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High Court of New Zealand Decisions |
Last Updated: 20 September 2016
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2013-404-004338 [2016] NZHC 1885
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BETWEEN
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DR FRANK BAILEY GELDER
First Plaintiff
PROBE INTERNATIONAL INC Second Plaintiff
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AND
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INNATE IMMUNOTHERAPEUTICS LIMITED
Defendant
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Hearing:
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9-12, 15-18 February 2016
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Appearances:
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B P Henry and A M Dunlop for Plaintiffs
C T Patterson and E J Grove for Defendant
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Judgment
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15 August 2016
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JUDGMENT OF COURTNEY J
This judgment was delivered by Justice Courtney on 15 August 2016 at 3.00 pm
pursuant to R 11.5 of the High Court Rules
Registrar / Deputy Registrar
Date............................
GELDER v INNATE IMMUNOTHERAPEUTICS LTD [2016] NZHC 1885 [15 August 2016]
Introduction
[1] In 1997 Dr Frank Gelder1 patented a method for treating
viral infections in humans particularly HIV. He assigned his rights in the
patented method to Probe
International Inc,2 of which he is the sole
director. Probe International assigned the rights to Innate
Immunotherapeutics Ltd (originally called
Viriyonx Corporation Ltd), of which
Dr Gelder was a co-founder.3
[2] Under a Royalty and Option Agreement (ROA) Innate must pay Dr
Gelder or Probe International a royalty fee in relation to
the commercial use of
the patented method. In this proceeding Dr Gelder and Probe International
allege that Innate has failed to
pay royalty fees due in respect of actual
income, or benefits to which a notional income can be ascribed, from the use of
the patented
method.
[3] The dispute centres mainly on biological material that Innate
transferred to a former employee in settlement of an employment
dispute.
Innate says that this material did not fall within the scope of the ROA and no
royalty fees are payable in respect of
it. The balance of the claim relates to
biological material that Innate sold to third parties. Innate says that this
material falls
outside the scope of the ROA.
[4] The effect of the ROA is a matter of interpretation to which the
accepted principles, summarised in Firm PI1 v Zurich Insurance Australia
Insurance Ltd, apply. The Court is to ascertain “the meaning which
the document would convey to a reasonable person having all the background
knowledge which would reasonably have been available to the parties in the
situation in which they were at the time of the
contract”.4
Background
The parties
[5] Dr Gelder, a US citizen, moved to New Zealand in the late 1990s.
Before then he had been working to develop a method for
the treatment of HIV and
had
1 The first plaintiff.
2 The second plaintiff.
3 For convenience I refer to the company as Innate throughout.
4 Firm PI1 v Zurich Insurance Australia Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432 at
[60], citing Investors Corporation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR
896 (HL) at 912; Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101 at [14].
been granted patents entitled “Compositions and methods for treating
viral infections”. The patented method utilised
the fact that the immune
system of goats (and other mammals) recognises parts of the HIV virus that the
human immune system does
not recognise. Under the patented method, antibodies
produced from purified goat plasma would be administered to supplement the
human
immune system, allowing it to target parts of the HIV virus that would otherwise
not be recognised and disrupt the life-cycle
of the virus. Another
company of which Dr Gelder was the director, Probe USA Inc (PUSA), was
to be responsible for
conducting clinical trials and distributing drugs
derived from the master patent.
[6] The antibody produced by the patented method was known as
HRG214.5
The goat’s immune response could be amplified by the use of an adjuvant
and Dr Gelder patented an adjuvant for use in this method,
known as Induct315.
This was essentially a bacterial cell wall extracted from the bacteria that
causes acne which is washed with
alcohol to the point that it becomes an immune
stimulant.
[7] In 1997 Dr Gelder moved to New Zealand to work with a New Zealand biochemist, the late Professor Wayne Watkins. They formed Probe Pharmaceuticals (NZ) Ltd (PPNZ) for the purpose of obtaining a licence from the Ministry of Health to produce medicines. PPNZ and PUSA were to work together to produce, conduct clinical trials of and distribute product to exploit the patents. Dr Gelder owned 50
per cent of the shareholding in both companies.6
[8] In 2000 PPNZ and PUSA were folded into one company, Innate. The purpose of the new company was to provide a vehicle for funding the development of HRG214 into clinical trials and exploiting the intellectual property and marketing rights to be had from the patents. This involved Innate: acquiring the shares and options in PPNZ, which subsequently amalgamated with it; purchasing the patent rights and intellectual property from Probe International in return for a substantial parcel of fully paid ordinary shares in Innate; and buying Probe International’s
shares in PUSA, the consideration being Innate entering into the
ROA.
