Interpreting a GMP manufacturing agreement

Drug development and manufacturing agreements are part of the “bread and butter” of transactional IP lawyers who work in the pharmaceutical sector. But IP Draughts doesn’t recall any reported English case in which the court has interpreted the provisions of such an agreement. That has now changed, with the publication this week of a High Court decision in the case of SciPharm SarL v Moorfields Eye Hospital NHS Foundation Trust [2023] EWHC 569 (Comm) (16 March 2023). (See https://www.bailii.org/ew/cases/EWHC/Comm/2023/569.html)

The background to this case includes:

1. Moorfields, as well as being an eye hospital of international renown, at the relevant time ran a GMP (Good Manufacturing Practice – a regulatory term) drug manufacturing facility. In passing, IP Draughts notes that Moorfields did this through its main legal entity, an NHS Trust, rather than forming a subsidiary company. As a result the NHS Trust is now liable for breach of a commercial contract.
2. SciPharm contracted with Moorfields for the latter to manufacture quantities of a drug called Treprostinil, for the treatment of lung disease. These quantities, described in the judgment as “12 clinical study batches”, were to be used in clinical trials. There is a regulatory requirement that such a drug must be manufactured in a GMP facility.
3. It seems that this part of the contract was complied with.
4. The dispute related, in part, to whether Moorfields was also required to supply validation batches of the drug. In the words of the judge in this case, “validation batches of the drug are produced whereby specific data is collected on the manufacturer’s processes and this information is submitted to the market regulator.”
5. Before Moorfields could manufacture validation batches, whistleblowers caused the regulatory authorities to inspect Moorfield’s GMP facility, and Moorfields shut down the facility.
6. It seems that the parties had intended that Moorfields would manufacture the drug for commercial use, under a separate supply agreement, but no supply agreement was signed.

The key points in dispute were whether the development agreement was more than a simple “fill-finish” contract for the 12 clinical study batches, and also included obligations on Moorfields (a) (as mentioned above) to supply the validation batches and (b) to continue to maintain its GMP status for as long as was required to enable SciPharm to obtain regulatory approval. The agreement wasn’t clear on these points.

In a judgment that looked in close detail at the wording of the contract, Deputy High Court Judge Andrew Hochhauser KC decided that Moorfields did have these obligations, was in breach of them, and that breach had caused SciPharm certain recoverable losses. The claim was for €1.8 million, but the level of recoverable damages is not yet clear. The judge went through various heads of damage and said yes or no to each of them, then asked counsel to agree on the level of damages that would result from his decisions. If they can’t agree, the matter will come back to the court.

The judge indicated that he was interpreting the express terms of the contract, rather than implying terms, though it looks like implying terms to IP Draughts. A key part of the judge’s reasoning was that he accepted the view of the claimant’s expert witness that a reference in the contract to “process validation” meant that Moorfields was required to manufacture additional batches for this purpose. The witness advised that:

the heading “6.0 Design Inputs: Quality Target Product Profile” in the Detailed Development Plan is “a specific regulatory term which refers to the development of generic products for marketing authorisations”, and the reference to “Regulatory and statutory requirements of the intended markets” within that heading has to be read in that context.

In IP Draughts’ view, the quoted text is rather thin as a main justification for saying that Moorfields was required to manufacture additional batches. Perhaps the judge framed it this way because English law tends not to imply extensive terms, particularly when the parties have signed a detailed agreement. As too often happens in court decisions over contract disputes, there is a smell of working out who deserves to win, then working backwards to the reasons.

How is the contract drafter supposed to ensure that disputes of this kind don’t arise? Perhaps by adding disclaimers that make clear what services will not be provided? By challenging technical colleagues to describe the services in greater detail in the technical schedule? It may be unrealistic to expect the contract drafter to have the necessary understanding of pharmaceutical science and regulation to spot inadequacies in their technical colleagues’ service descriptions.

In relation to the obligation to maintain GMP status after the contract work is completed, this seems to IP Draughts a potentially onerous obligation, and one that small-scale manufacturers should take into account when deciding whether they want to be in this line of business. Dabblers beware!

IP Draughts will be interested to see if the decision is appealed.

Ethical pressures on in-house lawyers

In-house lawyers are regulated differently in each jurisdiction. Some are not regarded as truly independent – hence the European Commission’s refusal to recognise that communications to and from in-house lawyers should benefit from legal professional privilege. Under the English system, there is no regulatory distinction between private practice and in-house solicitors: both are expected to achieve the same standards of independent, ethical conduct and to maintain their competence through continuing education.

Historically, neither the Law Society nor the SRA has focused much on in-house lawyers. Nor, for that matter, on commercial solicitors – a constituency that overlaps considerably with in-house solicitors. But times are a-changing, not least because the Law Society and SRA have noticed that the numbers of in-house English lawyers have increased greatly in the last few years. They now number well over 40,000.

