AstraZeneca UK Limited v Tesaro, Inc.

Royalty provisions in a professionally drafted patent licence are construed by identifying their objective meaning in the contractual, factual and commercial context. A broad licence may rationally be coupled with a royalty calculated on total net sales where a royalty based only on infringing use would create substantial uncertainty and administrative difficulty.

Under the US doctrine of patent misuse, a total-sales royalty may constitute misuse where the grant of the patent licence is conditioned on payment for products not using the patent. The relevant inquiry is whether the patentee uses the patent’s leverage to obtain that benefit. Mutual convenience is relevant but is not a free-standing or exhaustive test.

AstraZeneca, the head licensee of patents held by the Institute of Cancer Research and the University of Sheffield, granted Tesaro sub-licences concerning PARP inhibitors, including niraparib, marketed as Zejula. The parties agreed that royalties were payable on Zejula sales, but disputed whether the royalty was calculated on all net sales or only sales involving uses claimed or covered by the licensed patents.

The dispute required consideration of the contractual wording, the factual matrix, the parties’ knowledge of the patent claims, the head licence agreements, pre-contractual communications and the relevance of US patent misuse doctrine. Only the proper construction issue was determined.

1. Construction. The court applied the objective and unitary approach to contractual interpretation. The relevant language had to be assessed against the documentary, factual and commercial context, including the clause’s purpose, the agreement as a whole and commercial common sense.
2. Factual matrix. The head licence agreements formed part of the factual matrix but were not part of the same transaction as the later licence agreements. Their royalty provisions were not sufficiently clear to establish that they operated on a pay-to-infringe basis. Nor did AstraZeneca’s negotiating emails establish a common understanding that the sub-licence royalties would be calculated on that basis.
3. Patent misuse. As a matter of US law, a total-sales royalty could amount to patent misuse if the patent licence was conditioned on royalties for products not using the patent. Conditioning involved use of leverage derived from the patent, and did not require overt bullying or coercion. A royalty agreed for mutual convenience would not necessarily constitute misuse, but mutual convenience was not a binary or free-standing test. The absence of a mutual-convenience clause was relevant but not decisive.
4. Contractual language. The definitions of Compound, Licensed Products and Net Sales, read with sections 3.2, 5.3 and 5.5, indicated that the royalty was calculated by reference to products containing niraparib or Mk-2512, rather than by continuously determining the actual use made of each sale. Tesaro’s construction would require uncertain, continuing analysis of patent claims, patient characteristics and statistical prevalence, without any contractual mechanism for doing so.
5. Outcome. The factual matrix raised the possibility that the parties might have wished to avoid a total-sales royalty, but that consideration was insufficient to displace the ordinary meaning of the agreed wording. Tesaro was therefore obliged to pay AstraZeneca royalties on all net sales of Zejula in each country where licensed patents existed, from the first commercial sale in that country.