Licensee of can patent technology ordered to produce full accounting of sales to licensor in royalties dispute

About this case:

• Citation:
  [2024] CSOH 89
• Judgment:
  External link
• Court:
  Court of Session Outer House
• Judge:
  Lord Sandison

Pursuer Rocep-Lusol Holdings Ltd sought accounting from Lindal Dispenser GmbH in terms of a licensing contract entered into in September 2015 with the licensing period ending on 31 December 2023. The defender contended that on a true construction of the contract no royalties for payable for any period following the expiry of the patents on 22 December 2020.

The case was heard by Lord Sandison. Lord Davidson of Glen Clova KC and Welsh, advocate, appeared for the pursuer and Tariq KC for the defender.

Clear on the face of it

Under the terms of the contract between the parties, the pursuer exclusively licensed to the defender the benefit of certain patents which were due to expire on or by 22 December 2022. The contract provided for royalty payments to be made by the defender to the pursuer in respect of products sold or commercialised by it which used the patented technology at specified rates from 1 January 2016 until 31 December 2020 and then at lower rates for the period between 1 January 2021 and 31 December 2023.

It was submitted for the defender that an expired patent was no longer a patent and could not offer any rights or protections, and thus there was no longer a “product” manufactured under one or more of the licensed patents. There was no proper basis, as claimed by the pursuer, for the assertion that the defender had taken a commercial decision to pay royalties, albeit lower royalties, after the expiration date.

In addition to its main argument on construction of contract, the defender claimed that any obligation to make royalty payments on its part was the counterpart of an obligation on the part of the pursuer to provide it with exclusive rights to the technology, which it was unable to do after the patents expired. Finally, it argued that even if it would be due to make payments, any such obligation was unenforceable due to the prohibitions in sections 2 and 18 of the Competition Act 1998 and Articles 101 and 102 TFEU.

For the pursuer it was submitted that the defender had stated no relevant defence to the action. The obligation to account was clear on the face of the contract, while the defender’s approach proceeded on a highly literal approach ignoring the reality of the parties’ relationship to produce an artificial outcome. The definition of “patent” in the contract said nothing about “so long as the patents remain unexpired” or “only insofar as the patents are enforceable”.

Gained a benefit

In his decision, Lord Sandison said of the terms of the contract: “Contrary to the defender’s submission that it gained no benefit from the contractual relationship after 22 December 2020, by clause 2(4) the pursuer bound itself not to deal in products incorporating the patented technology for the full duration of the contract. The defender thus gained for the three years from the start of 2021 to the end of 2023 the benefit of not having in the market a competitor which was familiar with the relevant technology. The continued payment of royalties after the expiry of the licensed patents cannot be said to be entirely bereft of potential commercial explanation.”

He also noted: “The phrase ‘scope of protection’ of a patent is attended by a degree of ambiguity. It could mean either ‘protected by a patent’ (the defender’s preferred construction) or ‘within the scope of the claims’ of a patent (the pursuer’s preferred construction). The meaning which ought to be preferred is that which integrates itself more effectively with the remainder of the contractual provisions, so as to give effect to the principle that a contract ought to be construed as a whole. The application of that principle clearly indicates that the pursuer’s preferred construction of clause 2(1) is to be favoured.”

Turning to the defender’s other arguments, Lord Sandison said: “A reasonable person reading the contract objectively would appreciate that the patents were to expire on the dates respectively stated in Annex 1, that no valid rights in them could be conferred or otherwise dealt in after those dates, and that the contract had made provision for that circumstance by a reduction in the royalties payable after the latter of those dates. Such a reader would not conclude that the express obligation to pay royalties was dependent on the continuing conferral of rights on the defender after the points from which the pursuer could not validly confer such rights.”

He concluded on competition law: “The decisions of the European Court make it clear that an arrangement which involves the payment of royalties after the expiry of the intellectual property to which the royalties relate is not automatically something struck at by Article 101 TFEU. The Court has specifically acknowledged that such an arrangement may simply reflect a commercial assessment of the value to be attributed to the overall possibilities of exploitation granted by the license.”

Lord Sandison therefore granted decree de plano ordaining the defender to produce a full account of its sales or commercialisation of can and actuator products during the period 1 October 2022 until 31 December 2023.