[9] Innate engaged Dr Gelder (initially
through his family trust and later personally) to provide scientific advice
to support the research, development, clinical trials and FDA applications for
HRG214 and Induct315.
Producing HRG214
[10] Early in 2001 the US Food and Drug Administration gave
approval to conduct clinical trials for testing HRG214 in
patients with HIV.
Innate obtained permission to commence human clinical safety trials of HRG214 at
the Harvard Medical School
(Phase 1A and 1B) and human clinical safety and
efficacy trials elsewhere in the US (Phase 2A). Innate established a pilot
scale
production facility at leased premises in Walls Road, Penrose with Good
Manufacturing accreditation (GMP) from the New Zealand Ministry
of
Health.
[11] In 2003 Innate set up a separate research laboratory in leased
premises in Mahunga Drive, Manukau and began production of
HRG214. Broadly,
that process was: HIV antigen was introduced to goats kept specifically for this
purpose; Induct315 was used to
enhance the goats’ immune response; the
goats’ immune systems would respond and produce antibodies; and plasma was
collected
from the goats and purified. At that point the HRG214 existed in bulk
form.
[12] On Dr Gelder’s evidence plasma for the production of
HRG214 (bulk HRG214) was couriered directly from the
farm to the Walls Road
facility as required by Medsafe regulations. Bulk HRG214 that met the required
standard was processed further
and eventually reduced to 50 mm
vials in a Medsafe-approved pharmaceutical manufacturing grade
“clean
room”. I refer to this product as “finished
HRG214”. However, not all bulk HRG214 met the standard required
for use
in human clinical trials. Such product was either discarded or assigned to
research use only (RUO) and stored at the Mahunga
Drive premises.
[13] By about 2004 Dr Gelder was seeking to broaden the application of the patented method from HIV to other viruses, including Anthrax, SARS and West Nile virus. However, there was no or no significant funding for such trials.
The HRG214 programme is shut down
[14] The HRG214 development programme was funded almost entirely
by Innate’s shareholders. By late 2004, however,
the company was nearly
insolvent. In November 2004 all of Innate’s directors, including Dr
Gelder, and its commercial executives,
resigned. Simon Wilkinson, who had been
engaged in 2002 to promote Innate to new investors, took over as Chief Executive
Officer.
[15] The shareholders raised further funds and work continued. By 2008
it was apparent that HRG214 would not be commercially
successful. The main
problem was that anti-retroviral treatment was being preferred over the passive
immunotherapeutic therapy offered
by HRG214 and this led to difficulties
recruiting for the Phase 2 efficacy trial. In early 2009 Innate ceased its
HRG214 programme.
Work continued on the use of Induct315 to treat multiple
sclerosis.
The Fonterra project
[16] Sometime in late 2007 or early 2008 Mr Chris O’Loughlin,
employed in Innate’s research department, was approached
by the South
Auckland Independent Testing Laboratory (SAITL) which was, apparently,
associated with Fonterra. SAITL wanted
Innate to produce goat antibodies to
the cow antibodies (bovine IgG) found in the colostrums of dairy cows. It
wanted to use the
goat antibodies as a reagent to detect and measure the level
of colostrum.
[17] Mr Wilkinson described how Mr O’Loughlin brought the proposal to him and Dr Gelder and how, despite Innate never having made antibodies for sale previously, it was agreed that the project would be undertaken, because there was no apparent disadvantage and Innate was in need of any funds it could generate. In 2008 and
2009 Dr Gelder and Mr O’Loughlin developed a successful immunisation
and antibody collection process. Between April 2009 and
June 2011 Innate sold
goat and bovine IgG antibodies to SAITL. The total invoiced amount was
$166,923.
[18] The plaintiffs claim that these sales attracted royalty fees under the ROA. Innate says that this is the first time that this claim has been asserted even though Dr Gelder was involved in the project. Dr Gelder disputes that; he says that he did raise the matter with Mr Wilkinson, who became very angry. I do not need to
resolve this dispute. Dr Gelder became ill in mid-May 2009 and, before he
could return to work, Innate terminated his employment
contract. In those
circumstances, even if Dr Gelder had failed to assert rights in relation to
income from the sale of bovine IgG
antibodies at that time, I would not have
regarded it as significant in terms of his and Probe International’s right
to claim
royalty fees. Whether those sales attracted royalty fees under the
ROA is a matter of interpretation of the ROA and is not affected
by Dr
Gelder’s failure (if there was a failure) to assert such a claim.
Innate disposes of material in May 2009
[19] In May 2009 Dr Gelder had a serious heart attack. He moved to his
holiday house in Coromandel to recuperate. This coincided
with significant
changes at Innate, driven by its parlous financial situation. In particular,
the decision was made to surrender
the lease on the Mahunga Drive premises
and re-locate the whole operation to the much smaller Walls Road premises.
