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Cite as: [1998] EWHC Patents 314

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British Technology Group Ltd v. Boehringer Mannheim Corporation, Depuy Orthopaedics Inc [1998] EWHC Patents 314 (25th June, 1998)

CH 1997 B No. 5768

IN THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

PATENTS COURT

Before: THE HON. MR. JUSTICE LADDIE

 

IN THE MATTER OF AN AGREEMENT DATED 28TH FEBRUARY 1989 BETWEEN NATIONAL RESEARCH DEVELOPMENT CORPORATION AND BOEHRINGER MANNHEIM CORPORATION

 

B E T W E E N

 

BRITISH TECHNOLOGY GROUP LTD

Plaintiff

 

- and -

 

 

(1) BOEHRINGER MANNHEIM CORPORATION

(2) DEPUY ORTHOPAEDICS INC.

Defendants

 

Mr. Christopher Floyd QC and Mr. Pushpinder Saini instructed by Bird & Bird for the Plaintiff
Mr. Simon Thorley QC and Mr. David Lloyd Jones instructed by Simmons & Simmons for the Second Defendants

 

Hearing date: 15 June, 1998

JUDGMENT

This is the official judgment of the court and I direct that no further note or transcript be made

DATED: 25th June 1998

Mr. Justice Laddie:

Introduction

1. The plaintiff in this matter is British Technology Group Ltd. ("BTG") which is the statutory successor in title of the National Research Development Corporation ("NRDC"). By this Originating Summons, BTG seeks declarations relating to the true construction of an agreement between it and the first defendant, Boehringer Mannheim Corporation ("BM") dated 28 February 1989 (the "February 1989 Agreement"). It is accepted by the parties that the second defendant, DePuy Orthopaedics Inc. ("DePuy"), now stands in the shoes of BM.

2. These proceedings came before Pumfrey J. in February of this year on an application by DePuy to set aside the leave granted by Master Bowman to serve it out of the jurisdiction. In giving judgment for BTG, Pumfrey J. set out the factual background to the proceedings and the relationship between the parties. Both BTG and DePuy agree that his summary is essentially correct. The following recital of the background is largely based upon it.

Background

3. BTG’s business includes licensing patented inventions. The February 1989 Agreement relates to certain pending patents and applications covering an invention concerning artificial hip joints. The invention was made by a gentleman called Church and I will refer to it and the patents and applications covering it by reference to his name. The Church patents and applications licensed in 1989 cover the United Kingdom, France, West Germany (as it was then), Ireland, Switzerland and the United States. At the date of the licence, patents had been granted in all these countries except Ireland and the United States.

4. So far as the United States is concerned, there is a special problem. In contrast to most of the Western world, patents in the United States are, subject to a number of conditions, generally granted to the first inventor to make the invention, rather than the first to file a patent application. That means that a later-filed application can affect one filed earlier in relation to the same, or a similar, invention. In the United States, Church was filed in 1983, claiming priority from 7 April 1982. In November 1983, a patent referred to in these proceedings as Noiles was filed in relation to the same or a similar invention. Noiles was an employee of a corporation called Joint Medical Products Corporation ("JMP") which disposed of its business to Johnson & Johnson Professional Inc. ("JJP") in 1995.

5. An artificial hip joint consists of three parts, the ball, the bearing and the cup. The bearing fits into the cup which is implanted into the patient’s pelvis. The bearing and cup together form a socket. The socket retains the ball which is attached to a stem which is implanted in the patient’s femur (thigh bone). There are certain standard dimensions in the industry, so that one manufacturer’s ball can be used with another manufacturer’s socket. Although the Noiles and Church inventions are the same or very similar, the Church patents and applications have claims directed to the socket whereas the Noiles patent has claims both to the socket alone and to complete joint, i.e. the ball and socket together.

6. Between 1985 and 1990 DePuy (which is an old-established maker of prosthetic devices) had an agreement with JMP under which DePuy’s salesforce in the United States marketed JMP’s products. It seems that DePuy sold its own ball and socket components, but also sold JMP sockets. DePuy were notified of the Noiles patent when it was granted, in 1987. DePuy told JMP that DePuy had made the same invention at an earlier date, and in 1988 JMP applied to the US Patent Office for a so-called "reissue" of the Noiles patent. These proceedings are still pending.

