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Important takeaways from the High Court decision in Lundbeck and Sandoz patent litigation

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The High Court yesterday handed down a decision in the long running case involving H Lundbeck A/S (Lundbeck), a Danish Company, and its Australian subsidiaries Lundbeck Australia Pty Ltd (Lundbeck Australia) and CNS Pharma Pty Ltd (CNS Pharma) against Sandoz Pty Ltd (Sandoz) in relation to products containing the drug escitalopram.

Readers who have been following the case—various branches of which have spanned over a decade — will be aware that the facts are unusual.  The current case began following an earlier Federal Court case which found that an extension of term of Lundbeck’s patent for escitalopram was invalid, when—just after that judgment was delivered and on the last day before the expiry of the original term of the patent—Lundbeck applied for an extension of time to apply for an extension of term of the patent.

That extension of time, and the new extension of term, were subsequently granted by a Delegate of the Commissioner of Patents and Lundbeck and Lundbeck Australia brought proceedings against Sandoz seeking damages for infringement of the patent during the extended term.

Separately, CNS Pharma, a Lundbeck subsidiary which supplies an authorised generic escitalopram product in Australia, also sued on the basis that Sandoz’ sale of its generic escitalopram product was misleading or deceptive, and that it had suffered lost sales accordingly.

Sandoz had entered into a settlement agreement with Lundbeck and Lundbeck Australia prior to the judgment in the earlier case, and the key terms of that settlement agreement were a central platform of yesterday’s decision.

While the precise circumstances of this litigation are unlikely to be repeated, there are a number of aspects of the High Court decision which are of general significance to all, particularly those in the pharmaceutical arena.

The decision comprises a joint judgment of Chief Justice Kiefel and Justices Gageler, Steward and Gleeson (the majority) and a separate judgment of Justice Edelman.

1. Interpretation of the settlement agreement – lessons for drafting settlement agreements

Clause 3 of the relevant settlement agreement between Lundbeck, Lundbeck Australia and Sandoz granted Sandoz “an irrevocable non-exclusive licence to the Patent” which was said to be “effective from”:

  • 31 May 2009 if the Patent expires on 13 June 2009;
  • 26 November 2012 if the Patent expires on 9 December 2012;
  • 31 May 2014 if the Patent expires on 13 June 2014; or
  • 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).

The High Court had to consider how this clause was to be applied in this case, where the initial term of the patent expired on 13 June 2009 and was later extended (in 2014) so that the term of the patent was retrospectively extended so that it expired on 9 December 2012.

The majority noted the finding of the Federal Court at first instance and the Full Court that when the parties were entering into the settlement agreement in 2007 they were aware of the possibility that the patent could be extended after it expired on 13 June 2009, however that possibility was objectively remote.  At the time, the parties would have expected to know by 1 May 2009 when the Patent would expire.

The parties agreed that the Patent in fact expired with the expiration of its original term on 13 June 2009 and agreed that clause 3(a) above was triggered, with the result that the licence commenced on 31 May 2009.  The majority considered that the duration of that licence was only a 2 week period – i.e. until the initial term of the patent expired on 13 June 2009.

The majority considered the parties’ commercial motivation at the time of the settlement agreement and considered that Sandoz got a modest but valuable commercial benefit of a two week head start in exchange for Sandoz giving up its challenge to the validity of the Patent.  They also concluded that the clause did not address the question of whether an action could be brought against Sandoz in the circumstance that actually transpired, where a later extension of term of the patent was granted.

Of course, it is impossible for drafters to consider all remote possibilities that could eventuate, however in this case, had the parties turned their mind to the remote possibility of an extension of term being granted after expiry of the initial term, it is highly unlikely that Sandoz would have been content with a 2 week licence.  Justice Edelman noted this point at [106] saying:

“If Sandoz knew that its primary licence would only be for two weeks, it would be unlawful to sell to pharmacists without disclosing that fact and no reasonable pharmacist would purchase escitalopram products at short notice, knowing that even with instantaneous distribution the products could only be sold to customers for a small number of days from the date of purchase by the pharmacist.”

Justice Edelman also concluded that no reasonable person could conclude that by clause 3 of the settlement agreement, the Lundbeck entities intended to give up the remote possibility of bringing an action for infringement during an extended term, if an extension were later granted.  Relying in part on pre-contractual communications between the parties, he concluded that the intention of the clause was to grant Sandoz only a 2 week head start, limited to the final two weeks of the initial term of the patent.

The majority also considered that “it is not easy to regard the parties as having bargained away substantially the whole of the commercial benefit to Lundbeck Denmark of obtaining a grant of an extension of term after the original term had expired in the event that what seemed to be a remote possibility became a reality.”

It is interesting to note that the clause did not expressly refer to an end date for the licence granted to Sandoz.  The approach of the Court is to conclude from the context and the reference to 2 weeks in each of the sub-clauses, that the term of the licence was intended to be 2 weeks only.   When drafting licences or settlement agreements, it is thus important to address the term of any licence and to consider what will happen to the licence if the patent ends or is temporarily disrupted, as occurred here.  This will be particularly important if an invalidity or other challenge to the relevant patent (or other registered intellectual property right) is continuing.

