Licensing: The Dangers of Precedents - Oxonica Energy Ltd v Neuftec Ltd

I learned to draft as a pupil at 9 Old Square, the chambers of Robert Megarry, Lenny Hoffmann, Jeremiah Harman and Nick Patten. Unlike the common law chambers where I spent the first 6 months of my pupillage and indeed every set in which I was subsequently a tenant, there were no copies of Atlkin's Court Forms, the Encyclopaedia of Forms and Precedents or any other precedent book in chambers. When I asked why I was told that precedents were at best a distraction to clear thought and clear expression and at worst a potential danger to both the draftsman and his client. Though the ban on precedent books undoubtedly made my pupillage more difficult than it might otherwise have been, I understood the wisdom of it from the start. Indeed, I applied it to my practice and eventually imparted it to my own pupils.

A case transcript that shows just how wise that policy was is the decision of Mr Peter Prescott QC in Oxonica Energy Ltd v Neuftec Ltd [2008] EWHC 2127. Early in his judgment the deputy judge quoted Nicolas Boileau:

"Ce que l'on conçoit bien s'énonce clairement et les mots pour le dire arrivent aisément".

My translation, which I prefer to Peter Prescott's, is "He who thinks clearly expresses himself clearly the words coming easily." Mr Prescott urged all draftsmen to frame and display that quotation on their desks. "But too often", he lamented "the opposite precept is followed.

"Bits of legal boilerplate are bolted together so that it is the words that are allowed to shape the concept instead of the other way round. In that regard the invention of the word processor has worked wonders. Sometimes, I fear, it has dispensed with the 'concept' altogether. Misfortune not infrequently follows."

The words that spawned this litigation were a seemingly innocuous definition of "Licensed Products" as

"any product, process or use falling within the scope of claims in the Licensed Application or Licensed Patent".

The agreement in which they appeared was a licence to use a technology that had been developed by both licensor and licensee and which was protected partly by a string of patents and patent applications under the Patent Co-operation Treaty ("PCT") and partly by obligations of confidence that bound the licensee. The licensee had agreed to pay a royalty of 5% of the net sale price received by the licensee on the sale of Licensed Products.

The agreement would have been drawn up when the parties were friends and the only patent application in the contemplation of the negotiators and draftsmen was the application for patent protection in a number of countries using the machinery of the PCT. In the intervening period some patents were granted with very broad claims in some countries and in others patents were granted with very narrow ones. Also during that period, the licensee continued to develop the technology with the result that it could get an improved product that fell outside the claims of the granted patents in several countries though not outside the scope of the claims in the original PCT application. The crunch came when the licensee proposed to supply that new improved product obtained from a source other than the licensor and refused to pay royalties on the sales of that product. The licensor argued that the new product was caught by the definition of Licensed Products because that had been the intention of the parties at the time of their agreement. The licensee replied that it was bound only by the plain words of the agreement and that the patent application had been superseded by a patent that had been granted in terms that did not extend to the improved product.

The agreement contained all sorts of eccentric and redundant provisions, some of which referred to US patent law that had no relevance to the UK, that the deputy judge described as malapropisms. Clearly the agreement had been lifted from precedents - though which precedents his lordship knew not – and "assembled in a strange way". In his lordship's words at paragraph [64]:

"The more I read the document, the more I think: 'A little learning is a dangerous thing'. It contains a number of malapropisms: they cause me to believe that the draftsman was not very familiar with patent practice and terminology. It conveys an impression that he was not always clear in his own mind about what he was doing and, when not clear, allowed his word processor to do his thinking for him."

On reading this case I immediately broke into a cold sweat (as one does) and started to review the technology agreements that I had drafted or helped in the last few days. One, which had been drafted by someone else but which contained a lot of my red ink, was a technology evaluation agreement and licence. The other was a draft assignment between co-inventors in return for a share of receipts. Fortunately, I do think before committing pen to paper or at least finger to keyboard and, after stress testing my drafts again by a number of scenarios, found that they were likely to be robust enough to survive the sort of situation that arose in Oxonica.