As the regulatory body for over 200,000 solicitors in England and Wales, the SRA has recently produced a report on the challenges facing in-house lawyers. (See https://www.sra.org.uk/sra/research-publications/in-house-solicitors-thematic-review/) Among the headlines:

1. Independence …some in-house solicitors may not have the support and internal controls to maintain their independence. This may be particularly risky where the commercial interests of the organisation are not in alignment with regulatory obligations. For example, 5% of respondents had been pressured into suppressing information that conflicted with their regulatory obligations.
2. Ethics A minority had experienced significant ethical and political pressures. This included 10% who said their regulatory obligations had been compromised trying to meet organisational priorities.
3. Competence One in 10 respondents felt they did not have enough time to maintain their continuing competence. We also saw that senior leaders did not always reflect on learning needs and regulatory obligations appropriately. Interestingly, most junior solicitors self-managed their training and 25% had not received training on professionalism, ethics, or judgment within the past 12 months.

Perhaps the previous lack of regulatory focus on in-house lawyers has led to some legal departments neglecting their responsibilities in the above areas. In past decades, IP Draughts recalls seeing some in-house, English legal departments that presented themselves almost as law firms within the company for which they worked. He hasn’t seen this recently. Perhaps it is thought too stand-offish, and not compatible with being a good team member.

He hopes that the increased focus on in-house lawyers will lead to them being given more support to maintain their independence, ethical conduct and continuing technical competence. In practice, this implies budget, appropriate time off, written processes to ensure compliance, and support from the company’s Board and senior management. GCs and the Law Society have a role to play in encouraging best practice and supporting junior in-house lawyers.

Interpreting royalty clauses in the US pharma market

This article discusses an interesting case, reported this week, on the interpretation of a royalty clause. The case is Eteboxagu AB v Cycle Pharmaceuticals Ltd [2023] EWHC 462 (Comm) (06 March 2023).

If you have a major dispute over the interpretation of royalty language, and where the peculiarities of the US pharmaceutical market are involved, which part of the English court system should you choose to hear the dispute? The obvious alternatives are the Commercial Court (where this case was heard) or the Chancery Division, where many disputes about patents and pharmaceuticals are heard, including disputes over pharmaceutical licence agreements.

Perhaps you rely on counsel to choose for you, and if he or she is an IP specialist, they may choose the Chancery Division, whereas if they are commercial law specialists, they may prefer the Commercial Court. In this case, neither party’s counsel, nor the judge herself (a deputy High Court judge) appears to have a background in IP licensing or pharmaceuticals. They all appear to specialise in traditional areas of commercial law, such as shipping and insurance.

In IP Draughts’ view, this is a real dilemma. Barristers practising at the intersection of IP and commercial law are rare; really top-notch barristers doing so are even rarer. Having considered alternatives at the IP Bar, IP Draughts recently instructed Stephen Houseman KC, a commercial barrister, to advise on a dispute about a patent assignment. His advice was very helpful.

Anyway, back to this week’s case. The background to the agreement is a little unusual in that it wasn’t exactly a licence; the agreement was intended to give a chemist who helped to design a generic drug a fair share of revenues from sales of a related drug, after he and the defendant company had parted company. But the key issue before the court was one that is familiar to those of us who draft licence agreements: how do you interpret a definition of net sales, or here “Relevant Revenues”? Do you base it on the price actually charged to US customers, where there is subsequently a standard rebate of some of that price, or do you charge it on the price less the rebate?

The definition in this case included the following words:

Relevant Revenues shall be Cycle’s gross income from the sale of the Product excluding VAT and transport costs.

Readers who work in this field will immediately see that this definition is very brief, perhaps even amateurish. In fact, though it had no bearing on the judge’s decision, some time after the relevant agreement was signed, Cycle proposed an amendment to the definition, apparently drafted by the former London law firm SJ Berwin, which read:

“Relevant Revenues shall be Cycle’s gross amount invoicedincome from the sale of the Product excluding VAT and transport costs, and reduced by the following amounts (if not previously deducted from the amount invoiced):

(a) amounts actually allowed as trade, selling commissions, volume or quantity discounts, including early pay cash discounts;

(b) amounts repaid or credited by reason of defects, recalls, accrued or actual returns, rebates and allowances of goods or because of retroactive price reductions specifically identifiable to [nitisinone];

(c) rebates and administrative fees paid to medical health care organisations in line with approved contract terms; and

(d) rebates resulting from direct or indirect government (of an agency thereof) rebate programs or chargeback programs;

However, should Cycle outsource the selling of the Product to a distribution partner with the distribution partner recognising the revenues form the sale of the Product and then sharing those revenues with Cycle, then the Relevant Revenues, for the purposes of this agreement, shall be the distribution partner’s gross amount invoicedincome from the sale of the Product with the same exclusions and reductions applying as per the immediately preceding paragraph.excluding VAT and transport costs.”

