LEGAL ASSIGNMENT 4.2

Legal and regulatory update INTELLECTUAL PROPERTY Stem cell patenting The European Group on Ethics in

Science and New Technologies to the

European Commission published on 7th

May, 2002, its Opinion on the ethical

aspects of patenting inventions involving

human stem cells (Opinion No. 16). The

Opinion notes that Article 6 of the

Biotechnology Directive, in listing, inter

alia, ‘processes for cloning human beings’

and ‘uses of human embryos for industrial

or commercial processes’, as being

contrary to ‘ordre public’ under Article

53(a) European Patents Convention,

‘leaves open the question of patentability

of cells obtained from donated embryos.

Nor does it state precisely which embryos

are subjected to this exclusion.’

The Opinion goes on to observe that

isolated stem cells that have not been

modified do not meet the legal

requirements of patentability as to

industrial application. Moreover it

observes that such cells are ‘so close to the

human body, to the foetus or to the

embryo they have been isolated from, that

their patenting may be considered as a

form of commercialisation of the human

body’. It goes on to observe that

unmodified stem cell lines are not

patentable either as they have no specific

use. In contrast, the Opinion notes that

‘only stem cell lines which have been

modified by in vitro treatment or

genetically modified so that they have

acquired characteristics for specific

industrial application, fulfil the legal

requirements for patentability.’ It also

observes that ‘as to the patentability of

processes involving human stem cells,

whatever their source, there is no specific

ethical obstacle, in so far as they fulfil the

requirements of patentability (novelty,

inventive step and industrial application)’.

Patent litigation The English Court of Appeal has upheld

two decisions of the Patents Court finding

patents in the biosciences sector invalid

for lack of inventive step. Thus on 23rd

January, 2002, in Lilly ICOS LLC v Pfizer

Ltd it upheld a finding as to Pfizer’s patent

to the use of PDEv inhibitors for the oral

treatment of male erectile dysfunction

invalid for lack of inventive step and on

16th April, 2002, did the same in Asahi

Medical v Macopharma (UK) Ltd and anr in

finding Asahi’s patent for an apparatus for

separating blood into blood components

invalid for lack of inventive step.

On 6th March, 2002, the English

Patents Court, in Cairnstores Ltd &

Generics (UK) Ltd v AB Hassle, found two

AstraZeneca patents on omeprazole

formulations invalid for lack of inventive

step. The technical problem addressed by

the patents lay in the fact that ordinary

enteric coatings, if used to protect

omeprazole from the acid gastric juice,

would themselves react with omeprazole.

The solution claimed in the patent,

namely to prevent the acidic enteric

coating from reacting with the

omeprazole coating core by keeping them

apart by using a separating layer, was

however held to lack inventive step. The

judgment has been appealed.

Trade marks The issue of ‘bad faith’ in relation to trade

mark applications for pharmaceutical trade

marks was addressed by the English High

Court on 9th May, 2002, in Wyeth

( formerly American Home Products Corp) v

Knoll AG. Knoll’s device trade mark – a

stylistic representation of a moving person

against a circular background, with the

limbs and body of each person consisting

of single lines and their heads solid dots –

was registered in classes 5, 16 and 41. The

dispute centred on the registration in class

5 for ‘pharmaceutical preparations and

substances . . . dietetic substances adapted for medical use . . .’. Wyeth claimed that, with the exception of pharmaceutical

preparations and substances for the

treatment of obesity, the registrations were

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invalid under sections 3(6) (precluding the

registration of trade marks applied for in

‘bad faith’) and 32(3) (by which applicants

must state they have a bona fide intention

to use the mark) Trade Marks Act 1994.

Wyeth alleged that Knoll had had no

intention of using the mark in respect of

any other goods or services at the date of

the application. Wyeth based its claim on

evidence that Knoll had given in parallel

opposition proceedings. In these Knoll had

said that it had intended to use the mark

primarily on obesity products but that, if it

proved successful, it might use it for other

pharmaceutical products. Knoll was

successful in striking out the claim in

relation to the key class 5 products,

although the court held that it was not

appropriate at the summary stage to decide

on the other products and services. It did

not accept, on the wording of section 3(6)

and the evidence, that Knoll had acted in

bad faith. Knoll had had a firm intention to

use the mark in relation to products for the

treatment of obesity and contemplated that

it might use the mark on other products;

the products on which it intended to use

the mark fell within the specification of

goods; and it had not claimed all products

in class 5. Therefore it could not

reasonably be said that Knoll had been

inaccurate in its statement made under

section 32(3), let alone that it had acted in

bad faith under section 3(6). The precise

meaning of ‘bad faith’ could vary

depending on the linguistic context and

purpose but involved a degree of

dishonesty or something approaching

dishonesty. To say that an applicant

intended to use a mark in connection with

‘pharmaceutical substances’ when

intending only to use it with a specific

category of pharmaceutical substances did

not amount to a lack of good faith. The

Act did not require that the intention

concerned had to apply across the whole

range of goods and services in the

specification.