7. In 1987, DePuy first became aware of the Church patent application in the UK. It formed the view that sales of DePuy’s product outside the United States might require a licence from BTG, and sales in the US might also require a licence if a US patent was granted on the Church application. It also appeared that Church was available as prior art against the Noiles patent, potentially undermining the validity of the latter. The proceedings which would decide whether and to what extent Church was available against Noiles would be determined in proceedings called an ‘interference’. This interference was initiated ("declared") on 14 January 1992.

The February 1989 Agreement

8. It was against this background that the February 1989 Agreement was entered into. In many respects it is a standard patent licence agreement. However, because of the close similarity between the inventions the subject of the Church patent application and the Noiles patent in the United States, the possibility of interference proceedings and the further possibility that DePuy’s products might fall within the scope of the Noiles patent and therefore be the subject of patent infringement proceedings brought by JMP, the agreement contains special provisions relating to possible future conflicts between JMP and BTG relating to their respective patent rights. It is those provisions which are at the heart of the conflict which is the subject of this Originating Summons. Although I will need to consider the terms of the February 1989 Agreement in some detail, for the moment it suffices to say that Clause 3(4) contains provisions which contain certain financial safeguards for DePuy in the event that BTG enters into a settlement of the interference proceedings between it and JMP.

Events subsequent to the Agreement.

9. In April 1995 JMP sued DePuy for infringement of the Noiles patent, alleging infringement of claims 4 and 8. This action was started in the (Federal) District Court of Connecticut. The action was started although the Noiles patent had not been reissued, and although the interference with Church had not been decided. There are apparently 11 defendants in the Connecticut action, which has been stayed against all of them except DePuy. This action is proceeding in the Connecticut court, but no date has yet been set for trial. JMP claim triple damages for wilful infringement - a type of relief which is available under United States patent law.

10. On 27 March 1996, BTG entered into an agreement, entitled "Settlement Agreement", with JMP and JJP. This appears from its recitals to have as its purpose the resolution of issues in the interference and to settle it on the terms set out. It contains an agreement to submit the interference proceedings to arbitration, and different revenue sharing provisions, one appropriate to a victory for the Noiles patent, and the other for a victory by the Church patent. The interference was duly referred to an arbitrator, who in an unreasoned award effectively awarded priority to Noiles. That award is dated 30 September 1996.

11. In January 1997, DePuy applied in the Connecticut proceedings to make BTG a third party to the patent infringement proceedings. Leave was granted in Connecticut in September 1997 and service was effected on BTG in October. On 20 October 1997, these English proceedings were started.

The Connecticut Third Party Complaint

12. The Connecticut third party complaint appears, from the Motion for leave to file second amended counterclaim and third party complaint, to claim an indemnity against BTG for the amount of damages, if any, which JMP recovers against DePuy for infringement of the Noiles patent. The basis of the indemnity is put explicitly on the basis of clause 3(4) of the February 1989 Agreement and the Settlement Agreement. In short, DePuy says that if it is obliged to pay JMP/JJP more as a result of the infringement of Noiles than the total royalty obligation under the licence, then BTG is in breach of clause 3(4) and obliged to indemnify DePuy. DePuy says that BTG is in breach of the licence agreement by failing to obtain a suitable licence under Noiles covering the whole of the period for which DePuy is alleged to have infringed and the future. Thus, the true construction of the settlement agreement and of the licence agreement are directly in issue in the Connecticut proceedings by way of a third party complaint which was commenced shortly before the present proceedings. DePuy has also amended its counterclaim against JMP/JPP to claim relief for tortiously inducing a breach of the February 1989 Agreement. The breach is alleged to be entering into the settlement agreement in breach of clause 3(4) of the licence.

13. There are further procedural steps which have been taken in the Connecticut proceedings but they are not relevant to the issues which arise before me now.

The Originating Summons

14. By these proceedings, BTG seeks clarification of its contractual obligations to DePuy. Although the issue of the true construction of the February 1989 Agreement has been raised by DePuy in its counterclaim in Connecticut, Pumfrey J took the view that the English Court should assume jurisdiction because the issues before the United States court raised questions of construction as a matter of English law, which is the relevant law of the February 1989 Agreement, and because he came to the conclusion that declaratory relief from the English Court would provide a rapid resolution of the dispute between the parties.

