High Court reinforces the role of context in construing agreements and provides clarity to patentees and licensees

Long-term Corrs Chambers Westgarth client, Danish pharmaceutical company H. Lundbeck A/S (Lundbeck), was successful in its appeal before the High Court of Australia in H. Lundbeck A/S v Sandoz Pty Ltd [2022] HCA 4.

The decision concerns the proper approach to construction of an agreement where unforeseen events arise and has implications for patent infringement matters including the rights of licensees.

History of the dispute

The High Court’s decision in this matter is the latest instalment in Australia’s longest running patent infringement case which has included a previous High Court decision and one of the largest damages awards on record for patent infringement (approximately A$26 million). 

The case concerns Lundbeck’s antidepressant escitalopram (sold as Lexapro). Escitalopram is the pharmaceutical substance the subject of Australian patent no 623144 (the Patent). Lundbeck Australia Pty Ltd (Lundbeck AU), a subsidiary of Lundbeck Denmark, was the exclusive licensee of the Patent (which expired in December 2012). Lundbeck initially obtained an extension of term of the Patent from June 2009 to June 2014 on the basis of delay in obtaining marketing approval for Lexapro from the Therapeutic Goods Administration (TGA).

A number of generic companies, including Sandoz Pty Ltd (Sandoz), subsequently contested Lundbeck’s entitlement to the five year extension of term, arguing that any extension ought to have been based on Lundbeck’s earlier antidepressant Cipramil (a racemic mixture containing the molecules (+)-citalopram and (-)-citalopram) with the effect that any extension of term ought to expire in December 2012. The generic companies also sought to revoke the patent in its entirety.

Against the backdrop of those court proceedings, in February 2007, Lundbeck and Sandoz entered into a settlement agreement which ended Sandoz’s involvement in the court proceeding then on foot (Settlement Agreement). Under the Settlement Agreement Sandoz was entitled to a royalty free licence to enter the market two weeks prior to the date on which ‘the Patent expires’. The proceedings concerning the Patent continued without Sandoz as a party. Ultimately, the Court upheld the validity of the Patent but found that the extension of term should be cancelled on the basis that any extension ought to have been based on Cipramil.

Following the Court’s decision and the expiry of the original (unextended) term of the Patent in June 2009, a number of generic pharmaceutical companies, including Sandoz, launched generic escitalopram products. Prior to the launch of generic products, Lundbeck applied for an extension of term of the Patent based on Cipramil. It also applied for an extension of time within which to make that application and put the generic companies, including Sandoz, on notice that, if the extension applications were granted, they would infringe the Patent. The generic companies nevertheless proceeded to launch their products and opposed Lundbeck’s applications. 

The generic companies’ oppositions were ultimately unsuccessful, and in June 2014 the Commissioner of Patents granted Lundbeck’s extension of term application reflecting an expiry in December 2012. Lundbeck and Lundbeck AU then commenced proceedings for infringement of the Patent in the period between June 2009 and December 2012. The proceedings were defended by the generic companies and resolved with each generic company save for Sandoz. 

Primary judgment

At first instance, Justice Jagot found that Sandoz infringed the Patent and awarded Lundbeck and Lundbeck AU A$26 million in damages and interest. Relevantly, her Honour: 

• rejected an argument by Sandoz that the licence granted to it under the Settlement Agreement extended for the entire duration of the period from June 2009 to December 2012 – Her Honour found that the licence had a two-week operation only;
  
  
• awarded pre-judgment interest under the Federal Court of Australia Act 1976 (Cth) (Federal Court Act) accruing from the date on which the infringing conduct commenced (i.e. June 2009);
  
  
• found that Lundbeck AU as exclusive licensee had standing to sue under s 79 of the Patents Act 1990 (Cth) (the Act);
  
  
• found that Lundbeck AU’s related entity, CNS Pharma, had established misleading or deceptive conduct on the basis that Sandoz failed to warn pharmacists of the risk that they might be exposed to proceedings for infringement if the extension of the term of the Patent was granted; and
  
  
• found, in assessing Lundbeck’s damages, that Sandoz was entitled to a 25% discount on the basis of the availability of other generic products in the market (this reduction was reflected in the damages figure referred to above).

