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Contract law – construction of contract

In H Lundbeck A/S & Anor v Sandoz Pty Ltd; CNS Pharma Pty Ltd v Sandoz Pty Ltd [2022] HCA 4 (9 March 2022), the High Court considered two appeals arising out of long-running litigation between the parties, in respect of a standard patent of a pharmaceutical substance known as escitalopram (patent).

The appeals heard by the High Court raised many complex issues, but the resolution of these ultimately rested on one key issue: the construction of a clause in an agreement, executed in 2007 (settlement agreement), purporting to give the respondent on both appeals (Sandoz) an irrevocable, non-exclusive licence to exploit the patent.

H Lundbeck A/S (Lundbeck Denmark) is the owner of the patent. Lundbeck Australia Pty Ltd (Lundbeck Australia) is the Australian subsidiary of Lundbeck Denmark and holds the exclusive licence for the patent. CNS Pharma Pty Ltd (Pharma) is a subsidiary of Lundbeck Australia and sells a generic version of a drug, containing escitalopram, which it purchases from Lundbeck Denmark.

Lundbeck Denmark and Lundbeck Australia (entities) agreed to give Sandoz a licence for the patent if Sandoz discontinued legal proceedings against them for the revocation of the patent. Clause 3 of the settlement agreement provided for Sandoz’s licence to commence two weeks prior to the expiry of the patent on 13 June 2009 (the patent being dated 13 June 1989, and having the standard term of 20 years).

Unexpectedly, Lundbeck Denmark was granted, on 25 June 2014, an extension of the term of the patent to 9 December 2012. During the extended term of the patent, from 15 June 2009 to 9 December 2012, Sandoz sold generic escitalopram products.

The day after the extended term was granted, the entities commenced proceedings against Sandoz in the Federal Court, seeking, among other things, damages and pre-judgment interest on the basis that Sandoz infringed the patent by selling escitalopram products during the extended term.

Pharma also commenced proceedings against Sandoz in the Federal Court, seeking, among other things, damages and pre-judgment interest on the basis that Sandoz engaged in misleading or deceptive conduct, within the meaning of s52 of the Trade Practices Act 1974 and s18 of the Australian Consumer Law (by failing to warn customers that its escitalopram product might infringe the patent if and when the term of the patent was extended).

The primary judge found against Sandoz in both proceedings. Sandoz appealed the decisions and the Full Court of the Federal Court allowed both appeals. The Full Court held that the settlement agreement gave Sandoz a non-exclusive licence to the patent from 31 May 2009 to 9 December 2012. The holding of the licence meant that Sandoz did not infringe the patent and, accordingly, could not have engaged in misleading or deceptive conduct.

The entities appealed to the High Court (Lundbeck appeal), as did Pharma. The High Court unanimously allowed the Lundbeck appeal and dismissed the Pharma appeal. Kiefel CJ, Gageler, Steward and Gleeson JJ gave a joint judgment and Edelman J gave a judgment on his own.

In the Lundbeck appeal, Kiefel CJ et al observed, at [40], that s79 of the Patents Act 1990 (Cth) had the effect of filling the “temporal gap” between the expiration of the original term of the patent and the date on which the term of the patent was extended. Turning to the construction of the settlement agreement, their Honours noted, at [51], that parties to a written contract in respect of statutory rights “can ordinarily be taken to use statutory language according to its statutory meaning”.

Accordingly, the terms ‘patent’ and ‘expire’, used in the settlement agreement, took their content from the Patents Act. Their Honours concluded, at [56], that, by giving effect to the statutory meaning of these terms and being attentive to the “internal logic” of cl.3, the “overall effect” was to grant Sandoz a licence two weeks before the expiry of the original term of the patent, with the licence then coming to an end on the expiry of that original term.

Their Honours inferred, at [57], that the “commercial result” which the parties intended to produce by cl.3 was to give Sandoz a commercial advantage over its competitors by giving Sandoz a two-week head start on manufacturing, importing, marketing and offering to sell escitalopram products before the expiry of the original term of the patent.

Consequently, Sandoz did hold a licence during the extended term of the patent, and infringed the patent when it sold escitalopram products during the extended term. Having made this finding, their Honours then determined, at [61], that only Lundbeck Denmark (the holder of the patent), and not Lundbeck Australia, had rights to bring proceedings against Sandoz for infringing the patent.

And, at [68], their Honours held that Lundbeck Denmark’s cause of action against Sandoz only accrued on the date that the extended term was granted, and so Lundbeck Denmark could only obtain pre-judgment interest on damages, under s51A(1)(a) of the Federal Court of Australia Act 1976 (Cth), from that date.

In the Pharma appeal, their Honours observed, at [69], that the resolution of the appeal required highlighting only two principles relevant to the determination of whether conduct is misleading or deceptive – the first principle being (where the conduct is not directed to an identified individual) the need “to isolate by some criterion” a representative member of the target audience for the conduct.

And the second principle being (where the impugned conduct is said to be the non-disclosure of a circumstance) to establish that the representative member of the target audience would “hold a reasonable expectation that the circumstance would be disclosed if the circumstance exists”.

Their Honours, at [73], considered that it was “not self-evident” that pharmacists purchasing Sandoz’s escitalopram products would have held an expectation of being informed by Sandoz of the possibility that they might be exposed to proceedings for infringement of the patent.

Dr Michelle Sharpe is a Victorian barrister practising in general commercial, real property, disciplinary and regulatory law, 03 9225 8722, email msharpe@vicbar.com.au. The full version of these judgments can be found at austlii.edu.au.

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