When is a patent licence not a licence to exploit the invention? The High Court answers a $26 million question
We analyse the High Court’s decision on patent licences in settlement agreements in Lundbeck v Sandoz  HCA 4.
In H. Lundbeck A/S v Sandoz Pty Ltd  HCA 4 (Lundbeck v Sandoz), the High Court of Australia held that a licence in a settlement agreement expressed as a “irrevocable licence to the Patent” did not provide a defence to infringement for the period after expiry of the standard term of a patent which was granted an extension of term after expiry. The High Court also confirmed that although a patentee can bring infringement proceedings against an alleged infringer under s 79 of the Patents Act 1990 (Cth) (Patents Act), an exclusive licensee cannot. That is, where a patent term extension (PTE) has been granted after expiry of the original term of the patent, an exclusive licensee has no standing to bring proceedings.
Lundbeck v Sandoz is another chapter in the long running litigation between H Lundbeck A/S (Lundbeck Denmark) and its Australian subsidiaries Lundbeck Australia Pty Ltd (Lundbeck Australia) and CNS Pharma Pty Ltd (CNS Pharma), on the one hand, and a number of generic companies including Sandoz Pty Ltd (Sandoz) in relation to products containing escitalopram, a pharmaceutical substance used for treating depression. It concerns appeals from two decisions of the Full Court of the Federal Court (Nicholas, Yates and Beach JJ), each of which was on appeal from a judgment of a single judge (Jagot J).
Lundbeck Denmark was the patentee of a standard patent relating to escitalopram (the Patent), which was granted on 13 June 1989. The Patent was due to expire after the standard term of 20 years on 13 June 2009.
In February 2007, Lundbeck Denmark and Lundbeck Australia (Lundbeck) and Sandoz entered into “an irrevocable non-exclusive licence to the Patent” to resolve Sandoz’s challenge to the validity of the Patent (the Settlement Agreement).
On 12 June 2009, one day before the end of the standard 20 year term of the Patent, Lundbeck Denmark applied to the Commissioner of Patents for an extension of time to apply for a PTE for the Patent. The Commissioner granted the application in a decision that was the subject of a number of appeals but eventually upheld by the High Court. With the application for an extension of time to apply for a PTE having been upheld, on 25 June 2014, the Commissioner granted the application, which extended the term of the Patent to 9 December 2012.
On 26 June 2014, Lundbeck commenced infringement proceedings against Sandoz in the Federal Court, seeking orders for declaratory relief, damages and pre-judgment interest on the basis that Sandoz had infringed the Patent by selling generic escitalopram products between 15 June 2009 and 9 December 2012. Separately, CNS Pharma commenced proceedings against Sandoz in respect of misleading and deceptive conduct, seeking similar orders to Lundbeck.
First instance proceedings and appeal to the Full Court
At first instance, Jagot J found against Sandoz in both proceedings and made the orders sought by Lundbeck and CNS Pharma.
Sandoz appealed to the Full Court, which overturned the primary judge’s decisions and ordered the dismissal of both proceedings. Contrary to Jagot J’s findings at first instance, the Full Court found that Sandoz had held a non-exclusive licence from Lundbeck Australia from 31 May 2009 to 9 December 2012 through the operation of clause 3 of the Settlement Agreement. This, according to the Full Court, meant that Sandoz’s sales between 15 June 2009 and 9 December 2012 did not amount to acts of infringement. Lundbeck and CNS Pharma sought and were granted special leave to appeal to the High Court.
Appeal to the High Court
Kiefel CJ and Gageler, Steward and Gleeson JJ gave the majority judgment, and Edelman J gave a separate judgment.
Construction of the Settlement Agreement
The principal ground of each appeal concerned the competing constructions of clause 3 of the Settlement Agreement, which related to Sandoz’s licence and provided:
(1) Lundbeck Denmark and Lundbeck Australia jointly and severally grant Sandoz an irrevocable non-exclusive licence to the Patent effective from:
(a) 31 May 2009 if the Patent expires on 13 June 2009;
(b) 26 November 2012 if the Patent expires on 9 December 2012;
(c) 31 May 2014 if the Patent expires on 13 June 2014; or
(d) 2 weeks prior to the expiry of the Patent if the Patent expires on a date other than a date described in clause 3(a) to (c).