This would
require the disposal of surplus materials stored at Mahunga
Drive.
[20] Mr Wilkinson sent an email at 4.37 pm on 17 November 2009 to Dr
Gelder, Chris O’Loughlin and other Innate staff.
It concerned
the plasma held at the Mahunga Drive premises. Mr Wilkinson advised of
Innate’s intention (1) to create
a “library” comprising a
small number of bags of plasma related to each batch of HRG214 and Induct315 to
occupy a single
chest freezer (2) to allow Dr Gelder and/or Chris
O’Loughlin RUO material free of charge for possible resale on the basis
that
it would be stored by them off site and 10 per cent of any gross resale
price paid to Innate and (3) that any remaining RUO
material would be
destroyed by Mr O’Loughlin.
[21] Dr Gelder denies receiving this email. He had a conversation with Mr O’Loughlin earlier the same day, as a result of which he had sent Mr O’Loughlin an email (copied to Mr Wilkinson) advising that he did not condone or authorise the destruction of any of the product being held in Innate’s freezers. But Dr Gelder explained that his email was sent from a hotel in Coromandel and he did not receive the later email from Mr Wilkinson. I accept Dr Gelder’s evidence. It is consistent with an email sent by Mr O’Loughlin internally referring to the difficulties Dr Gelder was having accessing emails and giving an alternative email address for
him. Further, it is clear that Dr Gelder felt very strongly that HRG214
material and the other antibodies Innate had produced should
be kept. I have no
doubt that if he had received Mr Wilkinson’s email he would have
responded.
[22] Events were overtaken by the break-down of the walk-in
freezer at the Mahunga Drive premises. For financial reasons,
Mr Wilkinson
decided that it would not be repaired. Mr O’Loughlin gave evidence that
the walk-in freezer contained a significant
amount of Dr Gelder’s own
product, including antigens that he had brought with him from the US and
purified proteins. He telephoned
Dr Gelder to warn him that the material was
thawing out. Dr Gelder organised for a portable freezer unit to be delivered
and Mr
O’Loughlin emptied everything out of the walk- in freezer into the
portable freezer. Mr O’Loughlin described Dr Gelder
coming up from
Coromandel and, upon seeing the product and folders containing the
traceability of the product, becoming
angry, throwing his hands in the
air and walking out.
[23] Mr O’Loughlin took a freezer-load of plasma material. Innate
itself did not require any record to be made of what was
taken because Mr
Wilkinson and the other directors considered it to be worthless to the company.
In fact, Mr Wilkinson’s evidence
was that he believed (wrongly, it turned
out) that Mr O’Loughlin had destroyed most of the antibody
materials.
[24] The material that Mr O’Loughlin took on this occasion was not
the really valuable material that had been purified;
that was kept and moved to
the Walls Rd site. But it was material that he nevertheless considered as
having potential value because,
with the right equipment, it could be converted
into something saleable:
Yes well everybody who is in the field knows that antibodies by themselves
are expensive but if you can do something fancy with those
antibodies and
labelled them then the price of those antibodies just goes through the roof. And
we had to label antibodies to make
our diagnostic, our clinical diagnostics for
measuring pharmacokinetics in the patients being treated with HRG214 and we
knew at the time that those assays were going to be worth probably just as much
as the drug in terms of you know you sell a drug product, you’ve then
got to have the assays in place to monitor drug levels in patients
and also
measure patient response or immune responses against the drugs and that’s
sort of like a separate major money earner,
especially for biological.
(emphasis added)
[25] The material that Mr O’Loughlin did not take was moved to
Walls Rd. He had a junior staff member prepare a rough (probably
incomplete)
list of that material. A substantial amount of it was ultimately transferred to
Mr O’Loughlin as part of his settlement
with Innate, which I come to
next.
The settlement agreement between Innate and Mr
O’Loughlin
[26] In November 2009 Innate made its staff, including Dr Gelder,
redundant, effective 1 December 2009. Some key staff were needed
to close down
the Mahunga Drive premises, relocate that part of the operation to Walls Road
and maintain the operation there. Mr
O’Loughlin was offered a contract
for that purpose. Then, in early 2010, with shareholders having raised a
further $1.748m,
six of the previous 11 staff, including Mr O’Loughlin,
were offered fresh contracts. Dr Gelder was not offered employment.
[27] In late 2011, however, Mr O’Loughlin was again made redundant.
