Syntheta (Pty) Ltd previously Delta G Scientific (Pty) Ltd v Janssen Pharmaceutica NV and Another (449/1996) [1998] ZASCA 74 (21 September 1998)

2 This appeal concerns an application in terms of s 56 of the

Patents Act No 57 of 1978 (the Act) for a compulsory licence in

respect of a registered patent in circumstances and on grounds which

are somewhat unusual. The appellant, Syntheta (Pty) Ltd, formerly

Delta G Scientific (Pty) Ltd, is a subsidiary of a substantial public

company, Sentrachem Ltd,the main business of which is concerned

with chemical products. What is sought in the application is a licence

under South African Letters Patent No 75/7193 in respect of an

invention entitled "Triazole Derivatives" (the patent). The first

respondent, Janssen Pharmaceutica NV, a major Belgian research

company with worldwide interests in pharmaceutical agricultural and

veterinary products, is the inventor and registered proprietor of the

patent. First respondent is a subsidiary of a large American

Corporation. The second respondent, Novartis AG, formerly Ciba-

Geigy AG of Basel, is the registered exclusive licensee under the

patent. It is a well known multinational chemical company with large

3 interests in the field of agricultural chemical products. It will be

convenient when referring to the parties to describe first respondent

as "the patentee" and second respondent as "Ciba",

The patent was granted under the 1952 Patents Act (37 of 1952)

on a convention application claiming priority on the basis of two

applications filed in the United States of America. The normal term

of the patent expired on 17 November 1991. However, a five year

extension of term was granted to the patentee following an application

for prolongation made under s 39(l)(a) of the 1952 Act on the ground

that the patentee had not derived adequate remuneration from the

patent during its normal term. The present s 56 application was filed

on 30 August 1995 and set down in February 1996. Judgment was

given on 23 April 1996. The extended term was due to expire on 17

November 1996. It therefore had of the order of six months to run at

the time of judgment. Streicher J, sitting as Commissioner of Patents,

refused the application with costs but granted leave to appeal to this

4 Court in October 1996.

The patent relates to a novel group of chemical compounds consisting of triazole derivatives characterized by the nature of the side chain attached to the triazole nitrogen atom. The chemistry is complex, the formulae intimidating and the structures of the various compounds intricate. Happily the resolution of the disputes in issue does not demand a profound understanding of the science concerned. There are seven process claims in which specific starting materials are used to produce compositions useful in agriculture as fungicides. There are twenty six product claims. While a number of compositions can be (and are) produced following the teachings of the patent the concern of the appellants is limited to a product, propiconazole - a fungicide used extensively to treat diseases in cereals, bananas and coffee.

S 56 of the Act must be viewed in the light of its underlying purpose in the scheme of the Act. Beyond noting the essential

5 rationale, however, it is not necessary in this case (for reasons I give

later) to embark on a detailed analysis of either the Act or the section

itself. It will suffice to note that it is part of the theory upon which

our patent law is based that the limited statutory monopoly afforded

a patentee is seen as a means of encouraging inventors to put their

inventions into practice because by this means they obtain the

financial rewards their inventive gifts warrant. But what perhaps

requires more emphasis in so far as s 56 is concerned is that by

encouraging inventors to put their inventions to use the benefit to the

public (an essential quid pro quo of the theory) is served. S 56 finds

a counterpart in the patent legislation in all major industrial countries.

The precise focus of that legislation varies from country to country

and, indeed, from time to time. In the present Act s 56 was amended

in 1988 and more recently in 1997. This case is concerned with the

Act as it stood in 1996. The most recent amendments must therefore

be ignored.

6 The appellant advanced its case in the founding affidavits on

the basis (only) of s 56(2)(a) and (d) of the Act. It will be convenient

to set out those sections together with ss(l) (with which they must be

read) and ss (7) and (8):

"56. Compulsory licence in case of abuse of patent

rights. - (1) Any interested person who can show that the rights in a patent are being abused may apply to the registrar in the prescribed manner for a compulsory licence under the patent.