Parallel imports The European Court of Justice (ECJ) has

again been called on to return to the

long-running controversy surrounding

parallel imports of pharmaceuticals within

Europe in its judgments of 23rd April,

2002, in C-143/00 Boehringer Ingelheim

KG & ots v Swingward Ltd & ots and C-

443/99 Merck, Sharp & Dohme GmbH v

Paranova Pharmazeutika Handels GmbH.

These both concerned the parallel import

of repackaged pharmaceuticals first placed

on the market by the rights holder

elsewhere in the EC, into the UK and

Austria respectively. The manner of

repackaging varied. Some of the products

had been overstickered by the defendants,

some had been reboxed, sometimes using

the registered trade mark for the product

on the outside of the box and sometimes

not. The trade mark owners in both sets

of cases claimed that these activities

infringed their trade marks in the country

into which the parallel imports were

imported. It was not suggested that the

quality of the goods had been affected by

the defendants’ actions.

The ECJ considered firstly whether

repackaging could, in and of itself, be

prejudicial to the specific subject matter

of the trade mark and could be opposed

per se. The Court, following its case law

(notably Hoffmann La Roche [1978] ECR

1139 and Bristol Myers Squibb [1996] ECR

I-3457), held that it was not possible to

take this view. Instead, a trade mark

proprietor could only rely upon his or her

rights to prevent repackaging by a parallel

importer where by exercising those rights,

he or she did not contribute to the

artificial partitioning of the market. If the

repackaging is necessary to enable the

product to be marketed in the state of

import and it is done in such a way that it

respects the trade mark proprietor’s rights,

then to oppose the parallel importation of

that repackaged product will lead to

artificial partitioning of the market and so

restrict trade contrary to Article 28 and 30

EC Treaty.

As to the circumstances in which

repackaging would be considered necessary

to enable the product to be placed on the

market in the state of importation, the

ECJ drew a distinction between

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repackaging which was necessary to

comply with national rules and that which

solely gave the parallel importer a

commercial advantage. The trade mark

owner could not object to the former, but

could object to the latter. Here the

parallel importers had argued that

repackaging was necessary because of

consumer resistance to relabelling, but the

ECJ held that consumer resistance did not

always impede effective market access.

However, where there was strong

resistance by a substantial proportion of

consumers, that should be held to be a

hindrance to effective market access.

What on this basis was necessary was an

objective test and one that, ultimately, the

national courts had to decide.

Finally, the ECJ held that reasonable

advance notice of the repackaging must

be given by the parallel importer to

enable the trade mark owner to react to

the intended packaging. In each case the

national court must decide whether the

notice period was sufficient. However,

the ECJ indicated that where notice was

given, together with a sample of the

intended packaging, 15 working days’

notice would appear reasonable.

The ECJ will have a further

opportunity to consider parallel imports

in C-443/00 Aventis Pharma Deutschland

GmbH v Kohlpharma GmbH & anr. Here

Aventis held, pursuant to Regulation

(EEC) No. 2309/93 laying down

Community procedures for the

authorisation and supervision of

medicinal products for human and

veterinary use and establishing the

European Medicines Evaluation Agency

(EMEA), separate central marketing

authorisations for packages containing

respectively 5 and 10 3 ml cartridges of

an insulin suspension for injection. It

marketed its product in Germany in

packages of 10 and in France in

packages of 5. The defendants imported

the product from France, repackaging it

for the German market into packages of

10. Aventis objected, stating that all that

the defendant should do was double up

the packs of 5, overstickering as

necessary. The ECJ has been asked

whether, where a medicinal product is

the subject of two such separate central

marketing authorisations, it is permissible

for that product to be marketed in a

double pack. In his Opinion of 7th

March, 2002, the Advocate General

recommended that, because of the terms

of the marketing authorisation, the

product could not be lawfully marketed

in a double pack, thus rendering the

repackaging ‘necessary’.

