Glaxo Grp. Ltd. v. DRIT LP

• Decision Date: 03 March 2021
• Docket Number: No. 25, 2020,25, 2020
• Citation: 248 A.3d 911
• Court: Supreme Court of Delaware
• Parties: GLAXO GROUP LIMITED and Human Genome Sciences, Inc., Defendants Below, Appellants/Cross-Appellees, v. DRIT LP, Plaintiff Below, Appellee/Cross-Appellant.

248 A.3d 911

GLAXO GROUP LIMITED and Human Genome Sciences, Inc., Defendants Below, Appellants/Cross-Appellees,

v.DRIT LP, Plaintiff Below, Appellee/Cross-Appellant.

No. 25, 2020

Supreme Court of Delaware.

Submitted: December 16, 2020

Decided: March 3, 2021

Philip A. Rovner, Esquire, and Jonathan A. Choa, Esquire, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Lisa S. Blatt, Esquire (argued), Sarah M. Harris, Esquire, Sumeet P. Dang, Esquire, and Kimberly Broecker, Esquire, WILLIAMS & CONNOLLY LLP, Washington, D.C.; Attorneys for Defendants-Appellants/Cross-Appellees Glaxo Group Limited and Human Genome Sciences, Inc.

Gregory P. Williams, Esquire, Chad M. Shandler, Esquire, and Nicole Pedi, Esquire, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Keith R. Hummel, Esquire (argued), and Karin A. DeMasi, Esquire, CRAVATH, SWAINE & MOORE LLP, New York, New York; Attorneys for Plaintiff-Appellee/Cross-Appellant DRIT LP.

Before SEITZ, Chief Justice; VALIHURA, VAUGHN, TRAYNOR, and MONTGOMERY-REEVES, Justices, constituting the Court en Banc.

SEITZ, Chief Justice:

Glaxo Group Limited and Human Genome Sciences, Inc. (collectively, "GSK") owned patents covering Benlysta, a lupus

treatment drug. To expand its intellectual property rights, GSK filed a patent application with the United States Patent and Trademark Office ("PTO") claiming a method for treating lupus. Biogen Idec MA Inc. ("Biogen") held an issued patent covering a similar method for treating lupus. When parties dispute who was first to discover an invention, the PTO declares an interference. Rather than suffer the delay and uncertainty of an interference proceeding, the parties agreed to settle their differences through a patent license and settlement agreement ("Agreement"). GSK ended up with its issued patent. The PTO cancelled Biogen's patent, and Biogen received upfront and milestone payments and ongoing royalties for Benlysta sales.

The claims in a patent define its metes and bounds. Under the Agreement GSK agreed to make royalty payments to Biogen until the expiration of the last "Valid Claim" of certain patents, including the lupus treatment patent. The Agreement defines a Valid Claim as an unexpired patent claim that has not, among other things, been "disclaimed" by GSK.

GSK paid Biogen royalties on Benlysta sales. After Biogen assigned the Agreement to DRIT LP—an entity that purchases intellectual property royalty streams—GSK filed a statutory disclaimer that disclaimed the patent and all its claims. GSK notified DRIT that there were no longer any Valid Claims under the Agreement and stopped paying royalties on Benlysta sales.

DRIT sued GSK in the Superior Court for breach of contract and breach of the implied covenant of good faith and fair dealing for failing to pay royalties under the Agreement. The court dismissed DRIT's breach of contract claim but allowed the implied covenant claim to go to a jury trial. The jury found for DRIT, and the court awarded damages.

On appeal, GSK argues that the Superior Court should have granted it judgment as a matter of law on the implied covenant claim. On cross-appeal, DRIT asserts that, if the Court reverses the jury verdict on the implied covenant claim, it should reverse the Superior Court's ruling dismissing the breach of contract claim. For the reasons explained in this opinion, we find that the Superior Court properly dismissed DRIT's breach of contract claim but should have granted GSK judgment as a matter of law on the implied covenant claim. Thus, we reverse the court's judgment.

I.

We recount from the record what are largely undisputed facts relevant to our ruling. In 2007, GSK and Biogen each claimed patent rights to a method for treating lupus. Biogen held an issued U.S. patent and GSK had a pending U.S. patent application covering substantially the same subject matter. At the time of the dispute, U.S. patent law followed a "first to invent" regime where the PTO awarded priority to the party who first came up with the invention.¹ The PTO declared an "interference," which is an administrative proceeding to decide who has priority over the intellectual property rights. For GSK, winning the interference would cancel Biogen's patent. If Biogen prevailed, it could block GSK from commercializing Benlysta. Given the uncertainty, GSK and Biogen agreed to settle their dispute.

