Flynn v Burch

A warranty that no act has been done which might cause intellectual property rights to cease to be valid or enforceable may be capable of breach before invalidity has actually occurred. A claimant therefore has a realistic prospect of success where evidence shows that conduct could place a patent’s validity or priority at risk, even if the ultimate validity of the patent remains unresolved. Summary judgment or strike-out is inappropriate where the contractual construction and application of the warranty require further consideration. The claimant must nevertheless plead its alleged loss adequately.

The claimant brought an action for breach of warranty under a 2000 shareholders’ agreement. The warranty concerned acts or omissions whereby Product IPR might cease to be valid and enforceable. The defendant applied to strike out the claim or obtain summary judgment, arguing that no breach or loss could arise unless a patent actually lost priority or validity.

The dispute concerned two patent applications. Evidence given by the defendant in later European Patent Office proceedings allegedly placed the priority and validity of the second patent at risk, contributing to a reduction in the price obtained on the sale of the relevant company. The central issues were whether the warranty could be breached by creating a risk to validity and whether the second patent fell within the contractual definition of Patent if it lost priority.

1. Application dismissed. The defendant’s application to strike out the claim or obtain summary judgment was refused. The claimant was required to plead its loss properly, and the parties were expected to reconsider their pleadings.
2. The question on the application was whether the claimant had a realistic prospect of success, not whether its claim was ultimately correct. The word “might” in the warranty supported an arguable construction under which breach could occur by putting the second patent’s validity at risk, without requiring proof that the patent had actually become invalid or had actually lost priority.
3. The evidence demonstrated how the alleged risk could crystallise through a diminution in the value of the company, whose value depended on the patents. That gave the claimant a realistic prospect of establishing its case, although the court made no finding that the alleged breach or loss had in fact occurred.
4. The defendant also had an arguable construction point. If the second patent lost its priority claim, it might cease to fall within the contractual definition of Patent or Product IPR, with the consequence that the warranty might not apply. The meaning of “based on” in the definition of Patent, and the interaction between that definition and the wider definition of Intellectual Property Rights, were not finally determined.
5. The court observed that the defendant’s construction point appeared inconsistent with the pleaded case, but held that it was a proper argument with a realistic prospect of success. The court considered that the defendant was likely ultimately to succeed if the patent’s loss of priority meant that it was outside the warranty, but it was not fair to decide that issue on the present application.