Originally published March 2005
On 20 December 2004, Mr Justice Laddie held that Cambridge Antibody Technology Limited ("CAT") was correct in its interpretation of the royalty provisions in two patent licence agreements with Abbott.
In the 1990s, Abbott obtained a licence to use CAT's technology for DNA library creation and phage display technology. This technology led Abbott to create the anti-TNF? antibody, HUMIRA. HUMIRA is used to treat rheumatoid arthritis and is set to become a blockbuster drug.
The agreements provided that:
"Royalties paid to third parties, other than to the Medical Research Council, in order to license rights needed to practise or to have practised the technology claimed in the Patents, will be borne equally by the parties provided that CAT's royalty … is not less than two per cent of Net Sales".
Abbott argued that this meant it was entitled to offset against what was due to CAT, 50% of the royalties it paid to third parties in respect of any patented technology it used in the development of HUMIRA. This was subject to a contractual minimum according to which CAT would always receive a two per cent royalty. As Abbott had taken licences under a number of third party patents it claimed that the offset had reduced the amount payable to CAT to two per cent. It had calculated its royalty payments to CAT accordingly.
CAT accepted that there was an offset provision in the Agreements. However, it successfully argued that it applied only to royalties which Abbott needed to pay to third parties in respect of use of the technology licensed by CAT. All of the licences on which Abbott relied were in respect of patents covering parts of the process of producing HUMIRA other than that involving CAT's technology. Thus CAT argued that the offset provision was not triggered and Abbott should be paying a five per cent royalty.
The dispute centred on the meaning of the words "rights needed to practise or to have practised the technology claimed in the Patents". Mr Justice Laddie agreed with CAT that the royalty sharing obligation only applied to royalties paid by Abbott to third parties for rights which would be infringed by the use of the whole or part of CAT's technology.
In Mr. Justice Laddie's view this was the only construction which was consistent with the other provisions of the Agreements and which made commercial sense. It made sense that CAT's obligation to offer at least partial protection to Abbott against the impact of third party licence fees should be limited to the areas of the collaboration for which CAT was responsible. It was difficult to see any rational basis upon which it could have been decided that CAT would share the royalty burden on those parts of the technology which were to be Abbott's exclusive responsibility.
On the facts given in the judgment this seems to be the correct interpretation of the agreement. Although Mr Justice Laddie denied Abbott's request for permission to appeal, Abbot can apply to the Court of Appeal directly for permission to appeal.
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