What “may be” will be….

On 9 February 2024, the Court of Appeal handed down its decision in AstraZeneca UK Limited v Tesaro Inc. [2024] EWCA Civ 78, reversing the trial judge's (Richards J) decision and finding in favour of Tesaro Inc.

In 2012, AstraZeneca UK Limited ("AZ") entered into a licence agreement with Tesaro Inc ("Tesaro") pursuant to which AZ granted Tesaro an exclusive licence under certain licensed patents. Importantly, the licensed patents were sub-licensed by AZ, who in turn had licensed the patents from the patentees: University of Sheffield and the Institute of Cancer Research. The licensed patents claim second medical uses of, or methods of treatment using, existing compounds with a class of drugs known as PARP inhibitors; one such drug, niraparib, is being developed and commercialised by Tesaro. In 2017, Tesaro successfully obtained marketing authorisations from the FDA and EMA for niraparib for the treatment of certain types of cancer. Now the product is being commercialised, royalty payments flow under the licence agreement; however, AZ and Tesaro disagreed as to the scope of the royalty obligation under their licence:

• AZ contended that a royalty was payable by Tesaro on Net Sales of niraparib - regardless of whether the use of the product infringed the licensed patents; and

• Tesaro contended that a royalty was payable only on Net Sales of niraparib which infringed the claims of the licensed patents.

The trial judge found in favour of AZ, with the Court of Appeal overturning this.

Key Clauses

The key terms of the licence agreement are as follows:

1. Licence Grant: "...AstraZeneca hereby grants to TESARO and its Affiliates an exclusive (even as to AstraZeneca), royalty-bearing, license (the 'License') under AstraZeneca's rights in the Licensed Patents solely to Exploit the Compound and the Licensed Products within the Field in the Territory."

2. Royalty: "...TESARO shall pay to AstraZeneca during the royalty term stated in Section 5.5 a royalty of [X%] of the aggregate Net Sales of Licensed Products in the Territory..."

3. Royalty Term: This commenced on first commercial sale of the product and continued until "such time as there is no longer any Valid Claim that covers or claims the Exploitation of such Licensed Product in such country."

4. Definitions of Licensed Product and Compound: Licensed Product is ultimately defined by reference to the defined term Compound, which was stated to mean "TESARO's PARP inhibitor compounds niraparib and Mk-2512 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."

The dispute between the parties hung on the interpretation of the words "may be" in the definition of Compound.

The Court's Reasoning

All three appeal judges found in favour of Tesaro, albeit with Birss LJ and King LJ reaching that conclusion slightly differently to Arnold LJ. In the leading judgment, Arnold LJ held in favour of Tesaro on the following grounds:

1. The defined term Licensed Product is used in both the licence grant and royalty clauses such that both depend on the definition of Compound. The purpose of the italicised words was, in Arnold LJ's view, to align the scope of the licence with the scope of the patent claims and correspondingly the royalty obligation is aligned with the scope of the patent claims.

2. The italicised words must be given some meaning and effect and must have been included for a purpose. The apparent purpose is to align the scope of the licence and royalty with the scope of the patent claims.

3. The royalty term clause also defines duration of the royalty by reference to the existence of a Valid Claim in a Licensed Patent which covers or claims the Licensed Product - again indicating that the royalty is linked to the scope of the Licensed Patent claims.

4. The words "may be" in the definition of Compound connotate "futurity" rather than possibility. The trial judge had found that, if the royalty was to be limited only to sales of Licensed Products which are covered by the Licensed Patents, this wording should have said "will be" or "is" claimed or covered by the Licensed Patents and therefore had found in favour of AZ that the royalty applied to sales of any product containing niraparid or MK-2512. Arnold LJ disagreed, stating that the use of prospective language was understandable as certain Licensed Patents had not yet been granted (and may not be granted) and it was unclear at the time of entering into the agreement whether niraparib would even be successfully granted a marketing authorisation.  

5. The fact that the licence agreement did not include a mechanism for determining whether sales of niraparib fell within the scope of the Licensed Patents was not determinative of anything - it was entirely usual for patent licences not to contain any such mechanism.

6. Where the words of a contract are capable of two meanings - one of which is lawful and one is unlawful, the former interpretation is preferred. Here it was noted that AZ's interpretation that the royalty applied to sales of Licensed Product regardless of whether the Licensed Patents covered the Licensed Product could constitute "patent misuse" under US patent law. This was considered because the Licensed Patents include US patents and the US is a major market for the drug product.  Briefly, the patent misuse doctrine hangs on the concept that conditioning the grant of a licence on the payment of royalties on sales of products which would not otherwise infringe the licensed patents is patent misuse - such a royalty structure should only be acceptable where both parties have agreed that approach for their mutual convenience.  

7. The recitals in the licence agreement cross-referred to AZ's head licences from University of Sheffield and Institute of Cancer Research (which Tesaro had also seen). Further, one of AZ's negotiators for the licence had previously stated that the downstream royalties (Tesaro to AZ) should match the upstream royalties (AZ to ICR and University of Sheffield). The court then looked at the royalty provisions in the head licences which were clearly tied to net sales of products which were covered by the Licensed Patents.

Interestingly, both Birss LJ and King LJ disagreed with Arnold LJ's conclusion in point 4 above. Instead, they found that the words "may be" in the definition of Compound effectively meant that "as long as the possibility of the use being claimed [in the Licensed Patent] was not wholly fanciful [in respect of the Compound], then it was covered" - which would have meant that all of Tesaro's current use would be subject to a royalty. This interpretation was based on recognition of the particular complexity of being able to determine, categorically, whether any product at the point of sale would infringe a second medical use patent. However, notwithstanding this difference of opinion, Birss LJ and King LJ agreed that the strength of points 1-3 and 5-7 above were such as to ultimately find in favour of Tesaro - both placing particular emphasis on the strength of argument 6 above.

Commentary

Once again, this case emphasises the need for clear and consistent drafting of licence agreements - with particular focus on the expression of the royalty provisions and how the defined terms would be interpreted in that context. As the court notes, the inclusion of the contested language in the definition of Compound is unusual, with these defined terms ordinarily being limited to the specific molecule for the very reason that the term Licensed Product which this fits into is likely used in hundreds of places in the agreement and therefore the consequence of such wording would need to be considered in all such cases.

The issue flagged by the court regarding how/whether parties would be able to determine, at the point of sale, if a Licensed Product has been sold for purposes that would infringe a second medical use claim is also pertinent . While parties are alive to the issue it tends to be drafted with a view that, in the event of a dispute, the parties would then resolve that specific dispute when the full facts are known. As Arnold LJ points out - it would be unusual to include a contractual mechanism to provide for how the parties would determine if such a patent is infringed at the point of sale, and attempts to do so are like to either over simplify matters or add significant complexity depending on the approach taken.   

Perhaps most interestingly of all is the weight given by the courts to US patent law considerations for a licence which is governed by English law. Most (if not all) significant licence agreements in the life sciences sector will include US patents as part of the licensed patent portfolio, and the US is and will remain a major market for any resulting drug product; therefore, do all English law licence agreements now need to be mindful of the US doctrine of patent misuse?

Read the approved judgement from the Court of Appeal here.