Category Archives: Contract drafting

When is an exclusive licence not an exclusive licence?

In IP Draughts’ experience, clients sometimes query the use of the term “exclusive” in licence agreements. Different questions arise. Below are some of them, and IP Draughts’ short-form answers (good enough for a rough guide, but more work is required when considering the quesiton in an individual case).

What does “exclusive” typically mean in a licence agreement?

  • Does it mean that the licensor is not allowed to exploit the IP within the scope of the licence? Yes.
  • Does this need to be stated explicitly (eg through the use of a phrase such as “even as to the licensor”)? No, though IP Draughts would sometimes define exclusive, particularly if the parties have a different view of the world, or there is an EU element (see below).
  • Can you divide up the fields in which the IP is to be commercialised, and grant exclusive licences in separate fields under the same IP? Yes
  • If a licensee sells a licensed product for use in its field, but the purchaser (or a purchaser from that purchaser) uses it outside the field, can they be prevented from doing so and is the licensee in breach of their licence? Difficult legal issues, but often no.
  • Can you grant exclusive licences in different territories under essentially the same IP? Yes.
  • Does this mean that the licensor guarantees that no-one else (eg another licensee) will exploit in the licensed territory? No, particularly in the EU where passive sales by other licensees are allowed.
  • Does this mean that the licensee promises not to sell outside its licensed territory? No, particularly in the EU where passive sales outside the territory are allowed.

Meaning of exclusive in the (UK) Patents Act 1977 (“PA”)

Under the PA, an exclusive licensee has the right to bring proceedings against infringers in its own name. Exclusive licensee is defined in the PA, but only for the purposes of clarifying who has the statutory rights of an exclusive licensee – there is no general assumption that this definition is relevant when interpreting licence agreements. Section 130 of the PA provides:

‘exclusive licence’ means 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, and ‘exclusive licensee’ and ‘non-exclusive licence’ shall be construed accordingly.

A recent case in the English High Court explores what this definition means, and in particular whether a licence that is stated in a licence agreement to be “exclusive” is, in fact an exclusive licence for the purposes of the PA.

The decision in the case of Oxford Nanopore Technologies Ltd & Anor v Pacific Biosciences of California, Inc & Anor [2017] EWHC 3190 (Pat) was published on 14 December 2017. It is a decision of a (part-time) deputy judge, David Stone, who is a solicitor and a partner at Allen & Overy. The deputy judge reviewed the limited case law in this area, including the recent case of Illumina Inc and Ors v Premaitha Health PLC and Anor [2017] EWHC 2930 (Pat), which this blog discussed here. And, helpfully, he came up with 10 propositions in light of that case law and his assessment of the law, which are reproduced below:

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: Dendron, paragraph 9;

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: Dendron, paragraph 9. An exclusive licence will be expressly so: circumstances in which an exclusive licence will be implied will be rare, if they exist at all;

iii) It is for the party asserting that it is an exclusive licensee to demonstrate that it is: Dendron, paragraph 9;

iv) The assessment of whether or not a licence is exclusive is not a “once and for all assessment”: Dendron, paragraph 11. An exclusive licence may confer upon the patentee a power to convert the licence into a non-exclusive licence: Dendron, paragraph 11;

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: Dendron, paragraph 11;

vi) It is possible to have a plurality of exclusive licences in respect of any one patent: Courtauld’s, page 210; Illumina, paragraph 475;

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: Illumina, paragraph 254;

viii) An exclusive licensee may grant sub-licences to “persons authorised by him”: Dendron, paragraph 11; Illumina, paragraph 254;

ix) There is a distinction to be drawn between a licence and an equitable right to call for a licence: Courtauld’s, page 210; and

x) Where an equitable right to call for a licence is conditional (as it was in Illumina – the Hong Kong Government had to satisfy itself that the public mission of the Commissioner needs to be fulfilled, or that it is in the public interest to request the licence), the otherwise exclusive licence will remain exclusive unless and until the contractual conditions are fulfilled that enable the grant of the licence: Illumina, paragraph 476.

An interesting point of detail mentioned in this case, that IP Draughts had not previously spotted, is that in the Illumina case, Carr J had held that where an academic licensor reserves rights to use the licensed IP for academic research and publication, this does not prevent the licence from being an exclusive one. At paragraph 475 of the Illumina judgment, as reported in Oxford Nanopore, Carr J said:

475. Premaitha argued that since CUHK had reserved rights to use and develop Lo 2 and Lo 3 for academic research and publication at all times, the licence was not exclusive to Illumina. My conclusion on this issue is the same as in relation to the Quake Patents. The reservation does not extend to authorisation of any third party for commercial purposes. The licence [is] an exclusive licence of the right to exploit for commercial purposes and, according to section 130(7) [Stone: I think this was a reference for section 130(1)] an exclusive licence may be in respect of any right.

