In Oxonica Energy Ltd v Neuftec Ltd  EWCA Civ 668, the Court of Appeal of England and Wales upheld a judgment of the High Court. It was found that a licensee under a patent and know-how licence could not use the licensed know-how disclosed to it to develop and sell products outside the jurisdiction of the licence without incurring liability to pay royalties to the licensor. In reaching this conclusion, a distinction was made between what was licensed and what was royalty-bearing.
Neuftec invented a fuel additive that improved fuel efficiency and reduced emissions. It filed an application for a patent under the Patent Cooperation Treaty (PCT), which it then licensed to Oxonica. In time, patents were granted under the PCT application, many of which were narrower in scope than the original application as a result of prior art in the individual territories.
Oxonica developed a commercial product based on Neuftec’s technology, which it called Envirox. Envirox fell within the claims of the European patents and Oxonica paid royalties to Neuftec. Oxonica then informed Neuftec that it had developed a new product, Envirox 2, which did not fall within the scope of the European patents and that it did not propose to pay royalties to Neuftec on the Turkish sales of Envirox 2.
The agreements between Neuftec and Oxonica stated that a royalty was payable on any product “falling within the scope of claims in the Licensed Application or Licensed Patent.” “Licensed Application” meant the PCT application and certain related applications; “Licensed Patent” was defined as “any patent issuing from the Licensed Application thereof as well as foreign counterparts and reissues thereof”.
In the High Court, the judge held that any product covered by the claims of the PCT application was a product falling within the scope of “claims in the Licensed Application or Licensed Patent.” This interpretation meant that Oxonica was liable for royalties on sales of Envirox 2.
Oxonica appealed, arguing that the correct interpretation of the provision was that when and if the PCT application was superseded by a national application, it was the claims of that application that determined whether or not royalties were payable. Once that national application matured into a granted patent, it was the claims of the patent as granted that determined the royalty position. In other words, the position in any country within Oxonica’s territory would change over time.
Neuftec put forward yet another interpretation, which was that the phrase “Licensed Application or Licensed Patent” signified alternatives, such that royalties were payable on any product within the meaning of either “Licensed Application” or “Licensed Patent”.
COURT OF APPEAL DECISION
The Court of Appeal upheld the decision of the High Court, finding that Oxonica’s interpretation of the agreements overlooked the fact that the licence was a patent and know-how licence and that “it offended one’s business sense” to say that Oxonica were to get free use of the know-how in every country where there was to be no patent or a restricted patent. The Court of Appeal acknowledged that in such a country third parties would be free to compete with the licensee but held that the payment in this country was in respect of the “flying start” which the know-how gave to the licensee. Competitors, on the other hand, would have to commence their research and development from scratch.