Should exclusive licensees be losing sleep?
09
Mar
2021
Exclusive licences in the UK after Neurim and Flynn v Mylan, Illumina v Premaitha, and Oxford Nanopore Technologies v Pacific Biosciences of California

In December 2020, Neurim Pharmaceuticals (1991) Ltd and Flynn Pharma Ltd v Generics UK Ltd and Mylan UK Healthcare Ltd [2020] EWHC 3270 (Pat) (referred to below as “Neurim”) became the latest in a string of UK cases to consider the definition of an “exclusive licence” under the UK Patents Act 1977 (referred to below as the “Patents Act”).

In this article we consider Neurim and two other such cases (Illumina Inc and Ors v Premaitha Health PLC and Anor [2017] EWHC 2930 (Pat) (“Illumina”) and Oxford Nanopore Technologies & Anor v Pacific Biosciences of California, Inc. & Anor [2017] EWHC 3190 (Pat) (“Oxford Nanopore”), which highlight the strict approach taken by the UK courts when considering whether a patent licence truly is “exclusive”. The commercial impact of these cases is likely to be felt in the real world, not just in the pages of legal journals.

The Law

In each of the three cases, the courts were tasked with interpreting patent licences to determine if the licence in question was “exclusive”. Readers might be forgiven for thinking that this was purely a question of contractual interpretation, but in all three cases the courts considered the contract against the definition of an “exclusive licence” provided in s.130(1) of the Patents Act, which reads:

“a licence from the proprietor of or applicant for a patent conferring on the licensee, or on him and persons authorised by him, to the exclusion of all other persons (including the proprietor or applicant), any right in respect of the invention to which the patent or application relates”.

Neurim went beyond the previous two cases by also considering the importance of s.67(1) of the Patents Act in ascertaining if a party is an exclusive licensee. We’ll return to this in more detail below, but the text of s.67(1) states:

“Subject to the provisions of this section, the holder of an exclusive licence under a patent shall have the same right as the proprietor of the patent to bring proceedings in respect of any infringement of the patent committed after the date of the licence”.

An exclusive licensee’s right to bring an infringement action in its own name (rather than have to rely on the patentee) can be a commercially valuable right – and one worth fighting over, as these cases show.

Illumina: can I have a plus one?

The key question before the court in this case (at least in relation to licences) was whether a licence granted to Illumina “and its Affiliates” was an exclusive licence within the meaning of s.67(1) and s.130(1) of the Patents Act.

The key consideration for the judge, Mr Justice Henry Carr, was whether, as Illumina argued, it followed from the fact that all the affiliates were under Illumina’s control that the licence was, “to the exclusion of all other persons”, and, as a result, met the requirement of exclusivity in s.130(1).

Mr Justice Carr concluded that Illumina was not an exclusive licensee for the purposes of s.130(1) because, “a licence is only exclusive under section 130(1) if it is granted to a single person, although he may grant sub-licences to ‘persons authorised by him’” (our emphasis). Illumina, therefore, did not have standing to sue for infringement.

A “single person” in this case, meant a single legal person and the licence in issue did not comply with this definition because the licence was granted to several legal persons – Illumina “and its Affiliates”. As a disinterested party, the wording of s.130(1) may make this appear to be an obvious conclusion. However, licences are often drafted across different intellectual property rights, company structures, territories and jurisdictions and these cases underline that what works in one context may not work in another. We will return to what Illumina could have done to ensure that it was found to be an exclusive licensee in our “Practical Tips” section below.

Oxford Nanopore: do we have to stay together forever?

Oxford Nanopore concerned one specific question: is a licence an “exclusive licence” within the meaning of section 130(1), if a third party (i.e. not a party to the licence in question) has an option to take a licence under the patent in the same field as the licensee, but has not yet done so?

In this case, Harvard was the registered proprietor of the patent and Oxford Nanopore was stated to be the exclusive licensee. However, as had been acknowledged in the licence agreement between Harvard and Oxford Nanopore, a third party ‘X’, had previously been granted an absolute right to a licence on request (an “option”). It was admitted by Harvard/Oxford that this option was still valid and capable of exercise by X. Pacific Biosciences of California, Inc. argued therefore that Harvard’s licence to Oxford Nanopore was not exclusive, because it was not “to the exclusion of all other persons”. Oxford Nanopore argued that the licence remained exclusive as the “option” had not been exercised.

