Royalty Pharma Collection Trust v Boehringer Ingelheim GmbH: a costly misunderstanding and a lesson on the drafting of royalty clauses

Earlier this month, His Honour Judge Hacon (sitting as a Judge of the High Court) handed down his decision in Royalty Pharma Collection Trust v Boehringer Ingelheim GmbH [2021] EWHC 2692 (Pat)).

The action was brought by Royalty Pharma Collection Trust (“Royalty Pharma”) against Boehringer Ingelheim GmbH (“Boehringer”).

The licence agreement at the centre of the dispute was unusual in that it was governed by German law but provided that the courts of England and Wales had jurisdiction over any dispute. The court was assisted by experts on German law appointed by both parties. I won’t go into the analysis of German contract law interpretation here (although those aspects of the case still make for an interesting read). The case nevertheless delivers an important lesson on drafting royalty clauses whatever the governing law and should be of interest to anyone involved in the drafting and negotiation of patent licence agreements.

Aside from contractual interpretation issues, the case also concerned the infringement of EPC 2000 claims. You can read an analysis of this aspect of the decision by my colleague Florence Pilsner on the Kluwer Paten Blog here: http://patentblog.kluweriplaw.com/2021/10/26/the-english-high-court-applies-german-law-on-epc-2000-claims-in-royalty-pharma-v-boehringer/

At issue in the case was the wording of the royalty clause in the licence agreement and the question of whether the clause meant that:

1. royalties were only payable on sales of products in countries where there were valid claims covering the product; or
2. royalties were also payable on sales of products which were manufactured a country where there were valid claims covering the product.

Royalty Pharma argued for the latter interpretation, alleging that Boehringer had underpaid royalties (to the sum of around EUR 23m) in respect of sale of its Trajenta diabetes product which included the API linagliptin. Boehringer argued for the former interpretation. One of the patents licensed to Boehringer was the German designation of European Patent No. 1 084 705. Importantly, all of the API in Boehringer’s products was manufactured in Germany.

The licence agreement in question was entered into in 2005, assigned to Royalty Pharma in 2011 and then amended in 2015. The 2015 amendment made changes to the royalty clause and it was the effect of these 2015 amendments which were in dispute between the parties.

At the heart of the case seems to have been a misunderstanding by Boehringer of the basis on which royalty payment were due. Since 2011, Boehringer had been paying royalties under the agreement on worldwide sales of Trajenta, including on sales in territories where there were no relevant patents. This was despite the wording of the royalty clause which stated:

BI shall make royalty payments […] on Net Sales of Product in countries where a Valid Claim exists. […] For the avoidance of doubt royalties will not be payable on Net Sales in a country where no Valid Claim exists. 

In 2015, the royalty clause was amended to read:

BI shall make royalty payments […] on Net Sales of Product the development, manufacture, registration, use, import/export, marketing or offer to sell and/or sale of which, but for the Licence, would otherwise infringe a Valid Claim. […] For the avoidance of doubt royalties shall not be payable on Net Sales of Product the development, manufacture, registration, use, import/export, marketing or offer to sell and/or sale of which does not infringe a Valid Claim. 

One of Boehringer's main arguments was that the 2015 amendment did not change the events which triggered payment of royalties. However, after considering issues on the German law of good faith and applying German law principles of contractual interpretation, the court held that the royalty clause as amended in 2015 required the payment of royalties on the manufacture of linagliptin in Germany. Royalty Pharma therefore succeeded in its claim for underpayment of royalties under the amended agreement.

Boehringer had also counterclaimed for overpayment of royalties under the original agreement. By the time of closing, it was common ground that under the original agreement, only sale of a product in a country with a subsisting licensed claim covering the sales of the product gave rise to an obligation to pay royalties. Boehringer’s counterclaim for overpayment of royalties therefore succeeded.

This decision is an important lesson to patent licensors and licensees to bear in mind when agreeing and drafting the basis on which royalties will be calculated. Both approaches outlined above are common in patent licences. While it is generally going to be more favourable for licensees to pay royalties only on sales in countries where there is a valid claim covering the product (regardless of the patent status in the country of manufacture), the extent to which the distinction makes a difference will depend on a number of other issues such as the geographical scope of the Licensor’s patent portfolio and the countries in which the licensee intends to manufacture and sell the licensed products.

The case also highlights the importance of ensuring that everyone with responsibility for calculating royalty payments is familiar with the obligations under the relevant licence agreement. Misunderstandings on this point can be costly.