The detailed provisions of the February 1989 Agreement

15. Although it was entered into on 28 February 1989, Clause 2 of the agreement provides that it shall be deemed to have come into force on the "Effective Date" and shall be read and construed accordingly. The Effective Date is defined as 1 October 1988 (Clause 1(1)). The main licence provisions are included in Clause 3 which, so far as relevant, reads as follows:

"Licences
3(1) [BTG] agrees to grant [DePuy] Licences to use sell and otherwise dispose of Licensed Products in the territories specified in Part I of the First Schedule hereto.
(2) IN the event that a patent is granted pursuant to the Application specified in Part II of the First Schedule hereto:-
(i) [BTG] shall give prompt written notification to [DePuy] of such fact
(ii) [DePuy] shall have the option ... to be licensed under such granted patent
(iii) if such option is exercised [DePuy] shall thereafter be licensed to make, use sell and otherwise dispose of Licensed Products in the USA in accordance with the terms of this Agreement and at no extra cost.
(3) THE said Licences shall be non-exclusive.
(4) [BTG] agrees that it will not enter into any agreement to settle, compromise, or terminate an Interference in the United States Patent Office involving [BTG] and Douglas Noiles or [JMP] over the reissue, amendment, continuation of the United States Patent 4,678,472, or any present or future claims contained therein ... unless the terms of such settlement compromise or termination provide [DePuy] with a non-exclusive license to manufacture and sell products that otherwise infringe The Noiles Patent at no increase in [DePuy’s] total royalty obligation as contained in this Agreement."
16. Some of the expressions used in this Clause are defined or explained elsewhere in the agreement. Part I of the First Schedule referred to in Clause 3(1) contains a list of all the Church European patents or patent applications. Part II of the First Schedule referred to in Clause 3(2) contains only the Church United States application. Clause 3(1) and (2) refer to "Licensed Products". These are defined by reference to Clause 1(2) and (3):
"(2) "the said Patents" shall mean:-
(i) the Applications for Patents and Patents specified in Part I of the First Schedule hereto and any Patents which may be granted pursuant to such Applications and
(ii) in the event that the option specified in Clause 2(2) hereof is exercised by [DePuy] any Patents granted pursuant to the Application specified in Part II of the First Schedule hereto ...
(3) "Licensed Products" shall mean endoprosthetic devices which fall within the scope of any claim of any of the said Patents for any territory for which licences are to be granted hereunder and any spare or replacement parts thereof."

17. Clause 6 is concerned with royalties. The major provisions as far as these proceedings are concerned are as follows:

"(2) A royalty at the rates specified in sub-clauses (3) and (4) of this Clause shall be due from [DePuy] to [BTG] and shall be payable in the manner hereinafter provided in respect of all Licensed Products made or used or sold or otherwise disposed of by the Licensee in any territory in which [BTG] has a granted Patent.
(3) UNLESS sub-clause (4) below applies the royalty rate will be Seven and a half per centum (71/2%) of the currently applicable international distributor list price for the Licensed Product as published by [DePuy].
...
(6) IN the event that upon conclusion of Interference Proceedings in the US Patent Office between US Patent No. 4678427 and [BTG’s] US Patent Application No. 021609:-
(i) A US Patent is granted to [BTG] pursuant to its said Application and
(ii) [DePuy] is infringing the claims of both such granted US Patent of [BTG] and US Patent No. 4678427 (or any reissue thereof)
(iii) [BTG] is not entitled to grant [DePuy] a sub-licence under the said US Patent no. 4678427 (or any reissue thereof) as set out in Clause 3(4) hereof
then [BTG] will enter into negotiations with [DePuy] under this Clause in the light of royalties [DePuy] may have to pay in respect of said US Patent no. 4678427 (or any reissue thereof)."

18. Clause 6(4), which I have not set out, provides for a lower royalty rate (4%) if the metal components of the Licensed Products are made with a porous surface of certain defined characteristics. I was told that this surface treatment is the subject of a third party’s patent and that the reduction in royalty rate can be taken to be intended to take account of DePuy’s obligation to pay royalties to that third party. For the purpose of this judgment I will treat the royalty rate as being at a uniform rate of 71/2%.

19. For the sake of completeness I should also refer to Clause 4(1) which is in the following terms:

"4(1) THE said Licences (whether granted or to be granted) shall be subject to the terms and conditions contained in this Agreement and any formal Licence to be granted under the Patents of the United Kingdom shall be in the form set forth in the Second Schedule hereto."

