Flynn v Burch

This is an action for breach of warranty. The warranty in question is contained in an agreement between the claimant and the defendant which was made in June 2000 and was executed by deed.

The application before me is by the defendant to strike the action out on the grounds it has no reasonable prospect of success or for summary judgement in the defendant's favour. On this application the defendant is represented by Mr. Andrew Norris, instructed by Cobbetts and the claimants are represented by Mr. Jason Evans Toby and Mr. Christopher Hall instructed by Davenport Lyons. The facts

In August 1999 patent application No. 9920067.7 was applied for (the “first application”).

In June 2000 there were discussions between the claimant, Mr. Flynn and the defendant, Mr. Burch. The point of those discussions was that the claimant was going to invest in the relevant companies which were being set up or had been set up to exploit the inventions or invention referred to in the application. One of the agreements entered into was a shareholders agreement. The shareholders agreement contains a warranty given by the defendant. The relevant part of the warranty is as follows:

Product IPR is defined in the definition section of the agreement as follows: "Product IPR means all Intellectual Property Rights in or with respect to the Product including for the avoidance of doubt and without limitation (a) that the Patents and (b) the trade marks.”

Intellectual Property Rights are defined as including:

Patent is defined as follows:

In August 2000 a further patent application No. 0020962.7 was filed, I will call this the second application. As part of that process a declaration of priority was made in relation to that application to claim priority back to the first application. Both applications matured in this country into patents which can be referred to as the first and the second patents.

Moving on a decade, the position in 2011 was as follows. In proceedings in the European Patent Office concerned with a third party’s patent, (as I understand it the third party was a rival competitor company with the company which arose out of the agreements I have mentioned) the defendant swore an affidavit. The thrust of what was said in the affidavit is that Mr. Burch says that he made available to the public after August 1999 and before June

By this stage in 2011 or possibly 2012 the claimant owned the relevant company. He also wished to sell it. He wished to sell it for £3 million. He entered into negotiations with a buyer. The buyer said in the negotiations that the validity of the second patent was at risk as a result of the contents of Mr. Burch's affidavit because if the second patent loses priority, which is something that can happen in a patent case, then the information which Mr. Burch says is in the public domain would be potentially prejudicial prior art. The buyer, accordingly, was only prepared to pay £2 million because the value of the company depended on the value of the patents and the value of the patents depends on the balance of risks and this is a risk.

The sale was agreed for £2 million. The claimant now sues the defendant for breach of the

The defendant does not agree. The defendant's case is the claim is wrong because the claim

Before me there was no dispute about the law applicable to applications to strike out and summary judgment, I will not rehearse it in this judgment. I am not satisfied the defendant's argument on this application means that the claimant in this case has no realistic prospect of success. I should emphasise that what I am about to say about this does not mean at all that I find that the claimant is right in this claim. The question I have to ask myself is whether the claimant has a realistic prospect of success. The reason the claimant has some realistic prospect of success it seems to me is that the warranty in question uses the word "might". Breach of the warranty may not depend on whether the second patent actually is invalid or actually does lose priority. The warranty is capable, on the claimant's case, of being breached simply by putting the validity of the second patent at risk. I am not finding that that is what has happened, however, the claimant’s argument is a perfectly proper and reasonable argument. The risk to validity has crystallised or at least the evidence in this case demonstrates how it could crystallise by the diminution in value of the company whose value depends on the patents. At the risk of repeating myself I should emphasise that I am not finding that that has actually happened. What I am finding is that on the material before me there is a realistic prospect of the claimant being able to satisfy a Court that this is the case.

I can see a number of potential difficulties with the claimant's claim. One matter which I will

However, for these reasons, I am not prepared to strike out this case as I indicated to Counsel

Then in paragraph 30:

That argument is inconsistent with the way the defendant's case is pleaded. I will return to the pleadings in a minute. On the face of it however, it seems to me to be a proper argument and has a realistic prospect of success. In fact I must say at the moment I do not see the answer to it. The claimant's skeleton argument at paragraph 59 picked up what Ms Hall had said and rightly pointed out that the argument was inconsistent with the pleadings. The point is that, as pleaded at the moment, it is admitted that the second patent claims priority from the first application and therefore, as I understand the defendant's pleading, it is admitted that the second patent is within the definition Product IPR; whereas the point that Ms Hall makes is that if the second patent is not entitled to claim priority it must necessarily therefore cease to be within the definition Production IPR. The retort from the claimant (skeleton paragraph 59) is that the definition of the 'Patent' in the shareholders agreement includes applications not only claiming priority from the first patent application but also applications "based thereon" (my emphasis). Now it is true that the definition of Patent in the agreement does indeed use the words “based on” and it is also true, as the claimant rightly points out, that it is admitted in the pleadings that the second application is based on the first application. However, as I discussed with counsel I must say I am far from convinced that it is correct that the second patent is correctly to be characterised as being a patent or an application “based on” the first application.

The clause in question which defines "Patent" includes applications filed later which are either based on or claim priority from the “foregoing applications”. The “foregoing applications” clearly includes the first application. In my judgment an application “based on” an earlier application would be one which matures from it. There is no question that the second application is not that kind of thing. “Based on” could also include an application which claims priority from the first application, but that will only be true if in fact the claim to priority survives. As Ms Hall says, if the second patent loses priority, which would be the circumstances in which what Mr. Burch said would put its validity at risk, then the second patent can no longer to be regarded as something within the definition of Patent in the shareholders agreement. Accordingly there would have been no breach of the warranty. I should emphasise as I have already that I am not deciding this point now, not least because of the state of the pleadings not have I decided what the true construction of the shareholders agreement is.

It was because of these matters that I raised with Counsel at the start of this application the concerns I had with this application. Now, Mr. Evans Toby in the course of his address to me indicated that his client's case would be that the warranty is wider than I have just articulated it and he points to the fact that the definition of intellectual property rights is drafted in such a way that it might be said to cover the second application, even the second patent, even if the definition of "Patent" does not. I am bound to say I am far from convinced that that is correct. However, what this all goes to show, it seems to me is that this case needs to be considered carefully by those advising both sides. I rather think that the upshot of this morning's hearing will be that both sides need to deal with their pleadings.

Looking at the matter overall, it seems to me that the defendant is likely to succeed in this claim since the only circumstances in which Mr. Burch could be said to have put the validity of the second patent at risk are circumstances in which the second patent is not covered by the warranty and hence there is no breach either way. However, it would plainly not be fair to decide that point now and I do not do so. When I raised it with the parties they asked me to deliver my judgment on the application and that is what I have done. So, I will dismiss