In a Judgment by the Court of Appeal last month, the Court reversed the decision of Jacob J at first instance on a patent licence dispute between Oxford Gene Technology Ltd ("OGT") and Affymetrix Inc, Affymetrix UK Ltd ("Affymetrix") and Beckman Coulter Inc ("Beckman"). In essence, the Court of Appeal decided that a number of complicated arrangements that had been entered into by Affymetrix and Beckman succeeded in exploiting a "loophole" in a patent licence agreement between OGT and Beckman so that Affymetrix was entitled to a sub-license under the licensed OGT patent. The Court reached this decision despite the existence of a clause in the licence agreement between OGT and Beckman providing that the licences to Beckman carried no sub-licensing rights and that Beckman would not grant any sub-licences without the prior written consent of OGT.
The Court of Appeal Judgment is of interest both, in general, in its approach to interpretation of the agreements in issue and, in particular, in deciding whether research and development activities could, in the circumstances, amount to a "business in products". It is also an example of a third party succeeding in enforcing contractual arrangements with a patent licensee to obtain a sub-licence contrary to the wishes and intentions of the licensor.
The patents with which the appeal was concerned covered products embodying the ideas of Professor Edwin Southern (principal shareholder of OGT) relating to DNA arrays (the "Southern patents"). Exploitation of the Southern patents was originally under the management of Isis Innovations Limited, which granted a licence to Beckman. Beckman did some useful development work during the four years of the Isis agreement, resulting in some patents, but there had been no commercialisation or move towards commercialisation during that period. Consequently, the terms of the licence were renegotiated in 1996. Isis subsequently assigned the patents to OGT.
In August 1998, at the behest of Affymetrix, Beckman entered into arrangements with Affymetrix which they believed resulted in OGT being required to license Affymetrix or in Affymetrix having a licence under the Southern patents. The arrangement between Beckman and Affymetrix were designed, in particular, to exploit two clauses of the amended Isis agreement with Beckman that had been assigned from Isis to OGT:
(1) The Consortium Clause
"9.2 Following receipt of a written request form LICENSEE LICENSOR will not unreasonably withhold or delay the grant to a member of a LICENSEE Consortium of a non-exclusive licence under the Licensed Patent Rights and Technical Information."
In this context, the term "LICENSEE Consortium" was defined by clause 3.11:
"3.11 "LICENSEE Consortium" means any group, consortium, joint venture, partnership, alliance or corporation in which LICENSEE is a participant which has as one of its principal objectives the development and commercialisation of products and processes covered by the claims of the Licensed Patents."
(2) The Asset Purchase Clause
"16.2 LICENSEE'S rights under this Agreement and the licences herein granted shall pass to any person, firm or corporation succeeding to its business in products licensed hereunder as a result of sale, consolidation, re-organisation or otherwise, provided such person, firm or corporation shall, without delay, undertake directly with LICENSOR to comply with the provisions of this Agreement and to become in all respects bound thereby in the place and stead of LICENSEE."
Although clause 9.1 provided that the licences granted in the amended Isis agreement carried no sub-licensing rights and that Beckman would not grant any sub-licences without the consent of OGT, it was apparent to Affymetrix that they had two potential routes to obtain a licence under the Southern patents. The first was to join a consortium as defined in clause 3.11. The second was to succeed to Beckman's business as provided in clause 16.2.
Accordingly, with the primary purpose of obtaining rights under the Southern patents, Affymetrix entered into two agreements with Beckman, the first called "the Consortium Agreement", the second "the Asset Purchase Agreement". The Consortium Agreement provided in essence for Affymetrix to carry out the research and development and manufacture of arrays. Beckman's involvement was that the apparatus made by it would be compatible. A further agreement called "the Precedence letter" was signed to deal with the obvious inconsistency between the two agreements. In essence, the Consortium Agreement was to have immediate effect. If OGT refused to grant the requested patent licence to Affymetrix on reasonable terms and conditions within a specified time, the parties would terminate the Consortium Agreement. Thereafter, the Asset Purchase Agreement would come into effect.