20. Although this was raised during the course of argument, I understand both Mr. Floyd QC for BTG and Mr. Thorley QC for DePuy now to agree that it relates only to the licences provided for by Clause 3(1) and (2) of the February 1989 Agreement and has no direct relevance to Clause 3(4). I think they are right.

The Law

21. There is no dispute between the parties as to the legal principles to be applied in determining the proper meaning of a contract. As Saville J. said in Vitol B.V. v. Compagnie Europeene Des Petroles [1988] 1 Lloyds Rep. 574 at 576:

1. "The approach of the English law to questions of the true construction of contracts of this kind is to seek objectively to ascertain the intention of the parties from the words which they have chosen to use. If those words are clear and admit of only one sensible meaning, then that is the meaning to be ascribed to them and that meaning is taken to represent what the parties intended. If the words are not so clear and admit of more than one sensible meaning, the ambiguity may be resolved by looking at the aim and genesis of the agreement, choosing the meaning which seems to make the most sense in the context of the contract and its surrounding circumstances as a whole".

22. In most cases words are capable of bearing more than one meaning, so that the reasonableness of alternative constructions is one of the matters which may be taken into consideration. Within the limits of flexibility of the English language, the court will strive to avoid any construction which is absurd or repugnant. Furthermore, although the presumed intention of the parties must be assessed objectively from the words they have used in their contract and therefore evidence of their subjective intentions is inadmissible, the court is entitled to pay regard to the factual matrix known or taken to be known to the parties at the time the contract was entered into (see Prenn v. Simmonds [1971] 1 WLR 1381 and ICS Ltd v. West Bromwich B.S. [1998] 1 WLR 896). As is becoming more common now in the light of the latter authorities, both parties put in evidence of the factual matrix. In the end I do not think that that material adds significantly to an elucidation of the meaning of the February 1989 Agreement.

The First Question

23. Two questions of construction are raised in these proceedings. The first is expressed as follows by Mr. Floyd.

2. "Does Clause 3(4) of the Agreement impose an obligation on BTG to grant to DePuy a non-exclusive licence to manufacture and sell products that otherwise infringe the Noiles patent from 30 September 1996 (i.e. the date of the Award in the interference arbitration) or 27 March 1996 (i.e. the date of the joint submission to arbitration in the interference) or some other recent date (BTG’s case) or does this clause require the licence to be retrospective in effect such as to provide an indemnity to DePuy for its acts of infringement prior to these dates (DePuy’s case)."

24. At the outset it seems to me the question expressed in this way betrays some mischaracterisation of the scope of Clause 3(4). First of all, it does not oblige BTG to grant any licence to DePuy. It only imposes a fetter on BTG’s ability to settle or compromise any interference concerning the Noiles patent. It may not settle unless certain safeguards are secured for DePuy. Secondly, it is not accurate to say that DePuy’s case is that the clause requires BTG to provide DePuy with an indemnity for its acts of infringement of the Noiles patent. DePuy’s case is only that, if BTG wishes to settle any interference, then it must include terms which protect DePuy against all claims of infringement of the Noiles patent. It does not require BTG to settle on such terms. It does not put in place an automatic indemnity in favour of DePuy.

25. These criticisms aside, the question as expressed by Mr. Floyd identifies the first dispute between the parties. Clause 3(4) allows BTG to settle any interference which may be declared. The term of such a settlement must "provide [DePuy] with a non-exclusive license to manufacture and sell products that otherwise infringe The Noiles Patent". The issue is whether it is permissible for BTG to settle the interference if the licence under the Noiles patent covers only prospective acts of DePuy. This is BTG’s case. DePuy argues that BTG is only allowed to settle on terms which give DePuy the necessary licence for all acts, past and future, which fall within the scope of the Noiles patent. If BTG settles without securing such a licence for DePuy it is in breach of contract. DePuy says that that is what BTG has done. As a result JMP is continuing to pursue it for triple damages for the nearly ten years worth of alleged infringements prior to 1996. DePuy’s claim in the Connecticut proceedings is that, to the extent that JMP succeeds in recovering any damages above the permissible royalties (as to which see below) under the licence provided for under Clause 3(4), that is a direct result of and attributable to BTG’s breach of contract and is therefore recoverable by DePuy from BTG. It is for the Connecticut court to determine whether such damages are recoverable if there has been a breach of contract.