(2) The rights in a patent shall be deemed to be abused

if-

(a) the patented invention is not being worked in the Republic on a commercial scale or to an adequate extent, after the expiry of a period of four years subsequent to the date of the application for the patent or three years subsequent to the date on which that patent was sealed, whichever period last expires, and there is in the opinion of the commissioner no satisfactory reason for such non-working; [or]

(d)by reason of the refusal of the patentee to grant

7

a licence or licences upon reasonable terms, the trade or industry or agriculture of the Republic or the trade of any person or class of persons trading in the Republic, or the establishment of any new trade or industry in the Republic, is being prejudiced, and it is in the public interest that a licence or licences should be granted;

(7) In determining the conditions on which any licence is granted the commissioner shall have regard to any relevant facts, including the risks to be undertaken by the licensee, the research and development undertaken by the patentee and the terms and conditions usually stipulated in licence agreements in respect of the subject-matter of the invention, between persons who voluntarily enter into such agreements. (8) Any order of the commissioner under this section shall be made with a view to avoiding the abuse found by the commissioner to have been established.

Abuse of the patent rights is the cornerstone of the provision. A jurisdictional fact which the appellant was required to demonstrate under (2)(a) was thus that the "patented invention" was not being

8 "worked" in the Republic on and to the requisite scale or extent. With

regard ss (2)(d) a jurisdictional fact to be proved was a "refusal" to

grant a licence on "reasonable terms".

The general rule, which can so far as this appeal is concerned

be stated in its broad formulation and without reference to its

refinements, is of course that an applicant must make out its case in

the founding papers. The case which the appellant sought to make out

has, as indicated, some unusual features. The licence it sought was

one to produce only the product "propiconazole" and only "for the

purposes of export to countries where no (corresponding) patent

exists". This is amplified by the statement that it "does not seek a

licence to sell propiconazole or propiconazole - containing

compositions for use in South Africa". This is stated twice. The

affidavit also makes it clear that no licence was sought in respect of

the processes claimed (as appellant asserted that it had devised its

own process based on starting materials not considered in the patent).

9 Finally it is said that if it delayed manufacture until November 1996

(the expiry date) it would lose ground in the external "generic fine

chemical market". Its anticipated success in that field was said to be

vital to its straitened financial position (the result of an incorrect

commercial decision taken by its distributor). Thus it proclaimed the

grant of the licence was "critical for [its] survival". This hardly

suggests that any benefit to the South African public was a serious

consideration.

With that as a background one may turn to what is said in

relation to the jurisdictional facts. The introduction is a statement that

"propiconazole in the form of a commercially useful formulation is

sold in South Africa by [Ciba]" which is recorded as an exclusive

licensee - and that the "active ingredient" is not (to the best of the

deponent's belief) manufactured by either Ciba or the patentee in

South Africa. It is then said: "Thus the patented invention i.e. the

process for the production of propiconazole and propiconazole so

10 produced, is not being worked in South Africa on a commercial scale

or to an adequate extent, and there is ... no satisfactory reason for such

non-working."

This amounts, in truth, to little more than a recitation of the words of the subsection and is not a statement of facts from which the necessary legal conclusion can be drawn. The uses of and need for the product by the South African public and the desirability and feasibility of local production are not addressed. In particular what is overlooked is the fact that ss (2) is a statutory code. Importation is a topic addressed in ss 2(b) and (e) (which are not invoked). For the purpose of ss (2)(a) it will suffice if the patentee can show working (in Afrikaans "ge-eksploiteer") in any form. Non-working of the process claims is irrelevant because no licence is sought for the processes. Working of the product claims by importation is conceded in the paragraphs quoted above.

It is, in any event, also plainly established in the answering

11

affidavits that the invention is being worked where it is said that the market in South Africa (in the case of propiconazole) is being met by the importation by Ciba of the active ingredient and the making up thereof into an emulsifiable concentrate in South Africa. The answering affidavits in fact go further to state that the patentee and its licensee are "able fully to supply the South African market on reasonable terms". For the sake of completeness I might add that in the answering affidavits it is also asserted that sound economic reasons underlie the decision not to manufacture the active ingredient locally. These considerations are of course only relevant to further inquiries which could arise if the initial allegation of abuse was made out.