He challenged the bona fides of this redundancy and
the dispute was settled by
negotiation. Mr O’Loughlin described a settlement meeting at which one
of the directors agreed
that he could take whatever he wanted from the facility
and so he took the equipment and the reagents he needed to set up his own
laboratory. Innate did not supervise this process and did not require an
inventory from him as to what was taken. The settlement
agreement signed
subsequently included the following clause:
5. The Employer agrees to transfer possession of the following lab
equipment to the Employee:
(a) Chest freezer containing antisera specific to the Fonterra project; (b) Laboratory stand-up fridge located in the A7 area;
(c) Sorval RC5C centrifuge and associated rotors;
(d) Research use reagents, antisera, chromatography media and
proteins unrelated to the Employer’s core business as agreed
upon;
(e) Research use equipment and consumable unrelated to the
Employer’s core business as agreed upon;
(f) Ongoing good faith access to (or transfer of) research records and
test results relating to reagents, antisera and proteins
transferred to the
Employee.
(emphasis added)
Mr O’Loughlin’s use of the material
[28] In May 2015, for the purposes of this proceeding, Mr O’Loughlin prepared an inventory of the Innate product that he still holds. Although not entirely clear, I infer that the list includes both the material that he took in 2009 as well as the material he received as part of his settlement in 2011. All the material in the list was manufactured using Induct315. Some was raw plasma containing antibodies that were produced using an antigen (e.g. HIV or Anthrax) together with Induct 315. Some was product produced by purifying the raw plasma. Dr Gelder’s claim relates
to both groups.7 Mr O’Loughlin referred to both as
HRG214.
[29] Since leaving Innate Mr O’Loughlin has run a small business
purifying and selling the material he took. He has refrained
from significant
marketing efforts, preferring that the benefit he obtained from his settlement
does not become widely known. He
referred in his evidence to making $50-60,000
a year from the material he held and having sufficient material to continue this
business
for a further five years or so.
Agreements
The Royalty and Option Agreement
[30] The ROA was entered into in August 2000, when Probe International
sold its intellectual property and patent rights to Innate
(then called
Virionyx) and Innate acquired both PPNZ and PUSA. The recital of the ROA
relevantly records that:
A. GELDER is the inventor of certain new technologies and inventions which
he has assigned to PROBE and which PROBE has subsequently
assigned to
VIRIONYX.
B. PROBE has, separately to the assignment referred to above, agreed to sell
and VIRIONYX has agreed to purchase shares in Probe
USA Inc in consideration for
this Royalty Agreement.
C. This Agreement records VIRIONYX’s agreement to pay to PROBE a
royalty from proceeds of exploiting, by sale
or otherwise, the
technologies and inventions referred to in Background A.
(emphasis added)
7 Mr O’Loughlin also received as part of the settlement various antigens and antisera produced by
[31] The term “technologies and inventions” is not defined.
However, the parties
proceeded at trial on the basis that they included the patented
methods.
[32] The operative provision of the ROA is clause 9 which provides
that:
In pursuance of the Sale Agreement8 VIRIONYX shall pay to PROBE
or GELDER (as they shall stipulate) the Royalty Fees during the Term in return
for the sale to VIRIONYX
of the Probe Shares.
[33] Under clause 7 “Royalty Fees” are defined as:
3.25% of Net Revenues to a maximum aggregate of $54,166,664.
[34] Clause 7 also defines “Net Revenues” as having the meaning
set out in the
First Schedule. The First Schedule provides:
Definition of Net Revenues
Net Revenues shall mean, for any period:
The aggregate of:
Any income (including any capital profits) derived by or on
behalf of Virionyx, its Affiliates and its Licensees, from third parties
arising
in relation to the exploitation of the Patents (which includes any rights to
manufacture, sell or distribute the Products) and shall include royalties, lump
sum payments, periodic
payments or any other amount calculated by reference to
the sale of the Products. If any right is guaranteed to manufacture,
distribute or sell the Products otherwise than through arrangements reached on a
third
party arms length basis then, for the purposes of calculating income
received from such grant of right, such grant shall be deemed
to have been
reached on an arms length basis. The fair market value of any Products used
and sold by Virionyx, its Affiliates and its sub-licensees with any Combination
Product
where no amount is received by Virionyx in respect to such sales of
Combination Products.
Less (to the extent paid or allowed by Virionyx, its Affiliates and
its sub- licensees):
Trade credits, rebates and allowances on account of price
adjustments, rebate programmes, billing errors or rejectional
return of
Products.
Commissions to independent brokers or agents.
Export packaging, outbound freight or transportation
charges.
All taxes (excluding income taxes) tariffs, duties and other
governmental charges.
8 This is defined as the agreement described in background B i.e. the sale by Probe to Virionyx of
(emphasis added)
[35] “Patents” is defined in clause 7 as the patents listed in
the second schedule of the ROA and that schedule simply
lists the
patents.