26. BTG’s argument is as follows. A licence is conditional permission to do an otherwise prohibited act in the future. The word "licence" is not apt, without specific words to the contrary, to cover past prohibited and infringing activity. In support of this Mr. Floyd referred me to a number of dictionary definitions of that word and to three cases, Winter Garden Theatre (London) Limited v. Millenium Productions Limited [1948] AC 172, Allen & Hanbrury’s Limited v. Generics (UK) Limited [1986] RPC 203, and IDC Group Limited v. Clark [1992] 2 EGLR 484. He says that the prospective nature of the licence to be secured under Clause 3(4) is emphasised by the fact that it must be the subject of a "royalty obligation". The word "royalty", like the word licence itself, is not apt to cover damages for past infringements without special and clear wording to the contrary. Furthermore Mr. Floyd relied on the provisions of clause 6(6)(iii) which refers to the licence to be granted under Clause 3(4) as a "sub-licence". This, he says, means that it was contemplated by the parties that BTG would obtain a licence under the Noiles patent and then sub-licence on to DePuy. This also suggests prospective rights. Furthermore, any attempt to read Clause 3(4) in a way which pressurises BTG to secure favourable treatment for DePuy in respect of past infringements of the Noiles patent would be inconsistent with provisions of Clause 10 of the Agreement which excludes any warranty that operating under Church will not infringe any third party’s patents.

27. Mr. Thorley argues that the crucial words in Clause 3(4) are those which provide that that licence to be negotiated as part of the settlement of any interference will be to manufacture and sell products "that otherwise infringe The Noiles Patent". What is in contemplation is a licence which renders all infringements non-infringing. As a consequence it must look both to the past as well as the future. Mr. Thorley accepts that his argument would have been more difficult if the Clause had provided the licence was to manufacture or sell products "falling within" or "under" the Noiles patent.

28. None of the dictionaries relied upon by Mr. Floyd demonstrate that the word "licence" is necessarily tense sensitive. I think they are all neutral on that point. Similarly the cases he relies upon do not really address the question of the normal tense of the word. It seems to me that whether or not a licence is prospective only or retrospective in effect must be determined by reference to the contents of the agreement as a whole. The February 1989 Agreement itself illustrates that a licence can be retrospective. Although it was entered into in February 1989, its effective date is some 7 months earlier. This means that it granted licences in respect of antecedent activities. It is no misuse of language to refer to such activities as "licensed" even though there was no licence in place at the time they were performed. However in this case the terms of the Agreement itself make it clear that the licence applies to such prior activities. Similarly Clause 3(2)(iii) is in terms which suggest that the licence referred to there is only in respect of future activities.

29. On the other hand I do not accept Mr. Thorley’s argument. In my view the words "otherwise infringe" in Clause 3(4) do not mean anything more than "fall within the scope of". They do not mean that -all acts, whether past or future, which would otherwise be treated as infringements must be covered by the licence to be secured by BTG for the benefit of DePuy if an interference is to be settled.

30. I have come to the conclusion that in relation to this issue Clause 3(4) taken as a whole is complied with if BTG secures for DePuy a licence under the Noiles patent which covers only the future. It may, but need not, cover the past as well. This seems to me to be the natural meaning of the words "the terms of such settlement ... [must] provide [DePuy] with a ... licence to manufacture and sell". The matter can be looked at in this way. If BTG secures for DePuy a licence under the Noiles patent relating only to future manufacture and sale, would it fall within the latter words cited from Clause 3(4)? I think it would. I understood Mr. Thorley to agree. The fact that a broader licence might be of benefit to DePuy does not mean that BTG was under an obligation to secure it. Furthermore it seems to me that had it been the intention of the parties to ensure that the licence to be secured by BTG was to cover all past infringements by DePuy (which, as the eventuality demonstrates, might cover many years production and sale) it would have been expected to say so expressly. There is nothing to suggest, either in the February 1989 Agreement itself or in any of the factors put forward by the parties as part of the surrounding matrix that it was a requirement that settlement of any interference should be made dependent upon JMP abandoning the greater part of the triple damages which it might recover for many years of infringement of the Noiles patent.

31. It follows that in relation to this issue, BTG meets its obligations if it enters into a settlement which secures a suitable licence to DePuy under the Noiles patent in respect of subsequent acts of manufacture and sale. To comply with the requirements of Clause 3(4) that licence must be effective from the date of entry into the agreement to settle, compromise or terminate the interference. As I understand the submissions made to me, it is not disputed that the date of entry in the agreement to settle the interference here was the date on which BTG and JMP jointly submitted their conflict to arbitration, namely 27 March, 1996.