Since what I have set out above from the founding affidavits fails to establish an abuse there is no need to consider the discretionary aspects of the inquiry which arise for example under ss (7) and (8). I am thus of the view that no abuse under ss (2)(a) has

12 been made out and that appellant failed to make out its case on this

ground.

When it comes to ss (2)(d) the founding affidavit is again lacking in essential facts. All that is stated is that the patentee was requested to grant a licence. The founding affidavit reads - "A royalty of 6% of [appellant's] selling price was offered. If this was agreed to, [appellant] suggested a licence agreement incorporating this royalty and including the usual provisions for such agreements could be

drawn I submit that this was an offer for a licence on reasonable

terms. [The patentee] refused to grant a licence on these terms."

Counsel for appellant conceded that the onus appellant bore included that of establishing as a jurisdictional fact the reasonableness of the terms. What has been said in relation to ss (a) above is apposite here. A bald assertion does not establish facts necessary for a legal conclusion.

Again, when regard is had to the answering affidavit, it is

13 established that Ciba enjoyed a licence which was subject to a royalty

of 6% but that this was regarded as "low" and that it was concluded

only because Ciba was to bear significant development and

registration costs which the patentee would then not itself have to

bear or recoup. In appellant's case, of course, the licensee's position

would also have to be considered in determining what would be a

reasonable royalty and the recoupment of such additional costs would

have to form a component in the computation of a royalty for any

other licensee. The patentee's denial that 6% was reasonable was thus

supported by the terms of Ciba's licence and not the contrary as

appellant asserted.

The decided cases (see for example Hoffmann-La Roche & Co

A G's Patent [1973] RPC 601 at 606) suggest that it is normal that the

calculation of an appropriate royalty at the very least involves taking

into account three elements namely (a) the patentee's expenditure on

research and development; (b) the patentee's expenditure on

14 promotion; and (c) a servicing of the capital element to allow a

reasonable return on the capital employed in (a) and (b). This will

normally call, in a case like the present, for evidence as to the practice

of companies in the field as to how current research is financed and

recouped. It is true that details of this nature are to a large extent the

confidential information of, in this case, the patentee. But that does

not mean that a bare assertion can shift a tactical onus to the patentee

to prove that 6% is not reasonable. To revert to the founding

affidavits, however, there is no reason why appellants could not have

provided facts from which conclusions (even if tentative) could be

made. Far from doing so not even the price of the product in South

Africa (or indeed elsewhere) is set out nor is there any reference to

appellant's own cost structure. Given that it was at least in a position

to manufacture, this would seem to have been a source of potentially

helpful information. In short no serious attempt has been made to

prove the essential jurisdictional facts. It follows that here too no

15 case of abuse was made out.

The court below held, in the first place, that the conclusion to

be drawn from the facts was that appellant did not want a licence to

ensure an adequate working of the patent in the Republic during the

term of the patent. This is a conclusion which would seem to me to

be one which can reasonably be drawn. I do not read the judgment to

suggest that the learned judge was unconscious of the importance of

a finding that an abuse had to be shown. I read the observation to

reflect on whether a licence can, in terms of the section, be given to

a party whose avowed objects are wholly unrelated to the purposes of

the section. In this it would seem to me that the learned judge's

approach was both logical and in accordance with the overall purpose

of the section and one to which he was driven by the facts. I,

however, prefer to place the decision on a narrower ground and I

leave open the broader considerations which seem to me to underlie

the learned judge's conclusion on this point. The learned judge also

16 held that the appellant had failed to prove that a 6% royalty was

reasonable. In this regard his conclusion is matched by my own.

What I have said renders it unnecessary to deal further with the reasoning of the court a quo. It also renders any further analysis of the section or any more detailed discussion of the philosophy which underlies it unnecessary. Similarly it becomes unnecessary to discuss questions relevant to the discretionary elements of the section or the role of ss (7) and (8) and problems which could have arisen from the fact that the patent has in the interim finally expired. The applicant failed to make out a case for the grant of a licence. The appeal must fail. The order is:

The appeal is dismissed with costs including the costs of two counsel.

C PLEWMAN JA

CONCUR:

HARMS JA) SCOTT JA) ZULMAN JA) FARLAM AJA)