’ within the meaning of the licence agreement, and, therefore, that it has no obligation to pay Astex royalties and had mistakenly paid the two milestone payments. The court had to establish whether CD1 and CD2 were ‘Collaboration Compounds’ within the meaning of the licence agreement, given the definition of ‘Collaboration Compound’ underpinned the provisions relating to payment of milestones and royalties. This required interpretation of various provisions of the licence agreement and the meaning of certain defined terms such as ‘Program’, ‘Collaboration Term’ and ‘Project’. In its interpretation of the licence agreement, the court’s task was to ascertain ‘the objective meaning of the language which the parties have chosen to express their agreement when read in the context of the factual background available to the parties at the time of the agreement, excluding prior negotiations’.21 The court determined that neither CD1 nor CD2 were ‘Collaboration Compounds’, and AstraZeneca was entitled to restitution of the milestone payments that it had made in relation to CD1. The court held that AstraZeneca was entitled to restitution of the payments given it had been mistaken as to the contractual status of CD1 at the time when it had made the milestone payments, and that that mistake had caused the payments to be made. Despite the absence of provisions specifically prescribing a set duration or expiry, the court considered that the licence agreement contained references to its expiration and it was held that to construe otherwise would not be to give effect to the intention of the parties when making the agreement. It was also deemed highly improbable that it could have been intended that the licence agreement would continue forever unless terminated. This case highlights the importance of parties understanding the meaning, relevance and application of key defined terms before entering an agreement, and underlines that pursuing more accurate drafting may help to avoid ambiguity in interpretation of the agreement by the parties and/or a court further down the line. It is also a useful reminder of the basic rules of contractual interpretation under English law, notably ‘to ascertain the objective meaning of the language which the parties have chosen to express their agreement when read in the context of the factual background available to the parties at the time of the agreement, excluding prior negotiations’. F. Unwired Planet22—High Court sets FRAND royalty rate For the first time in the UK, the High Court has assessed a FRAND rate for a licence of SEPs under the European Telecommunications Standards Institute (ETSI) rules, finding that there can only be one set of licence terms which are FRAND in a given set of circumstances. Unwired Planet has a worldwide patent portfolio that includes numerous patents which are declared essential to various telecommunications standards. Part of its business is licensing those patents to telecommunications companies. In March 2014, Unwired Planet brought a patent infringement action against Huawei, Samsung and Google for infringement of six UK patents from its portfolio, five of which were claimed to be SEPs. This well-known and widely reported dispute consisted of a series of technical trials, followed by one non-technical trial to address competition law and FRAND issues. The April 2016 judgment related to the non-technical trial (concerning Huawei only as the other defendants had settled with Unwired Planet), in which the High Court considered whether there could be a range of FRAND terms, and if so what principles should be applied to determine that range, or whether there could only ever be one single set of FRAND terms in any given set of circumstances. In this case, both parties made offers of licence terms, neither of which were accepted by the other party. On the facts, the High Court found that neither offer was considered FRAND, and determined benchmark FRAND rates for a worldwide licence based on Unwired Planet’s patent portfolio. The headline points of Birss J’s conclusions are recapped below: It is not necessary to rely on competition law to enforce the FRAND undertaking. The boundaries of FRAND and competition law are not the same. A rate may be above the FRAND rate but not contrary to competition law. There is only one set of licence terms which are FRAND in a given set of circumstances. The legal effect of the FRAND undertaking relating to a SEP is not that the implementer is already licensed. Its effect is that an implementer who makes an unqualified commitment to take a licence on FRAND terms (settled in an appropriate way) cannot be the subject of a final injunction to restrain patent infringement. Whereas an implementer who refuses to take a licence on terms found by the court to be FRAND has chosen to have no licence, and so if they have been found to infringe a valid patent an injunction can be granted against them. FRAND characterises the terms of a licence but also refers to the process by which a licence is negotiated. Although an implementer does not owe a FRAND obligation to ETSI, an implementer who wishes to take advantage of the patentee’s FRAND obligation, must themselves negotiate in a FRAND manner. Offers in negotiation which involve rates higher or lower than the FRAND rate but do not disrupt or prejudice the negotiations are legitimate. An appropriate way to determine a FRAND royalty is to determine a benchmark rate which is governed by the value of the patentee’s portfolio. That will be fair, reasonable and generally non-discriminatory. The rate does not vary depending on the size of the licensee. It will eliminate hold-up and hold-out. Small new entrants are entitled to pay a royalty based on the same benchmark as established large entities. A FRAND rate can be determined by using comparable licences if they are available. In assessing a FRAND rate, counting patents is inevitable. In assessing the dominant position of a SEP holder, the practical effect of the FRAND undertaking and the potential for hold-out by an implementer are relevant factors and may lead to the conclusion that a SEP holder is not in a dominant position. G. Failure to give notice of an equitable assignment of a trade mark licence: lessons from GNIC v Holland & Barrett23 The High Court has recently confirmed the position that notice of an equitable assignment must be given before the equitable assignee can enforce its contractual rights against the other contracting party. This judgment serves as a timely reminder of the importance of notifying other contracting parties when assigning a contract, whether pursuant to restructuring, acquisitions or otherwise. Whilst this case concerned the exercise of termination rights under a trade mark licence agreement, the principles