The Second Question

32. The second question concerns the financial terms of any licence secured under Clause 3(4). There is no dispute between the parties that the Clause requires BTG not to settle the interference unless a cap is put on the royalties to be paid for use of the Noiles patent. Both Mr. Thorley and Mr. Floyd accept that Clause 3(4) can involve a sharing of the royalty "pie" between the Church and the Noiles patents. In other words (and subject to what I have to say below) although DePuy is obliged normally to pay 71/2% of the relevant product price to BTG in respect of use of the Church rights, for the purpose of achieving a settlement some part of that royalty might have to be diverted to pay for a licence under the Noiles patent. This could involve BTG accepting a smaller royalty in respect of Church. Nothing in Clause 3(4) expressly requires BTG to accept a lower royalty in respect of the Church rights but the parties agreed, correctly in my view, that this is one of the possibilities the Clause contemplates.

33. Mr. Floyd puts the construction issue in this way:

3. "Once licensed under the Noiles Patent, is the obligation of DePuy to pay a royalty calculated as a percentage of the currently applicable international distributor list price for the Licensed Product as published by DePuy, to be calculated on the price of the whole product, namely cup, bearing, ball and stem, as claimed in the Noiles patent (BTG's case) or on the price of the cup and bearing alone (DePuy's case)?"

34. In fact, as I understand it, BTG's argument is more refined than this and contains three elements: first that DePuy will obtain the necessary licence under both the Church and Noiles patents for the United States, secondly that throughout the existence of the licence under one or other or both of the licences, DePuy will pay royalties and thirdly that, while operating with the benefit of a licence under Noiles, DePuy would pay increased royalties calculated on the price of the whole product because that is what the claims of the Noiles patent cover. As I understand it, DePuy accepts the first two of these propositions but disputes the third. It says that throughout the licence period the royalty rate is limited to that which would apply under a licence of the Church patent alone.

35. A convenient way to approach this issue and to understand the difference between the parties is to consider what DePuy's obligations under the Agreement would have been absent the complication created by the existence of the Noiles patent. For this purpose it is only necessary to look at the United States of America since the Noiles patent is only relevant to that territory. It also must be borne in mind that the claims of the Church patents and applications cover only the cup and bearing of the artificial hip whereas the Noiles patent includes claims for the whole artificial hip consisting of cup, bearing, ball and stem. I was told that the ball and stem amount to some 80% of the cost of a complete prosthesis, the cup and bearing accounting for the balance.

36. At the time of signing the February 1989 Agreement, DePuy had no obligation to pay any royalties at all in respect of the manufacture and sale of prostheses in the United States. It has no obligation to do so even now. This is for two reasons. First, Clause 6(2) obliges DePuy to pay royalties only in territories in which BTG has a granted patent. Since there was (and still is) no granted Church patent in the United States, there could be no royalty obligation on DePuy. Secondly, even if a patent is granted on the Church application in the Unites States, DePuy is under no obligation to accept a licence under it. On the contrary, Clause 3(2) provides that if such a patent is granted DePuy acquires an option to take a licence. If the option is exercised the licence will be on the same terms as the licences under the European Church patents. But DePuy may choose not to exercise the option. For example it may decide that the patent is invalid or that its current product does not fall within its claims. If it declines to exercise the option it lays itself open to infringement proceedings, but that is a choice it is free to make. In any event, since there is no granted Church US patent, there is no question of the option having been exercised up to now.

37. If and when a Church patent in the US is granted and if DePuy exercises the option open to it pursuant to Clause 3(2), then it will be obliged to pay royalties of 71/2% on the currently applicable international distributor list price for the "Licensed Products". As noted at the beginning of this judgment, Licensed Products are defined as the devices which "fall within the scope of any claim" of the patents listed in Part I or Part 11 of the First Schedule to the February 1989 Agreement. This means that Licensed Products, within the meaning of the Agreement, are devices falling within the claims of the various Church patents and patent applications. Since, as noted above, all of the latter have claims limited to the cup and bearing, the Licensed Products consist of cups and bearings, i.e. sockets, falling within Church. If, for the sake of argument, the international distributor list price of a complete socket is £100, the royalty due is £7.50.