In considering whether the existence of the (unexercised) option rendered Oxford Nanopore’s licence incompatible with s.130(1) the judge set out the following ten propositions:

i) Whether or not a licence is an exclusive licence for the purposes of section 67(1) of the Patents Act is a matter for English law;

ii) A licence which purports to be an exclusive licence may not necessarily be so. Identifying an exclusive licence depends on a proper construction of the document or documents;

iii) It is for the party asserting that it is an exclusive licensee to demonstrate that it is;

iv) The assessment of whether or not a licence is exclusive is not a “once and for all assessment”. An exclusive licence may confer upon the patentee a power to convert the licence into a non-exclusive licence;

v) The “essential element” of an exclusive licence is that is it a licence to the exclusion of all other persons, including the patentee or applicant;

vi) It is possible to have a plurality of exclusive licences in respect of any one patent;

vii) But each exclusive licence may only be granted to one person – a licence will not be exclusive if granted to a number of entities, even if they are under the same control;

viii) An exclusive licensee may grant sub-licences to “persons authorised by him”;

ix) There is a distinction to be drawn between a licence and an equitable right to call for a licence; and

x) Where an equitable right to call for a licence is conditional the otherwise exclusive licence will remain exclusive unless and until the contractual conditions are fulfilled that enable the grant of the licence.

The reader may have noticed vii) and viii) which relate to the conclusions from Illumina. Applying these propositions, the judge determined that whilst ‘X’ had the right to call for a licence (per proposition ix)), it had not done so and, accordingly, the contractual conditions for the option had not been fulfilled (per proposition x)). Consequently Oxford Nanopore remained an exclusive licensee unless and until the option was exercised and it was therefore entitled to bring an infringement action. This highlights that the “exclusive” nature of a licence is capable of change over time, without amendment of the licence documents. Accordingly, though under proposition (ii) above, the exclusivity of a licence depends on the construction of the licence documents, the contracts may not always fix the exclusivity position unless they account for all possible future fact patterns.

Neurim: enforcing exclusivity  

In June 2020, in a closely followed decision, the Court of Appeal upheld the High Court’s refusal to grant an injunction restraining Mylan from launching their generic version of Neurim’s melatonin product (judgment here).

Our focus however is on the High Court trial decision handed down in December 2020, the issues in question being the patent’s validity and whether Mylan were, or were threatening to, infringe it. The infringement claim was brought by both the patentee (Neurim) and its licensee (Flynn). Hence an additional issue raised by Mylan concerned whether Flynn had an exclusive licence and therefore standing to be named as a claimant in the infringement proceedings.

Mylan raised two challenges to Flynn’s status as exclusive licensee: (i) the licence did not exclude others (including Neurim) from carrying out rights under the patent (i.e. “exclusivity”), and (ii) the licence did not give Flynn an independent ability to litigate infringements of the patent (i.e. s.67(1) Patents Act).

Part 1: Exclusivity

The court examined the licence and distribution agreement granted to Flynn by Neurim, which had been amended prior to the litigation. The licence granted Flynn “an exclusive licence to Distribute the Product in the Territory…” (capitalised terms were defined in the agreement).

On its face, the licence would therefore appear to be exclusive and, indeed, as the patent had been amended to narrow its claims to more closely align with the definition of “Product” in the licence, the judge decided that it was, in fact, exclusive. However, he was troubled by the mismatch between the scope of the un-amended patent claims and “Product” definition in the licence and whether the licence would still have been exclusive had the patent not been amended.  He provided an analysis of that hypothetical position (in which there was still a mismatch between the “Product” definition and the patent claims) which is instructive.

In the un-amended patent, the relevant claim had included a dosage range for melatonin from 0.025 to 10 mg.  The “Product” was defined to refer to a specific dosage, 2mg.  The licensed rights were therefore a subset of the invention described by the un-amended patent, meaning that there would have been another part of the invention which was not licensed to Flynn, and to which Neurim would have retained the ability to work (for example, relating to dosages of less or more than 2mg). The judge noted that under principle vi) of Oxford Nanopore it was possible to have a plurality of exclusive licences in respect of one patent – to “salami-slice” the patentee’s monopoly. However, where the monopoly contained in a single patent claim is to be split, the drafting must be crystal clear. He noted his concern that “salami-slicing” of rights under patent claims can produce an artificial or “unreal” scope of exclusivity, which he said he had felt in full measure whilst reaching his conclusion. This also echoes concerns raised in earlier case law, particularly Peaudouce SA v Kimberly Clark [1996] FSR 680.

