Company ordered to pay royalties for remainder of licensing period for expired patent loses appeal against decision

About this case:

• Citation:
  [2025] CSIH 20
• Judgment:
  External link
• Court:
  Court of Session Inner House
• Judge:
  Lord Pentland

Lindal Dispenser GmbH appealed against a decision in favour of the pursuer and respondent, Rocep-Lusol Holdings Ltd, contending that the commercial judge erred in his construction of the contract and in rejecting a submission that the pursuer was in breach of its own obligations. The pursuer and respondent argued that the contract had been appropriately construed based on what a reasonable person would understand it to mean.

The appeal was heard by the Lord President, Lord Pentland, with Lord Doherty and Lord Ericht. The defender and reclaimer was represented by Tariq KC while Lord Davidson of Glen Clova KC and D Welsh, advocate, appeared for the pursuer and respondent.

Sensible commercial arrangement

Under the agreement between the parties, the defender licensed can and actuator patents for commercialisation from 1 January 2016, with an automatic end date of 31 December 2023. The defender paid royalties as per the agreement from the commencement date until 30 September 2022, however after that date it refused to do so. The pursuer therefore sought an accounting from the defender in a commercial action and payment of such royalties brought out by that accounting or failing that a payment of 350,000 Euros.

The defender’s position was that no royalties were due because, on a true construction of the contract, no royalties were payable for any period after 22 December 2020, the latter of the two expiry dates of the licensed patents. Esto there was an obligation to make payments, it was a counterpart of the pursuer’s obligation to grant the defender an exclusive license, which it was unable to do after their expiry.

It was held by the commercial judge that the defender continued to benefit from provisions of the contract that were binding on the pursuer after 22 December 2020, including an obligation not to deal in products using systems identical or similar to those detailed in the licensed patents. The contract made provision for the expiry of the patents by including a reduction in the royalties payable after 22 December 2020. It followed that the pursuer was not in breach of any of the terms of the license agreement.

Counsel for the defender submitted on appeal that the judge’s interpretation of “protected by a licensed patent” did not give the word “protection” its ordinary and natural meaning. On an ordinary and natural reading, the agreement obliged the pursuer to grant the defender an exclusive license after 22 December 2020, and the commercial judge had erred in concluding otherwise.

For the pursuer it was submitted that the contract was a sensible commercial arrangement, and the parties had been well aware while contracting what the expiry dates of the patents were. The obligations undertaken by the pursuer after 22 December 2020 continued to be of value to the defender.

Less damage done

Lord Doherty, delivering the opinion of the court, said of the court’s approach: “Our impression is that the contract is one of moderate complexity, and that the quality of the drafting is at best  reasonable. This is a case where we consider that the contract may be construed principally by textual analysis, but contextual factors are not irrelevant. Part of the relevant factual background is that the parties understood at the time of contracting that after the natural expiry of all of the patents a third party who wished to exploit them by bringing new products to the market would be likely to require to spend a significant period of time developing and launching them.”

He continued: “The parties cannot have intended that ‘falling under one or more of the Licensed Patents’ meant that the technology used in the products involved the exploitation of an unexpired Licensed Patent. That would make no sense because they knew that by 22 December 2020 all of the Licensed Patents would have expired. The defender’s construction would have involved both parties agreeing to a provision which they knew could never be triggered. On the defender’s approach the clause would be meaningless whereas the pursuer’s construction makes sense of it.”

Considering the advantages of the pursuer’s preferred construction, Lord Doherty noted: “We agree with the commercial judge that the expression ‘falling under the scope of protection of one or more of the Licensed Patents’ is open to construction. Two possible meanings are (i) that the product was manufactured etc exploiting at least one of the Licensed Patents at a time before that patent expired; or (ii) that the product was manufactured etc exploiting technology which fell within the claims of at least one of the Licensed Patents, whether or not that patent had expired.”

He added: “Like the judge, we are satisfied that the reasonable reader, looking at the whole terms of the contract, and being mindful of the factual background we have described, would conclude that meaning (ii) is what the parties intended. Much less damage is done to the integrity of the contract by giving the disputed provisions the meanings suggested by the pursuer than by giving them those suggested by the defender.”

The court concluded by briefly dealing with the second ground of appeal: “It is common ground that the pursuer duly performed its obligation to grant an exclusive licence on the patents for the periods before their expiry. Ground of appeal 2 is premised upon construing § 2(1) as also having obliged the pursuer to grant an exclusive licence on the patents for further periods until 31 December 2023. The premise is unsound.”

For these reasons, the reclaiming motion was refused.