Settlement of a patent dispute: The $17.6 million reminder to make sure you've drafted what (you think) you've bargained for
Sandoz Pty Ltd v H. Lundbeck A/S [2020] FCAFC 133
What you need to know
- The Full Court has reinforced the basics for contractual interpretation, which apply equally to settlement agreements – the construction of ambiguous clauses will be read objectively in the way that provides the most commercial sense, relying on any relevant circumstances in existence at the time the contract was entered into, not events which followed post-contracting. Such as the granting of a late patent term extension.
- The Full Court has clarified that patent licences will still run, even when a patent has expired and is later extended. The pre- and post-extension patent cannot be delineated into pre-extension and after-extension rights.
- The existence of a licence to a patent that has retrospectively been extended may be a complete defence to a claim for patent infringement under s 79 of the Patents Act 1990 (Cth).
- This article does not review other issues about extended patent terms or exclusive licensees that were also considered in the appeal.
What you need to do
- When settling any dispute, including a patent dispute, be conscious of events that may occur in the future and provide for those eventualities clearly in the agreement. Assuming it is safe to be silent in relation to a known issue and that certain interpretations of rights will apply in the future if an issue arises or event comes to pass is a risky tactic, one which we have seen backfire before.
- Consider what might occur if a patent term is extended when granting a licence which is contingent on the expiry of the original patent term.
- Have a contractual contingency – deal with the possibility that a patent's term may be extended in any licencing agreement relying on the original patent term.
- Manifest intentions would need to be demonstrated to affix meaning to licence terms which are unclear and may not accurately convey the contracting parties' commercial intentions. Make sure you can show what the commercial intent specifically was, at the time of drafting.
Background
Expiration date of the Patent
Australian Patent No 623144 (the Patent), covering Lundbeck A/S' (Lundbeck) and its Australian subsidiary's, Lundbeck Australia Pty Ltd (Lundbeck Australia), escitalopram products, had an original term which expired on 13 June 2009.
Sandoz Pty Ltd (Sandoz) commenced revocation proceedings against Lundbeck and Lundbeck Australia when, in 2004, an extension of term was granted, extending the term of the Patent to 13 June 2014. The parties settled and discontinued that dispute via written agreement in February 2007 (the Settlement Agreement).
The Patent term continued to be the subject of heavy litigation, and in 2008, the extended term was found to be invalid. However orders to that effect were stayed while Lundbeck sought leave to appeal and later applied for a new extension of term and extension of time to do so. Subsequent to these events, Sandoz began to supply its generic escitalopram products from 15 June 2009, two days after the Patent purportedly expired in accordance with its original term.
However litigation on the Patent continued, and finally in 2014, the term of the Patent was extended with an effective expiry date of 9 December 2012. Lundbeck saw Sandoz's supply of the generic escitalopram products between 15 June 2009 and 9 December 2012 (the relevant period) as an opportunity to a bring an infringement action. But Sandoz alleged it had a licence to do what it had done.
Terms of the Settlement Agreement
Sandoz's defence primarily came from the terms of the 2007 Settlement Agreement. In particular, clause 3(1) which set out that Lundbeck and Lundbeck Australia would "jointly and severally grant Sandoz an irrevocable non-exclusive licence to the Patent" effective from approximately two weeks prior to: (a) 13 June 2009; (b) 9 December 2012; (c) 13 June 2014, if the Patent was to expire on any of those dates; or (d) the expiry of the Patent if the Patent expires on a date other those set out in (a) to (c).
Additionally, in clause 3(2) Lundbeck and Lundbeck Australia jointly and severally granted Sandoz an "irrevocable non-exclusive licence to the Patent, effective from the beginning of the calendar month in which the licence granted under clause 3(1) becomes effective, for the sole purpose of manufacturing, importing, marketing and offering to sell (but not selling or supplying) pharmaceutical products containing escitalopram". Meaning the manufacturing and marketing of Sandoz's generic escitalopram could potentially, and did, occur from 1 May 2009 (relying on the 13 June 2009 patent expiry date).
The Primary Judgment
Although finding in Lundbeck's and Lundbeck Australia's favour, the primary judge did not adopt the construction which any of the parties contended. Upon considering, amongst other things, the terms of the Settlement Agreement, her Honour determined that it was highly unlikely that in 2007, the parties could have contemplated the possibility of an extension of term being granted as it happened between 2009-2014. She found that upon nothing happening to preclude the patent from expiring before the end of its term, it expired, thus satisfying the requirements of clause (3)(1)(a).
However, her Honour went on to find that as the terms of the clause were drafted to provide an "irrevocable non-exclusive licence to the Patent" from an approximate two week period prior to the 2009 expiration date, and that one could not licence an expired patent, the licence to Sandoz had only been valid between 31 May 2009 to 13 June 2009, ceasing upon the Patent's expiry.
In finding this, her Honour concluded that the commercial bargain struck between the parties was to provide Sandoz with an approximate two week head-start into the market before the expiry of the Patent in exchange for dropping its invalidity claim.
However her Honour also concluded that it was highly unlikely that the commercial intention of Lundbeck was to grant a royalty-free licence to exploit an invention which was the subject of a patent. So that when the Patent's term was later extended, this opened up the relevant period for a claim of patent infringement, effectively meaning that the extended Patent operated separately to the expired Patent. Having found that Sandoz infringed claims 1 and 3 of the Patent during the relevant period, it was ordered to pay to Lundbeck and Lundbeck Australia ~$17.6 million in damages (plus interest).
The Appeal
The Full Court agreed with her Honour's reasoning that at the time of contracting in 2007, the parties would not have known what the extension of the patent term was likely to be but that in any case, they assumed they would know prior to 1 May 2009 (the earliest date that Sandoz could start marketing and manufacturing its generic escitalopram products).
However the Full Court did not accept her Honour's finding that the licence was only valid for the approximate two week period set out in clause 3(1)(a). It did not accept that the existence of a patent could be conceptually delineated into pre-expiry and post-extension phases.
In other words, if not precluded by its terms, a licence could not cease to apply to a patent that is merely extended after expiration of its original term, as it is the same patent in relation to which the licence was granted. As the Full Court said: "Sandoz either had a licence under the Patent or it did not. If it did have such a licence in the weeks leading up to the expiry of the Patent on 13 June 2009, then we do not see any basis for concluding that the licence would not provide Sandoz with a defence."
The Full Court rejected Lundbeck's submissions that Lundbeck did not intend to grant such a long royalty-free licence and the clause should be construed as contemplating at some point in the future the licence would stop applying. The Full Court considered that the "measure of uncertainty" that this would create for Sandoz was inconsistent with the conciseness of the clause which specified a clear start date.
Sandoz's interpretation that when the Patent reached the end of its term on 13 June 2009, it in fact expired for the purposes of clause 3(1), and thus the licence commenced some two weeks prior to that date and then continued to operate indefinitely from that date forward, was accepted.
Accordingly the Full Court reversed the primary judge's order that Sandoz pay damages for infringement.
Authors: Kellech Smith, Partner and Elizabeth Arms, Lawyer.
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