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  • Writer's pictureRosie Burbidge

How should a patent licence be interpreted?

Updated: Nov 2, 2023


A High Court judge has ruled in favour of AstraZeneca in a dispute over the interpretation of royalty provisions in patent licence agreements with Tesaro (now part of GSK).


In his judgment, Mr Justice Richards said that the licence agreements require Tesaro to pay a royalty on net sales in each country in which there are licensed patents from the first commercial sale in that country, rather than a royalty only on sales that are for uses claimed or covered by the licensed patents.


In a complex case, the judge concluded that considerations of factual matrix (including relating to patent misuse) were “insufficient to disturb the inferences to be drawn from the language of the contract”.


Background to the licences

The patents are second medical use patents and protect the use of a wide set of poly-ADP ribose polymerase (PARP) inhibitors in certain treatment regimes. In 2004, they were licensed by ICR and the University of Sheffield to KuDOS Pharmaceuticals, which was later acquired by AstraZeneca.


AstraZeneca subsequently sub-licensed the patents to Tesaro, which manufactures and sells the ovarian cancer drug niraparib, branded as Zejula. In 2022, Zejula had sales of £463 million.


Factual matrix

On the proper construction of the royalty provisions of the licence agreements, the judge found that there was no “right” way to interpret the patent specification, but he was able to draw some conclusions from the expert evidence.


He also found that the terms of the head licence agreement (between ICR/University of Sheffield and AstraZeneca) was relevant as part of the factual matrix, but did not form part of the same transaction as the licence agreements between AstraZeneca and Tesaro. Moreover, there was not a common belief that the head licence agreements required a “pay to infringe” royalty.


The judge considered the US doctrine of patent misuse, an affirmative defence whose purpose is to prevent harm to the market caused by a patentee seeking to extend the scope of a patent beyond that which the law allows, given that the licences covered US patents. He found that the position on patent misuse would likely have been uncertain.


Construction of agreement

Richards J noted that each of the patent licences was professionally drafted and executed after a process of negotiation. Section 5.3 of the licences provided that royalties would be driven by “aggregate Net Sales of Licensed Products in the Territory”. Having regard to the words of the agreement, the judge said he preferred AstraZeneca’s interpretation, though neither interpretation was without difficulty and they should be tested against the factual matrix.


Drawing his findings together, the judge found that, as its plans for Zejula were uncertain and the scope of the licensed patents was not certain, “Tesaro sought and obtained a broad licence that would permit it to use niraparib in any of the multiple ways whose use might be claimed in the licensed patents”. This meant that Tesaro would have the necessary freedom to operate to permit it to exploit niraparib as it saw fit even if ultimately it did not exploit niraparib in all the ways whose use was claimed in the licensed patents. In other words, the broad licence gave commercial certainty.


As to how royalties should be calculated, said the judge:

If there had been a clear dividing line between uses of niraparib that would infringe rights under the Licensed Patents and uses that would not, it may well have been possible for AZ and Tesaro to agree a basis of charging royalties by reference only to infringing use. However, both parties would have been aware that the Licensed Patents were second medical use patents. … there was nothing commercially irrational about agreeing a royalty based on total sales of Zejula which side-stepped all of the difficulties that would have been associated with a royalty charged on a ‘pay to infringe’ basis.”

What does this mean?

This judgment provides guidance on the interpretation of disputed licence agreements. The judge noted that consideration must be given both to the language of the contract and the factual matrix, even if (as in this case) the former outweighs the latter.


When entering into IP licensing agreements, it is vital to consider all the relevant factors and obtain expert advice where possible. We frequently advise clients on licences and can help to identify all the relevant issues.


To find out more about the issues raised in this blog contact Rosie Burbidge, Intellectual Property Partner at Gunnercooke LLP in London - rosie.burbidge@gunnercooke.com


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