Tuesday 9 September 2008

Broad construction of patent licence keeps royalties flowing

Sitting as a Deputy Judge of the Patents Court, England and Wales, last week, Peter Prescott QC had to consider entitlements to patent royalties in Oxonica Energy Ltd v Neuftec Ltd [2008] EWHC 2127 (Pat), which you can read here in full via BAILII.

In short, Neuftec was in possession of some valuable know-how concerning additives for diesel fuel. This know-how enabled additives to be dispersed in such a manner as to reduce fuel consumption and engine emissions. Neuftec filed an international patent application under the Patent Cooperation Treaty (PCT) and secured national patents in a number of countries.

While the fuel additives were still being developed Oxonica and Neuftec cooperated in solving a problem in the manufacture of the small particles necessary for the creation of the additives. In December 2001 Neuftec and Oxonica struck an exclusive licence and knowhow deal under the terms of which Oxonica had to pay Neuftec royalties in respect of the manufacture, use, sale or other exploitation of what the contract called "Licensed Products": these were "any product, process or use falling within the scope of the claims in the Licensed Application or Licensed Patent". For this purpose "Licensed Application" was defined as the PCT application together with "any continuation, continuation-in-part or divisional applications thereof as well as foreign counterparts and re-issues thereof". "Licensed Patent" was defined as "any patent issuing from the Licensed Application thereof as well as foreign counterparts and re-issues thereof". Oxonica exploited Neuftec's knowhow which it received under the licence agreement, developing its own commercial fuel additive which it called "Envirox", making royalty payments as provided under the licence.

Subsequently, Oxonica wanted to supply a variation of Envirox ("Envirox 2") to a Turkish oil company. But was Envirox 2 a Licensed Product within the meaning of the licence agreement? Oxonica went to court and sued for a declaration that it was not. Neuftec counterclaimed that it was entitled to an audit in respect of sales of Envirox 2, as well as payment of all royalty sums in respect of Envirox 2 that were due under the licence. The parties agreed that Envirox 2 fell within the broadest claims of the original PCT application but, at least in some important countries, it fell outside the broadest claims of the patents as granted in those countries.

Peter Prescott QC dismissed Oxonica's claim and allowed Neuftec's counterclaim.

1. On the application of settled principles of law regarding the interpretation of ambiguous formal commercial agreements, the licence was to be construed so that "Licensed Products" referred to products that fell within the scope of the claims of the Licensed Application or Licensed Patent, as the context required.

2. The context was that the obligation to pay royalties applied equally to the definitions of Licensed Application and Licensed Patent. Indeed, royalties were payable on things falling within the scope of the claims of the PCT application as filed, and nothing else.

3. This being so, Envirox 2 was a Licensed Product as defined, and attracted royalties accordingly.

The judgment has some interesting asides on contact interpretation, including whether the canons of interpretation contra proferentem are applicable in situations such as this.

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