That said, notwithstanding his discomfort in making this analysis, Mr Justice Marcus Smith deemed that, provided a clearly delineated licensed right itself is exclusive (even if it is only a “slice” of a claim of a patent), then a licence can satisfy s.130(1). In this case, as it was clear that Flynn had an exclusive right (in relation to a 2mg dose), Flynn could still have been an exclusive licensee in respect of that right even had the patent been left un-amended.

With that, Mylan’s first attack on the exclusivity of Flynn’s licence failed, but Mr Justice Marcus Smith’s decision didn’t stop there…

Part 2: Flynn’s independent ability to litigate

The licence included clauses dealing with the parties’ responsibilities when the licensed patent was being infringed. The agreement made clear that Neurim would “take the lead” in any infringement litigation, and Flynn would “provide reasonable assistance” to Neurim in joint proceedings. The licence was silent on the procedure should Neurim not seek to enforce its rights. Flynn had a right to be consulted on any settlement achieved by Neurim, but again Flynn’s role was a supporting one. In summary, the agreement contemplated no independent enforcement of the patent by Flynn.

The judgment confirmed that the right of an exclusive licensee set out in s.67(1) to bring infringement proceedings itself (having the same right as the patent proprietor) is stated by the Patents Act to be a consequence of the grant of an exclusive licence – it is not expressed to be a necessary condition for exclusivity. However notwithstanding this, the judge’s view was that unless a party can vindicate a right, there has been no grant of that right at all; the right to enforce the patent is an essential part of the grant of an exclusive licence.

The contractual provisions of the licence removed Flynn’s independent ability to prosecute a claim, and in the judge’s view, this deprived Flynn’s exclusivity of substantially all meaning. In effect, the judge found that it was not possible to contract out of the statutory provisions of s.67(1) and have a valid exclusive licence. Therefore, the judge concluded that Flynn was not Neurim’s exclusive licensee, and had no standing in the proceedings.

So, Flynn is not an exclusive licensee, so what?

In his judgment, Mr Justice Marcus Smith found Neurim’s patent to be valid and Mylan did not contest that its product would infringe the patent if valid. However, shortly after Neurim’s success in the High Court, the EPO’s Technical Board of Appeal revoked the patent ab initio.  Hence in a subsequent hearing to decide the form of order to be made by the UK court, Neurim accepted that it was not entitled to any substantive relief against Mylan, whether an injunction or damages. This makes the exclusive licensee finding rather academic in this case, but what then is the effect of the High Court’s decision on the remedies available to claimants generally?

If a licensee is found to be non-exclusive, with no standing in the infringement claim, any damages claim will be necessarily based on the losses suffered by the remaining claimant, the patentee. Depending on the licensing arrangement, a patentee’s losses are likely to relate to lost royalties which it would have received from its “exclusive licensee”, whereas a licensee may lose out on sales to an infringing product – its losses being the profit it would have made had it, rather than the infringer, made those. If a licensee is found not to be “exclusive” and therefore no longer a claimant in a matter, it will not be able to make a direct claim from the infringer in relation to the financial damage caused by lost sales. This is bad news for licensees, but likely to be good news for an infringer, who could end up being liable for lost royalty payments only, rather than also compensating a licensee’s lost sales.

Where now for the exclusive licence?

Oxford Nanopore sets out several qualities of a licence which a court will consider in order to assess exclusivity, in addition to the grant of rights clause. Combined with Neurim, it is clear that this assessment extends to the litigation provisions of a licence.

The judge mentioned that he was provided with no case law authority to assist his interpretation of s.67(1). He also noted that the definition of “exclusive licence” under s.130(1) does not require a right to litigate to be granted to the exclusive licensee (but, in his view, such a right should not be removed by agreement).

Indeed, we found this part of the judgment interesting for how uneasily it sat with common practice. Licences frequently include provisions setting out how the parties will enforce patents. There are good reasons for these clauses to, sometimes, curtail the rights of one party in favour of another. For example, a patentee may have several exclusive licensees under a single patent. If one of those licensees brings an infringement claim independently, a possible consequence is that the defendant brings a counterclaim – claiming that the patent is invalid. The impact of the licensee’s enforcement action could therefore go far beyond the limits of the licensee’s interests, to those of all the licensees and the patentee itself – something which the patentee may wish to control.