REGULATORY LAW Transparency Directive On 18th April, 2002, the English

Administrative Court rejected a challenge

to the UK Government’s reimbursement

policy for Viagra in R v Secretary of State

for Health, Ex Parte Pfizer Ltd under EC

Council Directive 89/105/EEC (the

Transparency Directive). Pfizer sought

permission to apply for judicial review of

a decision by the Secretary of State for

Health. In June 1999 the Secretary of

State made a decision restricting the

circumstances in which general

practitioners could prescribe Pfizer’s

product Viagra under the National Health

Service. The Secretary of State had

reasoned that the forecast cost of

unrestricted prescription could not be

justified. The decision letter referred to

the criterion notified to the European

Commission in compliance with Article

7.2 of the Transparency Directive. In

October 2001 the Secretary of State

reaffirmed his 1999 decision. Pfizer

argued that the 2001 decision failed to

conform to the requirements of Article

7.3 of the Transparency Directive in three

respects. Firstly it was incumbent on the

Secretary of State to identify something

about Viagra that justified why it was not

being reimbursed while treatments for

other non-life-threatening conditions

were. Secondly the Secretary of State had

failed to analyse each and every treatment

for non-life-threatening conditions.

Thirdly there was a complete absence of

any assessment of the justification for the

acceptance or rejection of other

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treatments of specific medical conditions.

The Secretary of State argued that, having

complied with the requirements of Article

7.2 of the Transparency Directive, he had

equally complied with Article 7.3, both in

his letter of October 2001 and in further

letters in January 2002 and March 2002.

The court held that Article 7 of the

Transparency Directive had to be read as

a whole and that Article 7.3 was not free-

standing. The general reason made public

so far as Article 7.2 was concerned was a

legally effective compliance with Article

7.3. The letter of March 2002

demonstrated a correct understanding and

application of the relevant principles of

law and complied with the transparency

requirements of Article 7.3 of the

Transparency Directive

Fertility treatments In R (on the application of Assisted

Reproduction and Gynaecology Centre) and

another v Human Fertilisation and

Embryology Authority the English High

Court held on 6 February 2002 that a

decision not to authorise certain fertility

treatment was not susceptible of judicial

review. The authority had considered a

request for advice carefully and

thoroughly, had produced a decision that

was plainly rational, and it was not the

function of the Court to enter such

scientific debates nor to adjudicate on the

merits of the authorities decisions or the

advice it gave.

‘Morning after’ pill In R v Secretary of State for Health &

Schering Health Care Ltd & Family Planning

Association)(Interested Parties) ex parte John

Smeaton (on behalf of the Society for the

Protection of Unborn Children) the English

High Court held on 18th April, 2002,

that the supply and use of the emergency

contraceptive pill (the ‘morning after’ pill)

Levonelle did not involve the commission

of the criminal offence of ‘procuring a

miscarriage’ under the Offences Against

the Person Act 1861, and thus the

decision to reclassify it as a pharmacy

medicine for which no prescription was

required was lawful. It had been argued

that as Levonelle acted to prevent

implantation it was not in fact a

contraceptive but an abortifacient.

PRODUCT LIABILITY Causation The House of Lords, on 20th June, 2002,

reversing the Court of Appeal in Fairchild

v Glenhaven Funeral Services & Others, Fox

v Spousal (Midlands) Ltd and Matthews v

Associated Portland Cement Manufacturers

(1978) Ltd, has held that the injustice of

denying an industrially injured employee

(here suffering from a disease caused by

exposure to asbestos) a remedy

outweighed any unfairness to successive

employers of such employee who had

failed to protect the employee from such

injury but who could not be proved to

have caused the damage complained of.

The Court of Appeal had held that where

successive employers were each

potentially liable but it could not be

determined which of them was actually

responsible for the condition, none of

them were liable.

Duty of care In Amanda Claire v Secretary of State for

Health (on behalf of the Committee on Safety

of Medicines) The English High Court on

15th February, 2002, held that the

respondent authority had not been at

fault, and had acted reasonably, in

delaying a warning as to the dangers of

aspirin in children under the age of 12 in

order to obtain industry cooperation in

disseminating the warning. In the interim

the claimant, when aged 6, had suffered

Reye’s Syndrome as a result of taking

aspirin. Moreover the respondent’s

decision to postpone its final decision was

an act or omission that was treated in law

as a discretionary or policy decision taken

in the exercise of statutory powers or

duties in respect of which no duty of care

applied.

