The Long Arm of the English Court?

The long arm of the English Court? Extra territorial reach in patent licence agreements (Chugai Pharmaceutical Co. Ltd and ors v UCB Pharma S.A. and ors [2017] EWHC 1216 (Pat))

Summary: If there is a dispute about the scope of a US patent licensed under an agreement subject to the exclusive jurisdiction of the English court, the English court will decide issues as to the scope of the US patent but is unlikely to decide issues relating to the validity of the US patent.

How did the action arise?

This case arises out of a worldwide non-exclusive royalty-bearing patent licence agreement granted by UCB to Chugai (the "Licence"). The patents relate to drugs containing a humanised anti-IL-6 receptor known as tocilizumab for treating arthritis. Chugai's tocilizumab drug is sold under the brand name Actemra in the USA and RoActemra in Europe. Actemra is Roche's fifth-best-selling medicine, with first-half 2017 sales rising 13 percent to 922 million Swiss francs ($936 million)1 (Roche licenses Actemra from Chugai).

From 12 January 2016, the only surviving patent under the Licence is a United States patent (US 7,556,771). Under the Licence, royalties are only payable by Chugai in countries where, but for the Licence, Chugai would infringe a Valid Claim of a relevant licensed patent. Chugai maintains that Actemra and RoActemra (which are, in part, manufactured and sold in the USA) do not fall within the scope of the '771 Patent and therefore its obligations to pay royalties ceased on 12 January 2016.

In arguing that its drugs do not fall within the scope of the '771 Patent, Chugai is relying on US principles of claim construction and on the prosecution history of the '771 Patent before the USPTO. In particular, Chugai relies on the US "doctrine of ambiguity", which sets up a "squeeze" between infringement and validity (i.e. Chugai argues that the '771 Patent must be construed in Chugai's favour as to construe it in UCB's favour would mean that the USPTO granted a patent which would be invalidated by the prior art).

The action has been advanced by Chugai in the form of a request for a declaration that Chugai is not obliged to pay royalties from 12 January 2016. That is, Chugai took the pre- emptive step of requesting confirmation from the English court that it did not have an obligation to pay royalties under the Licence, instead of waiting to be sued by UCB for failure to pay (or, perhaps, risking the Licence being terminated for material breach). Chugai has not applied for a declaration of non-infringement of the '771 Patent. Nor, importantly, has Chugai applied for a declaration that the '771 Patent is invalid.

Trial is listed for six days at the end of February 2018. However, a dispute arose as to whether the English court was able to hear the case at all given that the dispute between the parties centred on the scope of a patent registered in the USA having regard to the relevant principles of US claim construction. Judgment in relation to this question of whether the English court was able to hear the case at all was handed down on 26 May 2017.

Article 18 of the Licence contains a governing law and jurisdiction clause which provides that: "This Agreement is governed by, and shall be construed in accordance with the laws of England and the Parties hereby submit to the exclusive jurisdiction of the English courts".

Was the case a disguised attack on the validity of the US patent?

UCB submitted that the English court cannot hear a dispute concerning the validity of a foreign (i.e. non-English) patent for various reasons (including that it would infringe the territorial limits of the English court's jurisdictional powers and/or would be contrary to the foreign act of state doctrine, which militates against the English courts determining issues

1 https://www.roche.com/dam/jcr:2f06bbf8-3096-45b6-afd3-c5f57776eb6b/en/med-cor-2017-07-27-e.pdf

1 relating to the sovereign acts of a foreign state such as the granting of a foreign patent). UCB said that although Chugai had formulated its claim as a contractual one for a declaration concerning royalties, Chugai was actually attempting to raise the issue of validity of the '771 Patent by running the classic "squeeze" between infringement and validity in its claim construction arguments. UCB argued that the questions of infringement and validity were therefore inseparable.

Chugai argued that it was not seeking a declaration in relation to validity of the patent. It said that the effect of US validity law is incidental to the determination of the contractual question; and even insofar as it incidentally arises, it is only relied on to support Chugai's claim construction.

The court found in favour of Chugai on this point. It found that Chugai's action as a matter not only of form, but also of substance, does not challenge the validity of the '771 Patent.

The court explained that not every infringement dispute is concerned with, or principally concerned with, a challenge to the validity of the patent and Chugai's action was not a challenge to validity disguised as a contractual claim. Indeed, in a previous case (Actavis UK Ltd v Eli Lilly & Co [2014] EWHC 1511) the claimants sought declarations of non-infringement in relation to the UK, French, Spanish and Italian designations of a European patent and specifically undertook not to challenge the validity of the patent2. The Court of Appeal in that case held that just because validity was not in issue did not mean that the court couldn't consider what the consequences of the defendant's claim construction would be for the validity of the patent. It was still permissible to consider the consequences for validity even though validity was not, and could not, be raised.

The importance of the jurisdiction clause and definition of "Valid Claim"

The court found that the meaning of the parties having agreed to submit "to the exclusive jurisdiction of the English courts" was that all disputes under or in connection with the Licence have to be submitted to the English courts, unless the Licence terms indicate to the contrary.

Importantly, the Licence did contain an exception/qualification to the jurisdiction clause in Article 18. The definition of "Valid Claim" in relation to the licensed patents provided that a claim is to be treated as valid if it has "not been held to be invalid or unenforceable in an appealed or unappealable decision of a court of competent authority having jurisdiction over such Patent". The court found that this meant that only the US courts can determine that the '771 Patent is invalid.