The latter wording makes clear that various types of rebates can be deducted from the amount of income received from the sale of products. But the amendment was not signed. So, one of the issues the judge had to decide was whether rebates under the US system could be deducted, when calculating royalties under the briefer definition set out above. In particular, she mentioned that “a fixed 23.1% rebate was mandatory in the case of the government backed Medicare and Medicaid programmes.”

The judge interpreted “gross income” in the definition above and concluded that the rebates could be deducted. She said:

In summary, both parties were well aware at the date of the Original Agreement of the way in which drugs were marketed in the United States and that rebates were inevitable if Cycle was to develop a branded drug (as it eventually did). I am therefore satisfied that the objective intention of reasonable commercial men in the situation of the parties would have been to regard Cycle’s “gross income” as its effective income from the product which, in the case of sales in the United States, was the price after deduction of rebates.

The judge was asked to decide several other points. Cycle sold the product in the US through third party companies – Cardinal and Diplomat are named in the judgment. There was a question over whether they were “distribution partners” as described in the definition of Relevant Revenues, which would have affected the amount due to the claimant. The judge dealt with this point very quickly, concluding “they were not”. IP Draughts doesn’t think it worth spending more time on it here.

More interesting for the contract drafter is the judge’s discussion of a clause in the agreement concerned with certifying royalties. The clause read:

2.1 Cycle shall provide to Strömberg within a period of 14 days following the earlier of the date of filing of Cycle’s annual audited accounts with Companies House or 30 September (the “Certificate Date”) a certificate from Cycle’s auditors certifying the aggregate Relevant Revenues for the preceding calendar year (the “Certificate”).

It seems that Cycle tried to arrange for its auditors, PWC, to provide such a certificate to the claimant. But PWC declined to do so unless the claimant “signs a letter of engagement which contains a wide-ranging disclaimer, such as to undermine the worth of the certificate almost entirely.”

How should Cycle comply with its obligation to provide such a letter? The judge thought PWC’s approach was standard in the industry. She pointed out that PWC could provide the letter to Cycle, and Cycle could then forward it to the claimant. She observed that PWC might well want an indemnity from Cycle in respect of claims from the claimant, before preparing the letter:

…but if that is the necessary precondition of obtaining a certificate, then so be it. It may be commercially unpalatable for Cycle to provide such an indemnity, but it is the author of its own misfortune in this respect. It could easily have consulted its auditors before agreeing to the obligation in paragraph 12.1 and if it failed to do so, it only has itself to blame.

There is a lesson here for all of us: don’t agree terms that involve a third party (no matter how “standard” the terms may seem) without checking first whether the third party will cooperate.

Finally, IP Draughts was interested to see the judge’s discussion of the principle of “estoppel by convention”. The claimant argued that the discussions between the two key individuals of each party about amending the definition of Relevant Revenues to make explicit reference to rebates prevented (estopped) Cycle from arguing that US rebates could be deducted under the original wording. The judge quickly rejected this line of argument. But it was interesting to IP Draughts to see the argument being made, not least because it was an argument that was used effectively in another case in which IP Draughts was recently involved. He may be wrong, but his impression is that estoppel by convention is a development in English law that has only become well-established in the last 10-15 years.

Covid vaccine supply agreements – research meeting

As previously mentioned on this blog, IP Draughts has been assisting two IP academics, Naomi Hawkins and Alison Slade, with their research into Covid vaccine advanced supply agreements and related issues of policy. The final event of this project is due to take place on 23 March at 6pm at the Wellcome Collection in London. They describe the event as follows:

This event builds on our previous academic research and the workshops we held with key stakeholders including representatives from major UK law firms, UK universities, UK funding bodies, government and international organisations.

At the event Dr Alison Slade and Prof Naomi Hawkins will disseminate the results of our research to date. We will also host a panel discussion chaired by Prof Mark Anderson (Anderson Law and UCL) with expert panellists including:

• John Wilkinson (Partner, Cooley)
• Dr Andrew Walsh (Director, Academic Liaison, GSK)
• Dr Mairi Gibbs (Chief Operating Officer, Oxford University Innovation)
• Dr Alex Chaix (Deputy Director, Commercialisation of Research, UKRI)

Further information can be found, and bookings can be made at the Eventbrite link below. A drinks reception will conclude the evening.

We look forward to welcoming you on the 23 March.

https://www.eventbrite.co.uk/e/understanding-best-practice-for-intellectual-property-contract-terms-tickets-569773426657

If the earlier events in this project are any guide, the discussion at the above event will be very interesting.