[36] “Products” is defined as meaning:
The pharmaceutical preparation, compound or biological agent and any product
or part thereof which:
(a) Comprises a substance now termed HRG214 and which consists of
immunochemically engineered antibodies of selective passive
immunotherapy in
humans for HIV infections, including HIV I, HIV II and other human retro
virus such as HTLV, and as further
described in the Patents;
(b) Comprises a substance termed INDuct315 which currently consists of
a glycopeptides which stimulates immunological events,
resulting in immune
reconstruction and amplification and described in the Patents in conjunction
with production of the antibodies
termed HRG214;
(c) Any improvement to the above substances HRG214 and INDuct315.
Later agreements
[37] Following other disputes arising under the ROA, Innate and Dr Gelder entered into two further agreements.9 In cl 9 of a Deed of Settlement dated 14 July
2010 the parties recorded that:
Innate acknowledges that it is obliged to pay royalty fees to Gelder of 3.2
per cent of Net Revenue received by Innate from the commercialisation
of the
inventions described in the existing patents and patent applications held by
Innate.
[38] In a subsequent Deed of Amendment to Settlement Deed dated 3 June 2011
cl 2 provided that:
So as to avoid any doubt, the royalty fees due to Gelder pursuant to cl 9 of
the Deed and the Amendment are payable by Innate
in respect of net
revenues received by Innate from the commercialisation of the inventions
described in the existing patents
and patent applications (and any related and
subsequent divisional patent applications) for the life of the patents to a
maximum
of USD54,166,669 ...
9 There is no evidence as to the nature of the proceedings but the recital to the deed dated 14 July
2010 refers to a dispute regarding Dr Gelder’s obligation to execute documents relating to a
patent application.
[39] Both parties treated these later agreements, correctly, as relevant to
the interpretation of the ROA.
Is the material transferred to Mr O’Loughin within the scope of the
ROA?
Is the material “Product” within the meaning of the ROA
?
[40] The Company contends that royalty fees are only payable in relation
to the commercialisation of finished HRG214 and Induct315
that can be
administered to humans i.e. material that complies with Ministry of Health
standards in terms of production. On this
approach the raw plasma and RUO
HRG214 transferred to Mr O’Loughlin would not fall within the scope of the
ROA. Whether this
is correct turns on the interpretation of the definitions of
Net Revenues and Products.
[41] Entitlement to and calculations of royalty fees are determined by
reference to the defined Net Revenue, which is, broadly,
the aggregate of
specified income or benefits, less expenses. There are three types of
income/benefits specified. The first is
income (including capital profits)
arising in relation to the exploitation of the patents; this limb does not apply
to the material
Mr O’Loughlin acquired because Innate did not receive any
income from the transfer of it. The second limb is notional income
from rights
to manufacture, distribute or sell Products (defined) where the grant of rights
was made other than at arm’s length;
this could apply if the material
transferred falls within the definition of Product. The third is the fair
market value of Products
used or sold with any Combination Product where no
amount was received; although the phrase Combination Product is not defined,
this
limb could not apply because, even if the material that Mr O’Loughlin
took was Product, it was not sold with any other Product.
The definition of Product
[42] Mr Henry, for Dr Gelder, accepted that whether the transfer of the
material to Mr O’Loughlin attracts royalty fees
depends on whether it
falls within the definition of Product but argued that:
The definition is disjunctive and states that it includes “Pharmaceutical preparation, compound or biological agent and any product or part thereof”. The antibodies, using the word product in the quote ... in its normal and ordinary meaning are within the terms “compound” and “biological agent”
(when Product is not capitalized). These words are not defined in the RAOA
therefore their normal and ordinary meanings apply ...
these are wide
definitions and apply to the materials in question.
[43] I do not accept this argument. First, the definition does not
state that it “includes” the various forms of
material specified but
rather that it means those forms of material. Moreover, because the list
of materials is book-ended by “the” and “which” it is
clear that the qualifications contained in sub-paragraphs (a) – (c) apply
to all those forms of material. In the case of
HRG214 that means that, however
the material is characterised, it can only fall within the definition of Product
if it satisfies
sub-paragraph (a). Mr Henry did not address this aspect but it
formed the central plank of Innate’s argument.
[44] The essence of Innate’s argument was that sub-paragraph (a)
limits Product to material that can be used in humans and
since all the material
Mr O’Loughin took in either 2009 or 2011 had been categorised as RUO it
could never be used in that
way and therefore was not within the definition of
Product.