Full Court judgment

On appeal, Justices Nicholas, Yates and Beach overturned Justice Jagot’s findings and held:

• Sandoz had a complete defence to infringement due to the terms of the licence in the Settlement Agreement;
  
  
• if their findings regarding the Settlement Agreement were wrong, the 25% discount applied by Justice Jagot should be reduced to 2-3%;
  
  
• any pre-judgment interest should run from the date on which the extension of term was granted (i.e. June 2014) rather than June 2009;
  
  
• Lundbeck Australia as exclusive licensee does not have the right to sue under s 79 of the Act; and
  
  
• the misleading or deceptive conduct claim necessarily fell away given that the findings on infringement were overturned.

High Court’s findings

In its decision of 9 March 2022, the High Court unanimously upheld Lundbeck’s appeal and overturned the Full Court’s finding that Sandoz had not infringed (on the basis of a licence under the Settlement Agreement). The majority judgment was delivered by Chief Justice Kiefel and Justices Gageler, Steward and Gleeson. Justice Edelman delivered a separate judgment, agreeing on all issues with the majority.

1. Construction of the Settlement Agreement

The relevant provision of the Settlement Agreement (clause 3) provided: 

1. Lundbeck Denmark and Lundbeck AU jointly and severally grant Sandoz an irrevocable non-exclusive licence to the Patent effective from:
   
   
2. 31 May 2009 if the Patent expires on 13 June 2009;
   
   
3. 26 November 2012 if the Patent expires on 9 December 2012;
   
   
4. 31 May 2014 if the Patent expires on 13 June 2014; or
   
   
5. 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).

‘Patent’ was defined in the agreement to mean the Patent.

The majority of the High Court acknowledged that the ‘commercial result’ intended by the parties at the time of entering into the Settlement Agreement was to allow Sandoz to sell its generic escitalopram products during the final two weeks of the term of the Patent. This was viewed as a ‘valuable commercial benefit’ to Sandoz, and was given in exchange for it withdrawing its challenge to the validity of the Patent.

The High Court considered that the relevant clause 3(1) could not be interpreted as contemplating the extension of term of the Patent (granted following the expiry of the original term), which was not within contemplation:

[59]… 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 the term after the original term had expired in the event that what seemed to be a remote possibility became a reality. 

[60]: Objectively construed in the context within which the parties entered into the Settlement Agreement, the language of the settlement clause cannot be interpreted as saying anything about any right to bring proceedings against Sandoz that Lundbeck Denmark or Lundbeck Australia might have under s 79 of the Act in the event of an extension of the term of the Patent being granted after the original term of the Patent expired. (Emphases added)

Justice Edelman’s separate judgment also warrants consideration. His Honour emphasised there is no hard line between construction of terms and implication – the key difference is the extent to which reliance should be placed on context, and how far the literal language can take the parties. Justice Edelman had regard to the pre-contractual communications between the parties (which referred to the licence as an ‘early entry licence’) and the context of the licence (including the fact that the other generic entities were keen to launch their own escitalopram products). His Honour found that a slight implication was available in the circumstances to clarify that the licence was limited to the term of the Patent:

[102]: It requires only a slight inference beyond the literal meaning of the words to conclude that the reference in cll 3(1) and 3(2) to a "licence to the Patent“…carries the implication that the freedom to exploit the invention is limited to the term of the Patent.

Both the majority judgment and Justice Edelman’s separate judgement reinforce the importance of context in the construction exercise and the need to ascertain what would have been intended by a reasonable person in the position of the parties.

2. Accrual of cause of action and pre-judgment interest

Section 51A(1)(a) of the Federal Court Act empowers the Federal Court in ‘any proceedings for the recovery of any money’ to ‘order that there be included in the sum for which judgment is given interest…on the whole or any part of the money for the whole or any part of the period between the date when the cause of action arose and the date as of which judgment is entered’ (emphasis added). The current pre-judgment interest rate is 4.85%.

Interest awarded pursuant to s 51A can be substantial, particularly in pharmaceutical patent cases in which patentees can often wait a long time for Federal Court proceedings to be resolved (including the determination of any appeals). The High Court upheld the Full Court’s finding that Lundbeck’s cause of action did not ‘arise’ until the extension of term had been granted in June 2014. While the High Court recognised that s 79 of the Act is designed to provide the patentee which rights to pursue infringement with retrospective effect, it did not follow that the cause of action would therefore arise earlier.

