Oxonica Energy Limited v Neuftec Limited, 5 September 2008 [2008] EWHC 2127 (Pat)

This case has emphasised the importance of properly understanding in detail and making clear what the parties to a licence agreement want to license and on what terms. The agreement in question was very ambiguously drafted and revealed ignorance of basic concepts of patent law.  

The agreement embodied an exclusive patent and knowhow licence granted by Neuftec to Oxonica relating to fuel additives. At the time of the agreement, Neuftec had made a PCT application; no patents had yet been granted. Under the agreement, Neuftec granted an exclusive licence under the “Licensed Know-How, the Licensed Application and/ or Licensed Patent [defined terms] in all fields to make, manufacture, use, sell and/or otherwise exploit the Licensed Products throughout the Territory.” Licensed Products was defined as “any product, process or use falling within the scope of claims in the Licensed Application or Licensed Patent” (emphasis added). Royalties were payable upon the revenue received by the Licensee from the sale of the Licensed Products.  

One major issue that arose was whether, once patents were granted, the term Licensed Products encompassed products which fell within the scope of the claims of the Licensed Application (e.g. the PCT application) but did not fall within the narrower scope of the claims of the granted patents. It came down to the construction of the word “or” in the definition of Licensed Products. Oxonica argued that the term referred to those products within the scope of claims in the Licensed Application or Licensed Patent “as the case may be”; i.e. they are strict alternatives. Thus, royalties would not be payable once narrower patents were granted. Neuftec, on the other hand, argued that it meant the Licensed Application or Licensed Patent “or any of those”, so that royalties would continue to be payable.  

The Judge struggled with both interpretations, finally deciding in favour of Neuftec. Otherwise, he reasoned, one effect would be that if Oxonica’s products did not fall within the scope of the licence in certain territories where patents were granted, they would no longer be able to use the Licensed Know-How, and that could not have been intended. The test was to assess which interpretation best accorded with business common sense, so as to give effect to the commercial purpose of the agreement.

Another issue arose from the term “Licensed Application”. This was defined as the PCT and “any continuation, continuation-in-part or divisional applications thereof as well as foreign counterparts and re-issues thereof”. The Judge was surprised by this language given that it includes technical expressions used in US patent law, and that it was an English law agreement. The effect of the wording was that Licensed Application could include an “almost unlimited” number of continuing applications in the US, with the claims becoming ever wider.  

The Judge considered that if royalties had to be paid in respect of “Licensed Products” falling within the claims of all such applications, that would prove to be too much and that royalities should be limited only to products falling within the claims of the PCT application. On the other hand, it was clear that it was intended that an exclusive licence was to be granted with respect to all applications claiming priority from the PCT. In the event, the Judge concluded that all of the definitions had to be interpreted according to their context, and that one and the same defined expression may bear different meanings in different parts of the agreement. He concluded that “Licensed Products” had a narrower meaning in the context of the royalty clause than it did in the context of the licence clause.  

Irrespective of the particulars of this case, it reminds practitioners and clients of the importance of having a very clear understanding of the commercial and legal position to minimise ambiguities. However, the Judge’s requirement that those drafting agreements should look at all possible contexts of any particular definition is unusual and likely to be difficult to apply in practice. Oxonica has lodged an appeal, and it remains to be seen whether the Court of Appeal will uphold this approach.