[45] For convenience I set out sub-paragraph (a) again:
... the pharmaceutical preparation, compound or biological agent and any
product or part thereof which:
(a) comprises a substance now termed HRG214 and which
consists of immunochemically engineered antibodies for selective passive
immunotherapy in humans for HIV infections, including HIV I, HIV II and
other human retrovirus such as HTLV, and as further described in the
Patents
(emphasis added)
[46] I am not satisfied that the requirement that the antibodies be “for ... immunotherapy in humans” can only be met if the antibodies have been manufactured to the standard required by the Ministry of Health licence so that they could actually be administered to humans. In ordinary language, “for” in this context connotes purpose. But I do not consider that it needs to be, nor should be, interpreted literally. Rather, I see it as broadly descriptive of the product “termed HRG214” i.e. identifying the product by reference to one of the purposes (albeit the primary purpose) contemplated by the patents.
[47] It is evident from the stated purpose of the ROA and the later deeds
of settlement that the parties intended the ROA to encompass
exploitation of the
patents generally. Further, in August 2000, when the ROA was entered into,
permission had not yet been granted
to commence clinical trials and Innate had
not, of course, begun to manufacture HRG214 under MOH licence. It was possible
that
neither would eventuate; if the benefit of the ROA was to be limited to
HRG214 that could be administered to humans, a good deal
of the potential from
Dr Gelder’s work would go unrewarded. That would be contrary to the
obvious intention of the parties.
[48] Moreover, even if the phrase “for ... immunotherapy in
humans” were interpreted literally as being limited to
material that could
actually be administered to humans, sub-paragraph (c) would nevertheless include
material not suitable for that
purpose. Although the wording of sub-paragraph
(a) is conjunctive and appears, at first reading, to have three prerequisites,
on
closer analysis I am satisfied that it can only have two prerequisites. The
first is that it is a substance “termed HRG214”.
The second is
either that it consists of antibodies “for” immunotherapy in
humans or that it is “as further described in the Patents”.
Because the patents describe uses for the patented method other than
for
immunotherapy in humans the second and third limbs of sub-paragraph (a) are (on
Innate’s interpretation) mutually exclusive.
So although
“and” preceding the phrase “as further described in the
Patents” suggests a conjunctive meaning
those words could add nothing to
the meaning of sub-paragraph (c) if they were to be read conjunctively with
“for ...immunotherapy
in humans”. The word “and” is
therefore properly read as “or”.
[49] I consider, therefore, that either (1) the phrases “as further described in the Patents” and “for ... immunotherapy in humans” are read conjunctively, in which case the words “for ... immunotherapy in humans” must be interpreted broadly, as merely descriptive of one of the purposes of the patented method or (2) the phrases are read disjunctively, in which case the words “for ... immunotherapy in humans” could be interpreted narrowly to mean only material actually suitable for use in humans. In either case, if the material satisfied a use described in the patents it would fall within the scope of the ROA.
Does the material fall within the scope of the ROA?
[50] Both parties adduced evidence from highly qualified and experienced
patent attorneys. Their briefs were admitted by consent
and without
cross-examination. Innate’s witness, Dr Kieran Williams focused on the use
of Induct315; whether antibodies (HIV
or other) produced using Induct315 could
be considered to include, contain or comprise Induct315 or an improvement to
HRG214 or were
a product as defined in claim 1 of the patent or whether other
adjuvants could have been used in the production of the antibodies.
His
evidence therefore did not assist in determining either whether the material
taken by Mr O’Loughlin was material that
could be “termed
HRG214” or whether it could be used for a purpose other than immunotherapy
in humans.
[51] Dr Gelder’s witness, Dr Jon Ashen, addressed the first
question. He reviewed Innate’s production process against
the patents and
the schedules that Dr Gelder had prepared of the material in respect of
which royalty fees were claimed.
He concluded that, the material in
schedules two, three and four (the RUO material taken by Mr O’Loughlin)
had been produced
by Innate using technology disclosed in the patents and that
the compositions produced were to be regarded as being termed HRG214
within the
patents. Given that his evidence was not challenged and, in light of my
interpretation discussed above, I am satisfied
that all the material in
schedules two – four was (or is) material that is termed HRG214 for the
purposes of the ROA.
[52] Dr Ashen did not address the question of whether that material could
be used for a purpose other than immunotherapy in humans.
However, Dr Gelder
gave evidence on this issue and was cross-examined on his views. Although Dr
Gelder’s opinion was challenged,
his expertise to express it was
not. In addition Mr O’Loughlin’s evidence on this aspect was
helpful from
a practical perspective. I consider that I am entitled to take the
evidence of both witnesses into account and give it the weight
that I think it
appropriate. In doing so I naturally take into account Dr Gelder’s
interest in the proceeding.