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COMPANY/COMMERCIAL LAW Non-executive directors A consultation document was issued at

the beginning of June inviting views on

the role and effectiveness of non-

executive directors following the

announcement of an independent review

of these issues by the Secretary of State for

Trade and Industry on these issues. The

intention is that clarifying the position of

non-executive directors will promote

further good corporate governance in the

UK, and make it easier to identify the

sorts of people who would be best suited

to the job and most likely to perform to a

high standard.

The term ‘non-executive director’

under English law has no special meaning.

It represents all directors who do not

perform an executive function within a

company. No distinction is made on the

register of UK companies if a director

holds an executive position or has a

service agreement with the company such

as a managing or finance director.

Executive directors generally have day-

to-day control of the running of the

business. However, important decisions

are generally referred to the board as a

whole, where non-executives can exert

influence on a range of matters relating to

the company. Non-executives can

exercise a measure of control over the

company, provide alternative views and

help to protect the interests of

shareholders through their involvement

on the board.

Non-executives may be valued for

their business sense and industry

knowledge, or for skills used ‘behind the

scenes’ in promoting the company. They

can attract investors by virtue of their

reputation and experience. Non-

executive directors can represent the

company, enter into negotiations and sign

documents as appointed officers, although

these activities are usually the

responsibility of the management team.

The review will consider all aspects of

the role and position of non-executives.

Particular consideration will be given as to

whether the role of non-executive

directors should be different for smaller

companies. Appropriate

recommendations will be made to

Government. It is possible that the review

may lead to legislative changes but it is

more likely to result in the introduction

of a code of practice relation specifically

to non-executive directors. The

consultation document can be obtained

from the DTI at http://www.dti.gov.uk/

cld/non_exec_review or by calling +44

(0) 20 7215 3917. Responses are

requested by 6th September, 2002, and a

report to the Secretary of State is expected

by the end of the year.

CASES Director’s fiduciary duty and director’s competing interests: in Plus Group Limited & Ors v Pyke (2002) Reference: (2002) EWCA Civ 370

In general, a director’s fiduciary duty

means that they must act at all times in the

best interests of the company and must

not make any secret profit from their

connection with the company. In the

absence of restrictions there is no absolute

rule preventing directors from setting up

in competition. If a director has an

interest that conflicts with the interests of

the company they will be required to

notify the company of that interest. The

articles of association of the company may

then permit them to continue to be

involved in decisions relating to that

matter or may require them to abstain

from voting on such issues. It is usual for

directors’ service contracts to include an

undertaking from the director (known as

a restrictive covenant) that they will not

be involved or otherwise interested in a

business that competes with the company

of which they are a director. This case is

unusual because there were no restrictive

covenants placed upon the director.

The Court of Appeal held that a

director was not in breach of fiduciary

duties in setting up a company in

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competition with another company of

which they were still a director.

Relations between the defendant

director and the company had broken

down after he suffered a stroke and he had

been effectively excluded from all

decision making and participation in the

company affairs. One year after his illness

the defendant established a new company

in competition with the claimant

company. The defendant was not

removed as a director of the claimant

company until a further nine months

later.

The Court of Appeal supported the

first hearing decision that there was no

alleged breach of fiduciary duty. The

defendant had been effectively excluded

from the companies over six months

before he had established the competitive

business. The continued connection with

the claimants was not of the director’s

making and did not give rise to any

fiduciary duty towards them on his part.

Responsibility for signing-off accounts: Barings plc (in liquidation) & Anor v Coopers & Lybrand & Ors (2002) Reference: (2002) EWCH 461

A director must sign the balance sheet and

a director or secretary must sign the

directors’ report of the company’s annual

accounts as a mark of the approval of the

board. The signature on the balance sheet

confirms that the accounts give a true and

fair view of the state of affairs of the

company for the preceding financial year

and that they comply with the relevant

statutory provisions. If accounts are

approved by the board but do not comply

with the requirements of the Companies

Act 1985, every director who is a party to

their approval, either knowing that they

do not comply or reckless as to whether

they comply, is guilty of an offence and

liable to a fine.

This case arose as part of the litigation

following the collapse of Barings Bank. A

finance director was not deceitful in

signing representation letters for the

purpose of his company’s annual audit

even though various statements in the

representation letter were factually

incorrect.