apply more widely to the assignment of other contracts. The central issue in this case was whether GNIC had validly terminated a trade mark licence agreement (Licence) which permitted Holland & Barrett to use certain ‘GNC’ trade marks in the UK. The substantive issues of the case concerned the alleged breaches of the Licence by Holland & Barrett and whether GNIC’s termination rights had been triggered. However, the court considered three preliminary issues, one of which was whether GNIC was able to exercise the rights of the licensor at a time when it was only an equitable assignee of the benefit of the Licence, given that Holland & Barrett had not received notice of the assignment of the Licence to GNIC. The Licence was originally agreed between another company within the GNIC group (Oldco) and Holland & Barrett, but was assigned to GNIC as part of an internal restructuring (GNIC and Oldco being part of the same group). Holland & Barrett was not given notice of the assignment of the Licence to GNIC at the time of the restructuring or subsequently. Interestingly, Holland & Barrett was informed of the proposed restructuring shortly beforehand, but this was not deemed notice of assignment of the Licence. After around a decade since the assignment of the Licence, GNIC (now acting as licensor) served a number of termination notices on Holland & Barrett for alleged breach of the Licence by Holland & Barrett, such breaches relating to brand protection provisions and the scope of use under the Licence. Holland & Barrett disputed that it was in breach of the Licence, and, furthermore, claimed that GNIC did not have the right to terminate the Licence because it had not provided Holland & Barrett with notice of assignment of the Licence to GNIC (i.e. notice that GNIC, as opposed to Oldco, was the current licensor). It was established that the lack of notice to Holland & Barrett meant that GNIC was only an equitable (not legal) assignee of the Licence. In light of this, the court considered that Holland & Barrett could not have been expected to accept a termination notice from GNIC, without ever having received notice of any assignment taking place and of GNIC becoming the new licensor. The court felt that it would have been unfair on Holland & Barrett to find otherwise—Holland & Barrett was clearly entitled to know with whom it was in a contractual relationship. In reaching its decision the court applied Warner Bros,24 which related to exercising an option to extend a recording agreement against one of the parties that had not received notice of the assignment of the underlying recording agreement. The court considered that the principles from Warner Bros also applied to exercise of a termination right. A counterparty could not be expected to act on a notice to terminate which ‘comes out of the blue’ (as per Lord Denning in Warner Bros) from someone that it knows nothing about. The court considered that this was the case even in the context of trade marks. GNIC asserted that it was bound by the Licence but unable to police it, however, the court considered (amongst other objections) that by giving notice to Holland & Barrett, GNIC would then have been able to police the Licence. The court also stated that it is important that a licensee knows the identity of the licensor to whom it may have to pay royalties. It is worth noting that the court placed importance on the fact it considered it would not have been difficult, but ‘the simplest thing in the world’, for GNIC to have given notice to Holland & Barrett in this case (query then, perhaps, what would be the position where service of notice would have been more difficult). Interestingly, the court did not specify whether it should be the assignor (Oldco) and/or the assignee (GNIC) who should give notice of the assignment to the other contracting party. Practically, therefore, notification should be considered at the time of the transfer/assignment because providing notice could be problematic later down the line. Notice with or from the assignor (being original counterparty) may not be possible at a later date if, for example, the assignor has been wound up. As a result, an assignee may want to consider including that notices are given as a condition precedent in the assignment documentation, or a suitably worded further assurance clause providing that the assignor assists with notification to other counterparties. Given that the court applied Warner Bros, which has been heavily criticized in subsequent judgments and academic commentary, it is not surprising that this case has been appealed.25 Footnotes 9 Illumina (n 1). 10 Oxford Nanopore (n 2)—we understand that this case has been appealed. 11 However, this does not preclude multiple exclusive licensees under the same patent in respect of different fields or an exclusive licensee being able to have the right to sub-licence. 12 MT Højgaard A/S (n 4). 13 [1934] AC 402. 14 Chugai (n 3). 15 Teva Pharma (n 5); Kason Kek-Gardner Limited (n 5). 16 Rainy Sky SA & ors v Kookmin Bank [2011] UKSC 50. 17 ibid. 18 Arnold v Britton & ors [2015] UKSC 36. 19 Wood v Capita Insurance Services Limited [2017] UKSC 24. 20 Astex v AstraZeneca (n 6)—we understand that this case has been appealed. 21 As per the recent Supreme Court decision in Wood v Capita (n 19). 22 Unwired Planet (n 7). 23 General Nutrition Investment Company (n 8). 24 Warner Bros Records v Rollgreen [1976] 1 QB 430. 25 We understand that the appeal is outstanding currently. 1 Illumina Inc & Ors v Premaitha Health PLC & Anor [2017] EWHC 2930 (Pat). 2 Oxford Nanopore Technologies, President and Fellows of Harvard College v Pacific Biosciences of California and others [2017] EWHC 3190 (Pat). 3 Chugai Pharmaceutical Co Ltd v UCB Pharma SA and Celltech R&D Limited [2017] EWHC 1216 (Pat). 4 MT Højgaard A/S v E.ON Climate & Renewables UK Robin Rigg East Limited and another [2017] UKSC 59. 5 Teva Pharma - Produtos Farmaceuticos Lda & Anor v Astrazeneca-Produtos Farmaceuticos Lad & Anr [2017] EWCA Civ 2135; Kason Kek-Gardner Limited v Process Components Limited [2017] EWCA Civ 2132. 6 Astex Therapeutics Limited v Astrazeneca AB [2017] EWHC 1442 (Ch). 7 Unwired Planet International Ltd v Huawei Technologies (UK) Co Ltd & Anor [2017] EWHC 711 (Pat). 8 General Nutrition Investment Company v Holland And Barrett International Limited & Anor [2017] EWHC 746 (Ch). © The Author(s) 2018. Published by Oxford University Press. All rights reserved. This article is published and distributed under the terms of the Oxford University Press, Standard Journals Publication Model (https://academic.oup.com/journals/pages/about_us/legal/notices)

Journal

Journal of Intellectual Property Law & PracticeOxford University Press

Published: Jun 4, 2018

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