Exclusive patent licences under English law: Five pitfalls the licensee must avoid

3. Beware the dangers of 'salami slicing'

A patentee can grant more than one exclusive licence over its patent.  Some inventions more than others clearly lend themselves to being licensed in multiple fields.  Each licensee will have an exclusive licence in its own field and each may sue in respect of an infringement committed in contravention of its particular right.  

However, if you are taking a licence over a "slice" of a patent, you must ensure that your field of use is clearly defined in order to preserve the exclusivity of the arrangement.  This may be done by use of commonly accepted definitions or by using a belt and braces approach and adding a provision that specifically excludes other fields of use. 

The potential dangers of unintentionally granting overlapping exclusive licences and therefore destroying the exclusivity is apparent in Neurim & Flynn v Mylan [3], although the exclusive licence in this case stayed the right side of the line.

It is worth looking at the details of this case.  The patent, a second medical use patent, claimed prolonged release pharmaceutical formulations concerning the active ingredient melatonin to improve the restorative quality of sleep. By an unopposed amendment, the claims were, firstly, limited to sleep being improved in patients aged 55 or over and, secondly, each unit dosage being limited to 2 mg of melatonin (in contrast to the 0.025 to 10 mg specified in the original claims).

Flynn was granted an exclusive licence to distribute the Product for use in the Field.  In the licence, Product was defined as "the prolonged release prescription product containing 2mg Melatonin known as Circadin for use in the Field as covered by the Existing Marketing Authorisation namely, for the treatment of primary insomnia patients aged 55 and older" and Field was defined as "insomnia and circadian rhythm sleep disorders…".  

In relation to the amended claims, the judge held that it was difficult to see what could lie outside the scope of the grant by Neurim that would render the licence non-exclusive.  

In relation to the unamended claims, Mylan submitted that the definition of Product in the licence was narrower than the scope of the monopoly in the claims and therefore Neurim retained the ability to work the patent outside the grant of the licence to Flynn.  The judge admitted to being troubled by the submission and felt the full measure of the warning about the unreality of salami-slicing of rights articulated in Peaudouce v Kimberly Clark [4].  Nevertheless, he came to the conclusion (although strictly obiter) that Flynn's rights were exclusive since it had the right to work the patent to the exclusion of Neurim in relation to distributing a product containing 2 mg does of melatonin for those aged 55 and over.  This was because, provided the right was exclusive, even a sliver of a claim of a patent fulfilled the requirement in the Patents Act for exclusivity to "any right in respect of the invention".  

4. You must be able to vindicate your rights in the patent 

In a point which had not been decided before the Neurim case, the judge held that the licence between Neurim and Flynn could not be exclusive because it took away Flynn's right to sue for infringement by requiring any such action to be taken in conjunction with Neurim.  The judge explained his decision as follows:  As a consequence of the grant of an exclusive licence, the Patents Act states that the exclusive licensee has the same right as the proprietor to bring proceedings.  In other words, the Act confers on the exclusive licensee the ability to enforce another's (the patentee's) right to sue.  The effect of taking this away rendered the licence non-exclusive.  Although the provisions requiring that Neurim and Flynn jointly take the appropriate steps to enforce the patent with Neurim taking the lead and Flynn playing a supporting role were ostensibly procedural, they were in truth substantive.  Flynn therefore had no standing in the proceedings.

5. Don't agree to the patentee retaining rights to grant licenses to others in circumstances you can't control

An exclusive licence may not always remain exclusive.  For example, the patentee may reserve a power to convert the licence into a non-exclusive licence on the happening of an event such as a distributor failing to act with due diligence to distribute the patented product.  However, downgrading an exclusive licence to a non-exclusive licence in such circumstances is something that the licensee, in normal circumstances, has the ability to prevent.  

In other instances, patentees have granted an exclusive licence subject to a third party's right to call for a licence.  This is something that is outside the control of the exclusive licensee and can hang like a Sword of Damocles over the exclusivity of the arrangement – as soon as the third party exercises its right, the licence is no longer exclusive.

In two recent cases, the question of whether just the grant of such an equitable right to a third party destroyed the exclusivity of an otherwise exclusive licence.  In both cases the answer was that it did not do so.  

In the Illumina case mentioned above, an attack on the exclusivity of a license over two further patents in suit, 'Lo 2' and 'Lo 3', was based on the fact that it was subject to a right reserved to the patentee to grant the Hong Kong Government a non-exclusive licence in certain circumstances.  However, because the right was conditional and contingent on a request being made, which had not happened at the time of trial, the licence to Illumina remained exclusive.  In contrast to the decision on Lo 1, Illumina was therefore held to be the exclusive licensee of the Lo 2 and Lo 3 patents.  

A month after the decision in llumina, a challenge was mounted to an exclusive licence on the basis that a third party had an option to take a licence under the patent (Oxford Nanopore Technologies v Pacific Biosciences [5]).  As in the licence over the Lo 2 and Lo 3 patents in the Illumina case, there was a condition that the third party had to fulfill before it was granted a licence, in that it had to request a licence.  However, unlike the licence over the Lo 2 and Lo 3 patents, no other conditions had to be fulfilled. Nevertheless, this admitted low hurdle preserved the exclusivity of the licence.

And a final point to remember … register your exclusive licence as quickly as possible

Although not registering your exclusive licence does not stop you from suing an infringer, there are two distinct benefits to registering as soon as possible after it is signed.  Firstly, registration is notice of your exclusive rights in the patent to all the world.  If you do not register, a third party who subsequently takes an interest in the patent and who does not have actual knowledge of your licence, is not bound by it.  Secondly, if you do not register your exclusive licence within 6 months of its date, the court will not award costs or expenses in any infringement action – and costs can be considerable in such actions.