David Stone

This conclusion, which was focussed on whether a licence was exclusive for statutory purposes, may also be persuasive when considering the contractual issue, ie whether it is appropriate to describe a licence as exclusive when the licensor reserves rights of this kind.

IP Draughts admires the way in which David Stone has reduced the previous case law to a series of propositions, and hopes that we will see many more decisions by this talented judge in the field of IP agreements.

 

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Simplified UK government contract terms: hit or miss?

It seems that the Crown Commercial Service – a part of the UK government that has responsibility for procurement of goods and services – made a press announcement this week about their new, simplified form of contract. Government officials, including a commercial lawyer from the Government Legal Department (GLD), have spent a year reducing 50,000 words to about 8,000 words and made the terms less legalistic.

This initiative is, apparently, intended to make it easier for small and medium sized enterprises (SMEs) to contract with the UK government. Small companies ‘without a dedicated legal team will be able to better understand and adapt the Public Sector Contract to its needs by selecting the elements it needs to apply’, the government said. The story was picked up by the Law Society Gazette here.

With some detective work, IP Draughts was able to find the new terms here. (Click on the link to “terms and conditions” near the bottom of the page found at the last link.)

If you click through to those terms and conditions, you will be faced with about 43 documents of varying sizes. The largest of these documents, Schedule 1, is approximately 76,000 words and takes up 234 pages. Some are considerably shorter. But this and most of the other documents are schedules to a set of “Core Terms”.

So far as IP Draughts can tell, it is the Core Terms that have been the subject of the redrafting exercise. The other documents vary in their drafting style. Some are very heavyweight. For example, clause 1.1.1 of Call-Off Schedule 4 includes the following lead-in wording:

Without prejudice to any other right or remedy of the Buyer howsoever arising (including under Framework Schedule 6 (Order Form and Call-Off Schedules Template) and subject to the exclusive financial remedy provisions in Paragraph 2.4 of Call-Off Schedule 14 (Key Performance Indicators) and Paragraph 9.1.2 [concerning Delay Payments] of Part A of Call-Off Schedule 13 (Mobilisation Plan and Testing), if the Supplier commits any Default of this Call-Off Contract then the Buyer may (whether or not any part of the Deliverables have been Delivered) do any of the following:

Any initiative to reduce this style of drafting is to be welcomed. IP Draughts sympathises with the plight of an SME “without a dedicated legal team” struggling to understand the above monstrosity.  It is difficult for an experienced commercial lawyer to understand it.

If this was the style of the Core Terms before they were revised, then the redrafters deserve credit for greatly improving them. This is not, however, unqualified praise. In IP Draughts’ view, the new document could be much better still.

As Ken Adams is fond of saying, contract drafting consists of both “what you say” and “how you say it”. Reducing 50,000 words to 8,000 almost certainly involved taking decisions on omitting matters of substance and reducing the text down to terms that were thought essential to protect the government’s interests. (The cynical side of IP Draughts wonders how many unnecessary provisions have really been omitted, or have they just been moved to, or left in, the schedules, many of which continue to be, in IP Draughts’ view, excessively heavyweight. But let’s hope the next phase of this simplification process will be to reduce the overkill in the schedules.)

IP Draughts commends the GLD for reducing the “what you say” elements of the Core Terms. And for attempting to make the “how you say” elements easier for a non-lawyer to understand. Unfortunately, the “how you say” task has not been performed consistently and some of the choices of non-legal language are suspect. Some examples will illustrate the point.

The document adopts the word “must” for expressing contractual obligations. That is an understandable stylistic choice, and an alternative to “shall”. It is seen in some other UK contracts, eg the Law Society’s recently updated template property leases.

Where the drafter falls down, though, is in his consistent use of other words to express rights and obligations. At various times he uses “may”, “can” or “has the right to”. For example, clause 10.8 uses all three of these phrases at different points. In IP Draughts’ view, these terms mean the same thing, and one choice should have been made – preferably “may” – and the drafter should have stuck with that choice.

IP Draughts would not have used the expression “lets the Supplier know” in clause 3.2.4. It is, in his view, too conversational, and “informs” or even “tells” the Supplier would have been better. Similarly, the phrase “The Relevant Authority may talk to the Supplier” in clause 16.3 is not a good choice, in IP Draughts’ view. “Talk to” could simply be replaced with “contact”.

Even worse, in his view is the choice of the phrase “accepts that they can’t get relief for suspension” in clause 5.2 as one of the conditions for the operation of clause 5.1. IP Draughts is not even sure what form the “acceptance” is meant to take. Sometimes, the choice of modern language is just clumsy, eg the indemnity in clause 12.2 uses the phrase “any costs resulting from any Default by the Supplier relating to any applicable Law to do with a Contract.” “To do with” is not a good choice. The whole sentence needs unpicking, but this phrase should be replaced with “relating to” or “concerning” unless a better, plain English choice can be found.