Lundbeck submitted that the licences to Sandoz came to an end when the term of the Patent expired. It followed that if a PTE were to be granted after expiry of the term of the Patent, proceedings could be brought against Sandoz for post-expiry acts of infringement as if the PTE had been granted at the time the acts occurred. Sandoz, on the other hand, contended that there was an absence of any expressed or implied end date to the licences, meaning that the licences were perpetual, i.e. the licence permitted Sandoz to sell generic escitalopram during the extended patent term. It followed that Sandoz had a non-infringement defence by reason that it acted under a licence. Jagot J at first instance accepted Lundbeck’s submission. The Full Court, however, accepted Sandoz’s view. The High Court found in favour of the interpretation of clause 3 adopted by Jagot J, considering such an interpretation to be one that would be recognised by a reasonable person in the position of the parties.
The majority of the High Court found that when clause 3 is objectively construed, two things were apparent: (1) each of the sub-paragraphs of clause 3 was consistent in treating the expiry date of the licence as the date of expiry of the Patent; and (2) each sub-paragraph was consistent in specifying the commencement date of the licence as being a date that was two weeks before the expiry date of the Patent. The majority also considered that the language of clause 3 could not be interpreted to encompass any right to bring proceedings against Sandoz that Lundbeck Denmark or Lundbeck Australia might have under s 79 of the Patents Act in the event of a PTE being granted after the expiry of the original term of the Patent. Central to the majority’s reasons were the drafting, the “internal logic” of the licence clause, and the “commercial result” the parties were to be taken to have intended. The majority held that a licence “to the Patent” where the start date was calculated by reference to the expiry of the Patent effectively implied the date of expiry of the licence. In this regard, the majority held that the parties were taken to have used terms such as “expiry” in accordance with the meaning of those terms in the Patents Act.
It is apparent from the majority’s reasons, however, that the majority accepted Lundbeck’s submissions that it would be "madness" and "commercially incomprehensible" to take the parties as ”having bargained away substantially the whole of the commercial benefit to Lundbeck Denmark of obtaining a grant of an extension of the term after the original term had expired in the event that what seemed to be a remote possibility became a reality”. Expressed as it is, however, the submission suffers from a fallacy. To grant a royalty-free licence to one party is not to “bargain away of the whole of the commercial benefit” of a term extension. Lundbeck would still have rights to sue and recover damages from all other (unlicensed) generic parties.
In his separate judgment, Edelman J recognised as much, and indeed warned of the danger of judges “arrogating to themselves overconfidently the role of arbiter of commercial reasonableness or likelihood”. His Honour considered that on Sandoz's interpretation of clause 3, “all that the Lundbeck entities were giving up was possible rights against one legal person, Sandoz, in circumstances where the rights would only exist on the remote possibility of an extension. Moreover, even if that remote possibility were to be treated as a certainty, it would equally be "madness" for Sandoz to discontinue its litigation in exchange for primary and supplementary licences that would enable it to sell escitalopram products when those licences were worthless because they expired within a very short period”. His Honour held, therefore, that these background facts did not assist either interpretation of the licence provisions.
Edelman J regarded the other background facts as of more assistance, including as to the expressed purpose of the licence in pre contractual communications and the fact of multiple other generic suppliers positioning to launch their products upon expiry. The parties had described the licence as “an early entry licence”. Ultimately His Honour agreed with the majority, that “in effect, the licences ‘to the Patent’ carried the implication that the freedom to exploit the invention was limited to the term of the Patent”.