38. It is common ground that patents of the Church and Noiles vintage have a maximum life of 17 years under applicable United States legislation. Assuming that the Church patent issues on 1 January, 2000 and DePuy immediately exercises the option, royalties at the above rate will not commence until that date and will then continue to be payable until 31 December, 2017.

39. Mr. Floyd's argument is that BTG must secure a licence in favour of DePuy under the Noiles patent as the price for being allowed to settle the interference but that the total royalty to be paid by DePuy is capped to 71/2% of the international distributor list price of complete prostheses (i.e. cup, bearing, ball and stem). This is because the Noiles patent has claims for the complete devices. On the basis that the cost split between ball and stem on the one hand and sockets on the other is 80 to 20, if the socket costs £100 (the notional figure I have used for the purpose of illustration) the cost of the complete prosthesis will be about £500. The maximum royalty payable per product is therefore 71/2% of £500, i.e. £37.50. This total royalty is to be split between BTG as owner of the Church patent and whoever owns the rights to the Noiles patent. For example under one possible split of the royalty pie, BTG could continue to recover the full £7.50 it is entitled to under the Church patent and DePuy would be obliged to pay the balance of £30.00 to whoever controls Noiles.

40. In fact the position is somewhat more complicated than this. The Noiles patent was issued on 7 July, 1987. It will continue in force until July 2004. The effect of the provisions of Clause 3(4), if Mr. Floyd is right, is therefore as follows:

(a) For the period from 27 March 1996 (the commencement date of the licence under Noiles) to January 2000 (assuming that that is the date on which Church US is granted), the maximum royalty will be £37.50 per device and will all be payable to the owner of the Noiles rights.

(b) from January 2000 until July 2004, the same maximum royalty of £37.50 will be payable but it will be split between the owners of the Church and the Noiles rights.

(c) from July 2004 until the expiry of the Church US patent in 2017, the maximum royalty will be £7.50 since the only licensed patent then will be Church. All royalties will go to BTG.

41. In summary, DePuy will pay for longer and, at least for some of the time, at a higher rate than it would do if it only had to pay royalties under any Church US patent which might be obtained.

42. Mr. Floyd arrives at this conclusion by arguing that the royalty provisions of the February 1989 Agreement must be applied mutatis mutandis to any Noiles licence secured under Clause 3(4). This is because it is "strongly arguable that the effect and intention of Clause 3(4) of the Agreement is to add the Noiles Patent to Part II of the First Schedule to the [February 1989 Agreement] by including the Noiles Patent as a defined patent within the definitions of Clause 1(2)" (See Plaintiff’s Skeleton Argument paragraph 27(i)). Furthermore he says the words "at no increase in [DePuy's] total royalty obligation as contained in this Agreement" should be construed as if they read "at no increase in the royalty rate per unit as contained in this Agreement".

43. Mr. Thorley argues that the royalty under the Clause 3(4) licence cannot exceed that which would have been due to BTG under the February 1989 Agreement had there been a Church US patent in force. In other words, on the figures and assumptions I have made above, £7.50 per device, that sum to be split between BTG and the owners of the Noiles rights. He appears to concede that the royalties will be payable from the date of commencement of the Clause 3(4) licence (which he had argued to be 7 July 1987 as explained earlier in this judgment) until the expiry of the Church US patent which may be granted in the not too distant future. Even taking the commencement date of the licence as being March 1996, as I have held, this would mean that the royalties would be payable for 21 years. That is four years more than the longest possible duration of any Church US patent or any licence granted under it.

44. I can not accept either of these submissions. I think that the purpose of Clause 3(4) is apparent. The February 1989 Agreement proceeds on the assumption that there was a potential interference between the Church and Noiles patents. This means that they were viewed as covering essentially the same or very similar inventions. If the interference resulted in the Church application surviving and the Noiles patent failing, then Noiles would be removed from the equation. DePuy would simply have to decide whether to exercise its option under Clause 3(2). If Church failed and Noiles survived, then the February 1989 Agreement would become irrelevant to DePuy's business in the United States. It would have to decide whether to seek a licence under Noiles. However there were two other possible outcomes. One, contemplated by Clause 3(4), is that BTG and JMP tried to settle the interference so that both retained their patents for essentially the same invention. It appears to me that what the parties agreed in this Clause was that BTG should not be allowed to settle so as to produce this outcome unless DePuy’s financial position was safeguarded. It had agreed to pay a certain price by way of royalties for the right to exploit the invention in the United States and it was not prepared to allow BTG to settle the interference on terms which exposed it to paying more royalties. If BTG could not come to an agreement with JMP which secured that result, it could not settle. BTG and JMP would then have to fight out the interference with the probable result that either Church or Noiles, but not both, would survive.

