Dutch approach to interpreting licence agreements
20 December 2016
In a recently published interlocutory judgment between the Netherlands Cancer Institute (NCI) and Fujirebio Diagnostics Inc (FDI) (previously, Centocor Inc), the Court of the Hague has ascertained the meaning of a royalty provision in a licence agreement by applying the so-called “Haviltex formula”. According to this formula, not only the wording of a provision, but what parties could reasonably have understood the provision to mean and what they could expect from each other, is decisive for determining its meaning.
The dispute stemmed from a licence agreement between NCI and FDI. NCI discovered both the monoclonal 115D-8 antibody (which can detect certain antigens that are an important indicator for tumour cells) and the cell line used for its production. In 1984, NCI entered into a licence agreement with FDI, under which FDI developed the CA15-3 kit, an assay that contained NCI's antibody. FDI stated that it was obliged to pay only 4% royalties to NCI over the net sale price of the antibody, as the agreement provided that the “licensee [FDI] agrees to pay a percentage of Net Sales of Licensed Products [of] 4% with respect to the sale of Licensed Products”. NCI argued that the “licensed product” referred to the CA15-3 kit.
When interpreting this provision pursuant to the “Halvitex” formula, the court attached importance to an expert declaration that stated that it was usual in 1984 to calculate royalties over the revenues of the final product (that is, the CA15-3 kit). Further, NCI substantiated that negotiations focused only on the sale of the kit and not of the antibody. Therefore, FCI should have made its position clear during negotiations and explicitly included it in the agreement.
In the light of this, the court held that it is likely that royalties had to be calculated on the basis of the net sale price of the kit instead of the antibody, and therefore, FDI had underpaid royalties to NCI.
A prior version of this post was originally published by the same authors in Practical Law – Life Sciences, January 2017 Issue (Thomson Reuters).