[53] Dr Gelder said that the materials held by Mr O’Loughlin could be used either for research or for in-vitro diagnostic use. This evidence accords with the detailed description of the invention in the patent 6,043,347 dated 28 March 2000:
The present invention provides novel compositions and methods for diagnosing
and neutralizing viral infections. The invention will
be described in detail
with a focus on a preferred embodiment, in which the virus of interest is HIV.
It is to be understood however, that the principles of the invention can be
used to identify neutralizing regions of proteins of other
viruses and to
produce anti-bodies reactive with those proteins that can be used to diagnose,
treat and prevent infections causes
by these other viruses as well.
(emphasis added)
[54] Later, in relation to “diagnostic and prognostic uses
of antibodies and antigen” the patent states:
The anti-bodies and epitopes recognised by them and disclosed in the present
invention also are useful for the diagnosis and management
of HIV infection.
Typically, diagnostic assays employing anti-bodies and/or their respective
antigens entail the detection of the
antigen-antibody complex.
...
Kits also can be designed for use with the subject antibodies for use in the detection of HIV infection or the presence of HIV antigen. The kits comprise antibodies of the present invention optionally in conjunction with additional antibodies specific for other epitopes of HIV.
[55] I am satisfied from the wording of the patent itself and from Dr
Gelder’s evidence that the patented method did encompass
uses other than
the administering of HRG214 to humans for immunotherapy. As a result I find that
the material Innate transferred
to Mr O’Loughlin in 2009 and 2011 was
Product for the purposes of the ROA and, subject to the point I deal with next,
the transfers
of it would attract a royalty fee on the notional fair value of
the material.
Was the settlement between Innate and Mr O’Loughlin other than at
arm’s length?
[56] For convenience I set out again the second limb of the
income/benefit part of the definition of Net Revenue:
If any right is guaranteed to manufacture, distribute or sell the Products otherwise than through arrangements reached on a third party arm’s length basis then, for the purposes of calculating income received from such grant of right, such grant shall be deemed to have been reached on an arm’s length basis.
[57] Although this second limb does not explicitly provide for fair value, Mr Henry argued that this was to be implied and Mr Patterson acknowledged that to be a feasible interpretation. I agree; there can be no other purpose for this provision than
to ascribe a fair value to a transaction not entered into at arm’s
length. However, Innate asserts that the issue of fair
value does not arise
because its settlement with Mr O’Loughlin was reached on an arm’s
length basis.
[58] Mr Patterson argued that the agreement that led to Mr
O’Loughlin acquiring the material as part of the settlement of
his
employment dispute must be viewed as being at arm’s length because of the
nature of the dispute, the fact that both parties
were legally represented and
because the dispute was mediated in the knowledge that if a settlement was not
reached it would proceed
further and be determined by the Employment Relations
Authority. Mr Henry did not address this argument.
[59] An arm’s length transaction is one in which “the parties
act severally and independently in forming the bargain,
and in which neither of
the parties has the ability to exert personal influence or control over
the other”.10 In determining whether a transaction was
entered at arm’s length, regard is had to both the manner in which the
negotiations
were conducted, whether for example on an equal footing and an
adversarial basis, as well as the actual terms or value of the
bargain.11
[60] There are aspects of the transaction which could count against it
being treated as at arm’s length. The expert
evidence
(unchallenged) at trial was that Mr O’Loughlin’s best possible
outcome before the Employment Relations
Authority would have been money or
monies worth up to $40,000. Under the terms of his settlement agreement Mr
O’Loughlin
received a lump sum of $12,000 and rights to the gross sales of
the Fonterra project together with possession of the specified laboratory
equipment and biological material. The evidence regarding the value of the
material was unsatisfactory. But the fact that it has
produced a regular income
for Mr O’Loughlin of over $50,000 per annum for the last five years and
can be expected to produce
a similar sum for the next five years is a sound
basis on which to infer an approximate value.
[61] I have concluded, however, that the circumstances in which the
agreement
was entered into make in clear that the parties were at arm’s length.
These were
litigants in an adversarial relationship and neither was inclined to
grant the other an
10 Peter Spiller New Zealand Law Dictionary (8th ed, LexisNexis, Wellington, 2015) at 21.
11 Peake v Commissioner of Inland Revenue (1983) 6 NZTC 61,958, (1983) 7 TRNZ 23 (HC).
advantage. I am satisfied that the disproportionate advantage that Mr
O’Loughlin gained through the settlement agreement
was the result
of Innate’s failure to recognise the value of the material. This may
seem an unfair result for Dr Gelder
but there is no means by which Mr
O’Loughlin’s acquisition of the material can legitimately be
regarded as falling within
the definition of Net Revenue so as to attract a
Royalty fee.
