Licence agreements: exclusive jurisdiction clauses and more

The High Court has recently provided two interesting decisions on (respectively) jurisdiction and interpretation in the context of licence agreements.

The first case (Chugai v UCB [2017] EWHC 1216 (Pat)) relates to whether the English court has jurisdiction to consider the construction of US patent claims in determining whether royalties were payable under a patent licence agreement.

The second case (Astex v AstraZeneca [2017] EWHC 1442 (Ch)) involved the interpretation of a research collaboration and licence agreement, and provides a timely reminder on the basic principles of contractual interpretation in the context of licence agreements.

These two cases are discussed below.

Case 1: Chugai Pharmaceutical Co. Ltd v (1) UCB Pharma S.A. and (2) Celltech R&D Limited [2017] EWHC 1216 (Pat), 26 May 2017

Summary

The High Court held that it has jurisdiction to consider the construction of US patent claims in a dispute over royalties due under a patent licence agreement (which contained a provision whereby the parties submitted to the jurisdiction of the English courts).

Background

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 (which are, in part, manufactured and sold in the US) 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 has been listed for February 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.

Case overview

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 English court to determine since an English 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 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 English 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 English court had jurisdiction in respect of the issues raised by these disputed paragraphs.

Whilst agreeing that the court should carefully examine the substance of a dispute in the context of challenges to jurisdiction, it found that not every infringement dispute concerned a challenge to validity, and, therefore, that validity and infringement were separable. On the facts the court considered that Chugai was not claiming the 771 Patent to be invalid.

The court also recognised 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 rejected UCB’s argument that adjudicating on issues relating to the scope of the patent would be a breach of the principle of comity, on the basis that the parties had agreed that this would be judiciable by the English court.

Referring to recent case law on the Moçambique rule - that the English court had no jurisdiction to entertain an action for determination of the title to, or the right to possession of, land outside England, or the recovery of damages for trespass to such land - the court implied that this rule no longer applied to patents where infringement (not validity) was being determined. In addition, the longstanding contractual exception to the Moçambique rule was deemed to apply in this case, the parties having contractually agreed that the scope of the patents under the licence agreement should be determined by the English court.

The court also considered whether it was constrained by the doctrine of foreign act of state. Referring to the Supreme Court’s ruling in Lucasfilm v Ainsworth [2011] UKSC 39, the court considered the granting of a patent not to be an act of state, and that the foreign act of state doctrine is not an impediment to an action for infringement of foreign intellectual property rights, even if the validity of a grant of such intellectual property rights is in issue.

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 English court.

Commercial context

It appears that the English 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 English 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.

Case 2: Astex Therapeutics Limited v AstraZeneca AB [2017] EWHC 1442 (Ch), 21 June 2017

Summary

The High Court has ruled on the interpretation of a research collaboration and licence agreement between AstraZeneca and Astex (a drug discovery company). 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.

Background

The licence agreement related to a collaborative research project between Astex and AstraZeneca in which they were developing a beta-site amyloid precursor protein cleaving enzyme (BACE) inhibitor, relevant to the treatment of Alzheimer’s disease.

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 $1m 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.

Case overview

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” (as per the recent Supreme Court decision in Wood v Capita Insurance [2017] UKSC 24).

Under the licence agreement, whether CD1 and CD2 were “Collaboration Compounds” was in part dependent on whether they contained a compound which had been discovered as a “direct result” of chemical structure modification “performed as part of the Program”.

The parties disputed whether the “Project” was the same as the “Program”, and the duration of the “Program” and the “Collaboration Term”. AstraZeneca interpreted the “Program” as something that could only be performed by both parties in collaboration during the “Collaboration Term” (and, therefore, that the duration of the “Program” and the “Collaboration Term” should be the same), and that this was different to the “Project”. However, Astex interpreted the licence agreement differently to mean that the “Program” would continue to remain in place following the end of the “Collaboration Term” even when continued by AstraZeneca on its own. The court ultimately agreed with AstraZeneca and found that the “Program” ended with the “Collaboration Term”, suggesting that the clause that most strongly supported Astex’s interpretation may have contained a drafting error. The court then determined that neither CD1 nor CD2 were “Collaboration Compounds” due to the fact that they had not been discovered as a direct result of chemical structure modification performed as part of the “Program”.

Having established that CD1 was not a “Collaboration Compound”, the court turned to consider the law relating to mistakes in order to assess whether 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.

The court also assessed whether the licence agreement was capable of expiring. Despite the absence of provisions specifically prescribing a set duration or expiry, 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.

Commercial context

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”.