Future royalty term considerations at early stage R&D licences.

Summary

This case concerned the interpretation of the scope of royalty clauses in two sub-licence agreements concerning second medical use patents sub-licensed by AstraZeneca to Tesaro for the use of a PARP inhibitor to treat cancer.  Although the licensed patents only claimed use of the PARP inhibitor in cancers possessing a particular subset of cells, the royalty was stated to be payable on total net sales for all uses of the product to treat cancer.

Tesaro argued that the U.S. doctrine of patent misuse meant that the total sales royalty was not valid as it sought to extend the scope of the licensed patents beyond their claims.  However, although the High Court found that the U.S. doctrine of patent misuse could have relevance in interpreting a contract governed by English law when a royalty went beyond the sales of a patented product or use, that was not the case here.  In the present case the Judge found that the parties had agreed to a total sales royalty for their mutual convenience given the near impossibility in determining which sales would have been made for only the patented use.

Written by David Pountney, Senior Associate, Litigation, at Dehns.

AstraZeneca UK Limited v Tesaro Inc. [2023] EWHC 803 (Ch)

Case background

AstraZeneca is the exclusive head licensee of several second medical use patents, including U.S. patents, directed to the treatment of cancer and owned by the Institute of Cancer Research and the University of Sheffield (the ‘Licensed Patents’).  The Licensed Patents claimed the use of poly-ADP ribose polymerase (PARP) inhibitors in targeted treatment regimens for cancer patients in which DNA replication is blocked in cancer cells, which are classified as being homologous recombination deficient (‘HRD cells’).

Although the PARP inhibitor niraparib was the subject of a patent held by Merck Sharp and Dohme Corporation, as Tesaro was at an early stage of development in 2012, it obtained sub-licences of the Licensed Patents from AstraZeneca (the ‘Licence Agreements’) to give it ‘freedom to operate’.

The Licence Agreements (governed by English law), granted Tesaro an exclusive royalty-bearing licence to exploit the ‘Compound’, defined as niraparib “the use of which may be claimed or covered by, or the exploitation of which may be claimed or covered by, one or more of the Licensed Patents”. Royalties were to be paid on the aggregated net sales of Licensed Products, and ‘Product’ included the Compound.

In 2017, Tesaro obtained marketing authorisations in the US and EU for its product Zejula, for treatment of various forms of ovarian cancer, including those possessing HRD cells.

AstraZeneca argued that the definition of ‘Compound’ and the use of ‘may be’, required royalties to be paid on all sales of Zejula for use as a cancer treatment (i.e. a ‘total sales royalty’). Tesaro claimed it was a ‘pay to infringe’ licence so only uses falling within the claims bore royalties. They claimed support for their argument as such an agreement would be invalid under the U.S. doctrine of ‘patent misuse’: something both parties would have been aware of. The doctrine is a defence both to patent infringement and a contractual claim to royalties. The rationale for the doctrine is to prevent a patentee from obtaining royalties on sales of products falling outside the scope of the claims (often referred to as ‘conditioning’).

Decision

There was no dispute as to the relevant principles under English law for interpreting contracts. The judge considered that the parties would have been aware of the U.S. doctrine of patent misuse, and that would be relevant to the construction of the Licence Agreements (as the U.S. was a major market for the products). Accordingly, expert evidence from both parties on aspects of U.S. patent law on the doctrine of patent misuse was necessary.

Having heard the expert evidence, and considered the various US decisions relating to the doctrine, the judge concluded that the inclusion of a total sales royalty in certain circumstances could be justified, provided there had not been any refusal to grant a licence on any other basis than that agreed by the parties (i.e. there had been no conditioning), and that it was convenient to both parties. The Judge acknowledged the difficulty in ascertaining which sales of Zejula were being used to treat cancers classified as possessing HRD cells, and noted that the Licence Agreements did not contain any mechanisms for doing so.  Therefore, there was nothing commercially irrational in the parties agreeing to a total sales royalty.

The Judge therefore ordered Tesaro to pay AstraZeneca royalties “on all net sales of Zejula in each country in which there are licensed patents from the first commercial sale in that country.”

Implication

This decision highlights the importance at an early stage of research and development of carefully considering and negotiating the terms of any future royalties under a patent licence agreement. This is particularly so in cases where the US is an important market, and the U.S. doctrine of patent misuse may apply in principle.

Interestingly, this case has echoes of the previous litigation brought by Pfizer/Warner Lambert against generic manufacturers using skinny labels of the pain medication pregabalin to treat non-patented uses.  In that case the Court also acknowledged the inherent challenges in determining which sales had been made specifically for the patented indication.

Although AstraZeneca prevailed on this occasion, it could have avoided the need for protracted legal proceedings if it had been made clear in the Licence Agreements that the total sales royalty was for the mutual convenience of the parties.  However, it is important to note that although there was no evidence in the current case of AstraZeneca refusing to licence on other terms, the mere inclusion of the ‘mutual convenience’ wording will not assist a party where there is factual evidence that there has been conditioning and it refused to license on terms that did not go beyond the scope of a patent’s claims.