Court of Appeal Clarifies Scope of Royalty Obligations in Patent License Agreements

Introduction

In the matter of AstraZeneca UK Limited v Tesaro Inc [2024] EWCA Civ 78, the Court of Appeal has undertaken a detailed examination of the interpretation of patent sub-licenses within the context of contracts and patent law. This case highlights significant aspects of contractual interpretation, particularly how the courts delineate the scope of royalty obligations in a patent license agreement, as well as the interplay between UK and US patent law principles, specifically the doctrine of patent misuse.

Key Facts

The crux of the dispute in AstraZeneca v Tesaro revolves around the interpretation of royalty payment clauses in two patent sub-license agreements. AstraZeneca (AZ), as the licensor, entered into agreements with Tesaro (the licensee), involving the compound niraparib, a drug within the class of poly (ADP-ribose) polymerase (PARP) inhibitors used for treating cancer. The contention was whether Tesaro’s obligation to pay royalties to AZ was supposed to cover total sales of niraparib or only those sales for treatments falling within the scope of claims of the Licensed Patents.

The High Court initially sided with AZ, interpreting that royalties were due on all sales of niraparib for cancer treatments. Tesaro appealed this decision, raising the question of contractual interpretation to be examined by the Court of Appeal.

Legal Principles

The case rests on the principles of contractual interpretation, where the Court must ascertain the meaning of the agreement between the parties as it stood at the time of the agreement. The analysis centered on the definition of “Compound” within the agreement and its interrelation with the scope of the royalty obligation. Typically, a licensee only requires a license for actions that would otherwise infringe the patent, thus expecting the scope of the license to match the scope of the patent claims. However, for pragmatic reasons, parties may agree to a broader scope of royalty obligation that extends beyond the strict confines of the patent claims.

The judges discussed the correct construction of the phrase “may be claimed or covered by” with respect to the Licensed Patents, provided in the sub-licenses. Two main interpretations were considered—whether “may be” referred to a measure of probability of infringement or the existence of a possibility that the compound was used in a manner covered by the patent.

Furthermore, the Court explored the doctrine of patent misuse, noting that an agreement that extends the royalty obligation beyond the scope of the patent claims, without proper justification such as mutual convenience, might risk contravening this US patent law doctrine.

The judges also referenced the ‘Head Licences’, from which AZ derived the right to grant sub-licenses, and took into account related communications from AZ to Tesaro. The judges sought congruity between the Head Licences and the sub-licenses in interpreting the royalty obligations.

Outcomes

The Court of Appeal unanimously allowed the appeal, concluding that Tesaro’s reading of the Licence Agreements was the correct interpretation. The Court determined that the royalty obligation applied only to sales for uses or treatments falling within the scope of claims of the Licensed Patents, rejecting the High Court’s broader interpretation. The appellate decision meticulously dissected the terms of the agreement, particularly focusing on the definition of “Compound” and how it related to the royalty bearing products.

The judgments, while concurring on the outcome, offered some variation in their reasoning, particularly concerning the interpretation of the language “may be claimed or covered by”, found in the definition of “Compound”.

Conclusion

This case underscores the importance of precise language within patent licenses and the consequences of its interpretation in determining the scope of royalty obligations. The Court of Appeal’s judgment in AstraZeneca v Tesaro confirms that the royalty payment terms within a patent license must be directly construed in relation to the claims of the licensed patent, rather than inferred broadly. This ruling provides clarity for parties involved in the drafting and execution of patent licenses, underscoring the need for carefully tailored terms to the specific context of the agreement, while also mindful of the overarching principles of patent law.