In other cases, the drafter has tried, unwisely in IP Draughts’ view, to avoid technical language, but only in part of a sentence, leaving in other technical language. For example, clause 9.1 includes an IP licence:

The Supplier gives the Buyer a non-exclusive, perpetual, royalty-free, irrevocable, transferable worldwide licence to use, change and sub-license the Supplier’s Existing IPR…

In this example, the drafter seems to have objected to the word “grants” on the grounds that it is a technical term, but left in “non-exclusive, perpetual, royalty-free, irrevocable, transferable” which are all technical terms. This inconsistency seems all the more suspect when you look at the schedules to the Core Terms, which have not been “modernised”. For example, in the ICT schedule, the following words are used in clause 9.2.1:

The Supplier hereby grants to the Buyer a perpetual, royalty-free and non-exclusive licence…

These examples illustrate what IP Draughts interprets as a desire by the drafter to introduce a chatty, breezy tone to some of the contract terms. But he is doing so within a document that still contains a large amount of technical detail, and the result is a series of false notes that will make very little difference to the overall comprehensibility of the terms. IP Draughts suspects that most SMEs will probably not even notice the chatty phrases, as they are minor features of what is still a long, technical document.

This is hopefully the first of a series of improvements to government contract terms. IP Draughts doesn’t want to discourage the initiative or the individuals who are working on it. But he hopes they will approach the task in a spirit of continuous improvement, rather than treat the new Core Terms as a template for the drafting style of future government contracts.

 

 

 

 

 

 

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Patent judges do it better

In the previous posting on this blog, IP Draughts considered the different approaches of two Commercial Court judges (one current, the other now in the Court of Appeal) to the interpretation of a patent settlement agreement. For some reason, the parties had originally chosen to bring the case of Teva v AstraZeneca in the Commercial Court rather than the Chancery Division, where patent-related cases are usually heard.

The CA judgment spent many pages considering the approach taken in Arnold v Britton and other leading cases on how to interpret a contract. And yet the point at issue was simple: where a settlement agreement includes a definition of Patent that identifies (by number) a patent and an associated SPC, does this definition also cover a Paediatric Extension of that SPC? The Commercial Court said no, the Court of Appeal said yes.

On the same day as Teva was reported, another Court of Appeal case was reported, again on the interpretation of IP terms in a contract. The case was Kason Kek-Gardner Ltd v Process Components Ltd [2017] EWCA Civ 2132.

(By the way, both the Teva and Kason Kek-Gardner cases involved advocacy from Ian Mill QC. He wins IP Draughts’ award of  barrister of the month for cases on the interpretation of IP agreements.)

In Kason Kek-Gardner, the case had originally been heard in the Chancery Division by a judge who hears some IP cases (or did, until she retired last Autumn). IP Draughts commented on the first instance decision when it was published. The panel in the Court of Appeal was an exceptionally strong trio of commercial and patent judges, namely Lewison, Kitchin and Floyd LJJ. Lewison LJ gave the only judgement, and the other two simply agreed with him.

IP Draughts has to confess that he is a fan of Lewison LJ, and has been disappointed that he (Lewison) has not been allocated more often to contract-related cases in the Court of Appeal. He is the author of an excellent book, Interpretation of Contracts, that IP Draughts first stumbled across in the Bristows law library over 25 years ago. The latest edition and supplement can be found here.

Kim Lewison QC practised as a barrister mainly on commercial property cases, before becoming a Chancery judge. Though he had no prior involvement with patent cases, he became experienced and skilled at dealing with them during his time as a first-instance judge. Kitchin and Floyd LJJ were leading patent barristers before becoming highly-regarded patent judges.

General approach

So, how does Lewison LJ approach the interpretation of some badly-drafted and confusing IP terms in two sale of business agreements? His approach has several, distinct features:

  1. Citing case law. He doesn’t waste time quoting at length from Arnold v Britton and its companion cases on the general approach for interpreting contracts. He confines himself to mentioning the most recent in the line of Supreme Court cases on this subject, Wood v Capita Insurance Services Ltd [2017] UKSC 24. In relation to that case, he simply says: “The correct approach to the interpretation of contracts has been most recently discussed by the Supreme Court in Wood v Capita Insurance Services Ltd. I will not attempt to summarise or paraphrase it. As Lord Hodge said at [9] the legal profession has sufficient judicial statements of this nature.” Brilliant! If only more judges could take this approach, rather than reciting at length from what is now well-known law.
  2. Criticism. He doesn’t pull his punches. His assessment of the judge’s reasoning is withering: “Mr Mill was, I regret to say, justified in many of his criticisms of the judge’s reasoning process. However, despite Mr Mill’s forceful submissions to the contrary, on the points that matter I consider that she reached the correct answers, even if my route to those answers is not the same as hers. In short, she was entitled to make the order that she did; and appeals are against orders, not against reasons. I would dismiss the appeal.”
  3. Forensic analysis. Numerous legal principles were raised in argument, from whether extrinsic evidence is admissible when interpreting a contract, to whether a right of termination for disclosure of confidential information is an “innominate term”, ie neither a condition nor a warranty. Lewison LJ disposes of these and other arguments in a clear-headed, concise way.

