Legal development

A further lesson in drafting - settlement agreements

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    What you need to know

    • The High Court has held that the Full Court erred in its construction of a settlement clause.
    • The High Court found that Sandoz was granted a two week licence to sell generic escitalopram products.

    What you need to do

    • Consider all eventualities when settling a dispute, even circumstances that are particularly remote.
    • Ensure settlement agreements are drafted clearly and unambiguously to reflect the commercial intentions of the parties.


    Lundbeck, Sandoz and various third parties have brought numerous suits in relation to the validity of the Lundbeck patent for escitalopram (the Lexapro patent) and in relation to the proposed patent term extension of that same patent.

    In February 2007, Sandoz and Lundbeck entered into a settlement agreement to resolve Sandoz's challenge to the validity of the Lexapro Patent. The settlement granted Sandoz a licence of the patent due to commence at its earliest on 31 May 2009 or otherwise "2 weeks prior to the expiry of the patent". The patent expired on 13 June 2009. Accordingly, Sandoz began to supply its generic escitalopram products from 15 June 2009 and continued to do so until 9 December 2012.

    On 25 June 2014, Lundbeck Denmark was granted an extension of the patent term to 9 December 2012 which in effect nullified the 2009 expiry of the patent.

    This gave rise to the facts relevant to this case: Lundbeck saw Sandoz's supply of the generic escitalopram products as infringing its Lexapro Patent from June 2009. Sandoz argued the settlement agreement gave rise to a licence allowing the sales of generic escitalopram from 31 May 2009 and that licence then continued irrespective of the later extension of the patent term. The interpretation issue arose as the settlement agreement made no express provision for an end date to Sandoz's licence.

    Previous findings

    The primary judge found that Sandoz had infringed the Lexapro Patent, although her Honour did not accept either party's construction of the licence contained in the settlement agreement. More than A$16m in damages were awarded to Lundbeck.

    The Full Court then overturned that decision and found that Sandoz, through the construction of the settlement clause, was granted an irrevocable and perpetual, non-exclusive licence. The Full Court held that Sandoz's sales during the relevant period did not infringe.

    High Court decision

    The High Court ultimately sided with the primary judge, finding Sandoz infringed the Lexapro patent and awarding damages to Lundbeck.

    Construction of the settlement agreement

    On the proper construction of the settlement clause, the High Court unanimously allowed the appeal primarily on the basis that the Full Court misconstrued the effect of the settlement clause between the parties. For different reasons, the High Court found Sandoz was granted a two week licence to sell the generic escitalopram products which expired on 13 June 2009. Sandoz ultimately got no benefit from its settlement after the patent term was extended.

    The High Court did not accept that Sandoz was granted an irrevocable licence for a term which commenced on 31 May 2009 but which had no fixed end date.

    The majority confirmed "parties to a written contract… in respect of statutory rights can ordinarily be taken to use statutory language according to its statutory meaning". The High Court was critical of Sandoz's failure to apply this reasoning consistently.

    By interpreting the clause in light of the meaning of the words in the Patents Act 1990 (Cth), and in light of the "internal logic" of the settlement clauses, the majority found that the irrevocable non-exclusive licence granted to Sandoz in each of the clauses was to commence two weeks before the date of expiration (whatever that date was) and was to expire on the date of expiration of the patent.

    The majority acknowledged the "commercial result" was for Sandoz to be allowed to sell generic pharmaceutical products during the final two weeks of the term of the patent, ahead of other suppliers of generic products, in exchange for Sandoz giving up its challenge to the validity of the patent.

    Justice Edelman also found Sandoz to have been granted a two week licence. His Honour considered that this conclusion best reflected the implications in the relevant settlement clause that would be recognised by a reasonable person in the position of the parties.

    His Honour relied on the reasoning set out in Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 to imply that limitation to the licence.

    Justice Edelman referred to the purpose of the licence as giving Sandoz a head start over other generic manufacturers. This was clear from pre-contractual communications between the parties. In light of this purpose, it was reasonable the licence granted was limited to two weeks.

    Other issues

    The High Court agreed with the Full Court's findings in respect of the further two grounds of Lundbeck's appeal so Lundbeck's appeal on those matters was dismissed.

    The Court considered whether Lundbeck Australia, as exclusive licensee, has rights to bring proceedings against Sandoz under section 79 of the Act for events that occurred between the original expiration date and the date that the patent term was extended. It found that Lundbeck Denmark, as patentee, had rights to bring proceedings, but Lundbeck Australia did not as section 79 does not confer any rights on exclusive licensees.

    The second ground concerned when a cause of action for damages for infringement during the extended term arose for Lundbeck Denmark for the purpose of calculating pre-judgment interest.  The High Court confirmed that no cause of action arose for Lundbeck Denmark under section 79 until the later extension of the term of the patent in 2014 thus interest would only run from that date.

    The award of damages and pre-judgment interest to Lundbeck Denmark alone was remitted to the trial judge for determination.

    A separate argument that Sandoz had engaged in misleading conduct in representing to customers (pharmacists) that its products would not infringe a patent was also dismissed.

    Our summary of the Full Court decision is available here.

    Authors: Kellech Smith, Partner and Nikkie Xu, Lawyer.


    1. Federal Court of Australia Act 1976 (Cth), s 51A(1)(a)