Summary

On the proper construction of royalty-sharing provisions in agreements licensing the use of the claimant's genetic engineering technology by the defendant pharmaceutical companies, the defendants were not entitled to offset half of the royalties paid to third parties in respect of parts of the process for producing a drug that did not involve the claimant's technology against the royalties payable to the claimant based on the sales of the drug.

Facts

The claimant company (C) brought an action against the defendant companies (K) in respect of the amount of royalties payable to it under agreements between the parties. C was involved in the development and licensing of technology relating, among other things, to the production of antibodies. Under two successive agreements between C and K, K had obtained a licence to use ground-breaking genetic engineering technology invented by C which was the subject of two patent applications at the time the first agreement was entered into. C's "library creation" and "phage display" technology was part of a process that led to the design, manufacture and sale by K of a product (HUMIRA) that contained an antibody and was designed to treat rheumatoid arthritis. C's royalties were set on a sliding percentage of the income generated by the sales of HUMIRA. The dispute between the parties centred on the meaning of similarly worded Articles contained in each of the agreements, which provided that royalties paid to third parties "to license rights needed ... to practice or to have practiced the technology claimed in the Patents" would be borne equally by C and K, provided C's royalty to be paid was not less than 2 per cent of net sales of the product. The parties agreed that the royalty sharing provisions did not cover third party rights throughout the whole of the development process up to and including HUMIRA. C contended that the royalty-sharing provision only applied to royalties that K needed to pay to third parties in respect of the use of the library creation and phage display technology licensed by C, and was not triggered in any event because all the licences relied on by K were for patents that covered parts of the HUMIRA production process not involving C's technology. K submitted that the second agreement entitled it to offset half of royalties paid to third parties in respect of other patented technology it used or had used in the development of HUMIRA against what was due to C. K argued that it had no entitlement, and C had no corresponding obligation, to share third party royalties beyond the "product" stage, namely when the pharmaceutical-quality antibodies were created, rather than when the finished article, HUMIRA, was produced.

Held

C's construction of the royalty sharing provisions was correct. It was the only construction that was consistent with all the other provisions of the agreements and it made commercial sense in the factual matrix within which the agreements were set. K's arguments made no commercial sense and/or did not accord with the modern approach to construction, Investors Compensation Scheme Ltd v West Bromwich Building Society (1998) 1 WLR 896 applied. K's obligation to pay royalties to C was not dependent upon the existence or scope of C's patent protection. The agreements suggested that HUMIRA fell within the definition of "product" and went further than C's work in the area of the library and phage display parts of the development, since the whole development was done for and on behalf of K. When C brought its library and phage display technology to the program it was given no remit to assist in, or offer views on, the conduct of the later production stages of HUMIRA . The agreements did not oblige K to notify C of the technology it would use in the post-phage stages or of any third party rights it was considering taking licences under. Neither did they oblige K to enter into discussions with C in respect of any royalty rates it might contemplate accepting. It made obvious sense that C's obligation to offer at least partial protection to K against the impact of third party licence demands should be limited to the areas of the program for which C was responsible. There were sensible reasons why it might have been appropriate for C to share the royalty burden only in relation to its technology or, alternatively, in relation to the whole program from the final results of which it would obtain its royalty. However, it was difficult to see any rational basis for deciding that C should share the royalty burden on only those parts of the technology that were to be K's exclusive responsibility. (2) (Obiter) If, contrary to the court's decision, the agreements did not accord with the common intention of the parties as suggested by C, the agreements should be rectified on the ground of common mistake so as to state expressly that the royalty-sharing obligation applied only to third party rights that covered C's library and phage display technology.

Judgment for claimant.