Patent licence drafting - top tips from recent case

Royalty obligations in patent licences can either be directly tied to what the licensee is allowed to do and the specific patents involved, or they can be standalone rights that apply regardless of patent claim validity. This is a choice to be made by the parties negotiating a patent licence.

Sometimes we stare at a sentence for a long time trying to ensure that it means what we are actually thinking, doing our best to avoid future confusion in the relatively unlikely scenario in which we need to rely on the sentence. Every now and again, the little adjustments we make have a disproportionately large impact.

Case overview

In the Court of Appeal case of Astrazeneca UK Limited v Tesaro, Inc., for which the judgment was dated 9 February 2024, the definition of 'Compound' provided an example of one of those types of sentences. This is the wording (emphasis added):

"TESARO's PARP inhibitor compounds niraparib and Mk2512 the use of which may be claimed or covered by, or the Exploitation of which may be claimed or covered by, one or more of the Licensed Patents."

It was used in a patent licence agreement between AZ and Tesaro, which disagreed on its meaning, particularly in the content of Tesaro's obligation to pay royalties.

If royalty obligations are matched to the scope of the licence and the validity and scope of the licensed patents, the licensee would only pay if its use of the relevant technology would require a licence. In other patent licences, for a variety of reasons, the licensee may be required to pay even if its use would not otherwise infringe any claim of the patent. Put simply, in this case, AZ argued the latter, and Tesaro argued the former. Therefore, the question was one of contract interpretation. What did the parties mean by the above wording?

Top tips gathered from this case

There are some useful lessons for those of us drafting and negotiating patent licences. Lord Justice Arnold has provided some excellent tips, which we have paraphrased and simplified into the following rules:

• If you mean for the royalty obligations to match the scope of the licence, then it is a good idea to use the same defined terms to govern the two concepts.
• Particularly in key definitions, judges are likely to conclude that every word is intended to have a particular purpose. Otherwise, why would contract parties, particularly sophisticated pharma companies, use them?
• The timing of royalty obligations matter. If they start on patent grant and end on the validity of the claims ceasing, then this suggests that the royalty provisions are intended to be aligned to the scope of the licence.
• If the meaning of a sentence is disputed, judges may be directed to look at other related provisions of the contract to check for supporting or inconsistent words. Therefore, a consistency check should be done as part of the drafting process. Inconsistency may push the interpretation of ambiguous provisions towards an unfavourable result.
• If a royalty obligation is linked to patent scope, and you know that determining the applicable patent scope is likely to be subject to serious problems, it may be more appropriate to make the royalty obligations independent of patent scope. Without going into detail, there are several factors that may make patent scope uncertain. This is acknowledged several times in the judgment, particularly in relation to second medical use claims.
• A lawful interpretation is likely to be preferred. Therefore, if there is any concern about compliance with a particular legal doctrine (such as the US rule against patent misuse), then consider whether that concern indicates a particular interpretation of any wording in the agreement.
• If the patent licence is a sublicence, and the downstream royalties are intended to match the upstream royalties, it is important to assess the wording used for royalty and licence concepts in the headlicence. If you are deliberately using different language for the same concept, what distinction are you intending to make (if any)? In addition, the scope of a sublicence is unlikely to be intended to exceed what has been granted in the headlicence.
• Factual statements made in correspondence between the parties may be used as part of the background that would be available to assist with interpreting the agreement. There are some difficult legal concepts behind this, and it is not always the case, but it did happen in this case.
• If it is easy enough for parties to specify their choices, a judge may conclude that they did not intend to make a particular choice. Therefore, an extra clarification sentence may be very useful if those choices come under scrutiny.

Decision

In the sentence in question, the parties agreed to use the phrase "may be" in relation to use being covered by the valid claims of the relevant patents. Arnold LJ thought that the use of "may be" was referring to the fact that in future those uses could be covered by valid claims, acknowledging that at the stage of the licence there was uncertainty about the relevant applications proceeding to grant and the product being covered by any future marketing authorisation. In other words, it was just about timing.

In case you were thinking that that sounds simple enough, Lord Justice Birss disagreed on the particular interpretation of "may be". He considered the original judge's interpretation had merit, discussing whether the use of "may be" was about probability (the existence of a more-than-fanciful chance) rather than timing.

Have you got your royalty and licence scope provisions right? Do they mean what you want them to mean? Get in touch with Harry Jennings in our Pharmaceuticals and Life Sciences team on 07789 533 122 to discuss the drafting of your patent licence.