The position that interest is not available from the date of the infringing acts is inconsistent with the position in the United Kingdom[1] (although this difference can be explained by differences in the language of the relevant statutes). The consequence is that the delay caused by Sandoz’s efforts (and those of other generic companies) to prevent the extension of term from being granted (by pursuing oppositions) has had the effect that it was not liable for interest during that period.

The circumstances in which section 79 of the Act operate are relatively rare (i.e. an extension of term granted following original expiry). However, the same language can be found in section 57 of the Act which provides a patent applicant with retrospective rights to pursue infringement in respect of acts following a patent application becoming open for public inspection and before the patent is granted. Patent applicants should carefully consider the implications of this decision in that context.

3. Exclusive licensee’s standing to sue

As mentioned above, section 79 of the Act fills the temporal gap in circumstances where a patentee is

granted an extension of term following the expiry of the original term. It ensures that the patentee has the same rights in respect of conduct in the ‘gap’ period.

The High Court upheld the Full Court’s finding that because section 79 only refers to ‘the patentee’ and does not mention an ‘exclusive licensee’ – an exclusive licensee does not have rights to commence proceedings. The High Court found that the text in section 79 of the Act was ‘intractable and unambiguous’. Although section 79 of the Act applies in relatively rare circumstances, for the same reasons discussed above, the High Court’s decision on this aspect may well have implications in the context of applications in the pre-grant period which is covered by section 57 of the Act (which includes the same language). If the same construction were applied, exclusive licensees would have no right to recover pecuniary relief during that period.

Finally, an anomaly arises as section 78 of the Patents Act imposes restrictions on the rights of patentees during an extension of term but does not refer to exclusive licensees and, if not read to include exclusive licensees, would have the effect that they are not subject to those restrictions.

4. Failure to warn – misleading and deceptive conduct

Claims under the Australian Consumer Law (ACL)[2] are often run in addition to allegations of patent infringement in circumstances where there may be a question about the standing of an applicant to sue for patent infringement (e.g. where there may be a question about whether the licensee has an ‘exclusive licence’ within the meaning of the Act). Only the patentee and exclusive licensee can commence proceedings for infringement under section 120 of the Act, whereas any person has standing to commence proceedings under the ACL.

The ‘failure to warn’ customers of the risk of patent infringement has previously been found to constitute misleading or deceptive conduct contrary to the ACL.[3] Similar allegations have been pursued in a number of cases.[4] In this case, CNS Pharma alleged that Sandoz engaged in misleading or deceptive conduct by supplying generic escitalopram products from June 2009 without warning customers of the risk of infringement. The High Court rejected the argument by CNS Pharma on the basis that they did not establish, by evidence, that pharmacists would have had a reasonable expectation that they would be informed of the risk of infringement.

The High Court’s finding that positive evidence is required of a customer’s expectation may make it more difficult to establish a contravention of the ACL by way of a failure to warn of patent infringement. No such evidence was referred to in the leading authority of Ramset Fasteners (Aust) Pty Ltd v Advanced Building Systems Pty Ltd (1999) 44 IPR 481.

Key takeaways

The High Court’s decision has a number of implications for contract law as well as for patent law and practice.

First, the decision reinforces the importance of context and purpose to the exercise of construing terms in agreements – even terms which may appear to have an ‘ordinary meaning’. As this case demonstrates, the context of the agreement may well favour an alternative meaning. In this case that meaning excluded a remote and unforeseen possibility (which, in fact, eventuated). Second, Justice Edelman’s minority judgment suggests that where only a ‘slight’ implication is required by the context, it may not be necessary to satisfy the strict five-part test in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266.

Patentees and exclusive licensees should carefully consider the implications of this decision in respect of their rights in the period before a patent is granted and during an extension of term, including the right to recover for infringements and interest. Licensees should not assume that, to the extent they may not be eligible to make a patent infringement claim, they will be able to establish a contravention of the ACL. In order to establish a failure to warn of patent infringement, it will be necessary to prove that the relevant consumers would reasonably expect to be warned of the risk of patent infringement. Depending on the commercial context, that may be difficult.