First, the parties executed a binding term sheet to navigate their way clear of the interference. The parties appointed a neutral arbitrator to decide the priority between GSK's patent application and Biogen's issued patent. The arbitrator decided that GSK was the first to invent the lupus treatment method. Thus, its patent application had priority over Biogen's issued patent. The parties agreed that GSK would continue with its patent application. Biogen agreed to cancel its patent.

Next, in October 2008, GSK and Biogen entered into the Agreement. GSK agreed to pay Biogen a $3.5 million up-front payment, two milestone payments of $1.5 million each, and royalties on Benlysta sales through the expiration of certain patent rights, including any patent rights from GSK's pending patent application. Section 3.4 of the Agreement states that GSK must pay royalties until expiration of the last "Valid Claim" of any patent covering Benlysta. Section 1.49 of the definitions section defines a "Valid Claim" as:

[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.²

On December 6, 2011, the PTO issued to GSK U.S. Patent No. 8,071,092 (" ‘092 Patent"). GSK paid Biogen royalties for Benlysta sales as required by the Agreement. In 2012, DRIT, a healthcare investment vehicle that purchases royalty streams on pharmaceutical products, purchased Biogen's rights under the Agreement. GSK paid royalties to DRIT on Benlysta sales for three years.

What happened next involves patent disclaimers. Some background is helpful. A patent gives its owner the right to exclude others from making, using, offering for sale, or selling an invention.³ The scope of the monopoly is defined by the claims in the patent. Provided that periodic maintenance fees are paid, a utility patent expires twenty years from the application filing date.⁴ Once the patent expires, the patent holder can no longer assert its monopoly over the claimed invention, and typically the invention enters the public domain.⁵

A disclaimer cuts short the patent term. A disclaimer is the "renunciation of one's own legal right or claim, such as a renunciation of a patent claim ...."⁶ Section 253 of the Patent Act provides that a patentee may voluntarily "disclaim" all or part of his or her interest in a patent.⁷ The Patent Act contemplates two types of disclaimers: terminal and statutory disclaimers. Here, GSK filed a statutory disclaimer, which generally is "a statement in which a patent owner relinquishes legal rights to one or more complete claims of a patent."⁸

In 2015, GSK filed a statutory disclaimer and disclaimed the entire term of the ‘092 Patent from December 6, 2011—the day the PTO granted the patent to GSK. GSK informed DRIT that the statutory disclaimer eliminated any "Valid Claim" for royalties under the Agreement. In 2016, DRIT filed an action in the Superior Court and asserted claims for breach of contract and breach of the implied covenant of good faith and fair dealing for what it described as GSK's bad faith disclaimer of the ‘092 Patent.

GSK moved to dismiss the complaint. For the breach of contract claim, GSK argued that the Agreement expressly authorized GSK to disclaim the patent. For the implied covenant claim, GSK contended that the implied covenant cannot be used to imply terms—like a good faith requirement before disclaiming a patent—that are absent from the Agreement and that Biogen could have sought in negotiations. And, according to GSK, the implied covenant cannot modify action expressly permitted by the Agreement.

DRIT responded with an imaginative interpretation of Section 1.49. As DRIT argued, the phrase "in an order or decision" modified more than its closest antecedent.⁹ In addition to modifying "held enforceable, invalid, or cancelled by a court or administrative agency," DRIT claimed that it also modified a patent "that has not been dedicated to the public, disclaimed."¹⁰ Thus, any disclaimer must result from "an order or decision" and cannot be disclaimed voluntarily, as was the case here. DRIT also argued that, for the implied covenant claim, the parties did not anticipate that GSK could use a statutory disclaimer to undermine the economic basis for the Agreement. Thus, according to DRIT, the implied covenant required GSK to exercise its right to disclaim in good faith instead of acting in its economic self-interest.

The Superior Court found DRIT's interpretation of Section 1.49 "both legally and grammatically flawed."¹¹ The court reasoned that GSK had the express contractual right to disclaim the patent, and DRIT's request for the court to "interpret the Agreement as requiring that a Court/agency order or decision precede any disclaimer" violated the closest antecedent rule and was "untenable."¹² The court dismissed the breach of contract claim and held there was "no express contractual restriction" in the Agreement that limited GSK's ability to disclaim its rights to the patent.¹³

But the court allowed DRIT's implied covenant claim to proceed. As the court held, "[w]hen material aspects of an agreement are left to one party's discretion, the implied covenant demands that party exercise its discretion reasonably and in good faith."¹⁴ The court also noted that "the royalty payments were a ...