Although he clearly agonized over his decision comparing the issue to the conundrum of a Necker cube, Mr Prescott found for the licensior. At paragraph [101] he said that:

"the proper way to interpret this Licence Deed is to say that "Licensed Products" means things falling within the scope of claims of the Licensed Application or Licensed Patent as the context may require. Likewise, the definitions of "Licensed Application" and "Licensed Patent" should be understood with the qualification as the context may require."

Having regard to the context, his lordship held at paragraph [102] that royalties are payable on things falling within the scope of claims of the PCT as filed, and nothing else. Accordingly he concluded at paragraph [106] that royalties were payable in respect of any product, process or use falling within the scope of any claim of the PCT application as appended to the Licence Deed, and nothing else, that the new improved product was a Licensed Product as defined, and attracted royalties accordingly.

The deputy judge reached that conclusion by applying the principles on the construction of contracts that Lord Hoffmann had formulated in Mannai Investment Co Ltd v. Eagle Star Assurance [1997] UKHL 19 and Investors Compensation Scheme v. West Bromwich Building Society [1997] UKHL 28; [1998] 1 All ER 98; [1998] 1 WLR 896. Those principles essentially mean that the plain words of an instrument need not be followed slavishly if the result would be absurd, manifestly unjust or contrary to the obvious intention of the parties. Patent lawyers will see echoes of that approach in a whole string of Lenny judgments on the construction of patent claims from Improver Corporation v Remington Consumer Product Limited [1990] F.S.R. 181 to Kirin-Amgen Inc and Others v Hoechst Marion Roussel Ltd and others [2005] RPC 169, [2005] RPC 9, (2005) 28(7) IPD 28049, [2004] UKHL 46, 2005] 1 All ER 667. Indeed Lord Hoffmann's impact on patent law has been very much wider. Though essentially a general chancery practitioner in 9 Old Square, he has demystified much of English patent law on such thorny topics as sufficiency and the test for obviousness from Biogen Inc v. Medeva Plc [1997] RPC 1, [1996] UKHL 18, (1997) 38 BMLR 149 to Conor Medsystems Inc v Angiotech Pharmaceuticals Inc and Others [2008] UKHL 49 (9 July 2008). He had been my pupil master's pupil master and may well have been responsible for master's and my own caution in handling other peoples' precedents. He was a rising young silk when I was a pupil but it was clear even to me that he was heading straight for the House of Lords. I used to take a lot of notice of what he said and did and I like to think that some of his thinking has trickled down to me and through me to my own pupils and tenants.

One of the things that I learned early in my career – possibly form or at least through Lenny – was that an agreement or terms and conditions are tools for managing risk. But they are only tools and not a sufficient protection in themselves. Terms and conditions, for instance, can be compared to a medieval castle which typically had three lines of defence, a moat or commanding position on a rocky outcrop, a curtain wall and the keep itself. Most attacks were repelled at the moat or outcrop. If they made it to  the curtain wall they were met by arrows and boiling oil. If the attackers got as far as the keep, the castle was in trouble because hand-to-hand fighting was all that was left and we all know what happened to Macbeth when he met McDuff. So it is with Ts & Cs. Best practice is the first line of defence. Get that right – that is to say, give the customer what he or she wants - and you won't go far wrong. Insurance is the second line. If you screw up insurance allows you to compensate your customer or injured party. Terms and conditions manage the risk that arises form unforeseen screw-ups that cannot adequately be insured against. Anything more risks being struck down by the Unfair Contract Terms Act 1977 or the common law. The castle analogy applies to all sorts of other legal instruments such as confidentiality agreements. Public access clients are always asking me for a standard NDA and sulk when I refuse to give them one or quote for doing a proper job. But there it is.

So, folks, the choice is clear. Get a cut-price (and maybe not always that much cut price) from someone in factory chambers or a high street or country law firm with a flash website and glossy brochure and risk ending up in court like Oxonica and Neuftec or pay a bit more to go to a member of the IP Bar Association, the Intellectual Property Lawyers Association or a specialist eligible to join one of those associations such as one of my panellists and get an instrument that says what you intend to say because the draftsman has bothered to take some trouble over the draft and knows what he or she is doing.□