UK: Licence To Litigate

Last Updated: 28 October 2008
Article by Alistair Mann

The recent case of Oxonica Energy v. Neuftec1 is a telling example of how expensive litigation can ensue from drafting an intellectual property licence that is not fit for purpose.

Neuftec, who had a background in the motor industry, wanted to develop a fuel additive that would reduce fuel consumption and engine emissions. Neuftec wanted to use lanthanide oxides as active ingredients but these were known to clog filters and damage engines. They saw that the solution would be to make use of extremely small particles of cerium oxide coated with a lipophilic (oil-loving) substance to aid disbursement of the particles in the fuel. Neuftec approached Oxonica to manufacture the particles, who were a young nanotechnology company spun out from Oxford University.

The parties incorporated a joint venture company to develop the additive which combined Neuftec's know how of the motor industry and general commercial acumen with Oxonica's expertise in nanoparticles. The additive was developed successfully and Neuftec made an international patent application under the Patent Cooperation Treaty (PCT Application).

The parties then decided to structure the business relationship in a different way to allow Oxonica to take advantage of certain financial benefits. It was agreed that Neuftec would license its intellectual property to Oxonica who would exploit the technology and pay licence fees back to Neuftec. This arrangement was put into effect by two documents: a main agreement covering the operation of the business and an exclusive licence (the Licence Deed) giving Oxonica the right to use Neuftec's technology and know how in relation to lanthanide oxide fuel additives and the motor industry.

The Licence Deed stated that licence fees would be payable on the sale of Licensed Products and included the following definitions:

  • "Licensed Application: "the application appended in the Schedule hereto [i.e. the PCT Application] and any continuation, continuation-in-part or divisional applications thereof as well as foreign counterparts and re-issues thereof";
  • Licensed Patent: "any patent issuing from the Licensed Application thereof as well as foreign counterparts and re-issues thereof";
  • Licensed Products: "any product, process or use falling within the scope of claims in the Licensed Application or Licensed Patent".

Oxonica used the licensed technology and know how to develop a commercial fuel additive called "Envirox". The company began to sell this product and paid the fees due to Neuftec under the Licence Deed. The business was very successful and led eventually to the floatation of Oxonica on the London AIM stock exchange. National patents were granted to Neuftec in a number of countries some of which contained claims which were substantially narrower than those of the PCT Application.

Following the prospect of securing a lucrative fuel additive contract which would have generated significant sales and licence fees, Oxonica informed Neuftec that it had developed a superior additive product (Envirox 2) which whilst falling within the broadest claim of the PCT Application, fell outside the claims of some of the national patents as granted.

In those countries in which Envirox 2 fell outside the scope of the claims of the relevant national patent, Oxonica refused to pay Neuftec any licence fees. They contended that they were only required to pay fees under the Licence Deed where Neuftec had a pending patent application or granted patent with claims that covered the relevant product. Oxonica sued for a declaration that the product was not a Licensed Product under the Licence Deed and was not required to pay fees. Neuftec counterclaimed for an audit of accounts and payment of sums due arguing that it was enough that Envirox 2 fell within the claims of the PCT Application.

The court was faced with the task of construing the Licence Deed in which ambiguity begun with the phrase "Licensed Application or Licensed Patent" as used in the definition of Licensed Products. Oxonica argued that the phrase should be construed as meaning that Licensed Application and Licensed Patent were mutually exclusive and could not co-exist at the same time. They argued that at any point in time in a given country, Neuftec would either have a pending patent application or a granted national patent, but not both.

Neuftec argued that the phrase should be read inclusively and that it was enough that a product fell within a claim of the PCT Application notwithstanding that it did not fall within a claim of a granted patent. Neuftec submitted that this construction would make commercial sense as the Licence Deed was also a knowhow licence and the claims of the PCT Application would have been chosen as a convenient yardstick to denote royalty-bearing products.

In reaching his decision, Peter Prescott QC, sitting as Deputy Judge, provided a brief reminder on the rules of contractual construction. His task was an objective one: to decide what the Licence Deed would convey to a reasonable person who had all the background knowledge that would reasonably have been available to the parties in the situation in which they were at the time of the agreement2. Such knowledge would include neither the parties' subjective intentions nor their previous negotiating positions. In approaching this task, he was of the view that the draftsman in this case had shown little grasp of relevant patent law and had been over reliant on the use of precedents thus allowing "his word processor to do his thinking for him".

Peter Prescott QC noted some of the more profound anomalies featured in the drafting. For example, once clause provided that the Licence Deed would continue in force until either the date on which the last of the Licensed Patents had expired or the last of the Licensed Applications had been revoked. A patent application may be refused but it is never revoked. The definition of Licensed Application also contained a string of technical expressions used in US patent law: "continuation, continuation-in-part, divisional applications, counterparts and re-issues". This was unusual considering the agreement was subject to English law.

Having analysed the "veritable Necker cube of licence agreements", Peter Prescott QC decided in favour of Neuftec's construction and held that royalties were payable on products falling within the claims of the PCT Application as filed and nothing else. This was the convenient yardstick that measured the scope of Neuftec's technology imparted to Oxonica. He found that the reasonably informed man would have considered the recitals in both the Licence Deed and the main agreement covering the operation of the business to be particularly indicative of this intention. Oxonica's construction would have produced numerous commercial difficulties. For example, Oxonica could have been required to pay licence fees for selling a product in a country where Neuftec had a divisional application (Europe) or a continuing application (America) with arbitrarily wide claims. Oxonica could have also been exposed to the risk of using Neuftec's licensed knowhow outside of the claims of a national patent and being in breach of confidence.

The case is an example of the desire of English judges to give a sensible commercial effect to poorly drafted or ambiguous commercial agreements. If a judge is faced with deciding between two possible interpretations of an agreement, the judge will try to avoid an interpretation that "flouts business commonsense"3 and to make a decision that results in the most commercially sensible outcome. To avoid ending up in court in the first place, specialist advice should always be sought in the drafting of complex intellectual property licensing agreements.

Footnotes

1. Oxonica Energy Limited v. Neuftec Limited [2008] EWHC 2127 (Pat)

2. Investors Compensation Scheme v. West Bromwich Building Society [1997] UKHL 2

3. per Lord Diplock in Antaios Compania Naviera SA v. Salen Rederierna AB [1985] AC 191

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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