Accordingly, clause 3 had the effect that regardless of what the expiry date of the Patent ended up being, the irrevocable non-exclusive licence to the Patent granted to Sandoz was to commence two weeks before that date and was to expire on the date of that expiration. Clause 3 conferred on Sandoz “no more than permission to sell pharmaceutical products containing escitalopram during the period which commenced on 31 May 2009 and which expired with the expiration of the original term of the Patent on 13 June 2009”.
Rights of Lundbeck Australia to bring infringement proceedings against Sandoz
In the event the High Court found in favour of Lundbeck’s construction of clause 3, the High Court was then asked to consider whether Lundbeck Australia, as exclusive licensee of the Patent, could bring infringement proceedings against Sandoz under s 79 of the Patents Act.
The High Court considered s 79 of the Patents Act and concluded that the only rights to bring proceedings in respect of acts occurring between the date of the expiration of the original term of a patent and the date of the grant of a PTE are limited to the patentee. Accordingly, Lundbeck Australia, as an exclusive licensee, had no rights to bring proceedings against Sandoz under s 79 of the Patents Act. That right was only conferred on Lundbeck Denmark as patentee of the Patent. However, Lundbeck Denmark could only bring such proceedings when its cause of action accrued, that is when the PTE was granted in June 2014. It followed that Lundbeck Denmark could not claim pre-judgment interest prior to that time.
Misleading and deceptive conduct
CNS Pharma alleged that Sandoz engaged in misleading and deceptive conduct in supplying its generic escitalopram products on one or other of two bases: (1) that Sandoz failed, refused or neglected to warn its customers or potential customers that the sale of its generic escitalopram could infringe the Patent; and (2) that Sandoz impliedly represented that such products could be used by those customers and potential customers without infringing the Patent.
Jagot J found that Sandoz had engaged in misleading and deceptive conduct. The Full Court, having held that there was no patent infringement, accordingly found that CNS Pharma’s case could not be maintained.
The majority of the High Court held that a finding that Sandoz had engaged in misleading and deceptive conduct could not be sustained based on the lack of a foundation in the evidence for considering that pharmacists had held a reasonable expectation that Sandoz would inform them, not of an existing fact, but of a remote possibility that they might be exposed to proceedings for infringement if and when the Patent was granted a PTE at a future date.
Edelman J had a separate view on this issue. His Honour found that any implied representation by Sandoz that the generic escitalopram it sold did not infringe any patent was true at the time the representation was made and that CNS Pharma had failed to establish at trial that it was evident that such representation was subject to any material qualification “that there was a remote possibility that a future extension to the term of a patent might permit proceedings to be brought against the purchaser”. His Honour concluded that “the remoteness of the possibility is such that the sales by Sandoz did not involve any misleading or deceptive conduct”.
Outcome and next steps
The High Court allowed the Lundbeck appeal, but dismissed the CNS appeal. The matter has been remitted to Jagot J for the recalculation of damages and pre-judgment interest payable to Lundbeck Denmark alone.
- Lundbeck v Sandoz confirms that, in Australia, exclusive licensees are not entitled to sue for infringement under s 79 of the Patents Act where a PTE is granted after expiry and a cause of action does not accrue until the PTE is granted.
- While the facts of Lundbeck v Sandoz are unique and unlikely to be repeated, the decision of the High Court is of general significance.
- Australian courts will construe commercial agreements by ascertaining what a reasonable person in the position of the parties would have intended with inferences about that meaning to be drawn from information reasonably available to the parties.
- A written contract in respect of statutory rights such as patent rights will ordinarily be taken by the court as use of statutory language according to its statutory meaning. This is a salutary reminder that appropriate expertise should be brought to bear in the drafting of IP licence provisions. Edelman J was particularly critical of the expressions “licence to the Patent” and “licence of the Patent”, describing them as “ambiguous” and “nonsensical”. Further, “irrevocable” does not mean perpetual.
- Unless the possibility of an infringement claim being brought by a patentee is remote, a party may be liable for misleading or deceptive conduct claims if the party fails to inform a customer or potential customer that a product could infringe a patent and that they may be liable to a potential infringement claim.
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