45. In my view, when the Clause says that DePuy's "total royalty obligation as contained in this Agreement" will not increase, it means precisely that. It does not mean that the royalty rate will not change, as Mr. Floyd suggested. It means that any settlement arrived at between BTG and JMP could not oblige DePuy to pay more than the total of royalties which DePuy would have to pay under the February 1989 Agreement for Church alone.

46. It appears to me that the provision construed in this way makes sense. DePuy had agreed what it was prepared to pay for rights to the invention. It was not prepared to allow its licensor to agree to a position where essentially the same invention was now protected by two patents in a manner which required it to pay more by way of royalties. JMP and BTG could therefore agree to settle the interference so as to allow both patents to survive but it had to be on terms that they share between them the royalties which BTG could hope to obtain for exploitation of Church in the United States. Such a settlement could not impose on DePuy an obligation to pay any more by way of royalties than the total of the royalties which would be due from it under the February 1989 Agreement. If such an arrangement could not be agreed between BTG and JMP, then BTG was obliged to fight on in the interference.

47. That construction gives effect to the words of the Clause, does not require the Noiles patent to be added notionally to the First Schedule and does not require the words "total royalty obligation" to be substituted by the words "royalty rate per unit" as suggested by Mr. Floyd. I do not accept Mr. Floyd’s argument that the effect and intention of Clause 3(4) is to add the Noiles patent to the First Schedule to the February 1989 Agreement by including it as a defined patent within Clause 1(2). In my view there is nothing in the agreement or the surrounding factual matrix which supports that suggestion. It amounts to a significant re-writing of what the parties had agreed

48. There is, however, one further possible outcome to the interference; BTG and JMP fight on and both Church and Noiles survive. This is expressly contemplated and dealt with by Clause 6(6). BTG and DePuy will try to renegotiate the United States royalties.

49. Mr. Floyd says that the above interpretation of Clause 3(4) cannot be correct. Effectively any licence under the Noiles patent would be royalty free unless and until DePuy exercised its option under Clause 3(2). He says that this would not be reasonable. I do not agree. If DePuy failed to exercise the option once Church is granted, it would lay itself open to infringement proceedings under the Church patent, just as if the Noiles patent did not exist. Similarly it could be said that the construction I have come to is unfair and unreasonable in that if the Church US patent is not issued or is revoked, no royalties would be payable in respect of exploitation in the United States under the February 1989 Agreement and therefore the licence under Noiles would be royalty free in those circumstances also. Even if the parties thought of this possibility it may well be that they considered it so unlikely as not to be worth any special provision. In any event, I do not consider the result as being either unreasonable or unfair. Whichever way it is put, Mr. Floyd’s underlying complaint is that it is unreasonable or unfair that DePuy’s royalty obligations under Church in respect of the United States, no matter how high or low, should cap the amount recovered under a Noiles licence. There is nothing unreasonable or unfair in a licence containing a provision which prevents the licensor from coming to an agreement with a third party which imposes increased financial burdens on the licensee. That is particularly the case where the third party and the licensor are effectively claiming rights in the same invention. Multiple proprietorship may force a division of the spoils rather than a multiplication of the burden on a licensee.

50. Mr. Floyd also suggests that such a fetter on the right to recover royalties under Noiles would make it virtually impossible to settle the interference. Even if this is so, there is no compelling reason why a desire on the part of the licensor to settle the interference should be given priority over the licensee’s financial obligations. If the latter can not be safeguarded, why should the licensor not be required to fight it out with the third party to settle definitively which one owns the relevant patent rights.? Furthermore, it may well be that one or other or both of the parties thought that the strength of BTG’s position in the interference was so strong that it would be able to more or less dictate terms to JMP (This appears to have been the view of Pumfrey J. He said " the parties appear to have contemplated that BTG would be in the driving seat so far as any settlement of the interference with Noiles was concerned, so that it would be open to BTG to negotiate terms that would in effect give DePuy a free licence under Noiles.").


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