This article was first published on Lexis®PSL Dispute Resolution on 15 January 2018

1. What is the significance of this case?

Teva v AstraZeneca [2017] EWCA Civ 2135 is the latest case in a line of cases showing the way in which English courts construe written commercial contracts has changed over the last couple of years. In essence, when construing written commercial contracts, English courts have gone back to giving greatest weight to the strict literal interpretation of the wording used in the contract, and are giving less weight to constructions based on “business common sense”, especially where the court considers that a written contract is sophisticated and complex and was negotiated and prepared with the assistance of skilled professionals.

2. What was the case about?

AstraZeneca had a patent covering the pharmaceutical compound rosuvastatin, the active ingredient in certain statin drugs which AstraZeneca sells under the brand name Crestor®. AstraZeneca also obtained a Supplementary Protection Certificate (SPC) for rosuvastatin. An SPC is an intellectual property right that is distinct from the original patent but provides similar protection for pharmaceutical products which have obtained regulatory marketing authorisations. The SPC system was set up to compensate pharmaceutical manufacturers for the considerable length of time it can take between filing a patent application and obtaining the regulatory marketing authorisation required for a pharmaceutical product to be supplied. AstraZeneca’s SPC was due to expire on 3 July 2017.

Teva developed a generic version of rosuvastatin and wished to launch it in Portugal. Teva obtained a marketing authorisation for its generic product in 2012. AstraZeneca subsequently issued arbitration proceedings against Teva seeking an order to prevent Teva selling its generic product in Portugal. Teva challenged the validity of the patent in their defence, and launched the product in Portugal during February 2013.

Shortly after, AstraZeneca and Teva decided to settle the dispute by entering a settlement agreement governed by English law. Teva agreed to keep its generic product off the market in Portugal until 3 July 2017 (i.e., the date AstraZeneca’s SPC was due to expire). AstraZeneca agreed to withdraw and discontinue its actions against Teva in relation to the product in Portugal.

The settlement agreement was stated to be full and final settlement of the dispute in relation to AstraZeneca’s “Patent”, where the definition of “Patent” was “EP 0521471 [rosuvastatin] and Portuguese Supplementary Protection Certificate 156”.

However, the dispute in this case stems from the fact that it is possible to extend the duration of protection offered by an SPC by obtaining a so-called Paediatric Extension. The system of Paediatric Extensions was introduced to oblige pharmaceutical companies to carry out investigations as to whether and how their drugs could be used to treat children in certain situations (e.g. to find out what are appropriate doses for children of different ages). If the company completes studies in children in accordance with an agreed paediatric investigation plan and either obtains an approved indication for the treatment of children, or in the absence of approval includes the results of the paediatric studies in the product documentation, their reward is a six month extension to the term of the SPC. AstraZeneca obtained a Paediatric Extension for its SPC, thereby extending the SPC protection to 29 December 2017.

AstraZeneca argued that its Paediatric Extension enabled it to continue to enforce its rights, and in April 2017 AstraZeneca issued arbitration proceedings seeking an order to prevent Teva from selling their generic product in Portugal until after 29 December 2017.

Teva, in response, commenced proceedings in the English court, seeking a declaration that once the date of 3 July 2017 passed, then under the terms of the settlement agreement Teva would be free to launch its generic product in Portugal.

3. What was the decision?

The court of first instance found in favour of AstraZeneca, deciding that the Paediatric Extension was not covered by the patent settlement and therefore AstraZeneca was free to enforce its rights against Teva. The judge said it would have been “commercially absurd” for AstraZeneca to have agreed to allow Teva to market before expiry of the Paediatric Extension.

The Court of Appeal overturned this ruling, and decided, simply, that the Paediatric Extension is not a separate right to the SPC but is merely an extension of the duration of the SPC, and therefore AstraZeneca cannot bring a claim against Teva based upon infringement of the SPC as extended by the Paediatric Extension. Further, since 3 July 2017 is an explicit date stated in the settlement agreement, this remained the date after which Teva could launch its generic product in Portugal.

The Court of Appeal judge added, as an aside, that even if commercial common sense was relevant to the interpretation of the terms of the settlement agreement, then the overall commercial picture must be analysed. For example, although allowing Teva to market its product whilst AstraZeneca’s SPC remains in force appears an ill-judged concession, AstraZeneca has other “undoubted commercial benefits” from the settlement, such as the removal of the risk of the patent being found invalid and revoked.

4. How has the way in which English Courts construe written commercial contracts evolved?

The way in which the English courts construe commercial contracts has been evolving over recent years. The courts had been moving away from strict literal interpretation of the language used in written contracts and giving greater weight to arguments on construction based on “business common sense”. However, the 2015 Supreme Court case of Arnold v Britton [2015] UKSC 36 warned that in some instances, too much emphasis had been placed on considering commercial common sense, and that a strict literal interpretation of the language of the agreement should not be undervalued. Priority should therefore be given to the natural meaning of the words, even where the result of doing so might be considered unfair or commercially absurd.

