In an opinion issued on March 3, 2021, the Supreme Court of Delaware, one of the top commercial courts in the country, overturned a jury verdict that Glaxo Group Limited and Human Genome Sciences, Inc. (collectively, “GSK”) breached the implied covenant of good faith and fair dealing when GSK disclaimed all the claims of a lupus treatment patent it had licensed from Biogen thereby extinguishing its obligation to pay ongoing royalties on sales of its lupus treatment drug. The court’s reasoning and the outcome raise important considerations for life sciences practitioners in the transactional, litigation, and patent disciplines.

In 2007, Biogen held an issued patent related to a method for treating lupus, and GSK had a pending application directed to substantially the same subject matter. Rather than initiate interference proceedings before the United States Patent and Trademark Office to determine priority under the “first to invent” patent law in place at the time, Biogen and GSK elected to appoint a neutral arbitrator to decide the priority issue. The arbitrator ruled that GSK invented the lupus treatment method before Biogen.

Following the arbitrator’s determination, GSK and Biogen entered into a settlement agreement (the “Agreement”), under which GSK continued prosecution of its patent application and Biogen canceled its patent in exchange for a $3.5 million up-front payment, two milestone payments of $1.5 million each, and ongoing royalties tied to GSK’s sale of the lupus treatment drug. With regard to royalties, GSK agreed that its “obligation to make the royalty payments . . . will continue on a country-by-country basis until expiration of the last Valid Claim that, but for the license granted herein, would be infringed by the [lupus treatment] Product.”

The USPTO issued U.S. Patent No. 8,071,092 to GSK on December 6, 2011.Through 2012, GSK paid Biogen royalties for sales of the lupus drug as required by the Agreement. In 2012, GSK began paying the royalties to DRIT LP, a healthcare investment vehicle that purchased the royalty rights from Biogen.

In 2015, GSK filed a statutory disclaimer with the USPTO, disclaiming the entire remaining term of all claims of the lupus treatment patent. GSK concurrently informed DRIT that it would no longer make royalty payments under the Agreement because the statutory disclaimer eliminated any “Valid Claim” upon which royalties would be payable under the Agreement.

DRIT filed suit in Delaware Superior Court, bringing claims for breaches of contract and the implied covenant of good faith and fair dealing based on GSK’s actions and purported unilateral termination of its obligation to make royalty payments. The Superior Court granted GSK summary judgment of no breach of contract, but permitted the implied covenant claim to proceed to trial. Following trial, the jury returned a verdict that GSK’s statutory disclaimer of the ‘092 patent breached the implied covenant. GSK appealed to the Supreme Court of Delaware.

The Supreme Court of Delaware reversed, opining that the trial court should have granted GSK judgment as a matter of law that it had not breached the implied covenant of good faith and fair dealing. Reviewing Delaware precedent, the court noted that the implied covenant exists to address “gaps” and “to fill in the spaces between the written words” of a contract, but “cannot be invoked ‘when the contract addresses the conduct at issue.’”

Here, the Supreme Court of Delaware focused its analysis on the Agreement’s definition of “Valid Claim”:

[A] claim of an issued, unexpired patent within the Patent Rights that has not expired, lapsed, or been cancelled or abandoned, and that has not been dedicated to the public, disclaimed, or held unenforceable, invalid, or cancelled by a court or administrative agency of competent jurisdiction in an order or decision from which no appeal can be taken or was timely taken, including through opposition, re-examination, reissue or disclaimer.

The court reasoned that because a “Valid Claim” is one that has not been “disclaimed,” and because the Agreement nowhere else expressly prohibited GSK from disclaiming patent claims, there were no gaps in the Agreement and therefore no room to apply the implied covenant. On those grounds, the appeals court reversed the jury, resulting in a win for GSK. In training its focus on the definition of “Valid Claim,” the court de-emphasized the “until expiration” language in the “Royalty Term” provision of the Agreement, which some practitioners may have assumed would be outcome-determinative here—in the opposite direction. The operative “Royalty Term” language provided that royalties would be payable “until expiration of the last Valid Claim that, but for the license granted herein, would be infringed by the Product.”

The opinion may come as a surprise to transactional and licensing specialists, patent practitioners, and litigators alike. Even though the Supreme Court of Delaware noted that the goal of the implied covenant is to “preserve the economic expectations of the parties,” it permitted GSK to cease its royalty obligations through unilateral actions taken after the parties entered into the Agreement.