Key Takeaways

While obviously specific to the clause of the settlement agreement at issue in this case, the High Court’s analysis of the clause is an important reminder that:

  • commercial agreements will be construed through the lens of reasonable commercial parties and the court will infer their commercial intention from the context at the time they entered into the agreement;
  • parties using terms derived from the Patents Act will be expected to be using those terms as they are used in the legislation (such as, here, “Patent” and “expire”); and
  • the term “irrevocable” is not synonymous with “perpetual” or “continuing”, so here when Sandoz argued that the term “irrevocable” meant that the licence was ongoing to the end of the extended term of the patent, that argument was rejected in the context of the Court’s view that the intention of the parties at the time the Settlement Agreement was entered into was to grant Sandoz a 2 week early entry licence.
  • In any settlement agreement, it is important to consider and expressly address how the parties wish to deal with remote but foreseeable possibilities that may arise, particularly in relation to any cessation or revival of the relevant patent, to avoid future arguments about what was intended.

2. Only the Patentee can bring an action for infringement during the extended term of a patent where the extension is granted after the initial term expires.

The High Court was asked to consider whether Lundbeck Australia, as exclusive licensee of the Lundbeck patent, could bring infringement proceedings against Sandoz, or whether only Lundbeck had standing to bring proceedings for infringement during the extended term of the patent.

Section 79 of the Patents Act applies to circumstances where an extension of term is granted after the initial term of the patent has expired.  The section confers on the patentee the “same rights to start proceedings” for infringement, where an extension is granted after the expiry of the initial term of the patent, as if the extension had been granted when the action was undertaken.  This contrasts with section 120, which provides that a patentee or exclusive licensee may sue for infringement.  The Lundbeck parties argued that section 79 intended to confer these rights on the patentee and the exclusive licensee – consistent with other provisions of the Act, like section 120 particuarly, which provide that an exclusive licensee can bring an action for infringement during the initial term of a patent.

The majority considered this interpretation required too significant a departure from the words of section 79.  As a consequence, Lundbeck Australia had no power to commence a proceeding for infringement that occurred during the extended term of the patent.

A related finding was that Lundbeck could not bring proceedings for infringement until its cause of action accrued, when the extension of term was granted in 2014.  This meant that pre-judgment interest could not be claimed prior to that time.

Key Takeaways

The important takeaways are:

  • where an extension of a patent is granted after the initial term expires, only the patentee can bring an action for infringement that occurred during the extended term of the patent; and
  • the cause of action does not accrue until the extension of term is granted.

3. Misleading or Deceptive Conduct

CNS Pharma argued that Sandoz had:

  • failed to warn its customers or potential customers that the exploitation (including sale) of Sandoz’s products could infringe the patent; and
  • impliedly represented to customers and potential customers that the customers or potential customers could sell the Sandoz products without infringing the patent.

Sandoz’s customers were pharmacists, who were the only people in the Australian market legally able to sell the medication to consumers. 

At first instance, Justice Jagot concluded (at [545]) that:

Sandoz achieved its sales to pharmacists on the basis of an implied misrepresentation that its products did not infringe any patent, but the products would infringe if and when the extension of term was granted. The extension of term was granted and thus the products infringed. This is sufficient to constitute misleading and deceptive conduct in the circumstances.”

The High Court overturned this finding, noting that it was “something of an amalgam of CNS Pharma’s pleaded alternatives” ([71]).  The majority highlighted two principles that apply to a misleading or deceptive conduct argument of this type:

  1. where allegedly misleading or deceptive conduct is not directed to identified individual, it is necessary to “isolate by some criterion” a representative member of the class of people to whom the conduct is directed; and
  2. where the conduct is said to be failure to disclose some circumstance, ordinarily it is necessary to establish that the representative member of the class to whom the conduct was directed would hold a reasonable expectation that the circumstance would be disclosed.

In this case, as Sandoz argued, CNS Pharma had not produced any evidence that pharmacists would have held an expectation of being informed about a possibility that they might be exposed to proceedings for infringement if and when an extension of term of the Patent came to be granted in the future.  Hence, the majority concluded that the finding of misleading or deceptive conduct was without foundation in the evidence and could not be sustained.

Justice Edelman put this a slightly different way – he said

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, was not material.  That is, there was no material qualification to which any implied representation by Sandoz should have been subject. ([122]). 

As a result, his Honour held “The remoteness of the possibility is such that the sales by Sandoz did not involve any misleading or deceptive conduct by Sandoz.”

Key Takeaways

There are a number of important takeaways in this part of the decision.

  1. Depending on the circumstances, it may be misleading or deceptive to fail to inform a purchaser that a product could infringe a patent and that the purchaser may be exposed to potential liability for infringement.
  2. Where the possibility that an infringement action will be brought is remote, that possibility may not be material so failure to warn will not be misleading or deceptive.
  3. If seeking to prove that a failure to warn was misleading or deceptive, it is necessary to prove that the persons to whom the conduct was directed would have expected a warning in the circumstances. Where that conduct is alleged to concern intermediary exploitation, such as by retailers (including pharmacists), it is necessary to factually establish that a representative of the relevant class of persons would have expected to receive a warning that the relevant circumstances exist, when making a decision to purchase the relevant product.

Next steps in this epic contest

The battle is not over for Lundbeck, however. as the Commissioner of Patents granted a royalty-free licence to Sandoz on 11 April 2019, for reasons that include the unique procedural history of this matter: H Lundbeck A/S v Sandoz Pty Ltd [2019] APO 18.  Given the history of this litigation, we expect that the decision to grant a licence, and its terms, will be challenged and note that it is subject to merits review by the Administrative Appeals Tribunal, with potential further appeals.

 

King & Wood Mallesons represented Mylan, Aspen Pharma, and Apotex in related proceedings, prior to those parties settling the dispute with the Lundbeck entities.

 

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