Court of Appeal overturns controversial patent licensing decision

Those in the IP licensing world will have been watching closely the progress of appeal proceedings involving the decision of the UK Patents Court in Neurim v Mylan¹. At first instance the Patents Court ruled that the licence in question was non-exclusive (primarily) because the licensee did not have the right to bring infringement proceedings independent of the licensor/patentee under the terms of the licence agreement. Recently, the Court of Appeal overturned the Patents Court decision on this point, and provided some clarity on the impact of contractually agreed enforcement provisions when considering the exclusive nature of a patent licence in the context of patent standing and a licensee’s right to bring patent infringement proceedings.²

By way of background, Neurim (the patentee) had entered into licensing arrangements with Flynn, purporting to grant Flynn an exclusive licence to distribute and market products falling within the claims of patent EP 1 441 702 (“EP 702”) in the UK. The agreement contained provisions clarifying Flynn’s rights (as exclusive licensee) to bring infringement proceedings against third parties who might infringe the licensed patent, which, taken cumulatively, had the effect of preventing Flynn from bringing such infringement proceedings independently of Neurim. The Patents Court held that these provisions were inconsistent with the grant of an exclusive licence because an exclusive licence should permit the licensee to bring infringement proceedings independently of the licensor/patentee. As a result, despite the grant of an “exclusive licence”, the Patents Court held that Flynn was, as a matter of law, a non-exclusive licensee.

This raised alarm bells for many in the IP licensing world, because while section 67(1) of the UK Patents Act 1977 (“Patents Act”) states that exclusive licensees shall have the same right as the proprietor of the patent to bring infringement proceedings, it does not require an exclusive licensee to have the right to bring infringement claims independently. Furthermore, the decision seemed to many to be at odds with established practices for drafting exclusive licences, thus having the potential to undermine exclusivity and the ability of exclusive licensees to be joined to patent litigation. This first instance judgment, which generated some controversy, has now been overturned by the Court of Appeal, on a number of grounds:

• The first instance decision ignored the clear contractual and commercial effect of the exclusive licence in the licence agreement, which entitled Flynn to distribute and market products covered by the licensed patent in the UK to the exclusion of Neurim and all others (such that if Neurim did distribute or market such products, Flynn may be entitled to bring a breach of contract claim against Neurim), which ultimately met the key requirement for an exclusive licence of a patent.
• Taking the wording of section 67(1) (and also looking at section 67 more generally as a whole), it did not require the exclusive licensee to be able to take infringement action independently of the licensor/patentee. Indeed, the court noted that section 67(3) envisages the patentee always being involved in such proceedings as a joint claimant, or if the patentee declines to so participate, as a defendant.
• The same conclusion is reached when looking at the purpose of section 67, which is to enable an exclusive licensee to recover its own losses in the event of infringement. Excluding such recovery simply on the basis that the exclusive licensee is contractually prevented from bringing an infringement action “independently” would frustrate this very purpose.

The Court of Appeal also considered Mylan’s argument that Flynn’s licence could not be exclusive because it was not co-extensive with the claims of the patent. The Patents Court had dismissed this argument and the Court of Appeal agreed with that decision, finding that “a right in respect of part of the field covered by a [patent] claim is still a ‘right in respect of the invention’” in line with the definition of an exclusive licence in section 130(1) of the Patents Act, and that there was nothing in either that definition or previous case law to support Mylan’s argument to the contrary. Overall, Flynn had an exclusive right to work part of the licensed patent claims, to the exclusion of Neurim and all others, and this was sufficient to meet the exclusive licence definition in section 130(1). The Court of Appeal did, however, acknowledge that “there may be a limit as to how far one can salami-slice the monopoly in a claim”, although the agreement between Neurim and Flynn didn’t approach that limit as it covered a commercially valuable market.

The Court of Appeal’s decision (which included two IP specialist Lord Justices) will be welcome news for those in the patent licensing world, especially exclusive licensees (and also patentees/licensors seeking to retain control over infringement proceedings). It provides helpful clarification that a licensee of a UK patent does not need a right to bring infringement proceedings independently of the patentee in order to be considered an exclusive licensee.

Moreover this case highlights the importance of taking care and seeking specialist input when drafting patent licences, given that provisions concerning enforcement of licensed patents are often heavily negotiated and depend on the circumstances.

¹ [2020] EWHC 3270 (Pat).
² The exclusive licence issue is part of a wider patent infringement dispute between Neurim/Flynn and Mylan concerning Mylan’s generic melatonin product, which we have previously reported on here and here, and which impacts on Flynn’s ability to claim damages for patent infringement in the dispute.