In particular, Arnold v Britton held that if the wording used in a written commercial contract is clear and there is no manifest error or ambiguity, then considerations of “business common sense” do not arise even where the result might be considered unfair or commercially absurd. Lord Neuberger noted that “a court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed. […] it is not the function of a court when interpreting an agreement to relieve a party from the consequences of his imprudence”.

In a subsequent Supreme Court decision, Wood v Capita [2017] UKSC 24, the court somewhat softened the hard line taken in Arnold v Britton. One of the Supreme Court judges noted that “textualism and contexualism are not conflicting paradigms” in the field of contractual interpretation, but rather they are different approaches for differing situations: “some agreements may be successfully interpreted principally by textual analysis, for example because of their sophistication and complexity”; whereas other may be interpreted with a “greater emphasis on the factual matrix, for example because of their informality, brevity or the absence of skilled professional assistance”. The implication is that where a written contract is sophisticated and complex, and has been negotiated and prepared with the assistance of skilled professionals then much greater weight will be given to the literal meaning of the words used, particularly where the contract is clear and there is no manifest error or ambiguity. This will apply even where a literal interpretation could be considered unfair or commercially absurd.

5. What is the significance of the decision?

It will come as no surprise to most practitioners that deal with patents, SPCs and Paediatric Extensions that Paediatric Extensions are not a separate form of exclusive right – they are merely extensions to the duration of SPCs. Accordingly, a definition of “Patent” that included the SPC would also inherently include any Paediatric Extension. In fact the Court of Appeal did not spend much time on this point in it judgment, merely stating “The critical point is that a Paediatric Extension is just that, an extension of SPC 156” and therefore “the clear and natural meaning of the definition was such as to include any extension to the period of the SPC such as was effected by the Paediatric Extension”.

The interesting aspect of the Teva v AstraZeneca judgment is that the court did not refer to the textualism and contexualism balancing approach set out in Wood v Capita, but instead simply relied on the approach of Lord Neuberger in Arnold v Britton. Where the wording of a written contract is clear and there is no manifest error or ambiguity in the wording, then consideration of business common sense should not be allowed to change the natural meaning of the words used.

Even though the Court of Appeal in Teva v AstraZeneca did not refer to the balancing approach set out in Wood v Capita, arguably the decision is still consistent with Wood v Capita because the settlement agreement would likely be regarded as sophisticated and complex and to have been negotiated and prepared with the assistance of skilled professionals. So, following the approach in Wood v Capita, a more literal approach to construction would be appropriate.

It might well have been the case that AstraZeneca did not intend to allow Teva on the market before the SPC (including any Paediatric Extension) had expired, and Teva may have even accepted that principle. However, the Court of Appeal was not willing to save AstraZeneca by departing from the ordinary meaning of the words used in the settlement agreement to give effect to “business common sense” arguments.

6. Could AstraZeneca have avoided the issue?

AstraZeneca and Teva are both large international pharmaceutical companies and both will have a detailed knowledge of how the SPC and Paediatric Extension regimes operate. AstraZeneca could have avoided the issue by giving two alternative dates in the settlement agreement for when Teva could launch its generic product, an earlier date for if no Paediatric Extension was obtained and a later date if a Paediatric Extension was obtained. Alternatively, the settlement agreement could have been drafted less specifically so that Teva would be allowed on the market in Portugal, only when the exclusivity under the Patent/SPC ceased. However, it is possible that as part of the settlement negotiation Teva might have insisted on having a fixed date so that it could make preparations to launch its generic product.

7. What are the practical implications of the judgment for practitioners?

The case emphasises that where the wording of a written contract is clear and there is no manifest error or ambiguity in the wording, the court will follow a literal approach to interpretation as per Arnold v Britton. This remains consistent with Wood v Capita if the agreement is sophisticated and complex and was negotiated and prepared by skilled professionals. In such case there will be little scope for invoking interpretations based on “business common sense” even if a literal interpretation might be considered unfair or commercially absurd.

Teva v AstraZeneca reinforces the necessity for practitioners engaged in negotiating and drafting commercial contracts to achieve clarity, avoid ambiguity and to cover reasonably foreseeable potential future scenarios (such as the grant of a Paediatric Extension, a possibility that the court in Teva v AstraZeneca concluded was “probable”). The English courts appear to be increasing reluctant to intervene through contractual construction to rescue a contracting party if there has been an oversight in the contract drafting that results in what might be considered an unfair or commercially absurd consequences.