It was held that in order for the director

to be guilty of deceit the claimant would

have had to show that the director had

signed the representation letters either:

• knowing that the statements in the letters were untrue, without an honest

belief in their truth, or indifferent as to

whether or not they were true; or

• knowing that he had no reasonable grounds for making the statements,

without an honest belief that he had

such grounds or indifferent as to

whether he had or not.

The case turned on the facts as the

finance director was not in a position to

verify the statements, which had been

made by managers in other offices.

Although he may have been negligent he

did not necessarily lack an honest belief in

the truth of the statements.

Directors’ service contracts to be approved by shareholders: Knopp v (1) Thane Investments Ltd (2) Denbrae Ltd Reference: LTL 29/05/2002

The articles of association of a company

frequently require that service and other

agreements must be approved by the

shareholders. Even if the directors and

shareholders are the same people, as is

often the case in small companies, these

requirements must still be strictly

observed.

The Directors in this case had entered

into service contracts without shareholder

approval. The court held that the

company was lawfully entitled to

terminate the contracts on this basis and

also for breach of fiduciary duty.

The two defendant companies had the

same two directors. The directors passed

board resolutions approving very

generous service contracts between

themselves and the companies. Each

abstained from voting on the entering

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into of their own service contract but the

contract was approved by the other. The

two directors proceeded to run the

company in a manner that was for their

own personal benefit rather than the

interests of the company.

The companies terminated the

contracts on the basis that (1) the directors

had breached their fiduciary duty to act in

the best interests of the company and (2)

the terms of the agreements had not been

agreed by the companies in a general

meeting of the shareholders.

The judge held that there had been

serious breaches of fiduciary duty and

therefore the contracts could be

terminated on that ground. The judge

further stated that the contracts could

have been terminated in any event.

Where there is a requirement for

something to be agreed or approved by a

company in general meeting and that does

not take place it can be ratified only if all

the shareholders agree. In this case the

consent of all the shareholders was never

sought. The directors’ executive service

contracts were therefore avoidable at the

instance of the company as they had not

been validly entered into.

A memorandum of understanding can be legally binding: Bunn v Rees (2002) Reference: LTL 19/04/2002

It is open to a party to produce evidence

to show that an agreement was made

without any intention to create legal

relations. However, in commercial

relations this is a difficult burden to

discharge.

The terms of the document in this case

were consistent with a commercial

agreement that was intended to be legally

binding. It was described as an agreement

for the sale and purchase of the defendant

company’s share capital and was signed by

the parties. The expectation that the

parties would enter into a further, more

detailed agreement was not consistent

with an intention to create legal relations

in respect of a preliminary document. The

court found that the defendants were

experienced business people and fully

understood the consequences of signing

the document and the agreement was

held to be binding on the defendants.

It is crucial when entering into

commercial negotiations to know

whether there is an intention to create

legal relations, as the evidential burden of

proving there was none is a difficult one.

Biotechnology companies may be

involved in negotiations over the

assignment of intellectual property rights,

licensing or distribution and collaboration

in research and development. The

company must be aware of the potential

consequences of signing any document,

including a memorandum of

understanding or heads of terms. If the

terms in an agreement are sufficiently

clear and determine the roles and

obligations of each of the parties, an

intention to create legal relations may

easily be found.

Appointment of financial intermediary: Vernon-Kell v (1) Clinch and (2) Fairfield Imaging Limited (2002) Reference: LTL 14/05/2002

This case concerned the raising of funding

for a company (the second defendant) for

use in the development of its computer-

based techniques of cancer diagnosis and

prognosis. The claimant alleged that,

under an oral agreement, the company

had agreed to pay him £30,000 for

introducing an investor to the company

and a further 10 per cent of any finance

raised. The first defendant agreed that an

oral contract had been made but that it

was only required to make these payments

if cash was received or shares were issued

by the company.

The eventual outcome was quite

different from that originally envisaged

involving a reverse take-over of the

company. The first defendant argued

successfully that the final outcome was a

completely different transaction from the

negotiations in which the claimant had

been involved. The agreement related

only to certain outcomes of negotiations

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as then contemplated by the parties.

Accordingly the claimant was not entitled

to any further payment from the

company.

Companies should think carefully

about their obligations to all parties when

entering into arrangements with financial

advisers. Investment and funding are

critical to the success of the development

of a company and can take many forms. A

third party intermediary engaged to assist

in raising finance should always be

employed subject to a written agreement

which clearly sets out the terms and

conditions of any commission to be

received.

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