Interesting guidance

One of the issues before the court concerned a clause in a licence agreement that allowed the licensor to terminate the licence if the licensee disclosed the terms of the agreement to a third party. Lewison LJ decided that it was not appropriate to imply a term, as counsel had proposed, allowing disclosure of the terms “for reasonable business purposes”, including disclosure to a would-be purchaser of the licensee’s business. As Lewison LJ pointed out, an implied term of this kind would allow disclosure to a potential competitor. He concluded that no such term should be implied and the right of termination was enforceable.

As IP Draughts commented in his article on the first instance decision, a prospective purchaser of a business will typically want to see all material contracts, and may get restricted access to them in a data room. Those contracts will sometimes include restrictions on disclosure of their terms, with typically no express exception allowing disclosure to a prospective purchaser of the business. Despite such restrictions, it is not unheard of (to put it mildly) for all contracts to be put in the data room. This case confirms, now at Court of Appeal level, that confidentiality obligations mean what they say, and there is no permitted, but unstated, exception based on custom and practice in the M&A sector.

Which type of judge is better at interpreting IP agreements?

In the print-outs of the BAILII versions of the judgments, Lewison LJ takes 14 pages to deal with a large number of points of interpretation in relation to 3 agreements. Flaux LJ in the Teva case takes 15 pages to deal mainly with one issue in one agreement – whether to imply a term that SPC includes a Paediatric Extension to the SPC. IP Draughts has no objection to decision in the latter judgment, just its length. Judging from these two cases, in IP Draughts’ view…

Patent judges do it better!

 

 

 

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The limits of commercial common sense

Readers who are familiar with English contract law will be aware that, in recent years, the UK Supreme Court has developed its thinking on the interpretation of contract wording. In a series of landmark cases including Arnold v Britton, it has explored when it is appropriate to take account of “commercial common sense” when interpreting unclear or ambiguous wording. The cases are discussed in our 10,000-word article, Contract Law for IP Lawyers, published in OUP’s Journal of Intellectual Property Law and Practice earlier this year.

A recent case in the Court of Appeal applies the Supreme Court’s thinking to the interpretation of a settlement agreement relating to patents. Teva Pharma – Produtos Farmaceuticos Lda & Anor v Astrazeneca-Produtos Farmaceuticos Lad & Anr [2017] EWCA Civ 2135 was published on BAILII last week. The lead judgment, with which other members of the court agreed, was given by Lord Justice Flaux. (Regular readers will recall that we last encountered him as a panel speaker at our 2016 UCL panel debate on Dysfunction in Contract Drafting, since recorded on YouTube, where he may be said to have represented a traditional approach to contracts.)

IP Draughts has simplified the following explanation, so as to bring out the drafting issue.

Under a settlement agreement between Teva and AstraZeneca (AZ), Teva had agreed, inter alia, to withdraw a generic pharmaceutical product from the Portuguese market, and AZ had agreed not to sue Teva for infringement of an AZ Patent.

The “Patent” was defined in the settlement agreement as “EP0521471 and Portuguese Supplementary Protection Certificate 156”.

Supplementary Protection Certificates (SPCs) are a kind of patent term extension, that give up to 5 years’ protection for medicinal products covered by the patent, beyond the original 20-year life of the patent. A further period of extension, known as Paediatric Extension, extends the life of an SPC for an additional 6 months where the product is used to treat children.

One of the questions at issue was whether the above definition of Patent should be interpreted to include the Paediatric Extension. In the Commercial Court, an experienced commercial judge said no. The Court of Appeal, led by Flaux LJ (a former Commercial Court judge), overturned the judge and said yes. Both judges purported to apply the case law of Arnold v Britton. So how could they have disagreed on the outcome?

That is a good question, to which IP Draughts’ doesn’t have a convincing answer. The other two appeal judges who agreed with Flaux LJ, though highly regarded, are not noted for their commercial law expertise. So it is really one commercial judge’s view against another’s. Ultimately, are all questions of interpretation a “sniff test”, where the guidance of past cases can only take you so far, and where the outcome depends on which judge is allocated to the trial?

It would also be interesting know why this case was originally heard in the Commercial Court rather than the Chancery Division, where most IP-related disputes are heard. And whether an IP judge would have analysed the contract in quite the same way. All this is speculation. What we can be certain of is that applying the case law on interpreting contracts can point you in two opposite directions.

 

 

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