Material sold to third parties
[62] The more straightforward aspect of Dr Gelder’s claim relates
to royalties payable on the sale of biological material
to third parties.
There was agreement between the parties regarding these sales. The gross
income from them totalled NZ$167,403
and £440. The royalty payment at 3.25
per cent on these figures would be NZ$5,440.60 and
£14.30.12
[63] Mr Patterson submitted that these transactions do not fall within the first limb of the definition of Net Revenue, “any income derived by [Innate] ... from third parties arising in relation to the exploitation of the Patents”. He argued that these words only related to income derived from a third party’s exploitation of the patents i.e. where Innate had sold or licensed the rights to a third party. I do not consider this to be the natural and ordinary meaning of the phrase. The purpose of this definition is to identify the income that will attract royalty fees. If the words “arising in relation to the exploitation of the Patents” are read as referring to Innate’s exploitation of the patents, the income is readily ascertainable. Mr Patterson’s interpretation would, however, require identification of the amount made by third parties but there is no mechanism for ascertaining such amounts. Moreover, viewed against the stated purpose of the ROA and the subsequent deeds it is clear that the parties’ intentions were to identify income arising from Innate’s exploitation of the patents. It is reinforced by clause 2 of the Deed of Amendment to Settlement Deed dated 14 July 2010 which specifically refers to net revenues received by Innate from
the commercialisation of the inventions.
12 The default position is that a claim in a foreign currency is converted to New Zealand dollars at the date the plaintiff comes to execute the judgment. Mortimer v Motorsport Logistics Ltd [2013] NZHC 921 at [42]–[44]; referring to Miliangos v George Frank (Textiles) Ltd [1976 AC
443 (HL); American Express Europe v Bishop [1987] NZHC 241; (1987) 1 PRNZ 635 (HC); and Markinovich v The
proceeds of the sale of the ship “Gold Coast” HC Whangarei MH/02, 8 March 1997
[64] Mr Patterson also submitted that because these payments were the
subject of an agreement between Innate and Mr O’Loughlin
under which Mr
O’Loughlin was entitled to 33.33 per cent of the net profit of sales made
between July 2010 and December 2011,
royalties ought to be calculated on the
sales figure after deduction of the profit share to Mr O’Loughlin. I do
not accept
that argument. The definition of net revenue clearly contemplates
that the income limb is gross income and that it is reduced by
the specific
expenses identified. Mr O’Loughlin’s bonus/profit share arrangement
does not fall within those categories
that would reduce the revenue
figure.
Interest
[65] There is specific provision in clause 12 of the ROA for interest in
the event of non-payment:
In the event that [Innate] fails to pay the Royalty Fees on the due date interest shall accrue and be payable on such Royalty Fees at the Default Interest Rate, calculated daily from the due date until the actual date of payment.
[66] The Default Interest Rate is specified to be 15%. [67] Clause 10 identifies the due date for payment:
The Royalty Fees shall be calculated Quarterly and payable no later than 30
days following the end of each Quarter.
[68] “Quarter” is defined as:
... the quarterly periods in a calendar year, such quarters ending on 31st
March, 30th June, 30th September and 31st
December.
[69] Dr Gelder claims that interest is to be calculated on the basis that it compounds daily. But the clause specifies that it is the royalty payment itself that attracts interest. There is no provision for the payment of interest on interest. Toogood J took the same view in X v Y in relation to a similarly worded provision in a relationship property agreement.13 I do not accept Mr Henry’s submission that the position should be different because the agreement in this case was entered into in a
commercial context.
13 X v Y [2015] NZHC 2594 at [71].
[70] The invoices on which Royalty Fees are claimed are dated between
April
2009 and December 2011. Interest therefore begins running on each amount
from 30 days after the end of the relevant quarter to the
date of
payment.
Result
[71] Dr Gelder is entitled to royalty payments on the actual sales made
to third parties. There is judgment in his favour for
the amount of $5,440.60
and UK£14.30.
[72] Interest is payable on the amount of each of the invoiced sums
comprising the judgment debt at 15 per cent from 30 days after
the end of the
relevant quarter to the date of payment. The parties are to confer and agree
on the amount of interest payable.
Leave is reserved to seek directions if
agreement cannot be reached.
[73] No royalty fees are payable in relation to the material
acquired by
Mr O’Loughlin as part of his settlement with Innate.
[74] Dr Gelder is entitled to costs on a 2B basis. Mr Henry submitted
that, by
virtue of cl 16 of the ROA, Innate was liable to pay Dr Gelder’s actual
costs. I am
satisfied, however, that cl 16 does not have that
effect.
P Courtney J
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URL: http://www.nzlii.org/nz/cases/NZHC/2016/1885.html