One outcome from this case may be that parties may look for a way to retain control over enforcement through carving out dispute provisions from the main licence and instead dealing with these issues on a case-by-case basis as disputes arise, through separate litigation agreements. At present, it is difficult to tell whether such a strategy would be effective following this decision – depending on how both agreements are worded there may be a risk that the litigation agreement may be regarded as simply an amendment to the licence agreement removing exclusivity, but this is certainly something to consider on a case by case basis.

Following the revocation of the patent, Flynn will not be able to appeal this part of the judge’s decision. This is a shame given the absence of case law and statutory guidance in this area, though we suspect that Mr Justice Marcus Smith’s judgment will not be the last word on these issues

Practical considerations

The three judgments above offer useful guidance and items of caution, both when drafting and negotiating an “exclusive” licence and on enforcement, providing a few practical steps parties can take to avoid finding themselves with a non-exclusive, exclusive, licence…

Five considerations on entering into exclusive licences

  1. Do your research: would-be licensees should be prepared to undertake due diligence in order to ascertain what is being licensed – have other exclusive licences already been granted or does anyone else have an “option”? What patented technology has been licensed already, and what impact might those licences have on the exclusivity of the new licence? If the licence is found to be non-exclusive it won’t be possible to rectify this so a warranty as to other rights granted may be of limited value.
  2. Identifying the licensee: as Illumina made clear, an exclusive licence can only be granted to one “person”, not to “X (together with its Affiliates)”. When drafting an exclusive licence in which subsidiaries and group companies are to have use of the technology, a better approach is to give the exclusive licensee the right to grant sub-licences to its affiliates.
  3. Do you need “options”?: if an exclusive licence may change status, it must be clear when such a change of status may occur (under what conditions), such that the court can determine if an option had been exercised (per Oxford Nanopore).
  1. Relate the licence to the patent: the licence must relate to a product, invention, patent claim, set of claims or subset of claims which can be clearly identified as a right granted by the licensed patent(s).
  2. It is not about the name: calling a licence “exclusive” is not enough on its own to prove an exclusive licence. A court will take a holistic view of the licence, requiring all provisions of the document to be consistent with being an exclusive licence.

Five tips for enforcing exclusive licences

  1. Identify your claimants: before initiating proceedings as a patentee and exclusive licensee, practitioners should check that the licence is both “exclusive” in that it (i) precludes all others (including the patentee) from using the particular licensed rights, and (ii) grants the exclusive licensee the rights envisioned by the Patents Act.
  2. Use a litigation agreement: rather than bind the parties’ hands on how litigation will be conducted when entering into the licence, parties may prefer to wait until trouble is brewing to set out how they will enforce a patent. In either case (in the main licence or a standalone litigation agreement), care will need to be taken in the drafting to ensure the litigation provisions do not undermine the exclusivity of the licence. Further, contracting parties should bear in mind that if an exclusive licensee wants the right to sue for infringements committed before the date of the licence, this right is not automatically generated and will need to be expressly dealt with.
  3. Whose loss is it anyway: a judge finding that a licence is non-exclusive could have a significant effect on the quantum of damages that can be claimed in any litigation. An infringer may be able to avoid a big pay-out to a distributor/ seller if they are found not to be exclusive licensees and their losses have to be claimed indirectly through the patentee. Early identification of losses and the identity of the aggrieved party may help develop a more certain and effective litigation strategy.
  4. Know who is boss of the litigation: consider how exclusive licensees and patentees can best work together to enforce patents being mindful that, following Neurim, to convince a judge of their “exclusive” position, licensees may now need to be able to take a more independent role in infringement proceedings.
  5. Be ready to disclose licences (even the confidential bits): Mr Justice Marcus Smith also noted that Neurim and Flynn were “most unlikely” to succeed in demonstrating an exclusive licence unless they provided unredacted copies of the whole licensing agreements, as the exclusive licence was to be judged on the contract as a whole. Parties should be prepared to disclose the whole agreement to the other side and to the court in order to prove their positions. In doing so however, steps can be taken to maintain confidentiality, such as putting in place confidentiality “clubs” and limiting membership to those who reasonably need to see all of the terms of the agreement (e.g. outside counsel, limited members of the client team, etc).

This is a lively and developing body of law and for the reasons above, we expect that these decisions will continue to have significant impacts on patent licensing and enforcement in the United Kingdom. If you have any questions about reviewing your current arrangements or possible enforcement strategies please contact us.

View PDF