October 22, 2014

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Contract Has Latent Ambiguity if Objective Evidence Supporting Reasonable Alternative Meaning Exists

Addressing the issue of whether the terms of a licensing agreement were ambiguous, the U.S. Court of Appeals for the Third Circuit reversed summary judgment against plaintiff on breach of contract and remanded, finding the lower court had erred in refusing to consider objective extrinsic evidence supporting a reasonable alternative meaning of the disputed terms. Mylan Inc. v. SmithKline Beecham Corp., Case No. 12-1539 (3d Cir., July 22, 2013) (Ambro, J.).

SmithKline Beecham (GSK) holds the original FDA authorization for paroxetine hydrochloride controlled release tablets (paroxetine).Mylan filed an application to sell generic paroxetine, challenging GSK’s patent covering the product; GSK sued for patent infringement under the provisions of the Hatch-Waxman Act.  The parties settled soon thereafter. The settlement agreement, dated August 2007, provided Mylan an exclusive license to market and sell generic paroxetine for the remaining term of the patent, which was set to expire in July 2016, including rights to sell Mylan’s generic product and any authorized generic (AG) paroxetine manufactured by GSK. Mylan’s rights were exclusive even as to GSK. However, following concerns raised by the Federal Trade Commission as to the length and absoluteness of Mylan’s exclusive right, the agreement was amended to allow GSK to provide non-exclusive licenses to other applicants for generic paroxetine CR (controlled release) as part of settlement of subsequent patent litigation, as well as to allow GSK and affiliates to market and sell AG paroxetine two years after Mylan’s launch of generic paroxetine (the amendment was termed the AG clause). In 2010, GSK entered into an agreement with a third party, Apotex, as part of an unrelated antitrust litigation, allowing Apotex to earn revenues from sale of certain GSK-supplied products, including sale of AG paroxetine two years after Mylan’s launch. GSK and Apotex subsequently entered into an exclusive supply and distribution agreement for AG paroxetine, and Apotex began sales activities for AG paroxetine.

Mylan sued GSK for breach of the license agreement, taking the position that the AG clause allowed only GSK to market and sell AG paroxetine to downstream customers, such as wholesalers, retailers, and pharmacy chains. According to Mylan, allowing an intermediary generic drug company such as Apotex to sell AG paroxetine in competition with Mylan was inconsistent with Mylan’s position during the negotiation of the license agreement. The district court granted summary judgment in favor of GSK ruling that the AG clause was clear and unambiguous and permitted GSK to market and sell AG paroxetine to whomever it wished, including Apotex, after Mylan’s two-year period of generic exclusivity. The court refused to consider any evidence of the intent of the parties, or evidence of industry custom and usage of the term “marketing and selling” offered by Mylan, on the ground that “such evidence cannot be used ‘to create an ambiguity where none exists’ in order to preclude summary judgment.”  Mylan appealed. 

The 3d Circuit vacated the summary judgment on the breach of contract claim, finding that for purposes of summary judgment, the lower court should have considered the alternative meaning suggested by Mylan, and the nature of the objective evidence provided in support, to determine if the extrinsic evidence demonstrated the existence of a latent ambiguity, especially when Mylan’s alternative reading was “both reasonable and supported by objective evidence of the parties’ intentions.” The Court found that the district court was not free to reject extrinsic evidence on the ground that it found the agreement on its face free from ambiguity, where, as here the applicable law (New Jersey) requires otherwise.

© 2014 McDermott Will & Emery

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