Beckman duly notified OGT of the Consortium Agreement and asked OGT to grant Affymetrix a licence under clause 9.2 of the amended Isis licence, and later sent OGT a draft of the licence it claimed OGT was obliged to grant Affymetrix. No licence was granted, and in due course Affymetrix and Beckman took steps to implement the Asset Purchase Agreement.
Jacob J, the Judge at first instance, held:
(i) that OGT was justified in its refusal to grant a licence to Affymetrix because no consortium as required by clause 9.2 of the amended Isis licence existed; and
(ii) that the Asset Purchase Agreement did not result in Affymetrix succeeding to the amended Isis licence because Beckman did not have a "business in products" within the meaning of clause 16.2 of the amended Isis licence. He took the view that "business begins broadly when the sales start". At the date of the Asset Purchase Agreement Beckman had some laboratory equipment, some computer software and some material in laboratory notebooks together with a few thousand laboratory sample arrays. On the facts, there was no business to transfer.
The Court of Appeal
The Court of Appeal addressed the Consortium and Asset Purchase points in turn.
The Consortium Point
The main question for the Court of Appeal was whether the Consortium Agreement between Beckman and Affymetrix fell within the definition in Beckman's licence. They agreed with Jacob J's assessment of this issue. The relevant objective had to be a consortium objective. It was not sufficient to set up a consortium in which one of the members had as one of its principal objectives development and commercialisation.
The Court of Appeal accepted that "by concluding the Consortium Agreement in essence Affymetrix wanted to have and did obtain a licence under the Southern patents". "In reality the agreement amounted to a sub-licence upon terms, not one which provided a joint objective of development and commercialisation."
The Asset Purchase Point
The Court of Appeal disagreed with the decision of Jacob J that Beckman did not have a "business in products" for Affymetrix to succeed to under clause 16.2 of the amended Isis licence.
The Court of Appeal identified three important issues:
(1) Does clause 16.2 require the relevant activity of Beckman to have progressed to the stage of commercialisation as the judge held?;
(2) Did Beckman have a "business in products" as required by clause 16.2?;
(3) Did the Asset Purchase Agreement result in a transfer to Affymetrix of the "business in products" of Beckman?
The Court of Appeal considered that if Affymetrix succeeded to the business, the licence passed whether or not they "moth balled" that business while pursuing other interests.
The Court noted that the word "business" is extensively used and of indefinite signification. It observed that a man who sets up a company to carry out research and development with an aim of commercialising a method or product would be surprised to be told that he had not set up a business. The question in this case was, however, the meaning of the words "its business in products licensed hereunder" as they appeared in clause 16.2 of the amended Isis licence.
The Court of Appeal considered that the words did not suggest any limitation as to the type of business in products that are licensed. They are those products covered by the licence, namely all products covered by a claim asserted in good faith in the licensed patent rights. The Court noted that the licence covered the manufacture, use, sale and offer for sale of products and that there was no requirement that such activity had reached the stage of commercialisation.
In this respect, the Court drew support from clause 6 which required an upfront advance in addition to royalties after commercialisation. As the licence covered the period both before and after commercialisation the Court concluded that the words "products licensed hereunder" included products made other than for commercial use. The Court drew further support from the recitals to the Isis licence recording, among other things, that Beckman is in the business of "designing, developing and manufacturing and selling...." Accordingly, it found that the parties accepted that there can be a business in designing and developing.
Having established that Beckman had a "business in products", the Court of Appeal concluded that the Asset Purchase Agreement resulted in a transfer to Affymetrix of that business. Accordingly, Affymetrix benefited from a licence under the Southern patents and a defence to the patent infringement action by OGT against Affymetrix.
The Court of Appeal decision serves as a reminder that the courts will, in certain circumstances, be prepared to enforce arrangements that have been created by parties (and their lawyers) artificially for the purpose of exploiting "loopholes" in a separate arrangement i.e. that clever tricks can pay! This may not, however, be the last word on the matter as OGT has now petitioned for leave to appeal the decision to the House of Lords.