Introduction

The case of AstraZeneca UK Ltd v Tesaro Inc ([2024] EWCA Civ 78) adjudicated by the England and Wales Court of Appeal (Civil Division) on February 9, 2024, revolves around the interpretation of patent sublicences between the parties involved. AstraZeneca (AZ), as licensor, and Tesaro Inc. (Tesaro), as licensee, entered into Licence Agreements pursuant to Head Licences from the University of Sheffield and the Institute of Cancer Research (ICR). The central issue pertains to the calculation of royalties, specifically whether Tesaro is obligated to pay royalties based on total sales of niraparib or only on sales falling within the scope of the Licensed Patents.

Summary of the Judgment

The Court of Appeal upheld the appeal in favor of Tesaro, reversing the initial judgment by Richards J. The primary decision centered on interpreting the Licence Agreements' royalty obligations. Richards J. had interpreted the agreements to mandate royalties on all net sales of Zejula (niraparib) in each country where at least one Licensed Patent subsisted. However, the Court of Appeal concluded that the royalty obligation should align with the scope of the Licensed Patents, meaning that Tesaro only owes royalties on sales related to uses covered by the patent claims. This interpretation prevents Tesaro from paying royalties on sales that do not infringe the Licensed Patents, addressing the risk of patent misuse under US law.

Analysis

Precedents Cited

The judgment referenced key precedents to elucidate the principles of contract interpretation and patent misuse doctrine:

• Merrell Dow v Norton [1995] UKHL 14: Highlighted complexities in understanding second medical use claims in patent law.
• Lilly ICOS v Pfizer [2000] EWHC Patents 49: Discussed the dual aspects of patent claims related to treatment purposes.
• Unwired Planet v Huawei [2015] EWHC 1029 (Pat): Provided insights into patent licensing and royalty obligations beyond the scope of patent claims.
• House of Lords in Merrell Dow: Addressed conceptual difficulties in second medical use patents.

These precedents were instrumental in guiding the court's interpretation of the Licence Agreements and assessing the risk of patent misuse.

Legal Reasoning

The court's legal reasoning unfolded through several critical points:

• Contractual Interpretation Principles: Emphasizing that the scope of any licence and corresponding royalty obligations should be determined by the precise wording of the agreement.
• Definition of "Compound": Central to the dispute was the interpretation of "the use of which may be claimed or covered by the Licensed Patents." The court held that "may be" should be read prospectively, linking royalty obligations to potential future claims under the patents.
• Doctrine of Patent Misuse: The possibility that a royalty based on total sales could constitute patent misuse was a significant consideration. The court determined that aligning royalties with patent claims mitigates this risk.
• Consistency with Head Licences: The court noted that the Licence Agreements were consistent with the Head Licences, emphasizing that royalty obligations should mirror the scope of patent claims.
• Mutual Interpretation: Leveraging the principle that when contractual terms are ambiguous, the interpretation that avoids legal contravention (patent misuse) should be preferred.

Ultimately, the court favored Tesaro's interpretation, ensuring that royalties were contingent upon infringement of the Licensed Patents, thereby preventing blanket royalty obligations on all sales.

Impact

This judgment has significant implications for future patent licensing agreements:

• Clear Royalty Structuring: Establishes the importance of aligning royalty obligations with the specific scope of patent claims to avoid undue financial burdens.
• Risk Mitigation: Provides a framework to minimize risks associated with patent misuse, encouraging more precise and legally sound licensing agreements.
• Contractual Clarity: Reinforces the necessity for clarity in contractual terms, especially regarding definitions that influence financial obligations.
• Future Litigation: Serves as a precedent for courts to interpret similar clauses in future cases, promoting consistency in contractual interpretations.

Overall, the judgment promotes balanced and fair licensing practices, ensuring that licensees are not unfairly penalized for sales outside the patented scope.

Complex Concepts Simplified

Patent Misuse Doctrine

The patent misuse doctrine prevents patentees from extending the scope of their patents beyond what is legally permissible. For instance, charging royalties on products or uses not covered by the patent claims can constitute misuse. In this case, aligning royalties strictly with patent claims ensures compliance and fairness.

Second Medical Use Patents

Second medical use patents claim new therapeutic applications for known compounds. These patents focus on specific methods of treatment rather than the compounds themselves. The judgment highlights the complexities in enforcing such patents, particularly regarding what constitutes infringement.

Royalty Obligations

Royalty obligations refer to the payments a licensee must make to a licensor for the rights to use patented inventions. This case underscores the importance of clearly defining what sales trigger royalty payments to avoid unintended financial liabilities.

Conclusion

The AstraZeneca UK Ltd v Tesaro Inc judgment underscores the critical importance of precise contractual language in patent licensing agreements. By favoring Tesaro's interpretation, the Court of Appeal reinforced that royalty obligations should be directly tied to the scope of patent claims, thus preventing potential patent misuse. This decision not only clarifies the relationship between licensors and licensees but also sets a precedent for future negotiations and litigations, promoting fairness and legal compliance in the pharmaceutical industry's patent licensing practices.

The judgment serves as a valuable reference for legal practitioners and companies alike, emphasizing the need for meticulous drafting and interpretation of licensing agreements to safeguard against ambiguous obligations and ensure equitable partnerships.