The importance of this definition of Valid Claim was that UCB and Chugai had agreed that revocation or similar claims for invalidity of the '771 Patent should be determined by the US courts. Other than that definition, there was no exception to the broad scope of the jurisdiction clause in Article 18, which therefore covers disputes as to the scope of the licensed patents. Chugai's action was about the scope of the '771 Patent, not about the validity of the '771 Patent.

This type of wording in jurisdiction clauses and definitions of "Valid Claim" are very common in patent licence agreements. Indeed the court considered another case which had the same definition of "Valid Claim" and the court gave the same interpretation in that case (Celltech v Medimmune [2004] EWCA Civ 1331). The English courts are very keen to respect the bargain which the parties have struck and to require the parties to stick to their agreement, which in this case was to give jurisdiction to the English court concerning the scope of the licensed patents, but to recognise that the issue of validity could only be tried by the court(s) of the relevant country(ies).

2 Validity was deliberately not challenged as to do so would have been in contravention of the Brussels I Regulation.

2 Is there a commercial rationale to the division (in respect of jurisdiction) between scope of claim and validity issues?

The court had no problem with the conclusion that there could be a division between scope and validity in respect of jurisdiction. At paragraph 43 of the judgment, the court sets out 5 reasons why there is a commercial purpose to the division. In summary, the parties can acknowledge the reality that only national courts have the power to revoke a patent but there is still great commercial sense in having all issues of worldwide infringement determined by a single court. It increases the chance of consistency and will reduce the amount of litigation involved.

The court had great difficult with the natural consequence of UCB's arguments being that exclusive jurisdiction clauses in respect of infringement of foreign patents in the English court would generally be unenforceable, particularly as it recognised that such jurisdiction clauses are regularly included in patent licence agreements. The court set out at some length why respecting such jurisdiction clauses did not contravene the act of state doctrine (i.e. that the English courts must respect the sovereignty and autonomy of other states) or various other common law rules raised by UCB.

Another rationale for the division is that a claim for infringement is an action in personam, which only affects the parties to the action. In contrast, a patent is a monopoly right in rem, which applies not only to the parties to the action but to the entire population of the territory in which it is granted.

Comparison with the position under US law

The court relied on another English case concerning a claim before the English court for infringement of US copyright (relating to replicas of Star Wars storm-trooper helmets produced in England and sold to buyers in the US) (Lucasfilm Ltd v Ainsworth [2011] UKSC 39). That case was heard by the English Supreme Court and considered how the act of state doctrine has been applied by the US courts.

In summary, the position adopted by the English court in this case is similar to the position which has been adopted by the US courts. In the US, the act of state doctrine: has been used as a basis for non-justiciability of the validity of foreign trade mark and patent rights; has been held not to apply, however, where, in a dispute arising out of a patent licence, the issue was one of interpretation of the patent, and not of validity (Fairchild Semiconductor Corpn v Third Dimension (3D) Semiconductor, Inc (2008) 589 F Supp 2d 84, 98 (D Me) A potential area of difference between the UK and the US relates to the treatment of infringement (as opposed to contractual) claims. In Voda v Cordis Corp (2007) 476 F 3d 887 (Fed Cir.), the US court refused to allow the addition of claims for infringement of parallel foreign patents to claims for infringement of US patents, in litigation in which validity was in issue. The English Supreme Court in Lucasfilm preferred the dissenting judgment in Voda.

Obiter points

Although unnecessary to decide in this particular case (so the comments are obiter3), the court also commented on: whether it would have been able to hear the case if Chugai had requested a declaration for non-infringement (rather than a contractual claim). The answer to this was 'yes'.4 (This seems to differ from the US position - see Voda above.) what course it would have taken if Chugai was seeking to invalidate the '771 Patent in the English court. The answer was that (i) for Chugai to do so would have been contrary to the

3 Persuasive but not binding

4 Note that the position may well be different if there was no contractual relationship between the parties and therefore no jurisdiction clause (see Parainen Pearl Shipping Limited and ors v Kristian Gerhard Jebsen Skipsrederi AS and ors ([2017] EWHC 2570 (Pat))

3 Licence; and (ii) any finding of invalidity by the English court would not affect the obligation to pay royalties – this could only be affected by an invalidity decision by the US courts. whether, in the absence of a contractual agreement between the parties as to jurisdiction, a direct challenge to the validity of foreign patents could be heard by the English court. The answer to this was that there are "powerful arguments" why such direct challenges are unlikely to be heard by the English courts.5

Take-away points when drafting licence agreements

Consider in which jurisdiction you would want issues of infringement (i.e. whether the licensed patents covers the product) to be heard. Do you want worldwide infringement issues decided by a single court? Would your answer be the same whether or are acting for the licensor or the licensee? Make sure that you draft the jurisdiction clause and the definition of Valid Claim accordingly. Recognise that the English courts are likely to interpret your jurisdiction clause and Valid Claim definitions strictly – they will enforce the bargain struck by the parties. Recognise that agreeing to give a single court the remit to hear worldwide validity issues is unlikely to be effective: validity issues continue to need to be decided at the national level.

Alexandra Pygall Stephenson Harwood LLP [email protected] 30th November 2017

5 Note that in respect of European patents, Article 24(4) of the Brussels I Regulation compulsorily allocates jurisdiction over validity to the courts of the Member State in which the patent is registered, so this question would only be relevant to foreign patents registered outside the EU.