This case highlights the importance of considering future contingencies and party actions during the negotiation of a licensing arrangement involving future royalties. Had the Agreement placed express limitations on GSK’s ability to invalidate or disclaim the patent, GSK’s royalty obligations likely would have continued.

Some may argue that the holding of the case should be confined to the unique circumstances and facts of the case—GSK as the licensee had the exclusive right to control all patent prosecution and therefore had the power to control whether the claims of the licensed patent remained valid. Under those circumstances, Biogen could be seen as having empowered GSK to eliminate any valid claims of the patent. Even so, we expect transaction counsel will pay special attention to the “valid claim “ definition and litigators will cite the case to support positions that may previously have been thought commercially and legally untenable.

Print:
EmailTweetLikeLinkedIn
Photo of James Anderson James Anderson

James Anderson is an attorney in the Litigation Department and a member of the firm’s Asset Management Litigation and Intellectual Property groups. Jim leverages his technological background and expertise to represent clients in sophisticated business and intellectual property disputes.

Jim has experience litigating…

James Anderson is an attorney in the Litigation Department and a member of the firm’s Asset Management Litigation and Intellectual Property groups. Jim leverages his technological background and expertise to represent clients in sophisticated business and intellectual property disputes.

Jim has experience litigating cases for clients in the technology, life sciences, and financial services industries, including a significant number of pharmaceutical, biotech, consumer electronics, and asset management clients. He has litigated cases in state and federal courts throughout the United States, as well as before the International Trade Commission and Patent Trial and Appeal Board.

In addition to his commercial litigation practice, Jim advises clients on intellectual property strategy spanning the full range of patent, trademark, and trade secret protections. He has developed and maintained intellectual property portfolios in a broad range of industries, including consumer products, medical devices, machining and fabrication equipment, and semiconductor devices. Jim is registered to practice before the United States Patent and Trademark Office.

Jim also maintains an active pro bono practice. He has been awarded for his work on behalf of victims of domestic violence and abuse.

Jim has a degree in Mechanical Engineering, with a concentration in energy, power, and fuel cell technologies, from the University of Connecticut. Prior to joining Proskauer, Jim served as a judicial intern in the U.S. District Court for the District of Connecticut and represented clients with the UConn Intellectual Property and Entrepreneurship Law Clinic.

Photo of Baldassare Vinti Baldassare Vinti

Baldassare Vinti is a partner in the Patent Law and Intellectual Property Groups.

Baldo’s practice focuses on litigating patent, false advertising, trade secret, trademark and contractual matters in federal and state courts and before the International Trade Commission. He is a skilled intellectual…

Baldassare Vinti is a partner in the Patent Law and Intellectual Property Groups.

Baldo’s practice focuses on litigating patent, false advertising, trade secret, trademark and contractual matters in federal and state courts and before the International Trade Commission. He is a skilled intellectual property litigator with extensive experience in all aspects of litigation, including trials (jury and bench), Markman hearings, appeals before the Federal Circuit, case preparation and strategy, depositions, motion practice, and settlement negotiations. In the area of patent litigation, he has worked on cases involving a broad range of technologies, including medical devices, diagnostics, immunoassays, orthotics and prosthetics, proton pump inhibitor pharmaceuticals, dental implants, electronic medical records systems, wound dressings, pharmaceutical capsules, digital video compression, electronic book delivery and security systems, mobile phones and mobile media technologies, ATSC digital television standard, navigation, location-based services, bandwidth management, bar code scanning, irrigation equipment, waste management systems, laser inscription devices, and other related technologies. Baldo has represented numerous major corporations in patent litigations, including British Telecommunications PLC, Church & Dwight Co., Inc., Henry Schein, Inc., Maidenform Brands Inc., Mitsubishi Electric Corp., Ossur North America Inc., Panasonic Corp., Sony Corp., U.S. Philips Corp. and Zenith Electronics LLC.

In addition, Baldo regularly handles transactional work, including intellectual property due diligence, intellectual property licensing, structural transactions involving intellectual property, patentability studies, infringement/non-infringement opinions, and client counseling in patent and trademark matters. In addition, he has experience in patent prosecution matters.

Baldo is an author and frequent commentator on patent issues pertaining to medical devices and a host of other intellectual property topics, and has been quoted in the National Law Journal, Bloomberg BNA, Law360, Westlaw Journal and Inside Counsel magazine. He is also a regular contributor of articles published in Medical Product Outsourcing magazine that deal with the medical device industry.

Baldo served as a judicial intern for Hon. John E. Sprizzo of the United States District Court for the Southern District of New York and for Hon. Charles A. LaTorella of the New York Supreme Court.